Gladstone mercial (GOOD) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and notes, highlighting Q1 2023 financial performance Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric | March 31, 2023 (in Thousands) | December 31, 2022 (in Thousands) | Change (in Thousands) | Percentage Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------------ | | Total Assets | $1,186,583 | $1,201,509 | $(14,926) | (1.24)% | | Total Liabilities | $825,914 | $826,883 | $(969) | (0.12)% | | Total Equity | $190,628 | $204,570 | $(13,942) | (6.82)% | | Real estate, net | $990,766 | $1,000,303 | $(9,537) | (0.95)% | | Cash and cash equivalents | $14,286 | $11,653 | $2,633 | 22.60% | Condensed Consolidated Statements of Operations and Comprehensive Income This section outlines the company's financial performance over a period, showing revenues, expenses, and net income | Metric | Three months ended March 31, 2023 (in Thousands) | Three months ended March 31, 2022 (in Thousands) | Change (in Thousands) | Percentage Change | | :------------------------------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------------------ | | Lease revenue | $36,554 | $35,531 | $1,023 | 2.9% | | Total operating expenses | $25,434 | $25,658 | $(224) | (0.9)% | | Interest expense | $(8,828) | $(6,586) | $(2,242) | 34.0% | | Net income | $2,397 | $3,391 | $(994) | (29.3)% | | Net (loss) income (attributable) available to common stockholders | $(729) | $322 | $(1,051) | (326.4)% | | (Loss) income per weighted average share of common stock - basic & diluted | $(0.02) | $0.01 | $(0.03) | (300.0)% | | Incentive fee | $0 | $1,340 | $(1,340) | (100.0)% | Condensed Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three months ended March 31, 2023 (in Thousands) | Three months ended March 31, 2022 (in Thousands) | Change (in Thousands) | | :----------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $14,919 | $17,187 | $(2,268) | | Net cash provided by (used in) investing activities | $674 | $(17,571) | $18,245 | | Net cash (used in) provided by financing activities | $(12,794) | $1,866 | $(14,660) | | Net increase in cash, cash equivalents, and restricted cash | $2,799 | $1,482 | $1,317 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Organization, Basis of Presentation and Significant Accounting Policies This section describes the company's structure, financial statement preparation basis, and key accounting policies - Gladstone Commercial Corporation is a real estate investment trust (REIT) focused on acquiring, owning, and managing primarily office and industrial properties[17] - The company is externally managed by Gladstone Management Corporation and administrative services are provided by Gladstone Administration, LLC, both affiliates[17] - No material changes to critical accounting policies occurred during the three months ended March 31, 2023[21] 2. Related-Party Transactions This section details transactions with affiliated entities, including management and administration fees | Fee Type | Three months ended March 31, 2023 (in Millions) | Three months ended March 31, 2022 (in Millions) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | | Base Management Fee | $1.6 | $1.5 | | Incentive Fee | $0 | $1.3 | | Administration Fee| $0.6 | $0.5 | - The incentive fee was contractually eliminated for the quarters ending March 31, 2023, and June 30, 2023[26] - Gladstone Securities acts as the exclusive dealer manager for the Series F Preferred Stock offering, receiving selling commissions (6.0%) and a dealer manager fee (3.0%) on primary offering sales[34] 3. (Loss) Earnings Per Share of Common Stock This section presents the basic and diluted earnings per share calculations for common stock | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Basic (loss) earnings per share of common stock | $(0.02) | $0.01 | | Diluted (loss) earnings per share of common stock | $(0.02) | $0.01 | | Denominator for basic weighted average shares of common stock | 39,922,359 | 37,902,653 | 4. Real Estate and Intangible Assets This section details the company's real estate and lease intangible assets, including acquisition and revenue specifics | Metric | March 31, 2023 (in Thousands) | December 31, 2022 (in Thousands) | | :--------------------- | :---------------------------- | :------------------------------- | | Real estate, net | $990,766 | $1,000,303 | | Lease intangibles, net | $107,778 | $111,622 | - No properties were acquired during the three months ended March 31, 2023, compared to two industrial properties acquired for $13.463 million in the same period of 2022[40] | Lease Revenue Type | Three months ended March 31, 2023 (in Thousands) | Three months ended March 31, 2022 (in Thousands) | $ Change | % Change | | :----------------- | :----------------------------------------------- | :----------------------------------------------- | :------- | :------- | | Fixed lease payments | $32,141 | $31,332 | $809 | 2.6% | | Variable lease payments | $4,413 | $4,199 | $214 | 5.1% | | Total lease revenue | $36,554 | $35,531 | $1,023 | 2.9% | 5. Real Estate Dispositions, Held for Sale and Impairment Charges This section reports on property sales, assets classified as held for sale, and any impairment charges recognized - No properties were sold during the three months ended March 31, 2023 or 2022[49] - Two properties were classified as held for sale at March 31, 2023 (Columbia, SC and Baytown, TX), up from one at December 31, 2022 (Columbia, SC)[50] | Metric | March 31, 2023 (in Thousands) | December 31, 2022 (in Thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Total Assets Held for Sale | $4,722 | $3,013 | - No impairment charges were recognized during the three months ended March 31, 2023 or 2022[52] 6. Mortgage Notes Payable and Credit Facility This section details the company's mortgage debt, credit facility borrowings, and associated interest rates and derivatives | Debt Type | March 31, 2023 (in Thousands) | December 31, 2022 (in Thousands) | | :---------------------------- | :---------------------------- | :------------------------------- | | Mortgage notes payable, net | $354,556 | $359,389 | | Borrowings under Revolver | $26,250 | $23,250 | | Borrowings under Term Loan A, B, C, net | $366,740 | $366,567 | | Total mortgage notes payable and credit facility | $747,546 | $749,206 | - The weighted average interest rate on all debt outstanding as of March 31, 2023, was approximately 5.33%[55] - The Credit Facility (Revolver, Term Loan A, B, C) had $396.3 million outstanding at a weighted average interest rate of approximately 6.32% as of March 31, 2023[67] - The maximum additional amount drawable under the Credit Facility was $77.5 million at March 31, 2023, decreasing to $75.0 million by May 3, 2023[67][161] | Derivative Instrument | March 31, 2023 Fair Value (in Thousands) | December 31, 2022 Fair Value (in Thousands) | | :-------------------- | :--------------------------------------- | :------------------------------------------ | | Interest rate caps | $3,264 | $4,629 | | Interest rate swaps | $5,741 (net) | $11,996 (net) | 7. Commitments and Contingencies This section outlines the company's contractual obligations, including ground lease payments and outstanding letters of credit | Commitment Type | Total Anticipated Payments (in Thousands) | | :-------------------- | :---------------------------------------- | | Ground Lease Payments | $8,660 | - As of March 31, 2023, there was $14.4 million outstanding under letters of credit[71] 8. Equity and Mezzanine Equity This section details changes in stockholders' equity and mezzanine equity, including stock issuances and proceeds | Metric | March 31, 2023 (in Thousands) | December 31, 2022 (in Thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Total Stockholders' Equity | $188,987 | $202,780 | | Total Mezzanine Equity | $170,041 | $170,056 | - During Q1 2023, the company sold 0.2 million shares of common stock, raising $4.0 million in net proceeds under its At-the-Market (ATM) Equity Offering Sales Agreement[75] - A new 2023 Common Stock Sales Agreement was entered into on March 3, 2023, for the offer and sale of up to $250.0 million of common stock[76] - The company sold 22,256 shares of Series F Preferred Stock, raising $0.5 million in net proceeds during Q1 2023[82] 9. Subsequent Events This section reports significant events occurring after the balance sheet date, such as distributions and property transactions - Declared monthly distributions for April, May, and June 2023 for common, senior common, and preferred stocks[85][86][87] - Subsequent to March 31, 2023, and through May 3, 2023, the company raised an additional $0.3 million in net proceeds from the sale of 13,172 shares of Series F Preferred Stock[88] - On April 14, 2023, the company purchased a 76,089 square foot industrial property in Riverdale, Illinois for $5.3 million[89] - On April 6, 2023, the company repaid $2.7 million of fixed rate debt at an interest rate of 4.16%[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2023 financial condition, operational results, business environment, and key developments General This section provides an overview of the company's business as an externally advised REIT and its property portfolio - Gladstone Commercial Corporation is an externally advised REIT focused on acquiring, owning, and managing primarily office and industrial properties with net leases[94] - As of May 3, 2023, the company owned 138 properties totaling 17.3 million square feet across 27 states, with an occupancy rate of 96.0% and an average remaining lease term of 6.9 years[98] Business Environment This section analyzes the current market conditions impacting the company, including industrial demand, office trends, and interest rates - Demand for industrial space remains strong due to e-commerce and manufacturing onshoring, but faces inflation, supply chain disruptions, and labor shortages[99] - The office sector is experiencing softening fundamentals, with expectations for increased vacancy rates and lower renewal rates over the next 36 months[100] - Interest rates are volatile and expected to continue rising, potentially leading to global recessionary conditions[101] - The company collected 100% of all outstanding cash rents for calendar year 2022 and believes it has adequate liquidity and is in compliance with all debt covenants as of March 31, 2023[102][103] - The company is transitioning its variable rate debt from LIBOR to SOFR, with all variable rate debt based on SOFR as of March 31, 2023, except for $20.7 million of hedged LIBOR-based mortgages[105] Recent Developments This section highlights recent acquisitions, leasing activities, debt repayments, and equity offerings impacting the company - On April 14, 2023, the company purchased a 76,089 square foot industrial property in Riverdale, Illinois for $5.3 million[110] - During and subsequent to Q1 2023, six leases were executed, totaling 717,513 square feet with a weighted average remaining lease term of 7.3 years[111] - On April 6, 2023, $2.7 million of fixed rate debt was repaid at an interest rate of 4.16%[112] - In Q1 2023, $4.0 million in net proceeds were raised from common stock sales and $0.5 million from Series F Preferred Stock sales[113][118] - A new At-the-Market Equity Offering Sales Agreement was entered into on March 3, 2023, for up to $250.0 million of common stock[114] Diversity of Our Portfolio This section illustrates the company's diversified tenant base and property distribution across various industries and states - The company's largest tenant comprised only 4.3% of total lease revenue for the three months ended March 31, 2023, reflecting a diversified tenant base[121] | Industry Classification | Q1 2023 Lease Revenue (in Thousands) | Q1 2023 Percentage of Lease Revenue | | :------------------------------ | :----------------------------------- | :---------------------------------- | | Automotive | $5,140 | 14.2% | | Telecommunications | $4,940 | 13.5% | | Diversified/Conglomerate Services | $4,529 | 12.4% | | State | Q1 2023 Lease Revenue (in Thousands) | Q1 2023 Percentage of Lease Revenue | | :------------- | :----------------------------------- | :---------------------------------- | | Texas | $4,781 | 13.1% | | Florida | $4,117 | 11.3% | | Pennsylvania | $3,736 | 10.2% | Our Adviser and Administrator This section describes the external management structure provided by affiliated entities - The company is externally managed by Gladstone Management Corporation (Adviser) and Gladstone Administration, LLC (Administrator), both controlled by Mr. David Gladstone, the company's chairman and chief executive officer[122][124] - The Adviser and Administrator also provide services to other affiliated publicly-traded companies, including Gladstone Capital Corporation, Gladstone Investment Corporation, and Gladstone Land Corporation[123] Advisory and Administration Agreements This section details the terms of the agreements governing management and administration fees, including incentive fee elimination - The base management fee is calculated at an annual rate of 0.425% of the prior calendar quarter's 'Gross Tangible Real Estate'[126] - The payment of the incentive fee was contractually eliminated for the quarters ending March 31, 2023, and June 30, 2023[129] - The Advisory Agreement includes a termination fee clause, payable under specific conditions such as termination without cause[131] Significant Accounting Policies and Estimates This section confirms the adherence to GAAP and the absence of material changes to critical accounting policies - The financial statements are prepared in conformity with GAAP, requiring management to make judgments and estimates[133] - There were no material changes to critical accounting policies or estimates during the three months ended March 31, 2023[134] Results of Operations This section analyzes the company's financial performance, including revenues, expenses, and net income for the period | Metric | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :------------------------------------------------------------------ | :--------------------- | :--------------------- | :------- | :------- | | Total operating revenues | $36,554 | $35,531 | $1,023 | 2.9% | | Total operating expenses | $25,434 | $25,658 | $(224) | (0.9)% | | Interest expense | $(8,828) | $(6,586) | $(2,242) | 34.0% | | Net income | $2,397 | $3,391 | $(994) | (29.3)% | | Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders | $(736) | $324 | $(1,060) | (327.2)% | - The weighted average yield on the total portfolio increased to 7.9% as of March 31, 2023, from 7.4% as of March 31, 2022[135] Same Store Analysis This section defines and analyzes the performance of properties consistently owned and operated over comparative periods - Same store properties are defined as properties owned as of January 1, 2022, which have not been subsequently vacated or disposed of[137] Operating Revenues This section breaks down lease revenues by property category, explaining changes in same store and vacant property income | Lease Revenues Category | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :-------------------------- | :--------------------- | :--------------------- | :------- | :------- | | Same Store Properties | $29,891 | $28,253 | $1,638 | 5.8% | | Acquired & Disposed Properties | $2,142 | $1,918 | $224 | 11.7% | | Properties with Vacancy | $4,521 | $5,360 | $(839) | (15.7)% | | Total | $36,554 | $35,531 | $1,023 | 2.9% | - Increase in same store properties lease revenues primarily due to income from tenant-funded improvement projects and higher variable lease payments[138] - Decrease in lease revenues for properties with vacancy due to accelerated rent recognized in Q1 2022 from early lease terminations[138] Operating Expenses This section details the company's operating expenses, including depreciation, property costs, and management fees | Expense Category | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :-------------------------- | :--------------------- | :--------------------- | :------- | :------- | | Depreciation and amortization | $15,474 | $14,689 | $785 | 5.3% | | Property operating expenses | $6,727 | $6,623 | $104 | 1.6% | | Base management fee | $1,605 | $1,547 | $58 | 3.7% | | Incentive fee | $0 | $1,340 | $(1,340) | (100.0)% | | Administration fee | $565 | $462 | $103 | 22.3% | | General and administrative | $1,063 | $997 | $66 | 6.6% | - Property operating expenses for same store properties increased by 9.8% due to increased on-site employee requirements and general inflationary cost increases[140] - The incentive fee decreased by 100% due to its contractual elimination for the quarter ended March 31, 2023[143] Other Income and Expenses This section presents non-operating income and expenses, primarily focusing on interest expense fluctuations | Metric | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :-------------- | :--------------------- | :--------------------- | :------- | :------- | | Interest expense| $(8,828) | $(6,586) | $(2,242) | 34.0% | | Other income | $105 | $104 | $1 | 1.0% | - The significant increase in interest expense was primarily a result of higher interest costs on variable rate debt due to rising global interest rates[144] Net (Loss) Income (Attributable) Available to Common Stockholders and Non-controlling OP Unitholders This section analyzes the net income attributable to common stockholders and non-controlling interests, explaining changes year-over-year | Metric | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :------------------------------------------------------------------ | :--------------------- | :--------------------- | :------- | :------- | | Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders | $(736) | $324 | $(1,060) | (327.2)% | - The decrease was primarily due to increased interest expense from higher borrowing costs on variable rate debt, partially offset by increased operating revenues from asset acquisition activity[145] Liquidity and Capital Resources This section assesses the company's ability to meet short-term and long-term obligations and fund growth initiatives - Available liquidity as of March 31, 2023, was $91.8 million, comprising $14.3 million in cash and cash equivalents and $77.5 million in available borrowing capacity under the Credit Facility[146] - The company plans to use cash flows from operations, Credit Facility borrowings, and equity issuances to fund distributions, debt service, and portfolio growth[147][148] - As of March 31, 2023, the company had $357.0 million in mortgage notes payable, with $64.5 million due in the remainder of 2023 and $20.5 million due in 2024[153][155] | Contractual Obligation | Total (in Thousands) | Less than 1 Year (in Thousands) | 1-3 Years (in Thousands) | 3-5 Years (in Thousands) | More than 5 Years (in Thousands) | | :--------------------- | :------------------- | :------------------------------ | :----------------------- | :----------------------- | :------------------------------- | | Debt Obligations | $753,284 | $70,286 | $113,754 | $480,027 | $89,217 | | Interest on Debt Obligations | $162,118 | $38,287 | $71,019 | $46,194 | $6,618 | | Operating Lease Obligations | $8,660 | $492 | $987 | $1,008 | $6,173 | | Purchase Obligations | $7,222 | $5,244 | $0 | $1,978 | $0 | Funds from Operations This section presents Funds from Operations (FFO), a key non-GAAP metric for REIT performance, and its per-share impact - Funds from Operations (FFO) is a non-GAAP supplemental measure of operating performance, defined by NAREIT[164] | Metric | Q1 2023 (in Thousands) | Q1 2022 (in Thousands) | $ Change | % Change | | :------------------------------------------------------------------ | :--------------------- | :--------------------- | :------- | :------- | | FFO available to common stockholders and Non-controlling OP Unitholders - basic | $14,738 | $15,013 | $(275) | (1.8)% | | Basic FFO per weighted average share of common stock and Non-controlling OP Unit | $0.37 | $0.39 | $(0.02) | (5.1)% | | Diluted FFO per weighted average share of common stock and Non-controlling OP Unit | $0.37 | $0.39 | $(0.02) | (5.1)% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily interest rate fluctuations, and its mitigation strategies - The primary market risk is interest rate risk, impacting variable-rate debt and lease escalations[169] - The company uses interest rate cap agreements and interest rate swap agreements to mitigate interest rate risk[169][175] | Interest Rate Change | Net increase (decrease) to Net Income (in Thousands) | | :------------------- | :------------------------------------------------- | | 3% Decrease to SOFR | $2,012 | | 2% Decrease to SOFR | $532 | | 1% Decrease to SOFR | $266 | | 1% Increase to SOFR | $(266) | | 2% Increase to SOFR | $(532) | | 3% Increase to SOFR | $(798) | - The fair value of mortgage debt outstanding was $329.6 million as of March 31, 2023[173] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures, with no material changes to internal controls during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023, providing reasonable assurance for timely and accurate reporting[177] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[178] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous disclosures Item 1. Legal Proceedings The company reports no material legal proceedings currently active or threatened against it - The company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it[181] Item 1A. Risk Factors The company confirms no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K - There are no material changes to risks associated with the company's business or investment in its securities from those previously set forth in the Annual Report on Form 10-K for the year ended December 31, 2022[182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered equity sales or issuer repurchases of its own equity securities - No unregistered sales of equity securities occurred[183] - No issuer purchases of equity securities occurred[183] Item 3. Defaults Upon Senior Securities The company confirms no defaults occurred on its senior securities during the reporting quarter - No defaults upon senior securities occurred[184] Item 4. Mine Safety Disclosures This disclosure item is not applicable to the company's business operations - This item is not applicable[184] Item 5. Other Information No additional information is reported under this section - No other information is reported[184] Item 6. Exhibits This section provides a comprehensive list of all exhibits filed with the Form 10-Q, including key agreements and certifications - The exhibit index includes Articles of Restatement, Bylaws, Articles Supplementary for various preferred stocks, Investment Advisory Agreement, Dealer Manager Agreement, At-the-Market Equity Offering Sales Agreement, and certifications[186][188] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed/furnished[188] - iXBRL Instance Document and Taxonomy Extension Schema, Calculation, Label, and Presentation Linkbase Documents are attached as Exhibit 101[191] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the report's accuracy - The report was signed by Gary Gerson, Chief Financial Officer, and David Gladstone, Chief Executive Officer and Chairman of the Board of Directors, on May 3, 2023[195]