Gladstone mercial (GOOD) - 2021 Q4 - Annual Report

Part I Business Gladstone Commercial Corporation is a REIT specializing in acquiring and managing industrial and office properties to generate stable rental income and distributions, operating under an UPREIT structure - The company is a REIT focused on acquiring, owning, and managing primarily industrial and office properties, structured as an UPREIT and externally managed by Gladstone Management Corporation[25][29] - The company's strategy is to invest in a diversified portfolio of properties, primarily industrial and office, with net leases of 7-15 years that feature built-in rental increases to generate stable cash flow for distributions[26][30] - The company has no employees; all services are provided by employees of its Adviser and Administrator As of December 31, 2021, these entities had 69 full-time employees, with 36 dedicated to investment and asset management[63][64] Portfolio Snapshot as of February 15, 2022 | Metric | Value | | :--- | :--- | | Properties Owned | 129 | | Total Rentable Space | 16.2 million sq. ft. | | Geographic Footprint | 27 states | | Occupancy Rate | 97.2% | | Avg. Remaining Lease Term | 7.1 years | | Weighted Avg. Mortgage Term | 3.8 years | | Weighted Avg. Mortgage Interest Rate | 4.19% | Risk Factors The company faces significant risks from tenant defaults, financing challenges, industry concentrations, external management conflicts, and maintaining REIT status - Business risks include tenant inability to pay rent, especially from leveraged or lower middle market businesses, which could adversely affect cash flow and distributions The company is also exposed to risks from tenant bankruptcies and difficulties in re-leasing vacant or specialized properties[70][73][83] - As of December 31, 2021, the five largest tenants accounted for 13.1% of total lease revenue Significant industry concentrations include Telecommunications (16.5%), Diversified/Conglomerate Services (13.5%), and Healthcare (11.1%), exposing the company to downturns in these sectors[84] - Financing risks include reliance on external capital markets, potential default on Credit Facility covenants, and challenges in refinancing maturing debt, including balloon payments of $95.2 million due in 2022[96][102][104] - The company is dependent on its external Adviser and key personnel Potential conflicts of interest exist as the Adviser and its affiliates manage other entities, including Gladstone Capital, Gladstone Investment, and Gladstone Land[117][119][121] - Failure to maintain REIT qualification would result in corporate-level taxation and reduced cash available for distributions Compliance requires distributing at least 90% of REIT taxable income and meeting various asset and income tests[126][127] - The COVID-19 pandemic and its variants create significant uncertainty, potentially affecting market rental rates, property values, tenant stability, and the company's ability to secure financing and pay distributions[163][164] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties The company's portfolio comprises 129 properties across 27 states, with high occupancy and diversification by geography and industry Lease Expirations by Year (as of Dec 31, 2021) | Year of Expiration | % of Lease Revenue Expiring | | :--- | :--- | | 2022 | 4.5% | | 2023 | 8.4% | | 2024 | 7.5% | | 2025 | 11.0% | | 2026 | 9.4% | | Thereafter | 54.7% | Top 5 States by Lease Revenue (FY 2021) | State | Lease Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | Florida | $16,741 | 12.2% | | Texas | $16,124 | 11.7% | | Pennsylvania | $15,382 | 11.2% | | Ohio | $14,911 | 10.8% | | Georgia | $10,778 | 7.8% | Top 5 Industries by Lease Revenue (FY 2021) | Industry | Lease Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | Telecommunications | $22,712 | 16.5% | | Diversified/Conglomerate Services | $18,613 | 13.5% | | Healthcare | $15,216 | 11.1% | | Automotive | $13,555 | 9.8% | | Banking | $10,264 | 7.5% | Legal Proceedings The company is not currently subject to any material legal proceedings or threats thereof - The company reports no material legal proceedings[175] Mine Safety Disclosures This item is not applicable to the company - Not applicable[176] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, maintains a consistent distribution policy, and has shown competitive performance against REIT indices - The company's common stock is traded on Nasdaq under the symbol "GOOD" The company has never reduced or missed a scheduled distribution to common stockholders since its inception in 2003[178] - To maintain its REIT status, the company must distribute at least 90% of its REIT taxable income A covenant in its Credit Facility also limits distributions to 96% of its Funds from Operations (FFO)[178][179] Stock Performance Comparison (2016-2021) | Year | GOOD | S&P 500 | FTSE NAREIT All REIT Index (FNAR) | | :--- | :--- | :--- | :--- | | 2016 | $100.00 | $100.00 | $100.00 | | 2017 | $111.77 | $120.91 | $109.27 | | 2018 | $102.90 | $118.71 | $104.79 | | 2019 | $134.72 | $149.76 | $134.20 | | 2020 | $121.12 | $177.46 | $126.34 | | 2021 | $184.56 | $227.61 | $176.71 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting 2021 acquisitions, increased lease revenue, decreased net income due to property sales, and stable liquidity - The company collected 100% of outstanding rent for calendar year 2021 While the COVID-19 pandemic has adversely affected office demand, the demand for industrial space has remained strong due to e-commerce growth[191][196] - The company's liquidity as of December 31, 2021, was $29.2 million, comprising $8.0 million in cash and $21.2 million available under its Revolver Management believes this is sufficient for near-term needs[262] 2021 Key Activities Summary (in thousands) | Activity | Details | | :--- | :--- | | Acquisitions | 11 properties, 949,174 sq. ft., for $100,453 | | Dispositions | 3 properties, 123,971 sq. ft., for $9,473 (resulting in a $1,148 loss) | | Leasing | 16 extensions/modifications on 1.7M sq. ft. | | Financing | Repaid $15.2M in mortgages; Issued $21.5M in new mortgages | | Equity | Raised $36.6M from Common ATM, $6.9M from Series F, and $96.6M from Series G offering | Financial Performance Comparison (2021 vs. 2020, in thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Lease Revenue | $137,688 | $133,152 | 3.4% | | Net Income | $9,733 | $14,985 | (35.0)% | | FFO per Share (Diluted, Adj.) | $1.60 | $1.56 | 2.6% | | Net (Loss) per Share (Diluted) | ($0.12) | $0.09 | (233.3)% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, managed through fixed-rate debt and derivative instruments - The primary market risk is interest rate risk The company uses derivative contracts, including interest rate caps and swaps, to mitigate this risk on its variable-rate debt[289][295] Impact of LIBOR Increase on Net Income (as of Dec 31, 2021) | Interest Rate Change | Net Decrease to Net Income (in thousands) | | :--- | :--- | | 1% Increase to LIBOR | $(2,787) | | 2% Increase to LIBOR | $(5,221) | | 3% Increase to LIBOR | $(6,493) | Debt by Interest Rate Type (as of Dec 31, 2021, in thousands) | Debt Type | Amount | | :--- | :--- | | Fixed Rate | $436,530 | | Variable Rate | $274,888 | | Total | $711,418 | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including an unqualified opinion from PricewaterhouseCoopers LLP on financial reporting and internal controls - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021 PricewaterhouseCoopers LLP audited and concurred with this assessment[302][303] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects and that the company maintained effective internal control over financial reporting[307] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Real Estate, Net | $958,586 | $900,215 | | Total Assets | $1,143,352 | $1,097,908 | | Total Liabilities | $770,529 | $722,585 | | Total Equity | $202,562 | $216,037 | | Total Liabilities & Equity | $1,143,352 | $1,097,908 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Lease Revenue | $137,688 | $133,152 | $114,387 | | Total Operating Expenses | $102,800 | $99,855 | $80,231 | | Net Income | $9,733 | $14,985 | $9,541 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting or financial disclosure matters - None[464] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[467] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, these controls[470] Other Information The company reports no other information for this item - None[471] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[472] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[475] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2022 Proxy Statement[476] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the 2022 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2022 Proxy Statement[477] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[478] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[478] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including financial statements, schedules, governance documents, and material agreements - The report includes the consolidated financial statements and Schedule III – Real Estate and Accumulated Depreciation[480][481] - An extensive list of exhibits is provided, including governance documents, material agreements with the Adviser and Administrator, debt agreements, and equity offering documents[482][483][484] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits[485][486] Form 10-K Summary This item is not applicable to the company - Not applicable[488]