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Stonegate Initiates Coverage on Gladstone Commercial Corp. (NASDAQGS: GOOD)

Key Takeaways
  • Fundamentals remain strong with 96% occupancy levels
  • Diversification continues as 59% of properties areindustrial
  • Debt levels are decreasing with a recent $35.7M fixed ratedebt repayment

DALLAS, TX -- October 17th, 2023 --  Gladstone Commercial Corp. (NASDAQGS: GOOD): Stonegate Capital Partners initiates their coverage on Gladstone Commercial Corp. (NASDAQGS: GOOD). 

Business Overview

Gladstone Commercial Corp (“Good” or “The Company”) is a real-estate investment trust (REIT) that primarily focuses on acquiring, owning, and managing single tenant and anchored multi-tenant net-leased office and industrial properties. The Company also has the capacity to make long-term industrial and commercial mortgage loans to companies of various industries across the United States. Gladstone’s investment portfolio consists of real-estate properties that are leased to tenants with small- to medium-sized unrated businesses and larger rated businesses, occupied by companies controlled by buyout funds, and are purchased from and leased back to businesses that are seeking to raise capital. As of June 30, 2023, Gladstone owns 136 properties totaling 17.2 million square feet. GOOD IPO’d on the NASDAQ in 2003 under the trading symbol GOOD and is currently headquartered in McLean, Virginia.

 Company Updates

  • Transactions: GOOD has remained acquisitive, prioritizing mission critical properties in growth markets at attractive cap rates. The Company reduced its property portfolio by one location and one tenant on net to 136 properties and 110 tenants. This is in-line with managements stated objective to reduce holdings in non-core locations with three exits in the year to date. Additionally, on October 13, 2023 GOOD made its most recent purchase of a 70,000 sqft. industrial triple net property in Allentown, PA for $7.8M at a cap rate of 9.2%.
  • Decreasing Debt Levels: The Company ended the quarter with a total debt level of $759.0M with an average interest rate of 5.48%. This translates to a Net Debt/Gross Assets percentage of 45.4%. This is in-line with the 2022 ratio of 45.3%. As the Company continues to recycle assets, we expect debt levels to continue to decrease. We note that the Company repaid $2.7M in fixed rate debt during 2Q23. Subsequent to the end of the quarter the Company repaid an additional $35.7M of fixed rate debt.
  • Fundamentals Remain Strong: GOOD fundamentals remain very strong. Occupancy at the end of the quarter was 96% with 100% rent collection throughout the quarter. Lease terms remain strong at 6.8 years, down from 7.1 years in 2Q22. Subsequent to the end of the quarter GOOD collected 100% of rents in July.
  • 2Q23 Results: GOOD reported revenue, EPS, and adj FFO per share of $38.7M, ($0.19), and $0.24, respectively. This compares to consensus estimates of $37.0M, ($1.17), and $0.33. Net Income to common stockholders was a loss of $7.7M, largely due to impairment charges taken on three properties during the quarter. Core FFO for the quarter was $0.41 per share, an increase of 10.7% from the prior quarter.
  • Improving Diversification: GOOD continues to pivot from office properties into industrial. In 2Q23 the Company’s portfolio consisted of 59% industrial properties and 37% office properties. This was up from 52% industrial and 44% office in 2Q22. This pivot is even more pronounced since 2019 when the Company ended the year with 38% industrial and 57% office.
  • Payout Ratios: The Company currently pays a 9.9% dividend yield, paying out an annualized $1.20 per share. This is down from the $1.50 per share paid out in FY22. As is noted in the valuation segment, despite the decreased dividend the company still appears undervalued. Based on a 2Q23 per share values for FFO of $0.41, Core FFO of $0.41, and AFFO of $0.24 GOOD has payout ratios of 74%, 74% and 126% respectively.
  • Valuation: We use a combination of comp analysis, reNAV per share analysis, and a Perpetual Growth Model to frame our valuation of GOOD. When we average these valuation methods it returns a valuation range of $13.17 to $16.25 with a midpoint of $14.68.

About Stonegate
Stonegate Capital Partners is a leading capital markets advisory firm providing investor relations, equity research, and institutional investor outreach services for public companies. Our affiliate, Stonegate Capital Markets (member FINRA) provides a full spectrum of investment banking, equity research and capital raising for public and private companies.

Key Takeaways
  • Fundamentals remain strong with 96% occupancy levels
  • Diversification continues as 59% of properties areindustrial
  • Debt levels are decreasing with a recent $35.7M fixed ratedebt repayment
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