Gladstone Commercial: Steady, Flat Dividends

good tev

I may be too skeptical, but whenever I see high-yielding stocks among the Top Yield Equity REITs by Sector, I think something is wrong with the stocks. Perhaps I am just tired of seeing the same group of stocks top the charts for the wrong reasons. I will not explore this in too much detail, but consider the top-yield stocks to be HPT, SNH, GOV and SIR — all run by the same investment manager whom activists describe as “entrenched.” I feared the same about Gladstone Commercial Corporation (NASDAQ:GOOD), an externally managed REIT that sports a 9 percent dividend yield in the Mixed Industrial/Office sector.

For a sector with a 10.5 percent average return in H1 2015, Gladstone managed relatively well, with a 3.6 percent drop. Its price-to-FFO has been around 10.9× — below most of its peers.

good tenantThese risks might explain Gladstone’s low price-to-FFO and high dividend yield:

  • It has high leverage for a company in its sector. After reaching 67 percent debt-to-total enterprise, Gladstone has gradually decreased leverage and now sits on 52 percent.
  • The company has been paying dividends since 2003, but dividends have not increased since 2008, remaining stuck at $1.50 per year.
  • Their FFO did well during the Great Recession, but subsequently had a slight hiccough, decreasing in 2011 and 2012.
  • Gladstone is a small cap, with market capitalization of approximately $350 million. The current share price is the same as in 2003.
  • The company leases to small and medium-sized businesses, which has potentially limited financial resources.

good locationWhat is good is that Gladstone has been very steady. Since its IPO, occupancy has never dropped below 96 percent (it is currently about 99.5 percent), demonstrating the main characteristic associated with the strength of its tenants. Indeed, the company focuses on tenant creditworthiness. They started out with two properties and over time reached a portfolio of 98 properties whose tenant industry is diverse; transactions have been made via third-party acquisition, sale-leaseback, and build-to-suit JV and forward purchase. Gladstone mainly has single-tenant commercial or industrial real properties leased on triple-net basis with terms ranging from ten to fifteen years.

In the end, Gladstone might seem an opportunity for being undervalued, but there are risks associated therewith.

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Source: Gladston Commercial, Fast Graphs


Written by Heli Brecailo

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