Gladstone Commercial: A Long-Term Hold For Monthly Income (NASDAQ:GOOD)

Gladstone Commercial (NASDAQ:GOOD) is a diversified equity REIT that owned a portfolio of 135 properties spread across 17.1 million square feet and 27 states, mainly in the Southeastern U.S. as of the end of the fourth quarter of 2023. GOOD focuses on secondary growth markets with higher cap rates, with industrial properties constituting 60% of its property portfolio. Office properties are the second largest constituent at 36%. The REIT pays a monthly dividend, last declaring a $0.10 per share payout that was unchanged sequentially and $1.20 per share annualized for an 8.7% dividend yield. The yield has been pulled down over the last few months on the back of a sustained rally of the commons, but still sits far above their pre-pandemic average of around 6%.

GOOD generated fourth-quarter FFO of $0.36 per share, around $0.01 above consensus and up sequentially from a core FFO of $0.34 per share in the third quarter. It means GOOD is changing hands for 9.5x times its annualized fourth-quarter FFO. This is around a third lower than its sector median, with pending but still uncertain Fed rate cuts set to reverse the conditions that sparked the dip in the commons since early 2022. GOOD also has two outstanding preferreds with monthly payment schedules and attractive investment profiles against the REIT’s industrial-heavy portfolio.

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I own a significant amount of the Series G preferreds which have been part of my portfolio for a few months. I last covered and initiated a position in the ticker in November with the view that the double-digit discount to their $25 per share liquidation value was outsized against the fundamentals of the REIT. Further, GOOD’s debt maturity schedules, upcoming lease expirations, occupancy, and leasing momentum all render the REIT a strong long-term hold even as hopes dampen for near-term base interest rate cuts from the Fed.

Lease Expirations, Occupancy, And Debt Maturities

GOOD is set to see around four leases expire this year, spread across 1.8 million square feet, constituting 4.5% of its portfolio. Roughly 7.5% of its portfolio expires next year, with expirations over the next two years at 12% of GOOD’s portfolio. Leasing momentum has been extremely positive, with the 1.4 million square feet of leases signed during 2023. This drove a 13% net increase in same-store GAAP rent. Critically, GOOD’s portfolio occupancy ended the fourth quarter at 96.8% with the REIT collecting 100% of cash base rents during the year. Occupancy was up 20 basis points sequentially from 96.6% in the third quarter with GOOD closing out the fourth quarter with 6.8 years remaining on its average lease term and with its industrial assets with fixed annual escalations of 1.5% to 3.5% set to drive revenue growth. Further, renewal leases on currently below-market industrial rents are set to be signed at higher rates.

GOOD faces a relatively positive debt maturity profile with just around 3.4% of its total debt maturing in 2024, around $15.6 million. Another $28.2 million of debt matures next year against $3.4 million in cash and $51.5 million of debt available under GOOD’s line of credit. Bears would be right to highlight that GOOD has seen its cash from operations dip since the Fed started raising rates.

Investment Activity, The Preferreds, And The Fed

GOOD has seen its investment activity dip with an investment volume of $29.5 million in 2023, down from $114.4 million the previous year. The REIT invested in four industrial properties at a 9.6% weighted average cap rate last year. GOOD continues to dispose of its office properties, selling two non-core properties during the fourth quarter and with four properties held for sale as of the end of 2023.

While I’ve taken the relative safety of the preferreds, the commons at their current multiple against the industrial weighting of the portfolio are likely set for a strong performance as GOOD continues to benefit from its healthy maturity profile and lease expirations set to see same-store GAAP rent experience growth. However, with inflation remaining sticky, expectations for at least three rate cuts this year will continue to get pared back. This will not only lead to a dampening of investor sentiment and the REIT’s multiple, but will mean that upcoming debt refinancings will be completed at rates that currently sit at 22-year highs. The REIT covers its dividend by 120%, so the current yield is safe.