Gladstone Commercial Corporation: REIT With A 6.9% Dividend Yield, But Tread Carefully

GOOD has generated impressive revenue growth over the past several years, but growth of the bottom line has leveled off lately.

In order for GOOD to continue growing, it will need to stay on top of its lease expirations. This poses a potential headwind for the company going forward.

Growth Prospects

In 2016, GOOD reported funds from operation, or FFO, of $37.1 million. FFO-per-share of $1.55 declined 2% from the previous year.

There were a few reasons for the FFO decline last year. Although revenue and net income increased 3.1% and 10%, respectively, several items weighed on FFO-per-share.

These include 9.1% growth in operating expenses, higher preferred stock dividends, and a $2 million asset impairment charge. FFO-per-share was also negatively impacted by rising shares outstanding.

GOOD has exhibited strong growth over a prolonged period.

(Click on image to enlarge)

GOOD Growth

Source: May 2017 REIT Week Presentation, page 9

From 2012-2016, GOOD grew revenue and total assets by 11% and 9% each year, respectively.

However, as a REIT the company relies heavily on external capital to finance growth initiatives. Greater preferred and common shares outstanding have resulted in FFO dilution.

The good news is, GOOD’s financial performance has firmed to start 2017. First-quarter diluted FFO-per-share was flat year-over-year.

It is a good sign that the decline stopped last quarter. However, the company is now barely covering its dividend payments with cash flow.

FFO-per-share of $0.38 per share last quarter only covered the $0.375 per share dividend by $0.005 per share, as total assets declined 2.2% last quarter.

If GOOD has trouble renewing leases over the back half of 2017, it could put management in an uncomfortable position in 2018.

Dividend Analysis

GOOD has a current monthly dividend payment of $0.125 per share. On an annualized basis, the dividend payment is $1.50 per share, good for a 6.9% dividend yield.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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