Updated on June 2nd, 2021 by Bob Ciura
Real Estate Investment Trusts have a lot to offer investors who desire higher levels of investment income, such as retirees. For instance, Gladstone Commercial Corporation (GOOD) is a REIT with a high dividend yield of 6.8%.
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Gladstone Commercial appears to be an attractive dividend stock, especially considering the available alternatives. The S&P 500 Index, on average, has about a ~1.4% dividend yield. Plus, Gladstone Commercial is one of only 54 stocks that pays its dividend each month.
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However, Gladstone Commercial’s dividend is far from guaranteed. Its payout ratio is nearly 100%, leaving little room for error when it comes to maintaining the dividend.
This article will discuss the trust’s business model and financial performance, and why its dividend may be riskier than meets the eye.
Gladstone Commercial is a Real Estate Investment Trust, or REIT, that invests primarily in single-tenant, and anchored multi-tenant net leased assets. It owns 15.5 million square feet of office and industrial real estate in the U.S.
Gladstone Commercial has a very diversified portfolio. As of the end of March, the trust’s portfolio consisted of 120 properties in 27 states, leased to a 107 different tenants.
Source: Investor presentation
The trust’s portfolio is typically geared toward long-term agreements. In addition, Gladstone Commercial enjoys high occupancy rates, including a current rate of 95.5%. Impressively, occupancy has never fallen below 95% since the trust’s IPO in 2003.
Approximately 56% of Gladstone Commercial’s tenants are rated investment grade or are the non-rated investment grade equivalent. This contributes to a high-quality portfolio of tenants that should weather minor economic downturns, and preserve Gladstone Commercial’s rent streams.
The trust has generated impressive revenue growth in the past, but growth of the bottom line has leveled off lately. This creates some level of uncertainty with regard to the distribution’s safety.
Gladstone reported first quarter earnings on May 10th, 2021, and results were better than expected on both the top and bottom lines. Core funds–from–operations, or FFO, came to $15.4 million, a 15% increase from the prior quarter. Core FFO was up primarily due to an increase in lease revenue from new acquisitions, partially offset by an increase in interest expense, which was from higher rates on variable rate debt.
Gladstone collected 98% of cash rents during the first quarter during Q1. It also acquired a 180k square foot industrial facility in Ohio for $11.1 million, which is 100% leased to a single tenant for 14 years.
It sold two properties for total proceeds of $5.5 million, and renewed leases on 193k square feet on two existing properties. Gladstone also leased 189k of vacant square feet for 5.2 years at one property.
After Q1, the trust said it collected 98% of base April rents, and that occupancy was 95% as of the end of April.
Gladstone’s FFO–per–share has been between $1.50 and $1.60 for most of the past decade as the trust continues to issue new shares and debt to fund acquisitions, but those acquisitions fail to provide an economic gain. In other words, while the trust’s new properties provide growth on a dollar basis, when the cost of those acquisitions is factored in, it is essentially no gain on a per–share basis.
Given where the distribution is today, that could present a problem as the trust’s payout ratio is very close to 100%. However, despite the favorable fundamentals of the trust’s portfolio, its headwinds to earnings growth (dilution and operating expenses) are still very much present.
Gladstone Commercial has a current monthly dividend payment of $0.12515 per share. On an annualized basis, the dividend payment is $1.5018 per share, good for a 6.8% dividend yield.
The distribution had been stagnant at $0.125 per share monthly since January of 2008, reflecting the struggles the trust has had with respect to growth. However, the distribution received a fractional raise earlier in 2020 to the new level of $0.12515 cents per share monthly.
To its credit, Gladstone Commercial has paid monthly dividends for more than 15 consecutive years, an impressive track record of consistent payouts, although the distribution has been basically flat for more than a decade.
Since Gladstone Commercial’s 2003 initial public offering, the trust has not missed a distribution, nor has it reduced the distribution at any time, which is very impressive for a REIT given the wide array of economic conditions that have existed in this time frame.
Another important consideration when buying dividend stocks is balance sheet strength.
Too much debt can jeopardize a trust’s dividends. On a positive note, Gladstone Commercial has worked to significantly reduce its leverage over the past several years, and now has a balanced maturity schedule.
Source: Investor Presentation
Approximately two-thirds of Gladstone Commercial’s debt is fixed-rate, which could help mitigate the impact of volatile interest rates.
In addition, large maturities are a few years away, meaning the trust has time to generate cash to pay them off, or find better ways to refinance them.
Still, there is not much room for error because the trust maintains a high payout ratio. We see FFO of $1.59 per share, which would barely cover the annualized dividend payout of $1.50 per share.
This means there is very little wiggle room for Gladstone Commercial’s FFO when it comes to covering the distribution.
If the trust’s fundamentals deteriorate over the next few years, there is a chance it may not be able to sustain its dividend at the current level. We see this as the principal risk of owning Gladstone Commercial today.
Gladstone Commercial’s very high dividend yield is attractive and appears to be sustainable, at least in the near-term, given the trust’s current level of FFO. The trust enjoys high occupancy and strong rental rates as well. But given the ~100% payout ratio, we still have concerns about Gladstone’s dividend safety.
As a result, investors will need to monitor the trust’s results closely to make sure FFO does not decline much from present levels. Indeed, even a modest decline could jeopardize the dividend.
Gladstone’s yield is attractive, but it carries an elevated risk of a cut in the coming years, particularly if the current recession is worse than expected or drags on for a prolonged period.