Monthly Dividend Stock In Focus: Gladstone Commercial - Sure Dividend

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Monthly Dividend Stock In Focus: Gladstone Commercial

Updated on April 20th, 2022 by Quinn Mohammed

Real Estate Investment Trusts have a lot to offer investors who desire higher levels of investment income, including retirees. For instance, Gladstone Commercial Corporation (GOOD) is a REIT with a high dividend yield of 6.7%.

You can see the full list of 5%+ yielding stocks by clicking here.

Gladstone Commercial appears to be an attractive dividend stock, especially considering the available alternatives. The S&P 500 Index, on average, has about a ~1.3% dividend yield. Plus, Gladstone Commercial is one of only 50 stocks that pays its dividend each month.

You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:


However, Gladstone Commercial’s dividend is far from guaranteed. Its payout ratio is almost 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.

Business Overview

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 16.2 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 December 2021, the trust’s portfolio consisted of 129 properties in 27 states, leased to 108 different tenants in 19 industries.

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 97.2%. 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.

Gladstone reported fourth quarter earnings on February 15th, 2022, and results were essentially in line with expectations. Core funds-from-operations, or FFO, came to $15.1 million, a 2.8% increase from the prior quarter. Core FFO was up primarily due to an increase in lease revenue from new acquisitions and leased vacant space.

Gladstone collected 100% of cash rents due in 2021. During the year, Gladstone also acquired 11 fully occupied industrial properties. The properties add up to roughly 900k square feet of rental space and were purchased for $99.7 million, at a weighted average cap rate of 7.03%.

It sold three non-core properties for total proceeds of $9.5 million, and renewed leases on 883k square feet on ten existing properties. Gladstone also leased 676k of vacant square feet with lease terms ranging from 5.2 to 12.5 years at five properties.

Growth Prospects

The trust has generated impressive revenue growth in the past, but bottom line growth has leveled off lately. This creates some level of uncertainty with regard to the distribution’s safety. FY2022 core FFO expectations are strong though, which could bring down the payout ratio for the year.

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 for shareholders after accounting for share issuance and cost of debt. 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 approaching 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.

Still, the company has successfully grown its asset base at a 15% annual compound growth rate in the last decade. And since 2003, the portfolio has maintained high occupancy exceeding 95%.

With limited lease expirations in 2022, the company is focused on growth. They are interested in increasing the industrial allocation of the portfolio. Currently, industrial properties account for 51% of the property portfolio. Office properties make up 45% of the property portfolio, followed by retail at 3% and medical offices at 1%.

Dividend Analysis

Gladstone Commercial has a current monthly dividend payment of $0.1254 per share. On an annualized basis, the dividend payment is $1.5048 per share, good for a high 6.7% 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 was increased for the last three years, but the raises were so small they amounted not even to one penny per share. The latest fractional raise was at the start of 2022 to the new level of $0.1254 cents per share monthly.

To its credit, Gladstone Commercial has paid monthly dividends for more than 16 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

Nearly 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 couple 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 $1.65 per share, which is covering the the annualized dividend payout of $1.50 per share by a thin margin.

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.

Final Thoughts

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 payout ratio of above 90%, 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 to income investors, but there appears to be little in the way of earnings growth. The monthly payment schedule is a bonus with the high yield, but investors must pay attention to results and keep an eye on the payout ratio.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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