Value investors often struggle with whether to deploy capital in regular intervals, or to wait for an opportunistic dip in the market. The former strategists would say that time in the market is better than timing the market. I see merits in both strategies, however, and for those in the latter camp, the market rout over the past 6 weeks presents a great opportunity to layer into value names whose dividends have become attractive.
This brings me to Gladstone Commercial Corp. (NASDAQ:GOOD), which, at the current price, is trading towards the low end of its 52 week trading range of $19.74 to $26.13. This article highlights what makes GOOD an attractive high yield opportunity at present, so let’s get started.
Gladstone Commercial is a REIT that focuses on acquiring, owning, and operating net leased industrial and office properties throughout the United States. The company has been in business since 2003 and today owns 131 properties that are diversified across 110 tenants across 19 different industries and 27 states.
Moreover, GOOD has exposure to an overall healthy tenant base, of which 57% have an investment grade or investment grade equivalent credit rating. Its remaining average lease term of 7.1 years is less than the ~10 years of more retail-focused net lease REITs such as Realty Income (O), but that’s due to GOOD’s office exposure, which come with relatively shorter lease durations. As shown below, GOOD’s top 5 tenants are mostly comprised of well-recognized companies in their respective industries.
Meanwhile, GOOD’s portfolio continues to perform well, with a 97% occupancy rate during the first quarter. FFO/share was down by $0.01 on a YoY basis to $0.39, and this was primarily due to a one-time charge related to the expiration of a 2019 shelf registration and prepaid ATM expenses.
Furthermore, GOOD continues to gain increasing exposure to the busy industrial sector, with 4 industrial property acquisitions during and after the first quarter, with long-weighted remaining lease terms in the 7 to 13 year range. Since July of last year, management has been steadily increasing its industrial allocation from 32% to 51%, with a strong average acquisition cap rate of 6.8%.
Moreover, management has also steadily deleveraged the balance sheet. As shown below, GOOD’s net debt to gross assets ratio continues to decline, and currently sits at a healthy 44.6%.
Looking forward, management aims to increase its industrial allocation to 60% of its portfolio over the next 12 to 18 months. This is reflected by its current pipeline, as noted during the recent conference call:
Our current pipeline of acquisition candidates is approximately 310 million in volume representing 19 properties and all of which are industrial. Of the 19 properties, one property is in due diligence totaling 18.8 million. Six properties are in a Letter of Intent stage, totaling 104 million and the balance are under initial review. Our team is staying actively engaged in the markets as we believe acquisition opportunities will continue to rise and we can and will pursue.
Risks to GOOD include the external management structure, which could result in conflicts of interest. In addition, office properties are generally higher risk compared to industrial properties due to potentially higher tenant turnover and supply and demand imbalances.
I see these risks as being more than factored into the $20.44 current share price, as it sits well below its 52-week high of $26 from January, as well as below its near-term high of $23 achieved just a few weeks ago, in April. With a P/FFO ratio of 12.7, GOOD’s valuation sits well below that of its net lease peers.
Meanwhile, the price weakness has pushed GOOD’s dividend yield to 7.4%. While the payout ratio of 96% is high, this isn’t out of the norm for GOOD, which has never suspended nor reduced its dividend since its inception in 2003.
GOOD is a quality net lease REIT that continues to deliver steady results, while proactively managing its portfolio and balance sheet. Its office exposure presents some near-term risks, but I see this as being more than offset by its increasing industrial focus and recent acquisitions. The recent sell-off has pushed up the dividend yield, creating an attractive entry point for long-term income investors.