Real estate investment trusts (REITs) tend to fall into two categories: They either have a pure-play concentration on a specific property type or geographical region or take a broader approach by diversifying across both property type and region. Gladstone Commercial Corporation (NASDAQ: GOOD) is in that latter group.
Here's why it believes diversification is the best strategy for its investors.
Gladstone Commercial Corporation profile
Gladstone Commercial is a diversified REIT investing primarily in office properties and industrial real estate. It owns single-tenant and anchored multi-tenant properties. As of the end of 2021's first quarter, Gladstone Commercial owned 120 properties, spanning 15.5 million square feet of space in 27 states net leased to 107 different tenants in 19 industries.
The company owned the following property types:
- Industrial: 48% of its annualized rent
- Office: 47%
- Retail: 3%
- Medical office: 2%
Gladstone Commercial leases space in its properties to tenants across several industries, led by:
- Telecommunications: 15% of its annualized rent
- Diversified/conglomerate services: 15%
- Healthcare: 10%
- Automobile: 9%
- Building: 8%
- Banking: 7%
- All other industries: 36%
The company has a very diversified tenant base. For instance, the company's five largest tenants only contributed 13% of its total rent while leasing 10% of its available space.
Gladstone's overall tenant base includes a mix of public companies (49% of its rent) and private entities (51%). And what's more, 56% of those tenants have investment-grade or equivalent credit, implying they have the financial flexibility to meet their financial obligations during an economic downturn.
Gladstone Commercial focuses on owning properties in faster-growing markets, currently collecting 58% of its rent from the Sun Belt region. The company also aims to accumulate assets in specific markets, targeting submarkets in the path of growth to create valuable portfolios. Further, the REIT believes this strategy will grow shareholder value over the long term.
Gladstone Commercial is part of the Gladstone Companies family of funds. Founded by David Gladstone, the REIT's CEO and Chairman of the Board, Gladstone Companies has four affiliate publicly traded investment funds:
- Gladstone Commercial: a diversified REIT focused on net-leased office and industrial properties.
- Gladstone Land Corporation (NYSE: LAND): a farmland-focused specialty REIT.
- Gladstone Capital Corporation (NASDAQ: GLAD): a business development company (BDC) that invests in lower middle-market companies' debt.
- Gladstone Investment Corporation (NASDAQ: GAIN): a BDC acting as a buyout fund of lower middle-market companies.
Gladstone Commercial Corporation news
Gladstone Commercial's diversification and its focus on owning properties net leased to financially solid tenants across several industries paid big dividends in 2020. Those features helped insulate the REIT from the impact of the pandemic, which is evident in the company's rental collection rate. Gladstone collected 99% of the base rent owed in 2020 while signing deferral agreements with tenants for the remaining amount.
Overall, Gladstone Commercial's core funds from operations (FFO) rose 9.2% to $55.4 million, though it declined by 0.6% on a per-share basis. Two factors drove the overall increase in core FFO: The company purchased nine fully-occupied industrial properties for $130 million and it benefitted from lower interest rates on its debt.
However, FFO per share declined because the company issued 2.7 million new shares to help finance acquisitions. Gladstone also sold six properties last year to recycle that capital into new investment opportunities.
Gladstone Commercial jumped into 2021 with a solid start, collecting 98% of the rent it billed during Q1 2021. Combined with last year's acquisitions, that solid rental collection rate helped drive a 14.8% increase in its core FFO during that period.
Meanwhile, the REIT continued to enhance its portfolio: In Q1 2021, Gladstone purchased one fully-leased industrial property for $11.1 million and sold two noncore properties for $5.5 million. Then, in mid-June, the company bought another industrial property for $8.125 million.
Gladstone Commercial Corporation stock price
Gladstone Commercial has done a solid job generating returns for its shareholders in recent years: