GOODN - The Gladstone Commercial Preferreds' 8.65%+ Yields Just Got Better

2023-08-11 11:07:11 ET

Summary

• Gladstone Commercial Corporation's preferred stocks have experienced an inversion in pricing/yields relative to its common shares.
• The company authorized the repurchase of up to $20 million of its preferred stocks, causing their prices to increase.
• Despite a strong 2Q2023 earnings report, the preferred stocks have not seen significant price increases, presenting a buying opportunity.

We last reported on the Gladstone Commercial Preferreds in early December 2022. What occasioned the notice was an inversion of the pricing/yields of Gladstone Commercial common (GOOD), relative to its senior-in-the-equity-stack siblings, Gladstone Commercial Corporation 6.625% Series E preferred (GOODN) and Gladstone Commercial Corporation 6.00% Series G preferred (GOODO). Well, a lot has transpired since our last notice, but today, the inversion has happened again.

In our last report, we described GOODO trading at a discount-to-par price of $18.20 for a yield of 8.24% against its $1.50/share annual dividend and GOODN trading at a discount-to-par price of $20.00 for yield of 8.28% against its $1.65625 annual dividend. This contrasted against the common shares, GOOD, trading at $19.17 for a 7.82% yield against its $1.50 annual dividend.

On December 12 ^th , two days after our article appeared on Seeking Alpha, Gladstone issued a press release authorizing the open market repurchase of up to $20MM of the Series E and Series G preferreds. The share prices rapidly moved north of $21.00 so the buying bonanza was quickly concluded. We did not get to purchase as much as we wanted, but markets are dynamic.

The Company

In January of this year, GOOD acknowledged that it was a triple net lease REIT with a portfolio comprised of 50% industrial properties (coveted by all) and 50% office properties (looking for a reason to exist). In responsible measure, GOOD’s board of directors moved to reduce the common share’s annual dividend by 20% from $1.50 to $1.20. This quickly reduced the common share price from about a $19.50 high in January to a February close of about $13.70. Continuous speculation that there was another shoe to drop brought GOOD shares to a low of $10.84 in May.

Source: Seeking Alpha

Enduring this carnage, GOODO and GOODN pricing also collapsed. Though their superior position in Gladstone’s equity capital stack had not changed (and their dividends had not been reduced), fear, obscurity, and illiquidity combined to drop the preferred share prices by 25%.

Source: Seeking Alpha

2Q24 Earnings – Inversion Recurs

At market close on August 8 ^th , GOOD reported operational results for 2Q2023. Among the highlights, the company favorably sold a number of office buildings, accretively bought more industrial properties, extended leases for higher rates, and paid down debt. Another shoe has not yet dropped. In response, GOOD shares jumped by as much as 5%.

Shares of GOODO and GOODN, on the other hand, seemed oblivious to the strong report. Both issues stalled below their July closing prices, and our response was to buy. We dangled an offer of $17.31/share for GOODO and got some fills. This purchase price provides a going in yield of 8.67% and 44% upside to par.

Stronger Support than other Equity Preferred Choices

Over the last year or so of the rising interest rate environment, REIT preferred share prices have declined broadly. The market's negative response is partly fueled by competing yields from other fixed instruments, but also the prospect that the rate hiking cure for inflation will also throw the economy into deep recession.

You can still find 8.5% yields in hotel REIT preferreds like Hersha Hospitality preferred Series C ( HT.PC ) or Chatham Lodging preferred Series A ( CLDT.PA ), but their operating revenues come from the very recession prone travel/leisure industry. Hersha was forced to suspend all dividend payments when COVID closed the economy.

You could also look to deeply discounted preferred shares in the office sector, but that has its own story of secular decline even without recession. Vornado Realty ( VNO ) has a selection of preferreds that offer yields north of 9%, but its portfolio's revenue streams are uncertain enough the VNO management suspended payment of a common dividend earlier this year.

Gladstone Commercial, on the other hand, is a triple-net lease REIT. Its revenue streams are from long term leases on a growing portfolio of industrial properties. GOOD went through the Great Recession and COVID with 100% rent collection.

In this interest rate environment, this real estate environment, we don’t expect GOODO to return to par pricing any time soon. However, potentially nearing the apex of the interest rate cycle, buying deeply discounted, fixed-rate, senior equity in a portfolio of triple-net-leased industrial properties feels like a sound investment. We have known the executives at the Gladstone Companies for more than a decade and communicate with them regularly; they face market difficulties openly and honestly; they continue to earn our trust.

The Loneliness of the Long-Distance Preferred Stock Trader

While it felt great today snagging high dividend shares at a huge discount to call, we were also long GOODO while it languished near $15 a share in April and May. When your position is priced underwater, you try to console yourself in acknowledging the big yield you own and the potential upside to par, but if the verdict is still out on the issuing company’s viability, it’s a white-knuckle wait.

When the verdict does come in, good or bad, you will have no relief unless you know what you own. Its size, its potential performance within the macro environment, its liquidity.

In awaiting results from a microcap issue like Gladstone Commercial, we had to be ready to respond. We had to know the company. We had to be ready to sell at a loss if it was dark.

Fortunately, it was bright and no one else responded. We know the company and favorably added to our position. We will do it again tomorrow if the opportunity presents itself.

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