2023-03-27 09:37:27 ET
Summary
- In January, Gladstone Commercial adjusted its monthly dividend pay-out to $0.10 per share.
- The trust’s dividend coverage is therefore set to improve. The portfolio itself is well-performing.
- The stock is trading at 52-week lows and costs just 8.5x FFO.
The industrial real estate investment trust Gladstone Commercial Corporation (GOOD) has reduced its dividend by 20% , likely because it anticipates slowing growth and wants to conserve capital.
Investors in passive income have reacted as usual by selling the stock that caused GOOD to fall to a new 52-week low of $11.45 recently.
I believe the decrease makes Gladstone Commercial more appealing as an income investment, not less, especially as the trust's price should now accurately reflect the dividend cut of $0.10 per share. According to funds from operations, the stock is also inexpensive.
A Look At The Trust's Core Operating Portfolio
Gladstone Commercial invests largely in office and industrial properties that are leased to a portfolio of businesses from 19 different industries. At the end of 2022, the trust's portfolio had 137 properties totaling 17.2 million square feet across 27 states.
Although Gladstone Commercial's occupancy at the end of 4Q-22 was 96.8% (up from 96.9% in 3Q-22), and the trust received 100% of its rent in the fourth quarter, the REIT warned of slower growth in funds from operations in January.
Portfolio Overview (Gladstone Commercial Corp)
Office real estate remained the second largest block of investments with a 40% investment representation, while industrial real estate makes up over 56% of the trust's portfolio. A lower percentage of retail assets (3%), as well as medical office buildings (1%), were also owned by the trust.
At the end of 2022, no tenant accounted for more than 4% of rent in Gladstone Commercial's portfolio, and no industry contributed more than 14%.
Diversified Portfolio (Gladstone Commercial Corp)
Dividend Coverage Deteriorated, But This Is Already Reflected in Gladstone Commercial's FFO Multiple
Gladstone Commercial had a pay-out ratio of 111% in the fourth quarter, earning $0.34 per share in funds from operations while paying out $0.376 per share in total dividends.
The pay-out ratio should improve moving forward since the trust's dividend payment has been reduced in 1Q-23.
However, with the dividend being reduced to $0.10 per share every month, the trust's payout ratio ought to fall under 100% once more in 1Q-23.
FFO (Author Created Table Using Company Supplements)
Attractive FFO Multiple
On a diluted basis, Gladstone Commercial generated money from operations in 2022 of $1.54 per share. If we were prudent and conservative, we may predict that the trust will generate $1.50 in funds from operations per share in 2023.
Considering the trust's stock is currently priced at $12.27 per share, the FFO assumption corresponds to an 8.2x FFO multiple.
By comparison, STAG Industrial Inc. ( STAG ) , a different industrial market-focused REIT, is trading at an FFO multiple of 14.5x .
Gladstone Commercial is far more enticing from a pricing standpoint, but STAG Industrial is also one of my favorite buys for passive income investors, particularly due to the trust's strong dividend coverage and dividend growth prospects. With my portfolio of passive investments, I own both REITs.
I believe STAG Industrial is trading at a higher FFO multiple than Gladstone Commercial because the REIT did not cut its dividend pay-out. In fact, STAG Industrial is raising its monthly dividend and so investors should have higher confidence in the industrial REIT and the trust's dividend potential. Even Realty Income Corporation ( O ) could be considered a peer in the net-lease domain (net-lease means the tenant is responsible for all operating expenditures, not the landlord).
Realty Income's stock has a FFO multiple of 15.3x. STAG Industrial and Realty Income also have much lower pay-out ratios of 66% and 76% which I think explains why these stocks trade at higher FFO multiples. The safer the dividend, the higher the FFO multiple, so to speak.
Gladstone Commercial is also cheap in terms of a variety of other valuation metrics. The trust's stock is valued at 6.9x cash flow compared against a five year average cash flow multiple of 10.5x and an index multiple of 14.2x.
Valuation (Gladstone Commercial Corp)
Why Gladstone Commercial Could See A Lower Valuation
Passive income investors have sold out of the real estate investment since it announced a 20% dividend decrease in January. Although this is somewhat logical, in my opinion, Gladstone Commercial should be purchased for a portfolio of passive income securities due to the low FFO multiple. This is because I think the dividend is safe now that it has been cut and the monthly dividend remains attractive for passive income investors.
But, there are concerns, such as the possibility that the economy could quickly deteriorate due, in part, to the escalating crisis in the American banking system. Gladstone Commercial might see additional valuation reductions in the event of a 2023 FFO contraction.
My Conclusion
Gladstone Commercial may not be on the radars of many investors right now, but I believe it would be a grave error to write Gladstone Commercial off, sell the stock, or ignore it just because it is now selling at 52-week lows.
Given that management recently examined the stock's financial constraints and dividend payout, one could argue that the stock's dividend is relatively safe given its current FFO multiple of 8.2x.
I believe passive income investors are getting a deal here near 52-week lows with a 9.8% yield and dividend coverage expected to increase in 1Q-23.
For further details see:
Gladstone Commercial: Buy Near The 52-Week Low And Get A 9.8% Yield