Quick Update On Gladstone Commercial Corporation's Preferred Shares

| About: Gladstone Commercial (GOOD)

Summary

Gladstone Commercial Corporation announced another call on shares of GOODN.

GOODO and GOODP remain outstanding and dividends have been declared for them.

The new value for shares of GOODN is capped at $25.29.

The floor should be slightly lower, adjusted to remove the dividend after shares go ex-dividend.

This article was previously available to subscribers shortly before noon on 07/13/2016.

As many readers know, I entered into a position in GOODP a while back for the solid dividend and opportunity to do some channel trading. Since then I've been keeping an eye on the different series of preferred shares. This article is primarily about a different series of preferred shares: GOODN.

Remember to check the exact bid and asks before any orders.

On 7/12/2016 after the market closed Gladstone Commercial Corp. (NASDAQ:GOOD) announced dividends for several series of stock. The announcement included a call on GOODN.

GOODN

The call is effective August 18 th. The final value is $25.09401042 per share. Those shares are also scheduled to go ex-dividend on July 20 th, per the press release. That dividend will be

$

0.1484375

Click to enlarge

Therefore, the total cash value of those shares assuming no trading expenses should be:

$25.24245

Note: the value is slightly rounded (to 5 decimals).

As of my writing this the bid on shares of GOODN was $25.29. Shares were priced higher over the last two days, unrealistically high in my estimation. Update: Near writing completion the bid was at $25.30.

If an investor can exit and collect more than $25.24245 after trading expenses, they'll get more cash and free up their money for the next 40 to 60 days so they can use it for other orders.

If GOODN trades all the way down to $25.14 before the dividend or $25.00 after the dividend, it would offer a fairly respectable annualized return (assuming absolutely no trading costs).

Quick Math

If you're facing trading charges of about $9 per trade, you would need to be selling around 200 shares to drop the trading cost to $.045 per share for this to be worthwhile from a strictly cash view point. This puts no value on the time value of money and the opportunity to use the freed up capital to go fishing for cheap preferred shares.

GOODP and GOODO

For GOODO and GOODP, the dividends were declared for July, August, and September. The three declared dividends indicate that the call won't be coming as soon as I feared it might on GOODP. As a result, I raised the price of my limit sell order. In my opinion, GOODP should be sold if the investor can get about $25.60 to $25.70 for it. Anything higher than that is a clear sell. It should be purchased if the investor can buy it under $25.20. The three dividends that have been announced so far total $.48437, so the minimum cash expected on those shares is now $25.48437. If the shares can be sold later for $25.60 or simply sold around $25.40 after collecting two of the dividends, the investor is earning a solid annualized return. That is my strategy here. I'm leaving a limit sell order around $25.60 and simply collecting dividends while I wait. As we approach the final dividend that was declared, I may lower that price to around $25.40 to $25.50 to reduce the call risk.

Poor Liquidity Reminder

Another quick reminder, liquidity is terrible here so only trade with limit orders. In some cases it also makes sense to use the "all or none" qualifier on orders.

New Series

The new series of preferred shares is GOODM. The bid on GOODM was $25.45, which is moderately reasonable. I would consider putting some lowball offers in there to try to snipe GOODM in the same manner as I try to grab the cheap shares for GOODP. The yield on GOODM is lower, but it should be much better for call protection.

The Company Itself

GOOD is what I consider a medium to medium low quality REIT. However, it is not a poor quality REIT by any definition I would use. I'm not comfortable playing in the common shares, but I am very comfortable with investing in the preferred shares. Again, I stress the poor liquidity.

No Financial Advice

Since this article deals with extremely precise price points, this is an additional reminder that nothing should be construed as financial advice.

Update: Comparison to Other Triple Net Lease REITs

Gladstone Commercial Corporation could reasonably be considered a lower quality triple net lease REIT. It trades at much lower multiples of FFO and AFFO than several larger peers. Due to the higher cost of capital for GOOD, they are forced to seek properties with higher capitalization rates to generate the necessary returns. On the opposite side of the spectrum are the highest quality triple net lease REITs such as Realty Income Corporation (NYSE:O) and National Retail Properties (NYSE:NNN). These higher quality REITs will trade at much higher multiples (and lower dividend yields). They generally seek safer properties for investing.

Those factors can lead to dramatically different movements in the price of common shares, but the preferred shares are a bit of a different animal. Realty Income Corporation has one series of preferred shares that is currently outstanding, it is O-F, or O.PRF depending on your source. The F series for Realty Income Corporation has an original coupon rate of only 6.625%, becomes callable in February 2017, and last traded at $26.31. That means investors can feel fairly comfortable that they will get at least $.9661 in dividends per preferred share.

I expect those to be called and a new series of preferred stock to be announced. The logic comes from assessing the preferred shares of National Retail Properties. They have two series outstanding, the D series and the E series. NNN-D trades at a significant premium to par value, around $26.14 (premium of $1.14) and becomes callable the same month. The D series also carries the same 6.625% rate as the preferred shares of O.

The premium pricing on the preferred shares of O and NNN demonstrate a clear disconnection in the perceived quality of the REITs. Remember that GOODM is a new series of preferred stock from GOOD and it carries a coupon rate of 7%. GOOD hoped to issue enough shares of GOODM to fund calling all of GOODP, GOODO, and GOODN. Instead, they were only able to issue a small portion of that.

By investing in the preferred shares of GOOD the investor is taking on more quality risk than they would with the preferred shares of O or NNN, but the potential for losing a premium due to the call is also much lower since the shares trade at much smaller premiums.

Pitch for Subscribers

Since the Mortgage REIT Forum is a new exclusive research platform, the first 100 subscribers will be able to lock in their subscription rates at only $240/year. My investment ideas emphasize finding undervalued mortgage REITs, triple net lease REITs, and preferred shares. With the market at relatively high levels, there is also significant work on finding which securities are overvalued to protect investors from losing a chunk of their portfolio.

Disclosure: I am/we are long GOODP, NNN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.