Gladstone Commercial Corporation: The Preferreds Are Worth A Look

| About: Gladstone Commercial (GOOD)
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GOOD announced a new series of preferred stock and conditional calls on the old stock.

The market isn’t fully up to speed and the relative pricing between the issues is not logical.

There may be an opportunity to grab around .7% for locking up capital for one month.

Gladstone Commercial Corp. (NASDAQ:GOOD) announced their intention to offer a new series (series D) of preferred stock. The following announcement was included in the press release:

"…announced the conditional redemption of all outstanding shares of its $25.0 million 7.75% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"), and its $31.6 million 7.5% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") and its intention to redeem its $38.5 million 7.125% Series C Cumulative Term Preferred Stock (the "Series C Preferred Stock"). These optional redemptions are contingent upon the closing of an offering of a new series of cumulative redeemable preferred stock on or prior to June 13, 2016, with net proceeds to the Company sufficient to effect the redemptions, with priority given to the Series C Preferred Stock, then the Series A Preferred Stock, and then the Series B Preferred Stock. The Company may waive the contingencies with respect to the redemptions of one or more series, may authorize partial redemptions of one or more series and may cancel any redemptions at its sole discretion.

Notices of redemption on a conditional basis will be sent and publicized with respect to both the Series A Preferred Stock and Series B Preferred Stock, each with a conditional redemption date of June 15, 2016 at a redemption price of $25.00 per share plus all accrued and unpaid dividends. We intend to send notices of redemption for Series C Preferred Stock following the closing of the Company's preferred stock offering and the receipt of sufficient funds to redeem the Series C Preferred Stock."

Implications for Investors

The reason I'm publishing on this is because the market is still not fully up to speed on the implications here. The three series that are currently outstanding are A, B, and C. However, they trade under the tickers GOODP, GOODO, and GOODN respectively. If that seems strange and backwards to you, it feels that way to me also.

Be aware that different brokerages may use different symbols for the preferred shares. I'm providing the symbols used by Charles Schwab because that is where I manage my accounts.

The emphasis is first on redeeming the GOODN (Series C) with the 7.125% coupon because this series had a mandatory redemption date coming up. The second priority is given to GOODP with the 7.75% coupon rate because it is the highest rate preferred issue. The third priority goes to GOODO with the 7.5% coupon rate because it is has a lower rate than GOODP and neither had a mandatory redemption date.

I believe it is quite likely that the series D proceeds will be sufficient to pay off all three of the outstanding issues.

All three of the preferred issues were trading above par value. As an investor I was holding shares of GOODO because I saw an opportunity to acquire them a couple months ago at a weighted average price of $25.03 to $25.04. The call announced call date lines up with their June ex-dividend date, so I'm expecting one additional dividend worth about 15 to 16 cents per share (to be precise $.15625).

I was able to sell those shares at a material premium to the expected final call value of $25.15625 per share.

What They are Worth Now

The screenshot below shows the latest bid/ask as of my writing on the series C shares (known as GOODN):

The bid and ask size are terrible across all three series but the volume was already fairly large. Since the upcoming dividend is slightly under $.15 on this series, the bid price is fairly decent. GOODP (the highest dividend) has a bid below par value and GOODO has a bid just barely above par value. An investor selling at $25.11 is forfeiting about $.04 in dividends. If they can sell over $25.16, they are getting more cash.

It is my belief that the call date aligning with the next monthly payment means the cash paid to shareholders will be precisely equal to one monthly dividend plus the par value.

I might buy some GOODP if I can get a decent order through below par value. Getting one monthly dividend and getting paid off at par only means a gain of around .7%, but I see very little value elsewhere in the market so a return of around .7% for locking my cash up for one month seems perfectly acceptable. If the series D offering doesn't go well and GOODP doesn't get called, the share price was regularly floating around $25.40 to $25.70. The reason I refused to buy GOODP at those prices was the call risk.

Summary of Key Prices and Developments

All three preferred shares will be called if there is sufficient capital from the new offering.

GOODN - Coupon 7.125% is top priority, last bid was $25.11 at time of writing.

GOODP - Coupon 7.725% is second priority, last bid was just under par value at time of writing.

GOODO - Coupon 7.5% is third priority, bid was just over par value at time of writing.

These issues are fairly illiquid and should only be traded using limit orders. The bid and ask prices may change materially within short time spans, so please verify prices.

I contacted Charles Schwab to check their fee policy on preferred shares being called. They indicated that shareholders would not face any fees and called issues would simply be converted into cash in the account.

Extremely Specific Disclosure

I have placed a limit buy order for shares of GOODP below par value. It is unlikely to execute but it would offer me a yield greater than .7% for the month or around 8% to 9% annualized.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GOODP over the next 72 hours.

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.