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Gladstone's 6.2% Yield: As Interest Rates Fall, Monthly Preferred Shares Become Attractive


  • The Fed cut rates by 50 basis points this week, and if you are an income-focused investor, the yield on US Treasuries is pitiful.
  • However, the rate cut made select REIT investments more attractive, such as Gladstone Commercial's monthly dividend-paying preferred shares.
  • This article reviews the health of Gladstone's business, the common and preferred shares, risks, dividend safety, and concludes with our opinion about investing.
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The 10-year US treasury just set a new all-time closing low of 0.92%. And for income-hungry investors, that makes select REIT investments increasingly attractive. For example, consider the big healthy monthly dividend payments of the preferred shares of industrial/office REIT Gladstone Commercial Corporation (NASDAQ:GOOD). Not only did market wide fear drive the share price lower (and the healthy dividend yield higher), but it also made it easier for the businesses to refinance its debt, and on a relative basis it made the 6.2% yield that much more attractive. This article reviews the health of the business, the common and preferred shares, risks, dividend safety, and concludes with our opinion about why these big monthly-dividend-paying preferred shares are worth considering for a spot in your prudently-diversified long-term income-focused investment portfolio.

Coronavirus-Induced Rate Cut

In case you have been living under a rock, the market has been selling off hard in recent weeks. Specifically, the market's recently frothy valuation has been gripped by coronavirus fears. And it's the combination of fear and reality that caused the US fed to cut interest rates by 50bps just this week. Here's a look at what happened to interest rates, as per US treasuries (courtesy of Charlie Bilello).

The rate cut was intended as stimulus for the economy, but it does a few interesting and positive things for select investments. For example, it makes the big dividend payments by REITs more attractive on a relative basis. Granted, REITs have more risk than US Treasuries, but if you are focused on income, would you rather lock your cash up in Treasuries for the next five years at a 0.67% yield, or would you prefer a few healthy REIT investments that yield more than 6%.

Second, the rate cut is intended to stimulate the economy. It has a positive impact

Market sell offs like the current one are rare. At Big Dividends PLUS, our advice is don't panic. We're sharing attractive current opportunities with members, but for goodness sake, don't lose sight of your long-term goals!

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This article was written by

Blue Harbinger profile picture

Blue Harbinger is a team of analysts helping individuals achieve their investment goals by focusing on portfolio building and diversification to hedge risk.

They lead the investing group Learn more.

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

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (23)

rajeevkom profile picture
@Blue Harbinger - Excellent analysis as always. Very balanced. As of Dec 2020, office properties comprise of 51% of GOOD's portfolio. Given the Pandemic and work from home trends, does this introduce more risk triggered by office tenant's vacancies and lease cancellations?
coastalcruiser profile picture
The upside of GOODM is the payout. If GOOD were to cut their dividend, which they never have that I know of, the payout for their preferred stock would remain in tact.
Mark likes dividends profile picture
I'm glad that GOOD is on sale. I'm buying as much as I can afford to at these prices. A few months from now the virus will be history and so will these low prices.
Happy investing everyone.
Brasada profile picture
Hope it all works out for you. I recommend you watch their leverage is very high.....over 8 times for Debt/EBITDA, which is very high for any REIT let alone a microcap.
DigDugRVA profile picture
I’m a holder of the common shares in a brokerage account and in a Roth IRA equally split. I have a very long term time horizon and was looking for a way to generate investable cash. I will be taking a closer look at the preferred shares now for some added protection. Thank you for the article. Long $GOOD
I would have liked to have seen a little more analysis on this one. It's no secret (I think it was even in the recent CC?) that GM, their largest tenant, gave notice that they will not be renewing their lease which expires later this year. It's a huge amount of square footage.

Also, and though I hate to quote a known short's article, I think something like 8% of GOOD's leases expire this year.

I'm long the Pref shares so mentioning these details may not be in my best interest, though I have enough confidence in the Pref shares that I don't think I'm shooting myself in the foot by helping to inform potential new investors. I'd really have expected anyone writing an analysis on GOOD (and an SA Editor's Pick no less) to at least bring the details up in some way to show proper due diligence and make sure new investors don't go in blind. If I'm off-base here I'm sure someone will let me know.
Blue Harbinger profile picture
@Gambel 8% sounds like a low number considering the average remaining lease term of 7.3 years. Thanks for reading and commenting. Best, BH.
Brasada profile picture
8 percent of revenue is meaningful for any business. The leverage for their Bonds and preferred is approx 8.5 times and fixed coverage of 2.2....so this is worth watching for sure
Rob G. in Vegas profile picture
There is a very good chance that Tesla is looking at the expiring GM space in Austin. Looks like GOOD should not have too many problems re-leasing at least part of it.

From GOOD's 4/29/20 conference call:

"As noted last quarter, GM is expected to vacate our Austin, Texas property at the end of August. Our active marketing of the property with the assistance from the local chamber of commerce has resulted in two prospects for the entire building and two additional prospects each for approximately one-third of the building. It’s interesting to note that our GAAP rent at the property of $14.50 per square foot compares very favorably in the submarket with current space offerings in the low-to-mid $20 per square foot on a triple net basis."

Bob Cutlip

"There’s – two of them are the same and two of them are new. We did have a couple of, let’s say, smaller tenants that were interested. They’ve gone quite on us. One of the larger tenants is there in Austin and the other one is in California, well known name. In talking with the chamber and with our investment sales broker, if Governor Abbott does open up the state here soon, they expect to see activity pick up."

Looking to add to my small position in GOOD. What's your opinion on GAIN? It's at a discount to NAV with the recent market selloff. It's a big position of mine, but I think I will add even more at these prices.
Currently 16% of my portfolio. Certainly felt good about it in December :) Buying now would mean averaging up, but I think it's worth it on this pull back. 2nd largest position is NRZ at 14%. 3rd largest is MSFT at 11%. Looking to buy quality DGI stocks on the COVID19 pullback to diversify a bit.
Blue Harbinger profile picture
Hi @alex.erazo without knowing anything about you or the size of your portfolio, those sound like huge positions that are bringing a lot of unecessqry risk to your portfolio. My general rule is 5% is a big postion for an individual stock, and 10% is getting into pure crazy territory (although 10% would be a bit more palattable if it were an ETF or fund). I own $NRZ too, but for goodness sake man, bring down those risky positions sizes! Just my two cents. Best, BH
toh192 profile picture
All the loans use a LIBOR floor. Falling rates is very bad for business.
toh192 profile picture
And the loans are libor + XX%. XX is stacked on top of floor. Borrowings are fixed rate (afaik). Maybe you call XX the floor but my point remains the same. Lower income, same borrowing costs.
2whiteroses profile picture
@toh192 Is your point that many or most loans underwritten by GOOD not only float with LIBOR but also have a floor below which they will not go no matter how low LIBOR goes? I know many BDCs do have this cushion on loans but probably not all and I don't know any specifics with GOOD. Sure, LIBOR is is a floating rate, but the additional floor at least cushions the blow a bit on the downside provided the borrowers can keep paying.
The common stock is a good buy too.
Blue Harbinger profile picture
@Kurt Licherovsky It seem like you're probably right. The common has more upside and a bigger dividend yield, but the trade-off is more volatility for the common. Thanks for reading and commenting. Best, BH
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