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Gladstone Commercial: Stick To The Preferred Shares

Brant Munro, CFA profile picture
Brant Munro, CFA


  • Despite how cheap the common shares are, the level of risk is still high.
  • Preferred shares have excellent FFO coverage and the risk of being suspended is low.
  • Preferred shares look undervalued when compared to the US High Yield B Effective Yield.
  • Preferred shares of 9.80% plus look like a huge mispricing in the preferred space and look like a low-risk play to pocket double-digit returns.
General Motors World Headquarters



Gladstone Commercial Corporation (NASDAQ:GOOD) is a Maryland-based REIT that owns industrial and office properties. GOOD has historically entered into, and intends in the future to enter into, purchase agreements for real estate having net leases with terms of approximately 7-15 years

This article was written by

Brant Munro, CFA profile picture
I am always on the lookout for businesses that have a strong cash generating ability and a strong enough competitive advantage that I can be sure they will be around for the next decade, and at a price where I can be as sure as possible that I can achieve at least 15 percent annualized returns, or else companies whose price is deeply discounted from their asset base as long as its highly marketable. Im not one to shy away from takeover targets, provided the target still has a strong business that I would be okay with owning it even if the takeover did not go through. Since I began investing on my own 3 years ago I have achieved an annualized time weighted return of about 16 percent, and plan to continue to beat that hurdle as I learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOODO either through stock ownership, options, or other derivatives. 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.

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 (34)

Bluegrassriver profile picture
The preferred shares look solid. I like the revenue increasing for seven years in a row and they keep reducing leverage. If the offices will be renovated into condos or apartments it would be a big win. New housing is certainly needed in those two locations.
I can’t tell from the article or maybe I missed it, but is the dividend qualified?
Well, shoot. the price is getting run up today.
Eileen Dover profile picture
@ethel65 I'll wait for the drop back down.
Rob G. in Vegas profile picture
"Q1 2023 FFO was $14,847,000 or $0.37/share which annualized is $59,388,000 or $1.48/share (without the incentive fee however). This is FFO available to common shares relative to $3,002,000 in payments to preferred shareholders. That is coverage of almost 20x."

Not quite 20X. The preferred dividend payments for GOOD are $3.002 Million per quarter. $12M in annual preferred payments.

So that knocks down coverage on FFO/preferred dividends to 4.95X. Still good.
@Rob G. in Vegas Hi Rob, the coverage on the preferred is fine, but the common seems to be in danger. From Brant's article above, the credit line conditions state that the maximum dividends/FFO ratio is 96%. Brant notes that the annualized FFO in 1Q is $1.48/share, but the annual dividends are $1.20 for common shares and preferred dividends of $.30 per common share ($12 million/40 million common shares), for a total of $1.50, annualized. Trailing 12-month isn't as bad (91.8% ratio), but it seems as if the company needs capital gains or lower interest rates in order to keep paying $.10 per month on the common. Reinstating the incentive pay would lower FFO and force another dividend cut. The removal of incentive pay might not be as "voluntary" as it appeared.
Rob G. in Vegas profile picture
@SummitNJ I'm thinking there will another dividend cut for GOOD common at year end or in early 2024. I hope I'm wrong.
CincinnatiRick profile picture
@Rob G. in Vegas We can say "it's priced in" but you know that there will be another lurch downward when it happens. Buying opportunity?
My own opinion (not a fact) is that Gladstone is far from a quality company.
Look at its Shareholders Equity. $726 million raised from stock issues, $543 million returned to shareholders as dividends in excess of earnings (your money), $6 million in AOCI, $189 million left. It calls selling stock and giving you a dividend as "a return."
It will borrow more money from its line of credit in the near term. My opinion is that it's not paying dividends from value it created. That's what it's equity says, at least.
@SummitNJ wouldn’t dividends in excess of earnings include depreciation? Wouldn’t you use dividends in excess of FFO?
Rob G. in Vegas profile picture
@SummitNJ It is paying dividends from free cash flow. Here is what I commented when GOOD released EPS for 1Q 2023:

"FCF for the quarter fell to $13M, down from $16.2M during 1Q 2022. Why?

Big 34% jump in interest expenses and an additional $1M spent on cap-ex.

With $15M spent on common and preferred distributions, the common dividend still seems too high. They should have cut it more.

But plenty of coverage for the $3M they spend/quarter on the preferred dividends."

It was a mediocre quarter at best for GOOD, even with the waived incentive fee (which was $1.34M during 1Q 2022).
Eileen Dover profile picture
@Rob G. in Vegas Are you long either N or O ? Would you choose one over the other? Thanks
arcticfoxman profile picture
Yes, I've looked at swapping over but I think my traditional broker's costs are too expensive to bother as fundamentally Gladstone is solid as a rock. However your article has prompted to buy a small dip into the Series E (GOODN). Who knows, if interest rates don't go up, or even drop a notch in the next 12 months I may get called for a nice capital gain.
Just clicked to Follow you. 👍
Eileen Dover profile picture
@arcticfoxman Why N over O , the earlier possible call date ? Both yield 9.9%, but the O has a call date to 2026 as opposed to 2024 for N, so you would get the high yield for 2 years longer (should there not be a suspension of the common which might hit the Pref).
@arcticfoxman I don't think they're going to have the funds to call the preferreds.. which suits me just fine
@Eileen Dover
GOODN has a 6.625% coupon while GOODO has a 6% coupon. If the yield on the preferreds from to 6.25%, for example, GOOD has the incentive to call the N series, but won’t call the O series. Having said that, the O series trades better.
arcticfoxman profile picture
You're showing a call date of June 2021 for GoodO, that can't be relevant. Do u have an update?
Brant Munro, CFA profile picture
@arcticfoxman geez loaded with typos here. Its 2026 i believe.
@arcticfoxman correct, 6/28/2026
@Brant Munro, CFA measure twice, cut once.
Eileen Dover profile picture
"...meaning the common share dividend must be cut before the preferred share dividend can be". Of course you mean the common dividends must be suspended, not cut as they already have been this year from $1.50/sh to $1.20/sh.
toomuchgas profile picture
@Eileen Dover It could be cut further without being suspended.
arcticfoxman profile picture
@toomuchgas . In my experience of preferreds & bonds, companies still pay even if they've suspended the divi on the common stock.
The only times they've not is when they've gone bust, and it would be a very cold day for Gladstone to go bust. They're very solid.
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