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How Secure Is Gladstone Commercial's Dividend?

CEO Khai Intela
Real estate investment trusts (REITs) are known for their reliable dividend returns. However, not all REIT dividends are considered safe. In this article, we will delve into the safety of Gladstone Commercial's dividend, the factors...

Real estate investment trusts (REITs) are known for their reliable dividend returns. However, not all REIT dividends are considered safe. In this article, we will delve into the safety of Gladstone Commercial's dividend, the factors that contribute to its appeal, and the potential risks investors should be aware of.

Gladstone Commercial's Business

Gladstone Commercial is a diversified REIT that specializes in the ownership and management of single-tenant and multitenant net lease properties. With a portfolio of 129 properties across 27 states, the company generates the majority of its rental income from industrial and office properties. Unlike other REITs that focus on top-tier markets, Gladstone primarily operates in secondary growth markets, particularly in the Northeast, Midwest, Southeast, and select markets of the Southwest.

Over the past five years, Gladstone Commercial has experienced a modest revenue increase of 6.37%. While this growth may not be exceptional, it indicates a positive trajectory. Furthermore, the company boasts an impressive occupancy rate of over 97%, showcasing its ability to maintain strong tenant relationships, especially considering the ongoing challenges faced by the office space sector due to the COVID-19 pandemic. Additionally, same-store rents have seen a 2% year-over-year increase, although this falls short of the double-digit growth witnessed in industrial rents by other REITs.

Evaluating the Attractive Dividend

At present, Gladstone Commercial offers a dividend yield of 6.90%, which is considerably higher than the average equity REIT dividend yield of around 3%. This attractive payout may captivate income-focused investors seeking higher returns. However, it is crucial to assess the risks associated with such elevated dividend yields.

In terms of profitability, Gladstone Commercial experienced a 6.4% increase in core funds from operations (FFO) and revenue in 2021. Nevertheless, increased expenses, primarily due to the redemption of Class D shares amounting to $88.3 million, resulted in a net loss of $4.55 million for the full year. While the redemption of shares is not a recurrent expense, it impacted the company's net operating income, which might raise concerns about its ability to generate positive income in the future.

One of the key areas of concern is Gladstone Commercial's debt obligations. The company currently has approximately $95.17 million in mortgage maturities due in 2022, with only $8 million in cash and cash equivalents on hand. To meet these obligations, the company might have to consider restructuring its debt, issuing additional shares to raise capital (thus diluting existing shareholders' value), or selling assets. Share issuance has been a common practice for Gladstone, preventing significant per-share FFO growth despite the company's revenue increase over the years.

Balancing Risk and Returns

While the high dividend offered by Gladstone Commercial attracts many investors, caution is advised. The company needs to address its high dividend payout ratio of 94% and tackle its significant debt obligations to ensure a safer investment. High dividend yields often come with increased risk, making them less secure compared to other options. For those prioritizing safety, there are other diversified REITs, such as W.P. Carey, that offer similar portfolio exposure to Gladstone Commercial but with more reliable returns.

Investors should carefully assess the risk-reward balance and consider their investment goals before making a decision. While the allure of a high dividend might be appealing, it is essential to thoroughly analyze the sustainability and security of the investment in light of Gladstone Commercial's financial position and debt obligations.

GOOD Dividend Yield Chart Gladstone Commercial Corporation Dividend Yield data by YCharts.

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