Updated June 2nd, 2021 by Bob Ciura

Real Estate Investment Trusts have a lot to offer to investors looking for higher investment returns, such as retirees. For example, Gladstone Commercial Corporation (GOOD) is a REIT with a high dividend yield of 6.8%.

You can see the full list of Stocks yielding over 5% by clicking here.

Gladstone Commercial appears to be an attractive dividend stock, especially given the alternatives available. The S&P 500 Index has a dividend yield of ~ 1.4% on average. Plus, Gladstone Commercial is one of only 54 stocks that pays dividends every month.

You can download our full Excel spreadsheet of all monthly dividend stocks (along with key metrics like dividend yield and payout ratio) by clicking the link below:

Gladstone Commercial’s dividend is far from guaranteed, however. The payout ratio is close to 100% and leaves little room for error in maintaining the dividend.

This article discusses the trust’s business model and financial performance, and why its dividend can be riskier than it first appears.

Business overview

Gladstone Commercial is a real estate investment trust, or REIT, that invests primarily in single-tenant and anchored multi-tenant net rental assets. It owns 15.5 million square feet of office and industrial real estate in the United States

Gladstone Commercial has a very diversified portfolio. At the end of March, the trust’s portfolio consisted of 120 properties in 27 states, rented to 107 different renters.

Source: Investor Presentation

The trust’s portfolio is typically geared towards long-term contracts. In addition, Gladstone Commercial enjoys a high occupancy rate of currently 95.5%. What is impressive is that utilization has never fallen below 95% since the trust went public in 2003.

Approximately 56% of Gladstone Commercial’s tenants are investment grade or unrated investment grade equivalent. This contributes to a high quality tenant portfolio that should weather minor economic downturns and sustain Gladstone Commercial’s rental flows.

Trust has generated impressive sales growth in the past, but bottom line growth has flattened out recently. This creates some uncertainty about the security of distribution.

Growth prospects

Gladstone reported its first quarter results on 10th of Maythe, 2021, and the results were better than expected at both the top and the top lower lines. Core fundofOperating business (FFO) was $ 15.4 million, up 15% from the previous quarter. Core FFO increased mainly due to an increase in rental income from new Acquisitions, partially offset by an increase in interest expense due to higher interest rates on floating rate liabilities.

Gladstone collected 98% of bar rents in the first quarter of the first quarter. It also acquired a 180k square foot industrial $ 11.1 million facility in Ohio, 100% leased to a single tenant for 14 years.

It has sold two properties in total Proceeds of $ 5.5 million and renewed leases for 193,000 square feet for two existing properties. Gladstone also rentsed 189k of free square meters for 5.2 years in a property.

After this In the first quarter, the Trust said it took 98% of base rents in April and that occupancy was 95% by the end of April.

Gladstones FFOPerThe stock has traded between $ 1.50 and $ 1.60 for the last decade as confidence continues to grow Issue of new shares and bonds for financing Acquisitions, but these acquisitions do not bring economic benefits. In other words, While the trust’s new properties offer dollar-based growth, when the cost of these acquisitions are factored in, it is essentially no profit on a perShare base.

Given the current payout, this could be a problem as the trust’s payout ratio is very close to 100%. However, despite the positive fundamentals in the trust’s portfolio, headwinds to earnings growth (dilution and operating costs) are still very present.

Dividend analysis

Gladstone Commercial has a current monthly dividend Paying $ 0.12515 per share. On an annual basis, the dividend payment is $ 1.5018 per share, which translates into a dividend yield of 6.8%.

The payout has stagnated at $ 0.125 per share per month since January 2008, reflecting the trust’s struggles to grow. However, the payout was increased by a fraction in early 2020 to the new level of $ 0.12515 per share monthly.

Gladstone Commercial has paid monthly dividends for more than 15 consecutive years, an impressive track record of constant payouts, though the payout has been essentially unchanged for more than a decade.

Since Gladstone Commercial went public in 2003, the trust has not missed a payout, nor has it cut the payout at any time, which is very impressive for a REIT given the diverse economic conditions that existed during that period.

Another important consideration when buying dividend stocks is balance sheet strength.

Excessive debt can jeopardize a trust’s dividends. On the positive side, Gladstone Commercial has been working to reduce its leverage significantly over the past few years and now has a balanced maturity schedule.

Source: Investor Presentation

About two-thirds of Gladstone Commercial’s debt is fixed income, which could help mitigate the effects of volatile interest rates.

In addition, large maturities are still several years away, leaving the trust with time to generate cash to pay off or find better ways to refinance.

Still, there isn’t much room for error as the trust maintains a high payout percentage. We’re seeing an FFO of $ 1.59 per share, which would barely cover the annualized dividend payout of $ 1.50 per share.

This means that Gladstone Commercial’s FFO has very little headroom when it comes to coverage for distribution.

Should the trust’s fundamentals deteriorate over the next few years, there is a chance it will not be able to keep its dividend at current levels. We see this as the main risk of owning Gladstone Commercial today.

Final thoughts

Gladstone Commercial’s very high dividend yield is attractive and, given the trust’s current FFO level, appears sustainable, at least in the short term. The trust also enjoys a high occupancy rate and high rents. However, given the ~ 100% payout ratio, we still have concerns about Gladstone’s dividend security.

As a result, investors will need to closely monitor the trust’s results to ensure the FFO does not drop much below current levels. Even a slight decline could jeopardize the dividend.

Gladstone’s returns are attractive, but carries an increased risk of a cut in years to come, especially if the current recession is worse than expected or if it drags on for a longer period of time.

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