Gladstone Commercial Series G preferred: solid monthly payer at 7.5% with 25% call advantage

We have been long-time Gladstone Commercial (BUN) ordinary shares for more than a decade, so we were pleased with the date of 6 August.^th the publication of the operational results of 2Q24. Gladstone continues to transform its portfolio away from office buildings and towards net leased industrial assets. In the long run, this transition is good for the common stockholder and reassuring right now for GOOD’s credit quality as an issuer of multiple series of preferred stock. We have long preferred Gladstone Commercial 6.0% Series G (NASDAQ: GOOD) and that’s what we’re focusing on here today.

issuer

Gladstone Commercial is a $600 million market cap operator with 136 net lease properties totaling 16.8 million square feet. Over the past half-decade, GOOD has recycled capital to transform its profile from being mostly office assets…

… mostly industrial.

We meet with Gladstone’s management every year, and in early 2019, then CEO Bob Cutlip informed us of their intention to become an industrial REIT. Although no one anticipated the pandemic, it did not stop GOOD in selling office buildings and acquiring industrial assets.

During the same period, Gladstone made great strides in de-levering the portfolio and hedging floating rate debt in the context of rising interest rates.

With minimum debt maturities until 2026 and anticipated monetary easing, we believe Gladstone is a solvent issuer that will meet its obligations to preferred shareholders.

Capital stack

The Gladstone Companies (LAND, GOOD) have been series issuers of preferred stock, and at today’s market prices we find Gladstone Commercial Series G compelling on many levels. We always have fresh demand for fixed income and GOODO meets that, but has more potential than its 6.00% coupon suggests.

Bet on the shortfall

Gladstone Commercial currently has three series of preferred stock.

Series F is in the stage of capital formation and is not yet traded on an exchange. The 6.625% Series E (GOODN) is callable in October of this year, but given where interest rates are, we don’t anticipate the shares being redeemed anytime soon. Trading at just over $23, GOODN yields a respectable 7.15% in attractive monthly dividend payments. I previously owned GOODN and it is a solid pick, but market prices present a better opportunity under the same issuer umbrella.

The 6.00% Series G is not callable until June 2028, but if the higher GOODN coupon still exists, the GOODO will not be redeemed at that time. At the current market price of $20.00, GOODO produces a superior yield of 7.50% in the same attractive monthly dividend payments. The real benefit of the GOODO market price is the $5.00 discount off the face value. Shares do not need to be redeemed to capture par value; macroeconomic environments can get you.

If, as expected, the Fed begins a series of rate cuts in September, yields on fixed-income issues of all durations could fall in a rising bond market. We won’t speculate on the pace or extent of interest rate cuts, but we can monitor broader market forecasts and they point to progressive rate cuts.

In line with the Fed’s current rate target of 525-550 basis points, GOODO’s current yield of 7.50% is more than 350 basis points higher than the 10Y T-notes. Fed rate cuts could boost market prices and lower bond yields of all maturities, but GOODO’s 6.00% coupon is perpetual until the issue is called. If, as in the past, successive interest rate cuts create some level of shortfall in yield, then GOODO’s 6.00% coupon becomes more expensive and its share price will rise toward parity.

Price differentiates opportunity

In the REIT preferred stock universe, we can identify dozens of issues that offer current yields north of 7.0%. Most are from creditworthy issuers. The differentiator between them and GOODO’s 7% yield is the entry price. If you buy (fictitious) ABC Corp. 7.5% Series A Preferred at par (or real, Global Medical REIT Series A Preferred (GMRE.PR.A) at $25.00 market), you will capture and lock in a 7.5% yield.

If you buy GOODO at $20.00, you lock in a 7.5% return until the issue is redeemed. This purchase also has 25% upside potential to face value if the yield gap develops enough to push the share price to $25. It’s happened before.