GOOD for Gladstone

07/22/2005 12:00 am EST

Focus:

Adrian Day

Chairman and CEO, Adrian Day Asset Management

"We have confidence in David Gladstone, who for 30 years was eminently succesful as chairman of Allied Capital and American Capital," notes Adrian Day. "He launched Gladstone Capital in 2001, and it has returned over 78% for us." Now, Day looks at Gladstone's latest venture.

"Gladstone Commercial (GOOD NASDAQ) has, to date, been less successful than his previous ventures. Gladstone Commercial invests primarily in triple net-leased industrial and commercial property, with a few mortgage loans as well, primarily serving small and medium-sized businesses. Launched two years ago, the company has been slow putting its funds to work, and, because of this, market impatience has seen the stock do a round-trip up over $17 and back again to its IPO price.

"But we are very comfortable with David’s cautious approach. Given Gladstone's past successes, we have every reason to be comfortable and confident. So we think this is a good time to step up the plate and buy Gladstone Commercial at the current price. Right now, the company has 17 fully-leased properties, all paying on time, completing the investment of all equity raised in its IPO (a little over $100 million). It is now digging into its line of credit and will eventually leverage itself one-to-one.

"Progress has been behind schedule, largely because the market has been so hot. Though the pipeline of deals is very strong, the pricing has not been so good, and Gladstone is passing on many. As Gladstone puts it, 'there are too many real estate dollars chasing too few good properties.' However, he has an advantage over most over lenders. First, the firm has a culture of discipline and patience. In addition, a lot of competitors are looking for only rated tenants. But because of Gladstone’s credit expertise, itcan go to lower rated or even unrated tenants and perform credit checks itself. Higher interest rates will eventually work through to mortgage rates and cool the market, which may present Gladstone with an opportunity to buy. Since the company lends based on the spread, higher rates in themselves won’t affect the company.

"Currently the company is paying 8 cents a month dividend, equivalent to a 6.3% yield, a little head of Funds From Operations (FFO) in the latest quarter following a dividend increase. But David Gladstone is not the type of person to raise the monthly payout unless he were confident of earning it by year-end. Indeed, he says the outlook remains positive for increasing the dividend. As a REIT, it does not pay tax at the corporate level provided the income is passed on to shareholders in the form of dividends. Most of the dividends are non-qualified for tax purposes. Gladstone Commercial is for patient investors; buy up to a $15.23 limit."

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