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EX-32.2 - EXHIBIT 32.2 - GLADSTONE COMMERCIAL CORPex322_03312020.htm
EX-32.1 - EXHIBIT 32.1 - GLADSTONE COMMERCIAL CORPex321_03312020.htm
EX-31.2 - EXHIBIT 31.2 - GLADSTONE COMMERCIAL CORPex312_03312020.htm
EX-31.1 - EXHIBIT 31.1 - GLADSTONE COMMERCIAL CORPex311_03312020.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER: 001-33097 
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
02-0681276
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1521 WESTBRANCH DRIVE, SUITE 100
MCLEAN, VIRGINIA
 
22102
(Address of principal executive offices)
 
(Zip Code)
(703) 287-5800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
GOOD
 
Nasdaq Global Select Market
7.00% Series D Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODM
 
Nasdaq Global Select Market
6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODN
 
Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

1


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of April 28, 2020 was 33,934,907.

2


GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
March 31, 2020
TABLE OF CONTENTS
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Gladstone Commercial Corporation
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
 
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
 
Real estate, at cost
 
$
1,123,644

 
$
1,056,978

Less: accumulated depreciation
 
216,547

 
207,523

Total real estate, net
 
907,097

 
849,455

Lease intangibles, net
 
122,036

 
115,465

Real estate and related assets held for sale, net
 

 
3,990

Cash and cash equivalents
 
9,853

 
6,849

Restricted cash
 
4,678

 
4,639

Funds held in escrow
 
7,971

 
7,226

Right-of-use assets from operating leases
 
5,742

 
5,794

Deferred rent receivable, net
 
35,599

 
37,177

Other assets
 
5,849

 
8,913

TOTAL ASSETS
 
$
1,098,825

 
$
1,039,508

LIABILITIES, MEZZANINE EQUITY AND EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Mortgage notes payable, net (1)
 
$
486,315

 
$
453,739

Borrowings under Revolver, net
 
20,846

 
51,579

Borrowings under Term Loan, net
 
159,033

 
121,276

Deferred rent liability, net
 
20,679

 
19,322

Operating lease liabilities
 
5,808

 
5,847

Asset retirement obligation
 
3,163

 
3,137

Accounts payable and accrued expenses
 
7,684

 
5,573

Liabilities related to assets held for sale, net
 

 
21

Due to Adviser and Administrator (1)
 
3,152

 
2,904

Other liabilities
 
16,488

 
12,920

TOTAL LIABILITIES
 
$
723,168

 
$
676,318

Commitments and contingencies (2)
 

 

MEZZANINE EQUITY
 
 
 
 
Series D and E redeemable preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 12,760,000 shares authorized; and 6,269,555 shares issued and outstanding at March 31, 2020 and December 31, 2019 (3)
 
$
152,193

 
$
152,153

TOTAL MEZZANINE EQUITY
 
$
152,193

 
$
152,153

EQUITY
 
 
 
 
Senior common stock, par value $0.001 per share; 950,000 shares authorized; and 783,114 and 806,435 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively (3)
 
$
1

 
$
1

Common stock, par value $0.001 per share, 60,290,000 and 86,290,000 shares authorized and 33,930,020 and 32,593,651 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively (3)
 
34

 
32

Additional paid in capital
 
599,232

 
571,205

Accumulated other comprehensive income
 
(4,654
)
 
(2,126
)
Distributions in excess of accumulated earnings
 
(374,259
)
 
(360,978
)
TOTAL STOCKHOLDERS' EQUITY
 
220,354

 
208,134

OP Units held by Non-controlling OP Unitholders (3)
 
$
3,110

 
$
2,903

TOTAL EQUITY
 
$
223,464

 
$
211,037

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY
 
$
1,098,825

 
$
1,039,508

(1)
Refer to Note 2 “Related-Party Transactions”
(2)
Refer to Note 7 “Commitments and Contingencies”
(3)
Refer to Note 8 “Equity and Mezzanine Equity”

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Gladstone Commercial Corporation
Condensed Consolidated Statements of Operations and Comprehensive Income
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited) 
 
 
For the three months ended March 31,
 
 
2020
 
2019
Operating revenues
 
 
 
 
Lease revenue
 
$
33,619

 
$
28,137

Total operating revenues
 
33,619

 
28,137

Operating expenses
 
 
 
 
Depreciation and amortization
 
14,096

 
13,010

Property operating expenses
 
6,213

 
3,068

Base management fee (1)
 
1,412

 
1,267

Incentive fee (1)
 
1,055

 
851

Administration fee (1)
 
438

 
413

General and administrative
 
878

 
657

Total operating expenses
 
24,092

 
19,266

Other (expense) income
 
 
 
 
Interest expense
 
(7,252
)
 
(7,231
)
(Loss) gain on sale of real estate, net
 
(12
)
 
2,952

Other (loss) income
 
(5
)
 
81

Total other expense, net
 
(7,269
)
 
(4,198
)
Net income
 
2,258

 
4,673

Net loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders
 
9

 
(45
)
Net income attributable to the Company
 
$
2,267

 
$
4,628

Distributions attributable to Series A, B, D, and E preferred stock
 
(2,678
)
 
(2,612
)
Distributions attributable to senior common stock
 
(208
)
 
(224
)
Net (loss) income (attributable) available to common stockholders
 
$
(619
)
 
$
1,792

(Loss) earnings per weighted average share of common stock - basic & diluted
 
 
 
 
(Loss) earnings (attributable) available to common shareholders
 
$
(0.02
)
 
$
0.06

Weighted average shares of common stock outstanding
 
 
 
 
Basic and Diluted
 
33,634,946

 
29,516,870

Earnings per weighted average share of senior common stock
 
$
0.26

 
$
0.26

Weighted average shares of senior common stock outstanding - basic
 
793,429

 
864,303

Comprehensive income
 
 
 
 
Change in unrealized loss related to interest rate hedging instruments, net
 
$
(2,528
)
 
$
(722
)
Other Comprehensive loss
 
(2,528
)
 
(722
)
Net income
 
$
2,258

 
$
4,673

Comprehensive (loss) income
 
$
(270
)
 
$
3,951

Comprehensive loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders
 
9

 
(45
)
Total comprehensive (loss) income (attributable) available to the Company
 
$
(261
)
 
$
3,906

 
(1)
Refer to Note 2 “Related-Party Transactions”
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Gladstone Commercial Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)

 
 
For the three months ended March 31,
 
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 
Net income
 
$
2,258

 
$
4,673

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
14,096

 
13,010

Loss (gain) on sale of real estate, net
 
12

 
(2,952
)
Amortization of deferred financing costs
 
374

 
456

Amortization of deferred rent asset and liability, net
 
(462
)
 
(293
)
Amortization of discount and premium on assumed debt, net
 
15

 
16

Asset retirement obligation expense
 
26

 
32

Operating changes in assets and liabilities
 
 
 
 
Decrease (increase) in other assets
 
1,412

 
(743
)
Increase in deferred rent receivable
 
(214
)
 
(581
)
Increase (decrease) in accounts payable, accrued expenses, and amount due to Adviser and Administrator
 
2,391

 
(84
)
Decrease in right-of-use asset from operating leases
 
52

 
50

Decrease in operating lease liabilities
 
(39
)
 
(50
)
Increase (decrease) in other liabilities
 
1,124

 
(796
)
Leasing commissions paid
 
(715
)
 
(138
)
Net cash provided by operating activities
 
$
20,330

 
$
12,600

Cash flows from investing activities:
 
 
 
 
Acquisition of real estate and related intangible assets
 
$
(71,463
)
 
$
(6,315
)
Improvements of existing real estate
 
(2,031
)
 
(829
)
Proceeds from sale of real estate
 
3,947

 
6,318

Receipts from lenders for funds held in escrow
 
21

 
991

Payments to lenders for funds held in escrow
 
(766
)
 
(482
)
Receipts from tenants for reserves
 
435

 
624

Payments to tenants from reserves
 
(429
)
 
(271
)
Deposits on future acquisitions
 
(1,000
)
 
(565
)
Deposits applied against acquisition of real estate investments
 
2,541

 
215

Net cash used in investing activities
 
$
(68,745
)
 
$
(314
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of equity
 
$
28,296

 
$
14,292

Offering costs paid
 
(323
)
 
(179
)
Borrowings under mortgage notes payable
 
35,855

 
10,640

Payments for deferred financing costs
 
(382
)
 
(279
)
Principal repayments on mortgage notes payable
 
(3,162
)
 
(6,692
)
Borrowings from revolving credit facility
 
36,900

 
13,700

Repayments on revolving credit facility
 
(67,700
)
 
(31,500
)
Borrowings on term loan
 
37,700

 

Increase (decrease) in security deposits
 
12

 
(141
)
Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders
 
(15,738
)
 
(14,192
)

6


Net cash provided by (used in) financing activities
 
$
51,458

 
$
(14,351
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
$
3,043

 
$
(2,065
)
Cash, cash equivalents, and restricted cash at beginning of period
 
$
11,488

 
$
9,082

Cash, cash equivalents, and restricted cash at end of period
 
$
14,531

 
$
7,017

SUPPLEMENTAL NON-CASH INFORMATION
 
 
 
 
Tenant funded fixed asset improvements
 
$
353

 
$
1,015

Unrealized loss related to interest rate hedging instruments, net
 
$
(2,528
)
 
$
(722
)
Right-of-use asset from operating leases
 
$

 
$
5,998

Operating lease liabilities
 
$

 
$
(5,998
)
Capital improvements and leasing commissions included in accounts payable and accrued expenses
 
$
85

 
$
239

Non-controlling OP Units issued in connection with acquisition
 
$
502

 
$


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (dollars in thousands):

 
 
For the three months ended March 31,
 
 
2020
 
2019
Cash and cash equivalents
 
$
9,853

 
$
4,314

Restricted cash
 
4,678

 
2,703

Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows
 
$
14,531

 
$
7,017


Restricted cash consists of security deposits and receipts from tenants for reserves. These funds will be released to the tenants upon completion of agreed upon tasks, as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings and upon receipt by us of evidence of insurance and tax payments.

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Gladstone Commercial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization, Basis of Presentation and Significant Accounting Policies

Gladstone Commercial Corporation is a real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and office mortgage loans; however, we do not have any mortgage loans currently outstanding. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company (the “Administrator”), each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”).

All references herein to “we,” “our,” “us” and the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.

Interim Financial Information

Our interim financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission on February 12, 2020. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the impact of extraordinary events such as the novel coronavirus (“COVID-19”) pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical Accounting Policies

The preparation of our financial statements in accordance with GAAP, requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. On January 1, 2020, we completed the integration of the accounting records of certain of our triple net leased third-party asset managed properties into our accounting system and paid out of our operating bank accounts. For periods prior to January 1, 2020, we recorded property operating expenses and offsetting lease revenues for these certain triple net leased properties on a net basis. Beginning January 1, 2020, we are recording the property operating expenses and offsetting lease revenues for these triple net leased properties on a gross basis, as we have amended our process whereby we are paying operating expenses on behalf of our tenants and receiving reimbursement, whereas, previously these tenants were paying these expenses directly with limited insight provided to us. There were no other material changes to our critical accounting policies during the three months ended March 31, 2020.


8


Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). The new standard requires more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair market value through net income. The standard also requires that financial assets measured at amortized cost be presented at the net amounts anticipated to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. We are required to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. We adopted ASU 2016-13 beginning with the three months ended March 31, 2020. Adopting ASU 2016-13 has not resulted in a material impact to our consolidated financial statements, as we do not have any loans receivable outstanding, and our receivables are generally incurred from leasing arrangements that are collected monthly.

In March 2020, the FASB issued Accounting Standards Update 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”). The main provisions of this update provide optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020. We adopted ASU 2020-04 beginning with the three months ended March 31, 2020. Adopting ASU 2020-04 has not resulted in a material impact to our consolidated statements, as ASU 2020-04 allows for prospective application of any changes in the effective interest rate for our LIBOR based debt, and allows for practical expedients that will allow us to treat our derivative instruments designated as cash flow hedges consistent with how they are currently accounted for.

2. Related-Party Transactions

Gladstone Management and Gladstone Administration

We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip, is an executive managing director of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary. We have entered into an advisory agreement with our Adviser, as amended from time to time (the “Advisory Agreement”), and an administration agreement with our Administrator (the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of March 31, 2020 and December 31, 2019, $3.2 million and $2.9 million, respectively, were collectively due to our Adviser and Administrator. Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser each July. During its July 2019 meeting, our Board of Directors reviewed and renewed the Advisory Agreement for an additional year, through August 31, 2020.

Base Management Fee

Under the Advisory Agreement, the calculation of the annual base management fee equals 1.5% of our Total Equity, which is our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges), adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include operating partnership units in the Operating Partnership (“OP Units”) held by holders who do not control the Operating Partnership (“Non-controlling OP Unitholders”). The fee is calculated and accrued quarterly as 0.375% per quarter of such Total Equity figure. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources.

For the three months ended March 31, 2020 and 2019, we recorded a base management fee of $1.4 million and $1.3 million, respectively.


9


Incentive Fee

Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.

For the three months ended March 31, 2020 and 2019, we recorded an incentive fee of $1.1 million and $0.9 million, respectively. The Adviser did not waive any portion of the incentive fee for the three months ended March 31, 2020 or 2019, respectively.

Capital Gain Fee

Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three months ended March 31, 2020 or 2019.

Termination Fee

The Advisory Agreement includes a termination fee whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the Advisory Agreement after we have defaulted and applicable cure periods have expired. The Advisory Agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions thereof, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.

Administration Agreement

Under the terms of the Administration Agreement, we pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. We believe this approach helps approximate fees paid by us to actual services performed by the Administrator for us. For the three months ended March 31, 2020 and 2019, we recorded an administration fee of $0.4 million and $0.4 million, respectively.

Gladstone Securities

Gladstone Securities, LLC (“Gladstone Securities”), is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.


10


Mortgage Financing Arrangement Agreement

We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own (the “Financing Arrangement Agreement”). In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third-party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.09 million and $0.02 million during the three months ended March 31, 2020 and 2019, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% and 0.15%, respectively, of the mortgage principal secured and/or extended. Our Board of Directors renewed the Financing Arrangement Agreement for an additional year, through August 31, 2020, at its July 2019 meeting.

Dealer Manager Agreement

On February 20, 2020 we entered into a dealer manager agreement (the “Dealer Manager Agreement”), with Gladstone Securities (the “Dealer Manager”), whereby the Dealer Manager will serve as our exclusive dealer manager in connection with our offering (the “Offering”) of up to (i) 20,000,000 shares of 6.00% Series F Cumulative Redeemable Preferred Stock of the Company, par value $0.001 per share (the “Series F Preferred Stock”), on a “reasonable best efforts” basis (the “Primary Offering”), and (ii) 6,000,000 shares of Series F Preferred Stock pursuant to our distribution reinvestment plan (the “DRIP”) to those holders of the Series F Preferred Stock who participate in such DRIP. The Series F Preferred Stock is registered with the SEC pursuant to a registration statement on Form S-3 (File No. 333-236143), as the same may be amended and/or supplemented (the “Registration Statement”), under the Securities Act of 1933, as amended, and will be offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020 relating to the Registration Statement (the “Prospectus”).

Under the Dealer Manager Agreement, the Dealer Manager will provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay the Dealer Manager (i) selling commissions of 6.0% of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Selling Commissions”), and (ii) a dealer manager fee of 3.0% of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Dealer Manager Fee”). No Selling Commissions or Dealer Manager Fee shall be paid with respect to Shares sold pursuant to the DRIP. The Dealer Manager may, in its sole discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering.

3. (Loss) Earnings Per Share of Common Stock

The following tables set forth the computation of basic and diluted (loss) earnings per share of common stock for the three months ended March 31, 2020 and 2019. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted (loss) earnings per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of (loss) income would also be added back to net (loss) income. Net (loss) income figures are presented net of such non-controlling interests in the (loss) earnings per share calculation.

We computed basic (loss) earnings per share for the three months ended March 31, 2020 and 2019 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings per share for the three months ended March 31, 2020 and 2019 reflects additional shares of common stock related to our convertible senior common stock (the “Senior Common Stock”), if the effect would be dilutive, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net (loss) income (attributable) available to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).


11


 
 
For the three months ended March 31,
 
 
2020
 
2019
Calculation of basic (loss) earnings per share of common stock:
 
 
 
 
Net (loss) income (attributable) available to common stockholders
 
$
(619
)
 
$
1,792

Denominator for basic weighted average shares of common stock (1)
 
33,634,946

 
29,516,870

Basic (loss) earnings per share of common stock
 
$
(0.02
)
 
$
0.06

Calculation of diluted (loss) earnings per share of common stock:
 
 
 
 
Net (loss) income (attributable) available to common stockholders
 
$
(619
)
 
$
1,792

Add: income impact of assumed conversion of senior common stock (2)
 

 

Net (loss) income (attributable) available to common stockholders plus assumed conversions (2)
 
$
(619
)
 
$
1,792

Denominator for basic weighted average shares of common stock (1)
 
33,634,946

 
29,516,870

Effect of convertible Senior Common Stock (2)
 

 

Denominator for diluted weighted average shares of common stock (2)
 
33,634,946

 
29,516,870

Diluted (loss) earnings per share of common stock
 
$
(0.02
)
 
$
0.06

 
(1)
The weighted average number of OP Units held by Non-controlling OP Unitholders was 501,233 and 742,937 for the three months ended March 31, 2020 and 2019, respectively.
(2)
We excluded convertible shares of Senior Common Stock of 654,942 and 721,872 from the calculation of diluted (loss) earnings per share for the three months ended March 31, 2020 and 2019, respectively, because they were anti-dilutive.

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of March 31, 2020 and December 31, 2019, excluding real estate held for sale as of December 31, 2019 (dollars in thousands):
 
 
 
March 31, 2020

December 31, 2019
Real estate:
 
 
 
 
Land (1)
 
$
146,580

 
$
137,532

Building and improvements
 
907,577

 
851,245

Tenant improvements
 
69,487

 
68,201

Accumulated depreciation
 
(216,547
)
 
(207,523
)
Real estate, net
 
$
907,097

 
$
849,455


(1)
This amount includes $4,436 of land value subject to land lease agreements which we may purchase at our option for a nominal fee.

Real estate depreciation expense on building and tenant improvements was $9.0 million and $8.0 million for the three months ended March 31, 2020 and 2019, respectively.
 

12


Acquisitions

We acquired five properties during the three months ended March 31, 2020, and two properties during the three months ended March 31, 2019. The acquisitions are summarized below (dollars in thousands):

Three Months Ended
 
Aggregate Square Footage
 
Weighted Average Lease Term
 
Aggregate Purchase Price
 
Acquisition Expenses
 
Aggregate Annualized GAAP Rent
 
Aggregate Debt Issued or Assumed
March 31, 2020
(1)
890,038

 
14.8 Years
 
$
71,965

 
$
255

(3)
$
5,303

 
$
35,855

March 31, 2019
(2)
60,850

 
12.2 Years
 
6,318

 
130

(3)
516

 


(1)
On January 8, 2020, we acquired a 64,800 square foot property in Indianapolis, Indiana for $5.3 million. The property is leased to three tenants with a weighted average lease term of 7.2 years with annualized GAAP rent of $0.5 million. On January 27, 2020, we acquired a 320,838 square foot, three-property portfolio in Houston, Texas, Charlotte, North Carolina, and St. Charles, Missouri for $34.7 million. The portfolio has a weighted average lease term of 20.0 years, and an annualized GAAP rent of $2.6 million. We issued $18.3 million of mortgage debt with a fixed interest rate of 3.625% in connection with the acquisition. On March 9, 2020, we acquired a 504,400 square foot property in Chatsworth, Georgia for $32.0 million. We entered into an interest rate swap in connection with our $17.5 million of issued debt, resulting in a fixed interest rate of 2.8%. The annualized GAAP rent on the 10.5 Years lease is $2.2 million.
(2)
On February 8, 2019, we acquired a 26,050 square foot property in a suburb of Philadelphia, Pennsylvania, for $2.7 million. The annualized GAAP rent on the 15.1 year lease is $0.2 million. On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $3.6 million. The annualized GAAP rent on the 10.0 year lease is $0.3 million.
(3)
We accounted for these transactions under ASU 2017-01, “Clarifying the Definition of a Business.” As a result, we treated our acquisitions during the three months ended March 31, 2020 and 2019 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.3 million and $0.1 million, respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the three months ended March 31, 2020 and 2019 as follows (dollars in thousands):

 
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
Acquired assets and liabilities
 
Purchase price
 
Purchase price
Land (1)
 
$
7,296

 
$
726

Building and improvements
 
54,000

 
4,541

Tenant Improvements
 
1,285

 
93

In-place Leases
 
4,442

 
432

Leasing Costs
 
4,261

 
307

Customer Relationships
 
2,223

 
196

Above Market Leases (2)
 
210

 
23

Below Market Leases (3)
 
(1,752
)
 

Total Purchase Price
 
$
71,965

 
$
6,318


(1)
This amount includes $2,711 of land value subject to a land lease agreement.
(2)
This amount includes $53 of loan receivable included in Other assets on the condensed consolidated balance sheets.
(3)
This amount includes $62 of prepaid rent included in Other liabilities on the condensed consolidated balance sheets.

Significant Real Estate Activity on Existing Assets

During the three months ended March 31, 2020 and 2019, we executed three and two leases, respectively, which are summarized below (dollars in thousands):


13


Three Months Ended
 
Aggregate Square Footage
 
Weighted Average Remaining Lease Term
 
Aggregate Annualized GAAP Rent
 
Aggregate Tenant Improvement
 
Aggregate Leasing Commissions
March 31, 2020
 
232,648

 
6.8 years
 
$
3,185

 
$
1,892

 
$
715

March 31, 2019
 
130,240

 
6.2 years
 
1,187

 

 
71


Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the nine months ending December 31, 2020 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

Year
Tenant Lease Payments
Nine Months Ending 2020
$
82,835

2021
107,411

2022
101,883

2023
94,182

2024
85,298

2025
76,287

Thereafter
293,679

 
$
841,575


We account for all of our real estate leasing arrangements as operating leases. A majority of our leases are subject to fixed rental increases, but a small subset of our lease portfolio has variable lease payments that are driven by the consumer price index. Many of our tenants have renewal options in their respective leases, but we seldom include option periods in the determination of lease term, as we generally will not enter into leasing arrangements with bargain renewal options. A small number of tenants have termination options.

Future minimum lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and real estate held for sale as of December 31, 2019, for each of the five succeeding fiscal years and thereafter, is as follows (dollars in thousands):
 
Year
Tenant Lease Payments
2020
$
107,159

2021
101,794

2022
94,252

2023
86,460

2024
77,414

Thereafter
307,591

 
$
774,670

 

14


Lease Revenue Reconciliation

The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the three months ended March 31, 2020 and 2019, respectively (dollars in thousands):

 
 
For the three months ended March 31,
 
 
(Dollars in Thousands)
Lease revenue reconciliation
 
2020
 
2019
Fixed rental payments
 
$
29,479

 
$
27,162

Variable rental payments
 
4,140

 
975

 
 
$
33,619

 
$
28,137


Intangible Assets

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of March 31, 2020 and December 31, 2019, excluding real estate held for sale as of December 31, 2019 (dollars in thousands):

 
 
March 31, 2020

December 31, 2019
 
 
Lease Intangibles
 
Accumulated Amortization
 
Lease Intangibles
 
Accumulated Amortization
In-place leases
 
$
97,348

 
$
(50,602
)
 
$
92,906

 
$
(48,468
)
Leasing costs
 
73,231

 
(35,240
)
 
68,256

 
(33,705
)
Customer relationships
 
67,587

 
(30,288
)
 
65,363

 
(28,887
)
 
 
$
238,166

 
$
(116,130
)
 
$
226,525

 
$
(111,060
)
 
 
 
 
 
 
 
 
 
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
Above market leases
 
$
14,818

 
$
(10,112
)
 
$
16,502

 
$
(10,005
)
Below market leases and deferred revenue
 
(36,365
)
 
15,686

 
(34,322
)
 
15,000

 
 
$
(21,547
)
 
$
5,574

 
$
(17,820
)
 
$
4,995


Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $5.1 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and comprehensive income.

Total amortization related to above-market lease values was $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income. Total amortization related to below-market lease values was $0.7 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income.

The weighted average amortization periods in years for the intangible assets acquired during the three months ended March 31, 2020 and 2019 were as follows:
 

15


Intangible Assets & Liabilities
 
2020
 
2019
In-place leases
 
16.3
 
13.0
Leasing costs
 
16.3
 
13.0
Customer relationships
 
19.5
 
17.9
Above market leases
 
18.0
 
10.0
Below market leases
 
14.2
 
0.0
All intangible assets & liabilities
 
16.9
 
14.5

5. Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions

During the three months ended March 31, 2020, we continued to execute our capital recycling program, whereby we sell properties outside of our core markets and redeploy proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. On February 20, 2020, we sold one non-core property, located in Charlotte, North Carolina, which is detailed in the table below (dollars in thousands):

Square Footage Sold
 
Sales Price
 
Sales Costs
 
Loss on Sale of Real Estate, net
64,500

 
$
4,145

 
$
198

 
$
(12
)

Our disposition during the three months ended March 31, 2020 was not classified as a discontinued operation because it did not represent a strategic shift in operations, nor will it have a major effect on our operations and financial results. Accordingly, the operating results of this property is included within continuing operations for all periods reported.

The table below summarizes the components of operating income from the real estate and related assets disposed of during the three months ended March 31, 2020, and 2019 (dollars in thousands):

 
 
For the three months ended March 31,
 
 
2020
 
2019
Operating revenue
 
$

 
$
295

Operating expense
 
33

 
70

Other expense, net
 
(12
)
(1)
(1
)
(Expense) income from real estate and related assets sold
 
$
(45
)
 
$
224


(1)
Includes a $0.01 million loss on sale of real estate, net on one property.

Real Estate Held for Sale

As of March 31, 2020, we did not have any properties classified as held for sale. At December 31, 2019, we had one property classified as held for sale, located in Charlotte, North Carolina. This property was sold during the three months ended March 31, 2020.

16



The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheets (dollars in thousands):
 
 
December 31, 2019
Assets Held for Sale
 
Real estate, at cost
$
7,411

Less: accumulated depreciation
3,421

Total real estate held for sale, net
3,990

Total Assets Held for Sale
$
3,990

Liabilities Held for Sale
 
Asset retirement obligation
$
21

Total Liabilities Held for Sale
$
21


Impairment Charges

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the three months ended March 31, 2020 and did not identify any held and used assets which were impaired. We also did not recognize an impairment charge during the three months ended March 31, 2019.

We continue to evaluate our properties on a quarterly basis for changes that could create the need to record impairment. Future impairment losses may result, and could be significant, should market conditions deteriorate in the markets in which we hold our assets or should we be unable to secure leases at terms that are favorable to us, which could impact the estimated cash flow of our properties over the period in which we plan to hold our properties. Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis.

6. Mortgage Notes Payable and Credit Facility

Our mortgage notes payable and Credit Facility as of March 31, 2020 and December 31, 2019 are summarized below (dollars in thousands):

 
 
Encumbered properties at
 
 
 
Carrying Value at
 
Stated Interest Rates at
 
Scheduled Maturity Dates at
 
 
March 31, 2020
 
 
 
March 31, 2020
 
December 31, 2019
 
March 31, 2020

March 31, 2020
Mortgage and other secured loans:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate mortgage loans
 
62

 
 
 
$
445,786

 
$
412,771

 
(1)
 
(2)
Variable rate mortgage loans
 
12

 
 
 
44,830

 
45,151

 
(3)
 
(2)
Premiums and discounts, net
 
-

 
 
 
(224
)
 
(239
)
 
N/A
 
N/A
Deferred financing costs, mortgage loans, net
 
-

 
 
 
(4,077
)
 
(3,944
)
 
N/A
 
N/A
Total mortgage notes payable, net
 
74

 
 
 
$
486,315

 
$
453,739

 
(4)
 
 
Variable rate revolving credit facility
 
47

 
(6)
 
$
21,600

 
$
52,400

 
LIBOR + 1.65%
 
7/2/2023
Deferred financing costs, revolving credit facility
 
-

 
 
 
(754
)
 
(821
)
 
N/A
 
N/A
Total revolver, net
 
47

 
 
 
$
20,846

 
$
51,579

 
 
 
 
Variable rate term loan facility
 
-

 
(6)
 
$
160,000

 
$
122,300

 
LIBOR + 1.60%
 
7/2/2024
Deferred financing costs, term loan facility
 
-

 
 
 
(967
)
 
(1,024
)
 
N/A
 
N/A
Total term loan, net
 
N/A

 
 
 
$
159,033

 
$
121,276

 
 
 
 
Total mortgage notes payable and credit facility
 
121

 
 
 
$
666,194

 
$
626,594

 
(5)
 
 
 
(1)
Interest rates on our fixed rate mortgage notes payable vary from 2.80% to 6.63%.

17


(2)
We have 58 mortgage notes payable with maturity dates ranging from 7/1/2020 through 8/1/2037.
(3)
Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.00% to one month LIBOR + 2.75%. As of March 31, 2020, one month LIBOR was approximately 0.99%.
(4)
The weighted average interest rate on the mortgage notes outstanding as of March 31, 2020 was approximately 4.32%.
(5)
The weighted average interest rate on all debt outstanding as of March 31, 2020 was approximately 3.86%.
(6)
The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 47 unencumbered properties as of March 31, 2020.
N/A - Not Applicable

Mortgage Notes Payable

As of March 31, 2020, we had 58 mortgage notes payable, collateralized by a total of 74 properties with a net book value of $730.5 million. We have limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. We have full recourse for $4.8 million of the mortgages notes payable, net, or 1.0% of the outstanding balance. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. 

During the three months ended March 31, 2020, we issued four mortgages, collateralized by four properties, which are summarized in the table below (dollars in thousands):

Aggregate Fixed Rate Debt Issued
 
Weighted Average Interest Rate on Fixed Rate Debt
$
35,855

(1)
3.22%

(1)
We issued $18.3 million of fixed rate debt in connection with the three-property portfolio acquired on January 27, 2020 with a maturity date of February 1, 2030. The interest rate is fixed at 3.625%. On March 9, 2020, we issued $17.5 million of floating rate debt swapped to fixed rate debt of 2.8% in connection with the one property acquisition.

We made payments of $0.4 million and $0.3 million for deferred financing costs during the three months ended March 31, 2020 and 2019, respectively.

Scheduled principal payments of mortgage notes payable for the nine months ending December 31, 2020, and each of the five succeeding years and thereafter are as follows (dollars in thousands):
 
Year
 
Scheduled Principal Payments
 
Nine Months Ending December 31, 2020
 
$
28,514

 
2021
 
39,329

 
2022
 
107,733

 
2023
 
72,065

 
2024
 
49,172

 
2025
 
37,112

 
Thereafter
 
156,691

 
Total
 
$
490,616

(1)

(1)
This figure does not include $0.2 million of premiums and discounts, net, and $4.1 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets.

We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility.


18


Interest Rate Cap and Interest Rate Swap Agreements

We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps and interest rate swaps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At March 31, 2020 and December 31, 2019, our interest rate cap agreements and interest rate swaps were valued using Level 2 inputs.

The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our condensed consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at March 31, 2020 and December 31, 2019 (dollars in thousands):
 
 
 
March 31, 2020
 
December 31, 2019
Aggregate Cost
 
Aggregate Notional Amount
 
Aggregate Fair Value
 
Aggregate Notional Amount
 
Aggregate Fair Value
$
1,672

(1)
$
204,090

 
$
161

 
$
166,728

 
$
250


(1)
We have entered into various interest rate cap agreements on variable rate debt with LIBOR caps ranging from 2.00% to 3.25%.

We have assumed or entered into interest rate swap agreements in connection with certain of our acquisitions or mortgage financings, whereby we will pay our counterparty a fixed rate interest rate on a monthly basis, and receive payments from our counterparty equivalent to the stipulated floating rate. The fair values of our interest rate swap agreements are recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at March 31, 2020 and December 31, 2019 (dollars in thousands):

March 31, 2020
 
December 31, 2019
Aggregate Notional Amount
 
Aggregate Fair Value Asset
 
Aggregate Fair Value Liability
 
Aggregate Notional Amount
 
Aggregate Fair Value Asset
 
Aggregate Fair Value Liability
$
63,168

 
$

 
$
(3,538
)
 
$
45,777

 
$

 
$
(1,173
)


19


The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands):

 
 
Amount of loss recognized in Comprehensive Income
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Derivatives in cash flow hedging relationships
 
 
 
 
Interest rate caps
 
$
(163
)
 
$
(333
)
Interest rate swaps
 
(2,365
)
 
(389
)
 
 
 
 
 
Total
 
$
(2,528
)
 
$
(722
)

The following table sets forth certain information regarding our derivative instruments (dollars in thousands):

 
 
 
 
Asset (Liability) Derivatives Fair Value at
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
March 31, 2020

 
December 31, 2019

Interest rate caps
 
Other assets
 
$
161

 
$
250

Interest rate swaps
 
Other liabilities
 
(3,538
)
 
(1,173
)
Total derivative liabilities, net
 
 
 
$
(3,377
)
 
$
(923
)

The fair value of all mortgage notes payable outstanding as of March 31, 2020 was $501.9 million, as compared to the carrying value stated above of $490.6 million. The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

Credit Facility

On July 2, 2019, we amended, extended and upsized our Credit Facility, expanding the Term Loan from $75.0 million to $160.0 million, and increasing the Revolver from $85.0 million to $100.0 million. The Term Loan has a new five-year term, with a maturity date of July 2, 2024, and the Revolver has a new four-year term, with a maturity date of July 2, 2023. The interest rate for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. We used the net proceeds derived from the amended Credit Facility to repay all previously existing borrowings under the Revolver. We incurred fees of approximately $1.3 million in connection with the Credit Facility amendment. The bank syndicate is now comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association.

As of March 31, 2020, there was $181.6 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 2.60%, and $12.6 million outstanding under letters of credit, at a weighted average interest rate of 1.65%. As of March 31, 2020, the maximum additional amount we could draw under the Credit Facility was $17.2 million. We were in compliance with all covenants under the Credit Facility as of March 31, 2020.

The amount outstanding under the Credit Facility approximates fair value as of March 31, 2020.


20


7. Commitments and Contingencies

Ground Leases

We are obligated as lessee under four ground leases. Future lease payments due under the terms of these leases as of March 31, 2020 are as follows (dollars in thousands):

Year
 
Future Lease Payments Due Under Operating Leases
Nine Months Ending December 31, 2020
 
$
350

2021
 
477

2022
 
489

2023
 
492

2024
 
493

2025
 
494

Thereafter
 
7,305

Total anticipated lease payments
 
$
10,100

Less: amount representing interest
 
(4,292
)
Present value of lease payments
 
$
5,808


Rental expense incurred for properties with ground lease obligations during the three months ended March 31, 2020 and 2019 was $0.1 million and $0.1 million, respectively. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the condensed consolidated statements of operations and comprehensive income.

Letters of Credit

As of March 31, 2020, there was $12.6 million outstanding under letters of credit. These letters of credit are not reflected on our condensed consolidated balance sheets.


21


8. Equity and Mezzanine Equity

Stockholders’ Equity

The following table summarizes the changes in our equity for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three Months Ended March 31,
Series A and B Preferred Stock
2020
2019
Balance, beginning of period
$

$
2

Issuance of Series A and B preferred stock, net


Balance, end of period
$

$
2

Senior Common Stock
 
 
Balance, beginning of period
$
1

$
1

Issuance of senior common stock, net


Balance, end of period
$
1

$
1

Common Stock
 
 
Balance, beginning of period
$
32

$
29

Issuance of common stock, net
2

1

Balance, end of period
$
34

$
30

Additional Paid in Capital
 
 
Balance, beginning of period
$
571,205

$
559,977

Issuance of common stock, net
27,930

14,111

Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
97

(220
)
Balance, end of period
$
599,232

$
573,868

Accumulated Other Comprehensive Income
 
 
Balance, beginning of period
$
(2,126
)
$
(148
)
Comprehensive income
(2,528
)
(722
)
Balance, end of period
$
(4,654
)
$
(870
)
Distributions in Excess of Accumulated Earnings
 
 
Balance, beginning of period
$
(360,978
)
$
(310,117
)
Distributions declared to common, senior common, and preferred stockholders
(15,548
)
(13,913
)
Net income attributable to the Company
2,267

4,628

Balance, end of period
$
(374,259
)
$
(319,402
)
Total Stockholders' Equity
 
 
Balance, beginning of period
$
208,134

$
249,744

Issuance of common stock, net
27,932

14,112

Distributions declared to common, senior common, and preferred stockholders
(15,548
)
(13,913
)
Comprehensive income
(2,528
)
(722
)
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
97

(220
)
Net income attributable to the Company
2,267

4,628

Balance, end of period
$
220,354

$
253,629

Non-Controlling Interest
 
 
Balance, beginning of period
$
2,903

$
4,675

Distributions declared to Non-controlling OP Unit holders
(189
)
(278
)
Issuance of Non-controlling OP Units as consideration in real estate acquisitions, net
502


Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
(97
)
220

Net (loss) income (attributable) available to OP units held by Non-controlling OP Unitholders
(9
)
45

Balance, end of period
$
3,110

$
4,662

Total Equity
$
223,464

$
258,291



22


Distributions

We paid the following distributions per share for the three months ended March 31, 2020 and 2019:
 
 
 
For the three months ended March 31,
 
 
2020
 
2019
Common Stock and Non-controlling OP Units
 
$
0.37545

 
$
0.37500

Senior Common Stock
 
0.2625

 
0.2625

Series A Preferred Stock
 

(1)
0.4843749

Series B Preferred Stock
 

(1)
0.46875

Series D Preferred Stock
 
0.4374999

 
0.4374999

Series E Preferred Stock
 
0.414063

 


(1)
We fully redeemed all outstanding shares of both Series A Preferred Stock and Series B Preferred Stock on October 28, 2019.

Recent Activity

Common Stock ATM Program

During the three months ended March 31, 2020, we sold 1.3 million shares of common stock, raising $27.9 million in net proceeds under our At-the-Market Equity Offering Sales Agreements (the “Common Stock Sales Agreement”), with Robert W. Baird & Co. Incorporated (“Baird”), Goldman Sachs & Co. LLC (“Goldman Sachs”), Stifel, Nicolaus & Company, Incorporated (“Stifel”), BTIG, LLC, and Fifth Third Securities, Inc. (“Fifth Third”) (collectively, the “Common Stock Sales Agents”), pursuant to which we may sell shares of our common stock in an aggregate offering price of up to $250.0 million (the “Common Stock ATM Program”). As of March 31, 2020, we had remaining capacity to sell up to $209.2 million of common stock under the Common Stock ATM Program.

Mezzanine Equity

Our 7.00% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) and 6.625% Series E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”) are classified as mezzanine equity on our condensed consolidated balance sheets because both are redeemable at the option of the shareholder upon a change of control of greater than 50% in accordance with ASC 480-10-S99 “Distinguishing Liabilities from Equity,” which requires mezzanine equity classification for preferred stock issuances with redemption features which are outside of the control of the issuer. A change in control of our company, outside of our control, is only possible if a tender offer is accepted by over 90% of our shareholders. All other change in control situations would require input from our Board of Directors. In addition, our Series E Preferred Stock is redeemable at the option of the shareholder in the event a delisting event occurs. We will periodically evaluate the likelihood that a delisting event or change of control of greater than 50% will take place, and if we deem this probable, we would adjust the Series D Preferred Stock and Series E Preferred Stock presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment. We currently believe the likelihood of a change of control greater than 50%, or a delisting event, is remote.

We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”) with Baird, Goldman Sachs, Stifel, Fifth Third, and U.S. Bancorp Investments, Inc. (the “Series E Preferred Stock Sales Agents”), pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $100.0 million. We did not sell any of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the three months ended March 31, 2020. We do not have an active At-the-Market program for our Series D Preferred Stock.

Universal Shelf Registration Statements

On January 11, 2019, we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form S-3/A on January 24, 2019 (collectively referred to as the “2019 Universal Shelf”). The 2019 Universal Shelf became effective on February 13, 2019 and replaced our prior universal shelf registration statement. The 2019 Universal Shelf allows us to issue up to $500.0 million of securities. As of March 31, 2020, we had the ability to issue up to $409.7 million under the 2019 Universal Shelf.

23



On January 29, 2020, we filed an additional universal registration statement on Form S-3, File No. 333-236143 (the “2020 Universal Shelf”). The 2020 Universal Shelf was declared effective on February 11, 2020 and is in addition to the 2019 Universal Shelf. the 2020 Universal Shelf allows us to issue up to an additional $800.0 million of securities. Of the $800.0 million of available capacity under our 2020 Universal Shelf, approximately $636.5 million is reserved for the sale of our Series F Preferred Stock. As of March 31, 2020, we had the ability to issue up to $800.0 million of securities under the 2020 universal shelf, as we have not sold any securities under the 2020 Universal Shelf.

Series F Preferred Stock

On February 20, 2020, the Company filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of the Company’s authorized and unissued shares of common stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. Currently, there are no shares of the Series F Preferred Stock outstanding.

Amendment to Operating Partnership Agreement

In connection with the authorization of the Series F Preferred Stock, the Operating Partnership controlled by the Company through its ownership of GCLP Business Trust II, the general partner of the Operating Partnership, adopted the Second Amendment to its Second Amended and Restated Agreement of Limited Partnership, including Exhibit SFP thereto (collectively, the “Amendment”), as amended from time to time, establishing the rights, privileges and preferences of 6.00% Series F Cumulative Redeemable Preferred Units, a newly-designated class of limited partnership interests (the “Series F Preferred Units”). The Amendment provides for the Operating Partnership’s establishment and issuance of an equal number of Series F Preferred Units as are issued shares of Series F Preferred Stock by the Company in connection with the Offering upon the Company’s contribution to the Operating Partnership of the net proceeds of the Offering. Generally, the Series F Preferred Units provided for under the Amendment have preferences, distribution rights and other provisions substantially equivalent to those of the Series F Preferred Stock.

9. Subsequent Events

Distributions

On April 14, 2020, our Board of Directors declared the following monthly distributions for the months of April, May and June of 2020:

 
Record Date
 
Payment Date
 
Common Stock and Non-controlling OP Unit Distributions per Share
 
Series D Preferred Distributions per Share
 
Series E Preferred Distributions per Share
April 24, 2020
 
April 30, 2020
 
$
0.12515

 
$
0.1458333

 
$
0.138021

May 19, 2020
 
May 29, 2020
 
0.12515

 
0.1458333

 
0.138021

June 19, 2020
 
June 30, 2020
 
0.12515

 
0.1458333

 
0.138021


 
 
 
$
0.37545

 
$
0.4374999

 
$
0.414063


Senior Common Stock Distributions
Payable to the Holders of Record During the Month of:
 
Payment Date
 
Distribution per Share
April
 
May 6, 2020
 
$
0.0875

May
 
June 5, 2020
 
0.0875

June
 
July 6, 2020
 
0.0875


 
 
 
$
0.2625


24


Series F Preferred Stock Distributions
Record Date
 
Payment Date
 
Distribution per Share
April 29, 2020
 
May 5, 2020
 
$
0.125

May 28, 2020
 
June 5, 2020
 
0.125

June 25, 2020
 
July 2, 2020
 
0.125

 
 
 
 
$
0.375


Financing Activity

On April 24, 2020, we repaid $5.9 million of fixed rate mortgage debt collateralized by one property with an interest rate of 6.0%, and we repaid $12.1 million of variable rate mortgage debt collateralized by two properties with an interest rate of one month LIBOR + 2.25%. We repaid these mortgages using cash on hand and borrowings from our Credit Facility.

COVID-19

As of April 28, 2020, we have collected approximately 98% of all outstanding April cash base rent obligations. In April 2020, we granted rent deferrals to three tenants representing approximately 2% of total portfolio rents. The agreements with these tenants include current partial payment in exchange for rent deferrals of varying terms with deferred amounts to be paid by the respective tenant back to us, for the period starting in July 2020 and ending through March 2021. We have received and may receive additional rent modification requests in future periods from our tenants. We are unable to quantify the economic impact of these potential requests at this time.


25


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

All references to “we,” “our,” “us” and the “Company” in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where otherwise noted or where the context indicates that the term means only Gladstone Commercial Corporation.

General

We are an externally-advised real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning, and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and office mortgage loans; however, we do not have any mortgage loans currently outstanding. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment.

We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately 7 to 15 years and built in rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property.

All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease.

As of April 28, 2020:
 
we owned 122 properties totaling 15.1 million square feet in 28 states;
our occupancy rate was 96.6%;
the weighted average remaining term of our mortgage debt was 5.0 years and the weighted average interest rate was 4.36%; and
the average remaining lease term of the portfolio was 7.5 years.


26


Business Environment

The rapid spread of the coronavirus identified as COVID-19 has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter in place orders, the promotion of social distancing and limitations on business activity, including business closures. These measures and the pandemic have caused a significant national and global economic downturn, disrupted business operations, including those of our tenants, significantly increased unemployment and underemployment levels, and are expected to have an adverse effect on both industrial and office demand for space in the short term. Interest rates have been volatile and although interest rates are still low by historical standards (and in some cases have been reduced to help curb the impact of COVID-19), lenders have varied on their required spreads over the last several quarters. Fourth quarter 2019 statistics reflect that single property listings and investment sales volumes are lower as compared to the prior year’s same period, although the full year volume was healthy. After completing the 11th year of the current cycle, some national research firms had been estimating that both pricing and investment sales volume would be peaking and the national economy would be slowing in the near term, prior to the rapid spread of COVID-19. Global recessionary conditions are expected in 2020 as a direct result of the COVID-19 pandemic, although the actual impact and duration are unknown. See “Impact of COVID-19 on Our Business” below for the impact on the COVID-19 pandemic on our business.

From a more macro-economic perspective, there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact, the extent and duration of social distancing and the adoption of shelter-in-place orders, and the ongoing impact of COVID-19 on business and economic activity.

Impact of COVID-19 on Our Business

The extent to which the COVID-19 pandemic may impact our business, financial condition, liquidity, results of operations, funds from operations or prospects will depend on numerous evolving factors that we are not be able to predict at this time, including the nature, duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact on economic activity from the pandemic (such as the effect on market rental rates and commercial real estate values) and actions taken in response; the effect on our tenants and their businesses; the ability of our tenants to make their rental payments, any closures of our tenants’ properties, our ability to secure debt financing, service future debt obligations or pay distributions to our stockholders. Any of these events could materially adversely impact our business, financial condition, liquidity, results of operations, funds from operations or prospects.

We collected all of cash base rent obligations during the first quarter of 2020. As of April 28, 2020, we have collected approximately 98% of all April cash base rent obligations. In April 2020, we granted rent deferrals to three tenants representing approximately 2% of total portfolio rents. The agreements with these tenants include current partial payment in exchange for rent deferrals of varying terms with deferred amounts to be paid by the respective tenant back to us, for the period starting in July 2020 and ending through March 2021. In connection with one of the rent deferrals, we were able to obtain short term mortgage payment relief from our lender on the loan associated with those properties. We may pursue additional loan relief agreements in the future. We have received and may receive additional rent modification requests in future periods from our tenants. However, we are unable to quantify the outcomes of the negotiation of relief packages, the success of any tenant’s financial prospects or the amount of relief requests that we will ultimately receive or grant. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil & gas industries. These industries, among certain others, have generally been severely impacted by the COVID-19.

We believe we currently have adequate liquidity in the near term, and we believe the availability on our Credit Facility is sufficient to cover all near term debt obligations and operating expenses. We are in compliance with all of our debt covenants, and we amended our Credit Facility within the past nine months to increase our borrowing capacity. We have had numerous conversations with lenders and do not believe there will be a credit freeze in the near term. Public equity markets have been volatile as of recent, and we do not anticipate using our at the market programs until there is more stability in our share price. We continue to monitor our portfolio and intend to maintain a reasonably conservative liquidity position for the foreseeable future.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our personnel, tenants and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, financial condition, liquidity, results of operations, funds from operations or prospects, we believe that it is important to share where we stand today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.

27



Other Business Environment Considerations

The long-term impact of tax reform in the U.S. also continues to be unknown at this time, although the lowering of the corporate tax rate is generally expected to be beneficial. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term, particularly with the recent fiscal stimulus as well as other geo-political issues relating to the global economic slowdown has increased domestic and global instability. These developments could cause interest rates and borrowing costs to be volatile, which may adversely affect our ability to access both the equity and debt markets and could have an adverse impact on our tenants as well.

All of our variable rate debt is based upon the one month London Inter-bank Offered Rate (“LIBOR”), although LIBOR is currently anticipated to be phased out during late 2021. LIBOR is expected to transition to a new standard rate, the Secured Overnight Financing Rate (“SOFR”), which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition, as we cannot assess whether SOFR will become a standard rate for variable rate debt. Any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based debt, or the value of our portfolio of LIBOR-indexed, floating rate debt.

We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have four partially vacant building and three fully vacant buildings.

We have five leases expiring during the remainder of 2020, which account for 5.1% of lease revenue recognized during the three months ended March 31, 2020, 11 leases expiring in 2021, which account for 4.9% of lease revenue recognized during the three months ended March 31, 2020, and eight leases expiring in 2022, which account for 6.4% of lease revenue recognized during the three months ended March 31, 2020.

Our available vacant space at March 31, 2020 represents 3.4% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $1.8 million. We continue to actively seek new tenants for these properties.

Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our $100.0 million senior unsecured revolving credit facility (“Revolver”), with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent), which matures in July 2023, and our $160.0 million term loan facility (“Term Loan”), which matures in July 2024. We refer to the Revolver and Term Loan collectively herein as the Credit Facility. While lenders’ credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market, (the “CMBS market”), to issue mortgages to finance our real estate activities.

Recent Developments

2020 Sale Activity

During the three months ended March 31, 2020, we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions located in our target secondary growth markets, as well as repay outstanding debt. We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. On February 20, 2020 we sold one non-core property located in Charlotte, North Carolina, which is detailed in the table below (dollars in thousands):

Square Footage Sold
 
Sales Price
 
Sales Costs
 
Loss on Sale of Real Estate, net
64,500

 
$
4,145

 
$
198

 
$
(12
)


28


2020 Acquisition Activity

During the three months ended March 31, 2020, we acquired five industrial properties, one property located in Indianapolis, Indiana, a three-property portfolio in Houston, Texas; Charlotte, North Carolina; and St. Charles, Missouri, and one property in Chatsworth, Georgia, which are summarized in the table below (dollars in thousands):

Aggregate Square Footage
 
Weighted Average Lease Term
 
Aggregate Purchase Price
 
Acquisition Costs
 
Aggregate Annualized GAAP Rent
 
Aggregate Mortgage Debt Issued or Assumed
890,038

 
14.8 years
 
$
71,965

 
$
255

(1)
$
5,303

 
$
35,855


(1)
We accounted for these transactions under ASU 2017-01. As a result, we treated these acquisitions as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.3 million of acquisition costs that would otherwise have been expensed under business combination treatment.

2020 Leasing Activity

During the three months ended March 31, 2020, we executed three leases, which are summarized below (dollars in thousands):
 
Aggregate Square Footage
 
Weighted Average Remaining Lease Term
 
Aggregate Annualized GAAP Rent
 
Aggregate Tenant Improvement
 
Aggregate Leasing Commissions
232,648

 
6.8 years
 
$
3,185

 
1,892

 
$
715


2020 Financing Activity

During the three months ended March 31, 2020, we issued four mortgages, collateralized by four properties, which are summarized below (dollars in thousands):
Aggregate Fixed Rate Debt Issued
 
Weighted Average Interest Rate on Fixed Rate Debt
$
35,855

(1)
3.22
%

(1)
We issued $18.3 million of fixed rate debt in connection with the three-property portfolio acquired on January 27, 2020 with a maturity date of February 1, 2030. The interest rate is fixed at 3.625%. On March 9, 2020, we issued $17.5 million of floating rate debt swapped to fixed rate debt of 2.8% in connection with the one property acquisition.

On April 24, 2020, we repaid $5.9 million of fixed rate mortgage debt collateralized by one property with an interest rate of 6.0%, and we repaid $12.1 million of variable rate mortgage debt collateralized by two properties with an interest rate of one month LIBOR + 2.25%. We repaid these mortgages using cash on hand and borrowings from our Credit Facility.

2020 Equity Activities

Common Stock ATM Program

During the three months ended March 31, 2020, we sold 1.3 million shares of common stock, raising $27.9 million in net proceeds under our Common Stock ATM Program. As of March 31, 2020, we had remaining capacity to sell up to $209.2 million of common stock under the Common Stock ATM Program.

Preferred ATM Programs

We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”), with Baird, Goldman Sachs, Stifel, Fifth Third, and U.S. Bancorp Investments, Inc. (the “Series E Preferred Stock Sales Agents”), pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $100.0 million. We did not sell any of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the three months ended March 31, 2020. We do not have an active At-the-Market program for our Series D Preferred Stock.

29



Universal Shelf Registration Statements

On January 11, 2019, we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form-S-3/A on January 24, 2019 (collectively referred to as the “2019 Universal Shelf”). The 2019 Universal Shelf became effective on February 13, 2019 and replaced our prior universal shelf registration statement. The 2019 Universal Shelf allows us to issue up to $500.0 million of securities. As of March 31, 2020, we had the ability to issue up to $409.7 million under the 2019 Universal Shelf.

On January 29, 2020, we filed an additional universal registration statement on Form S-3, File No. 333-236143 (the “2020 Universal Shelf”). The 2020 Universal Shelf was declared effective on February 11, 2020 and is in addition to the 2019 Universal Shelf. the 2020 Universal Shelf allows us to issue up to an additional $800.0 million of securities. Of the $800.0 million of available capacity under our 2020 Universal Shelf, approximately $636.5 million is reserved for the sale of our Series F Preferred Stock. As of March 31, 2020, we had the ability to issue up to $800.0 million of securities under the 2020 universal shelf, as we have not sold any securities under the 2020 Universal Shelf.

Series F Preferred Stock

On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the 6.00% Series F Cumulative Redeemable Preferred Stock of the Company, par value $0.001 per share (the “Series F Preferred Stock”) and (ii) reclassifying and designating 26,000,000 shares of the Company’s authorized and unissued shares of Common Stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as Common Stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. Currently, there are no shares of the Series F Preferred Stock outstanding.

Amendment to Operating Partnership Agreement

In connection with the authorization of the Series F Preferred Stock, Gladstone Commercial Limited Partnership (the “Operating Partnership”), a Delaware limited partnership controlled by the Company through its ownership of GCLP Business Trust II, the general partner of the Operating Partnership, adopted the Second Amendment to its Second Amended and Restated Agreement of Limited Partnership, including Exhibit SFP thereto (collectively, the “Amendment”), as amended from time to time, establishing the rights, privileges and preferences of 6.00% Series F Cumulative Redeemable Preferred Units, a newly-designated class of limited partnership interests (the “Series F Preferred Units”). The Amendment provides for the Operating Partnership’s establishment and issuance of an equal number of Series F Preferred Units as are issued shares of Series F Preferred Stock by the Company in connection with the Offering upon the Company’s contribution to the Operating Partnership of the net proceeds of the Offering. Generally, the Series F Preferred Units provided for under the Amendment have preferences, distribution rights and other provisions substantially equivalent to those of the Series F Preferred Stock.


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Diversity of Our Portfolio

Gladstone Management Corporation, a Delaware corporation (our “Adviser”) seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the three months ended March 31, 2020, our largest tenant comprised only 3.6% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three months ended March 31, 2020 and 2019 (dollars in thousands):
 
 
 
For the three months ended March 31,
 
 
2020
 
2019
Industry Classification
 
Lease Revenue
 
Percentage of Lease Revenue
 
Lease Revenue
 
Percentage of Lease Revenue
Telecommunications
 
$
5,600

 
16.6
%
 
$
4,769

 
16.9
%
Diversified/Conglomerate Services
 
4,137

 
12.3

 
3,653

 
13.0

Healthcare
 
4,107

 
12.2

 
3,256

 
11.6

Automobile
 
3,847

 
11.4

 
3,779

 
13.4

Banking
 
2,487

 
7.4

 
2,213

 
7.9

Buildings and Real Estate
 
2,109

 
6.3

 
1,127

 
4.0

Information Technology
 
1,715

 
5.1

 
1,554

 
5.5

Personal, Food & Miscellaneous Services
 
1,500

 
4.5

 
1,499

 
5.3

Electronics
 
1,335

 
4.0

 
1,124

 
4.0

Machinery
 
1,296

 
3.9

 
562

 
2.0

Diversified/Conglomerate Manufacturing
 
1,183

 
3.5

 
1,265

 
4.5

Beverage, Food & Tobacco
 
976

 
2.9

 
376

 
1.3

Chemicals, Plastics & Rubber
 
948

 
2.8

 
745

 
2.6

Personal & Non-Durable Consumer Products
 
612

 
1.8

 
605

 
2.2

Childcare
 
557

 
1.7

 
557

 
2.0

Containers, Packaging & Glass
 
533

 
1.6

 
456

 
1.6

Printing & Publishing
 
346

 
1.0

 
300

 
1.1

Education
 
210

 
0.6

 
165

 
0.6

Home & Office Furnishings
 
121

 
0.4

 
132

 
0.5

Total
 
$
33,619

 
100.0
%
 
$
28,137

 
100.0
%


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The tables below reflect the breakdown of total lease revenue by state for the three months ended March 31, 2020 and 2019 (dollars in thousands):

State
 
Lease Revenue for the three months ended March 31, 2020
 
Percentage of Lease Revenue
 
Number of Leases for the three months ended March 31, 2020
 
Lease Revenue for the three months ended March 31, 2019
 
Percentage of Lease Revenue
 
Number of Leases for the three months ended March 31, 2019
Texas
 
$
5,054

 
15.0
%
 
16

 
$
3,949

 
14.0
%
 
12

Florida
 
4,230

 
12.6

 
11

 
3,763

 
13.4

 
9

Ohio
 
3,651

 
10.9

 
15

 
2,657

 
9.4

 
16

Pennsylvania
 
3,398

 
10.1

 
9

 
3,393

 
12.1

 
9

Georgia
 
2,248

 
6.7

 
9

 
1,210

 
4.3

 
6

Utah
 
1,960

 
5.8

 
4

 
1,861

 
6.6

 
3

Minnesota
 
1,628

 
4.8

 
5

 
934

 
3.3

 
6

Michigan
 
1,573

 
4.7

 
6

 
1,506

 
5.4

 
6

North Carolina
 
1,449

 
4.3

 
8

 
1,556

 
5.5

 
8

South Carolina
 
1,229

 
3.7

 
2

 
1,159

 
4.1

 
2

All Other States
 
7,199

 
21.4

 
43

 
6,149

 
21.9

 
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