Exhibit 99.1 Gladstone Commercial Announces Second Quarter Results MCLEAN, Va.--(BUSINESS WIRE)--Aug. 8, 2006--Gladstone Commercial Corp.: -- Reports Net income available to common stockholders of $368,390 or $0.04 per diluted weighted average common share -- Reports Funds from Operations ("FFO") of approximately $2.4 million or $0.31 per diluted weighted average common share -- Acquired two properties for a total investment of approximately $22.1 million Gladstone Commercial Corp. (NASDAQ:GOOD) (the "Company") today reported financial results for the quarter ended June 30, 2006. A description of Funds from Operations, ("FFO") a relative non-GAAP ("Generally Accepted Accounting Principles in the United States") financial measure, is located at the end of this news release. All per share references are fully diluted weighted average common shares, unless otherwise noted. Net income available to common stockholders for the quarter ended June 30, 2006 was $368,390, or $0.04 per share, compared to $1,149,531, or $0.15 per share, for the same period one year ago. Net income available to common stockholders for the six months ended June 30, 2006 was $870,746, or $0.11 per share, compared to $1,684,715, or $0.22 per share for the same period one year ago. Net income results when compared to the same period last year were affected by increased interest expense associated with the leveraging of our properties, coupled with the dividends the Company paid on its preferred stock. The Company also recognized a net unrealized loss from foreign currency transactions of approximately $212,000 and $199,000, or $0.03 per share, for the three and six months ended June 30, 2006, respectively. The unrealized loss was primarily a result of the valuation of the mortgage notes payable for the two Canadian properties, due to a decrease in the value of the U.S. dollar relative to the Canadian dollar by approximately 5% between April 1, 2006, and June 30, 2006. The Company sold both properties subsequent to the end of the quarter and the mortgage notes were assumed by the buyer; therefore, the Company will no longer recognize unrealized gains and losses from the valuation of the mortgage notes. FFO for the quarter ended June 30, 2006 was approximately $2.4 million, or $0.31 per share, compared to approximately $1.8 million, or $0.24 per share, for the same period one year ago. FFO for the six months ended June 30, 2006 was approximately $4.8 million or $0.61 per share, compared to approximately $2.9 million or $0.38 per share for the same period one year ago. A reconciliation of net income, which the Company believes is the most directly comparable GAAP measure to FFO, is set forth below: For the For the three three For the six For the six months months months months ended June ended June ended June ended June 30, 2006 30, 2005 30, 2006 30, 2005 ----------- ----------- ----------- ----------- Net income $852,765 $1,149,531 $1,699,565 $1,684,715 Add: Real estate depreciation and amortization, including discontinued operations 2,081,072 696,977 3,915,819 1,234,733 ----------- ----------- ----------- ----------- FFO 2,933,837 1,846,508 5,615,384 2,919,448 Less: Dividends attributable to preferred stock (484,375) - (828,819) - ----------- ----------- ----------- ----------- FFO available to common stockholders 2,449,462 1,846,508 4,786,565 2,919,448 Weighted average shares outstanding - basic 7,762,503 7,669,802 7,717,501 7,668,409 Weighted average shares outstanding - diluted 7,911,871 7,692,639 7,858,146 7,715,100 Basic net income per weighted average common share $0.05 $0.15 $0.11 $0.22 =========== =========== =========== =========== Diluted net income per weighted average common share $0.04 $0.15 $0.11 $0.22 =========== =========== =========== =========== Basic FFO per weighted average common share $0.32 $0.24 $0.62 $0.38 =========== =========== =========== =========== Diluted FFO per weighted average common share $0.31 $0.24 $0.61 $0.38 =========== =========== =========== =========== Second quarter highlights: -- Acquired two properties with approximately 240,000 square feet for an aggregate purchase price of approximately $22.1 million; and -- Borrowed $14.9 million pursuant to a long-term note payable collateralized by security interests in five of its properties, which accrues interest at a rate of 6.58% per year. "Our second quarter results were negatively affected by a net unrealized loss from foreign currency transactions of approximately $212,000, or $0.03 per diluted share, resulting in reporting net income of $0.04 per diluted share. Subsequent to quarter end, we sold our two Canadian properties with the gain to be recognized in our third quarter results," said Chip Stelljes, Executive Vice President and Chief Investment Officer. "We believe this property disposition, along with the acquisition of two properties in the second quarter, will benefit our shareholders over the long-term and will result in a stronger and more focused portfolio." Subsequent to quarter end, the Company: -- Declared monthly cash dividends on common stock of $0.12 per common share for each of the months of July, August and September 2006; -- Declared monthly cash dividends on Series A preferred stock of $0.1614583 per share for the months of July, August and September 2006; -- Acquired one 12,000 square foot office building for approximately $2.8 million; and -- Sold its two Canadian properties for approximately $6.9 million, for a gain of approximately $1.7 million. The Company paid approximately $360,000 in taxes related to the gain on the sale and the mortgages associated with the Canadian properties were assumed by the buyer. Also subsequent to June 30, 2006, the Company's Board of Directors approved an offer to the executive officers and directors of the Company and the employees of the Company's external investment adviser, Gladstone Management Corporation, who hold stock options (the "Optionees"), to amend the terms of all outstanding stock options under the Company's 2003 Equity Incentive Plan (the "Options") to accelerate the contractual expiration date of the Options to December 31, 2006. The offer is conditioned upon the acceptance by all of the Optionees, so that if the offer is accepted, 100% of the outstanding Options will be amended to expire on December 31, 2006. The offer to amend the Options is currently scheduled to expire at 5:00 p.m., Eastern Time, on August 31, 2006. If the offer is accepted by 100% of the Optionees, then, effective January 1, 2007, the Company will implement the amended and restated investment advisory agreement with Gladstone Management and the administration agreement with Gladstone Administration, LLC, as approved by the Company's stockholders on May 24, 2006. The Company filed a Schedule TO and related documentation regarding the offer with the Securities and Exchange Commission on July 12, 2006. The Company's Board of Directors also accelerated in full the vesting of all outstanding unvested options effective July 11, 2006. The financial statements attached below are without footnotes so readers should obtain and carefully review the Company's Form 10-Q for the quarter ended June 30, 2006, including the footnotes to the financial statements contained therein. The Company has filed the Form 10-Q today with the SEC and the Form 10-Q can be retrieved from the SEC website at www.SEC.gov or our website at www.GladstoneCommercial.com. The Company will hold a conference call Wednesday, August 9, 2006 at 9:30 a.m. ET to discuss its earnings results. Please call (877) 407-8031 to enter the conference. An operator will monitor the call and set a queue for the questions. The conference call replay will be available two hours after the call and will be available through September 9, 2006. To hear the replay, please dial (877) 660-6853, access playback account 286 and use ID code 210295. Gladstone Commercial Corporation is a publicly traded real estate investment trust that focuses on investing in and owning triple-net leased industrial and commercial real estate properties and selectively making long-term mortgage loans. Additional information can be found at www.GladstoneCommercial.com. For further information, contact our Investor Relations Manager, Kelly Sargent at 703-287-5835. NON-GAAP FINANCIAL MEASURES Funds from Operations The National Association of Real Estate Investment Trusts ("NAREIT") developed FFO, as a relative non-GAAP supplemental measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income), and should not be considered an alternative to net income as an indication of the Company's performance or to cash flow from operations as a measure of liquidity or ability to make distributions. The Company believes that FFO per share provides investors with a further context for evaluating the Company's financial performance and as a supplemental measure to compare the Company to other REITs; however, comparisons of the Company's FFO to the FFO of other REITs may not necessarily be meaningful due to potential differences in the application of the NAREIT definition used by such other REITs. To learn more about FFO please refer to the Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission today. This press release may include statements that 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, including statements with regard to the future performance of the Company and the closing of any transaction. Words such as "may," "will," "believes," "anticipates," "intends," "expects," "projects," "estimates" and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on the Company's current plans, expectations and beliefs that are believed to be reasonable as of the date of this press release. Factors that may cause the Company's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements include, among others, those factors listed under the caption "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended, December 31, 2005, as filed with the Securities and Exchange Commission on February 28, 2006, and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission today. The risk factors set forth in the Form 10-K under the caption "Risk Factors" are specifically incorporated by references into this press release. All forward-looking statements are based on current plans, expectations and beliefs and speak only as of the date of such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Gladstone Commercial Corporation Consolidated Balance Sheets (unaudited) June 30, December 31, 2006 2005 ------------- ------------- ASSETS Real estate, net of accumulated depreciation of $5,722,987 and $3,408,878 respectively $219,373,127 $161,634,761 Lease intangibles, net of accumulated amortization of $2,614,455 and $1,221,413, respectively 24,535,650 13,947,484 Real estate and related assets held for sale, net 5,458,407 - Mortgage notes receivable 20,981,073 21,025,815 Cash and cash equivalents 931,560 1,740,159 Restricted cash 2,386,510 1,974,436 Funds held in escrow 1,697,031 1,041,292 Interest receivable - mortgage note 67,140 70,749 Interest receivable - employees 28,589 - Deferred rent receivable 3,111,718 2,590,617 Deferred financing costs, net of accumulated amortization of $549,399 and $260,099, respectively 3,037,719 1,811,017 Prepaid expenses 196,852 385,043 Deposits on real estate - 600,000 Accounts receivable 105,395 225,581 ------------- ------------- TOTAL ASSETS $281,910,771 $207,046,954 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $118,690,395 $61,558,961 Mortgage notes payable related to assets held for sale 4,797,876 - Borrowings under line of credit 29,660,000 43,560,000 Deferred rent liability 5,111,381 - Asset retirement obligation liability 1,419,559 - Accounts payable and accrued expenses 437,693 389,792 Accounts payable and other liabilities related to assets held for sale 198,381 103,210 Due to adviser 177,459 164,155 Rent received in advance, security deposits and funds held in escrow 2,897,781 2,322,300 ------------- ------------- Total Liabilities 163,390,525 108,098,418 ------------- ------------- STOCKHOLDERS' EQUITY Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 1,150,000 shares authorized and 1,000,000 shares issued and outstanding at June 30, 2006 1,000 - Common stock, $0.001 par value, 18,850,000 shares authorized and 7,816,972 and 7,672,000 shares issued and outstanding, respectively 7,817 7,672 Additional paid in capital 131,590,977 105,502,544 Notes receivable - employees (2,259,036) (432,282) Distributions in excess of accumulated earnings (10,820,512) (6,129,398) ------------- ------------- Total Stockholders' Equity 118,520,246 98,948,536 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $281,910,771 $207,046,954 ============= ============= Gladstone Commercial Corporation Consolidated Statements of Operations (unaudited) For the three months For the six months ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005 ----------- ----------- ------------ ----------- Operating revenues Rental income $6,027,830 $2,092,231 $10,894,906 $3,795,831 Interest income from mortgage notes receivable 558,434 501,645 1,111,346 797,228 Tenant recovery revenue 43,798 37,300 49,420 41,600 ----------- ----------- ------------ ----------- Total operating revenues 6,630,062 2,631,176 12,055,672 4,634,659 ----------- ----------- ------------ ----------- Operating expenses Depreciation and amortization 2,064,312 664,467 3,863,519 1,169,762 Management advisory fee 719,392 483,794 1,372,134 955,655 Professional fees 232,960 11,201 431,418 340,886 Taxes and licenses 39,069 24,450 89,963 151,396 Insurance 102,845 67,021 185,842 137,404 General and administrative 306,698 95,411 452,485 229,750 Asset retirement obligation expense 24,940 - 71,641 - Stock option compensation expense 33,602 - 79,818 - ----------- ----------- ------------ ----------- Total operating expenses 3,523,818 1,346,344 6,546,820 2,984,853 ----------- ----------- ------------ ----------- Other income (expense) Interest income from temporary investments 4,057 13,192 11,431 107,713 Interest income - employee loans 28,589 5,236 34,137 9,921 Other income 10,400 - 10,400 - Interest expense (2,155,968) (254,803) (3,774,536) (291,022) ----------- ----------- ------------ ----------- Total other expense (2,112,922) (236,375) (3,718,568) (173,388) ----------- ----------- ------------ ----------- Income from continuing operations 993,322 1,048,457 1,790,284 1,476,418 ----------- ----------- ------------ ----------- Discontinued operations Income from discontinued operations 71,215 103,784 109,253 211,099 Net realized gain (loss) from foreign currency transactions 167 (2,590) (649) (2,937) Net unrealized (loss) gain from foreign currency transactions (211,939) (120) (199,323) 135 ----------- ----------- ------------ ----------- Total discontinued operations (140,557) 101,074 (90,719) 208,297 ----------- ----------- ------------ ----------- Net income 852,765 1,149,531 1,699,565 1,684,715 ----------- ----------- ------------ ----------- Dividends attributable to preferred stock (484,375) - (828,819) - ----------- ----------- ------------ ----------- Net income available to common stockholders $368,390 $1,149,531 $870,746 $1,684,715 =========== =========== ============ =========== Earnings per weighted average common share - basic Income from continuing operations (net of dividends attributable to preferred stock) $0.07 $0.14 $0.12 $0.19 Discontinued operations (0.02) 0.01 (0.01) 0.03 ----------- ----------- ------------ ----------- Net income available to common stockholders $0.05 $0.15 $0.11 $0.22 =========== =========== ============ =========== Earnings per weighted average common share - diluted Income from continuing operations (net of dividends attributable to preferred stock) $0.06 $0.14 $0.12 $0.19 Discontinued operations (0.02) 0.01 (0.01) 0.03 ----------- ----------- ------------ ----------- Net income available to common stockholders $0.04 $0.15 $0.11 $0.22 =========== =========== ============ =========== Weighted average shares outstanding Basic 7,762,503 7,669,802 7,717,501 7,668,409 =========== =========== ============ =========== Diluted 7,911,871 7,692,639 7,858,146 7,715,100 =========== =========== ============ =========== Gladstone Commercial Corporation Consolidated Statements of Cash Flows (unaudited) For the six For the six months months ended June ended June 30, 2006 30, 2005 ------------ ------------ Cash flows from operating activities: Net income $1,699,565 $1,684,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, including discontinued operations 3,915,819 1,234,731 Amortization of deferred financing costs, including discontinued operations 289,300 74,836 Amortization of deferred rent asset 126,748 93,385 Amortization of deferred rent liability (303,478) - Asset retirement obligation expense, including discontinued operations 81,573 - Stock compensation 79,818 - Unrealized loss (gain) from foreign currency transactions 199,323 (135) Changes in assets and liabilities: Decrease (increase) in mortgage interest receivable 3,609 (2,824) Increase in employee interest receivable (28,589) (444) Decrease in prepaid expenses 177,168 69,008 Decrease in other assets 120,186 59,515 Increase in deferred rent receivable (720,712) (206,111) Increase in accounts payable and accrued expenses 52,302 112,530 Increase (decrease) in due to adviser 13,304 (5,060) Increase (decrease) in rent received in advance and security deposits 725,907 (435,228) Payments to lenders for operating reserves held in escrow (1,452,201) - Increase in operating reserves from tenants 892,137 - ------------ ------------ Net cash provided by operating activities 5,871,779 2,678,918 ------------ ------------ Cash flows from investing activities: Real estate investments (40,506,626) (41,116,911) Issuance of mortgage note receivable - (10,000,000) Principal repayments on mortgage notes receivable 44,742 42,856 Increase in restricted cash (412,074) - Receipts from tenants for capital reserves 435,633 - Payments to tenants from capital reserves (234,518) - Payments to lenders for capital reserves held in escrow (755,350) - Receipts from lenders for capital reserves held in escrow 308,135 - Deposits on future acquisitions (500,000) (550,000) Deposits applied against real estate investments 1,100,000 - ------------ ------------ Net cash used in investing activities (40,520,058) (51,624,055) ------------ ------------ Cash flows from financing activities: Proceeds from share issuance 25,485,010 - Offering costs (1,302,004) - Borrowings under mortgage note payable 31,900,000 3,150,000 Principal repayments on mortgage note payable (302,410) (12,471) Borrowings from line of credit 60,000,400 22,010,000 Repayments on line of credit (73,900,400) - Principal repayments on employee loans - 16,211 Payments for deferred financing costs (1,650,237) (1,015,176) Dividends paid for common and preferred (6,390,679) (4,140,980) ------------ ------------ Net cash provided by financing activities 33,839,680 20,007,584 ------------ ------------ Net decrease in cash and cash equivalents (808,599) (28,937,553) Cash and cash equivalents, beginning of period 1,740,159 29,153,987 ------------ ------------ Cash and cash equivalents, end of period $931,560 $216,434 ============ ============ NON-CASH INVESTING ACTIVITIES Increase in asset retirement obligation $1,510,330 $- ------------ ------------ NON-CASH FINANCING ACTIVITIES Fixed rate debt assumed in connection with acquisitions $30,129,654 $- ------------ ------------ Notes receivable issued in exchange for common stock associated with the exercise of employee stock options $1,826,754 $75,000 ------------ ------------ CONTACT: Gladstone Commercial Corporation Kelly Sargent, 703-287-5835