Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020



☐	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	22102
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

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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 ☒ No ☐

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 ☒ 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	☒

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 ☒

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of July 27, 2020 was 34,049,706.

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GLADSTONE COMMERCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED

June 30, 2020

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		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	4

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2020 and 2019	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	48

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	50

SIGNATURES		53

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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)



	June 30, 2020			December 31, 2019
ASSETS
Real estate, at cost	$	1,106,274		$	1,056,978
Less: accumulated depreciation	219,175			207,523
Total real estate, net	887,099			849,455
Lease intangibles, net	117,106			115,465
Real estate and related assets held for sale, net	11,839			3,990
Cash and cash equivalents	9,563			6,849
Restricted cash	4,988			4,639
Funds held in escrow	8,405			7,226
Right-of-use assets from operating leases	5,689			5,794
Deferred rent receivable, net	35,850			37,177
Other assets	5,512			8,913
TOTAL ASSETS	$	1,086,051		$	1,039,508
LIABILITIES, MEZZANINE EQUITY AND EQUITY
LIABILITIES
Mortgage notes payable, net (1)	$	465,383		$	453,739
Borrowings under Revolver, net	42,410			51,579
Borrowings under Term Loan, net	159,090			121,276
Deferred rent liability, net	20,966			19,322
Operating lease liabilities	5,768			5,847
Asset retirement obligation	3,037			3,137
Accounts payable and accrued expenses	6,188			5,573
Liabilities related to assets held for sale, net	149			21
Due to Adviser and Administrator (1)	3,328			2,904
Other liabilities	16,959			12,920
TOTAL LIABILITIES	$	723,278		$	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 6,356,119 and 6,269,555 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively (3)	$	154,140		$	152,153
TOTAL MEZZANINE EQUITY	$	154,140		$	152,153
EQUITY
Senior common stock, par value $0.001 per share; 950,000 shares authorized; and 776,647 and 806,435 shares issued and outstanding at June 30, 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 33,960,707 and 32,593,651 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively (3)	34			32
Additional paid in capital	599,741			571,205
Accumulated other comprehensive income	(5,135		)	(2,126		)
Distributions in excess of accumulated earnings	(388,900		)	(360,978		)
TOTAL STOCKHOLDERS' EQUITY	205,741			208,134
OP Units held by Non-controlling OP Unitholders (3)	$	2,892		$	2,903
TOTAL EQUITY	$	208,633		$	211,037
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	1,086,051		$	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.

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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 June 30,						For the six months ended June 30,
	2020			2019			2020			2019
Operating revenues
Lease revenue	$	33,525		$	28,197		$	67,145		$	56,334
Total operating revenues	33,525			28,197			67,145			56,334
Operating expenses
Depreciation and amortization	14,182			12,622			28,278			25,632
Property operating expenses	6,295			3,060			12,508			6,128
Base management fee (1)	1,389			1,293			2,801			2,560
Incentive fee (1)	1,119			904			2,173			1,755
Administration fee (1)	395			397			833			810
General and administrative	752			782			1,630			1,439
Impairment charge	1,721			—			1,721			—
Total operating expenses	25,853			19,058			49,944			38,324
Other (expense) income
Interest expense	(6,716		)	(7,005		)	(13,968		)	(14,236		)
(Loss) gain on sale of real estate, net	—			—			(12		)	2,952
Other income	9			71			4			152
Total other expense, net	(6,707		)	(6,934		)	(13,976		)	(11,132		)
Net income	965			2,205			3,225			6,878
Net loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders	28			16			37			(29		)
Net income attributable to the Company	$	993		$	2,221		$	3,262		$	6,849
Distributions attributable to Series A, B, D, and E preferred stock	(2,688		)	(2,612		)	(5,366		)	(5,225		)
Distributions attributable to senior common stock	(204		)	(225		)	(411		)	(449		)
Net (loss) income (attributable) available to common stockholders	$	(1,899	)	$	(616	)	$	(2,515	)	$	1,175
(Loss) earnings per weighted average share of common stock - basic & diluted
(Loss) earnings (attributable) available to common shareholders	$	(0.06	)	$	(0.02	)	$	(0.07	)	$	0.04
Weighted average shares of common stock outstanding
Basic and Diluted	33,939,826			30,449,739			33,787,386			29,985,881
Earnings per weighted average share of senior common stock	$	0.26		$	0.26		$	0.52		$	0.52
Weighted average shares of senior common stock outstanding - basic	776,718			861,237			785,074			862,762
Comprehensive income
Change in unrealized loss related to interest rate hedging instruments, net	$	(481	)	$	(988	)	$	(3,009	)	$	(1,711	)
Other Comprehensive loss	(481		)	(988		)	(3,009		)	(1,711		)
Net income	$	965		$	2,205		$	3,225		$	6,878
Comprehensive income	$	484		$	1,217		$	216		$	5,167
Comprehensive loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders	28			16			37			(29		)
Total comprehensive income available to the Company	$	512		$	1,233		$	253		$	5,138


(1)	Refer to Note 2 “Related-Party Transactions”

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

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Gladstone Commercial Corporation

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)



	For the six months ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	3,225		$	6,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	28,278			25,632
Impairment charge	1,721			—
Loss (gain) on sale of real estate, net	12			(2,952		)
Amortization of deferred financing costs	793			810
Amortization of deferred rent asset and liability, net	(975		)	(680		)
Amortization of discount and premium on assumed debt, net	29			32
Asset retirement obligation expense	49			63
Amortization of right-of-use asset from operating leases and operating lease liabilities, net	26			27
Operating changes in assets and liabilities
Decrease (increase) in other assets	1,606			(734		)
Increase in deferred rent receivable	(672		)	(870		)
Increase in accounts payable, accrued expenses, and amount due to Adviser and Administrator	1,529			923
Increase in other liabilities	941			57
Leasing commissions paid	(1,139		)	(236		)
Net cash provided by operating activities	$	35,423		$	28,950
Cash flows from investing activities:
Acquisition of real estate and related intangible assets	$	(71,463	)	$	(46,557	)
Improvements of existing real estate	(3,872		)	(2,227		)
Proceeds from sale of real estate	3,947			6,318
Receipts from lenders for funds held in escrow	41			1,218
Payments to lenders for funds held in escrow	(1,220		)	(921		)
Receipts from tenants for reserves	1,284			1,674
Payments to tenants from reserves	(962		)	(1,296		)
Deposits on future acquisitions	(1,000		)	(1,215		)
Deposits applied against acquisition of real estate investments	2,541			1,065
Net cash used in investing activities	$	(70,704	)	$	(41,941	)
Cash flows from financing activities:
Proceeds from issuance of equity	$	30,785		$	33,746
Offering costs paid	(358		)	(497		)
Borrowings under mortgage notes payable	35,855			41,140
Payments for deferred financing costs	(397		)	(713		)
Principal repayments on mortgage notes payable	(24,391		)	(30,958		)
Borrowings from revolving credit facility	73,900			47,900
Repayments on revolving credit facility	(83,200		)	(47,500		)
Borrowings on term loan	37,700			—
Increase (decrease) in security deposits	12			(106		)
Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders	(31,562		)	(28,751		)

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Net cash provided by financing activities	$	38,344		$	14,261
Net increase in cash, cash equivalents, and restricted cash	$	3,063		$	1,270
Cash, cash equivalents, and restricted cash at beginning of period	$	11,488		$	9,082
Cash, cash equivalents, and restricted cash at end of period	$	14,551		$	10,352
SUPPLEMENTAL NON-CASH INFORMATION
Tenant funded fixed asset improvements	$	1,357		$	1,645
Unrealized loss related to interest rate hedging instruments, net	$	(3,009	)	$	(1,711	)
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	$	14		$	811
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 six months ended June 30,
	2020		2019
Cash and cash equivalents	$	9,563	$	7,590
Restricted cash	4,988		2,762
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows	$	14,551	$	10,352

Restricted cash consists of security deposits and receipts from tenants for reserves.

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

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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 and six months ended June 30, 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.

Significant 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 and six months ended June 30, 2020.

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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.

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.

In April 2020, the FASB issued a staff question-and-answer document, Topic 842 and Topic 840: Accounting for Lease Concessions related to the Effects of the COVID-19 Pandemic (“COVID-19 Q&A”), to address frequently asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the tenant, which would be addressed under the lease modification accounting framework, or if a lease concession was under the enforceable rights and obligations within the existing lease agreement, which would not fall under the lease modification accounting framework. The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease modification, as long as the concession does not result in a substantial increase in rights of the lessor or obligations of the lessee. This election is available for concessions that result in the total payments required by the modified contract being substantially the same as or less than the total payments required by the original contract. At this time, we have 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 elected to not evaluate these leases under the lease modification accounting framework.

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, also serves as the executive vice president of commercial & industrial real estate of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary, as well as executive vice president of administration of our Adviser. 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 June 30, 2020 and December 31, 2019, $3.3 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 agreements with our Adviser and Administrator each July. During their July 2020 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2021.

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Base Management Fee

Under the Advisory Agreement, the calculation of the annual base management fee equaled 1.5% of our Total Equity prior to the July 14, 2020 amendment, 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 was 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 and six months ended June 30, 2020, we recorded a base management fee of $1.4 million and $2.8 million, respectively. For the three and six months ended June 30, 2019, we recorded a base management fee of $1.3 million and $2.6 million, respectively.

On July 14, 2020, the Company amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Amended Agreement”). The Company’s entrance into the Amended Agreement was approved by its board of directors, including, specifically, unanimously by its independent directors. The Amended Agreement revised and replaced the previous calculation of the Base Management Fee, which was based on Total Equity, with a calculation based on Gross Tangible Real Estate. The revised Base Management Fee will be payable quarterly in arrears and shall be calculated at an annual rate of 0.425% (0.10625% per quarter) of the prior calendar quarter’s “Gross Tangible Real Estate,” defined in the Amended Agreement as the current gross value of the Company’s property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any subsequent capital improvements thereon). The calculation of the other fees in the Amended Agreement remain unchanged. The revised Base Management Fee calculation will begin with the fee calculations for the quarter ending September 30, 2020.

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 and six months ended June 30, 2020, we recorded an incentive fee of $1.1 million and $2.2 million, respectively. For the three and six months ended June 30, 2019, we recorded an incentive fee of $0.9 million and $1.8 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and six months ended June 30, 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 and six months ended June 30, 2020 or 2019.

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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, Michael LiCalsi (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 and six months ended June 30, 2020, we recorded an administration fee of $0.4 million and $0.8 million, respectively. For the three and six months ended June 30, 2019, we recorded an administration fee of $0.4 million and $0.8 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.

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. 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 did not pay financing fees to Gladstone Securities during the three months ended June 30, 2020, but we paid financing fees to Gladstone Securities of $0.09 million during the six months ended June 30, 2020, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25%, of the mortgage principal secured and/or extended. We paid financing fess to Gladstone Securities of $0.08 million and $0.10 million during the three and six months ended June 30, 2019, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.21% and 0.20%, respectively, of the mortgage principal secured and/or extended. Our Board of Directors renewed the agreement for an additional year, through August 31, 2021, at its July 2020 meeting.

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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 and six months ended June 30, 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 and six months ended June 30, 2020 and 2019 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings per share for the three and six months ended June 30, 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).



	For the three months ended June 30,						For the six months ended June 30,
	2020			2019			2020			2019
Calculation of basic (loss) earnings per share of common stock:
Net (loss) income (attributable) available to common stockholders	$	(1,899	)	$	(616	)	$	(2,515	)	$	1,175
Denominator for basic weighted average shares of common stock (1)	33,939,826			30,449,739			33,787,386			29,985,881
Basic (loss) earnings per share of common stock	$	(0.06	)	$	(0.02	)	$	(0.07	)	$	0.04
Calculation of diluted (loss) earnings per share of common stock:
Net (loss) income (attributable) available to common stockholders	$	(1,899	)	$	(616	)	$	(2,515	)	$	1,175
Net (loss) income (attributable) available to common stockholders plus assumed conversions (2)	$	(1,899	)	$	(616	)	$	(2,515	)	$	1,175
Denominator for basic weighted average shares of common stock (1)	33,939,826			30,449,739			33,787,386			29,985,881
Effect of convertible Senior Common Stock (2)	—			—			—			—
Denominator for diluted weighted average shares of common stock (2)	33,939,826			30,449,739			33,787,386			29,985,881
Diluted (loss) earnings per share of common stock	$	(0.06	)	$	(0.02	)	$	(0.07	)	$	0.04

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(1)	The weighted average number of OP Units held by Non-controlling OP Unitholders was 503,033 and 502,133 for the three and six months ended June 30, 2020, respectively, and 742,937 for both the three and six months ended June 30, 2019.


(2)	We excluded convertible shares of Senior Common Stock of 650,055 and 718,770 from the calculation of diluted (loss) earnings per share for the three and six months ended June 30, 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 June 30, 2020 and December 31, 2019, excluding real estate held for sale as of June 30, 2020 and December 31, 2019, respectively (dollars in thousands):



	June 30, 2020			December 31, 2019
Real estate:
Land (1)	$	144,304		$	137,532
Building and improvements	893,547			851,245
Tenant improvements	68,423			68,201
Accumulated depreciation	(219,175		)	(207,523		)
Real estate, net	$	887,099		$	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 $9.2 million and $18.2 million for the three and six months ended June 30, 2020, respectively. Real estate depreciation expense on building and tenant improvements was $8.1 million and $16.1 million for the three and six months ended June 30, 2019, respectively.

Acquisitions

We acquired five properties during the six months ended June 30, 2020, and six properties during the six months ended June 30, 2019. The acquisitions are summarized below (dollars in thousands):



Six Months Ended		Aggregate Square Footage	Weighted Average Lease Term	Aggregate Purchase Price		Capitalized Acquisition Expenses			Aggregate Annualized GAAP Fixed Lease Payments		Aggregate Debt Issued or Assumed
June 30, 2020	(1)	890,038	14.8 Years	$	71,965	$	255	(3)	$	5,303	$	35,855
June 30, 2019	(2)	1,174,311	13.7 Years	46,563		452		(3)	3,819		8,900

(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 year lease is $2.2 million.

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(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. On April 5, 2019, we acquired a 207,000 square foot property in Ocala, Florida, for $11.9 million. The annualized GAAP rent on the 20.1 year lease is $0.8 million. On April 5, 2019, we acquired a 176,000 square foot property in Ocala, Florida, for $7.3 million. The annualized GAAP rent on the 20.1 year lease is $0.7 million. On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio, for $3.2 million. The annualized GAAP rent on the 7.0 year lease is $0.2 million. On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $17.9 million. The annualized GAAP rent on the 8.5 year lease is $1.6 million. We issued $8.9 million of mortgage debt with a fixed interest rate of 4.35% in connection with this acquisition.


(3)	We treated our acquisitions during the six months ended June 30, 2020 and 2019 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.3 million and $0.5 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 six months ended June 30, 2020 and 2019 as follows (dollars in thousands):



	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Acquired assets and liabilities	Purchase price			Purchase price
Land (1)	$	7,296		$	3,053
Building and improvements	54,000			34,670
Tenant Improvements	1,285			858
In-place Leases	4,442			3,177
Leasing Costs	4,261			2,982
Customer Relationships	2,223			1,491
Above Market Leases (2)	210			1,865
Below Market Leases (3)	(1,752		)	(1,533		)
Total Purchase Price	$	71,965		$	46,563


(1)	This amount includes $2,711 of land value subject to a land lease agreement.


(2)	This amount includes $53 of loans 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 six months ended June 30, 2020 and 2019, we executed eight and five leases, respectively, which are summarized below (dollars in thousands):



Six Months Ended	Aggregate Square Footage	Weighted Average Remaining Lease Term	Aggregate Annualized GAAP Fixed Lease Payments		Aggregate Tenant Improvement		Aggregate Leasing Commissions
June 30, 2020	362,171	6.6 years	$	5,000	$	2,226	$	962
June 30, 2019	230,264	8.8 years	3,366		785		910

Future Lease Payments

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

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Year	Tenant Lease Payments
Six Months Ending 2020	$	54,979
2021	108,646
2022	103,030
2023	95,269
2024	86,407
2025	77,057
Thereafter	296,165
	$	821,553

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 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

Lease Revenue Reconciliation

The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the six months ended June 30, 2020 and 2019, respectively (dollars in thousands):



	For the three months ended June 30,				For the six months ended June 30,
Lease revenue reconciliation	2020		2019		2020		2019
Fixed lease payments	$	29,690	$	27,254	$	59,169	$	54,416
Variable lease payments	3,835		943		7,976		1,918
	$	33,525	$	28,197	$	67,145	$	56,334

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 June 30, 2020 and December 31, 2019, excluding real estate held for sale as of June 30, 2020 and December 31, 2019, respectively (dollars in thousands):

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	June 30, 2020						December 31, 2019
	Lease Intangibles			Accumulated Amortization			Lease Intangibles			Accumulated Amortization
In-place leases	$	96,215		$	(51,633	)	$	92,906		$	(48,468	)
Leasing costs	72,914			(36,259		)	68,256			(33,705		)
Customer relationships	66,400			(30,531		)	65,363			(28,887		)
	$	235,529		$	(118,423	)	$	226,525		$	(111,060	)

	Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion			Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion
Above market leases	$	14,758		$	(10,259	)	$	16,502		$	(10,005	)
Below market leases and deferred revenue	(37,368		)	16,402			(34,322		)	15,000
	$	(22,610	)	$	6,143		$	(17,820	)	$	4,995

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $5.0 million and $10.1 million for the three and six months ended June 30, 2020, respectively, and $4.5 million and $9.5 million for the three and six months ended June 30, 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 $0.4 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 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 $1.4 million for the three and six months ended June 30, 2020, respectively, and $0.6 million and $1.2 million for the three and six months ended June 30, 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 six months ended June 30, 2020 and 2019 were as follows:



Intangible Assets & Liabilities	2020	2019
In-place leases	16.3	15.5
Leasing costs	16.3	15.5
Customer relationships	19.5	20.5
Above market leases	18.0	9.3
Below market leases	14.2	7.8
All intangible assets & liabilities	16.9	17.0

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

Real Estate Dispositions

During the six months ended June 30, 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 six months ended June 30, 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 and six months ended June 30, 2020, and 2019 (dollars in thousands):



	For the three months ended June 30,							For the six months ended June 30,
	2020				2019			2020				2019
Operating revenue	$	—			$	294		$	—			$	589
Operating expense	1				77			32				147
Other expense, net	—			(1)	(1		)	(12		)	(1)	(1		)
(Expense) income from real estate and related assets sold	$	(1	)		$	216		$	(44	)		$	441


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

Real Estate Held for Sale

As of June 30, 2020, we had two properties classified as held for sale, located in Maple Heights, Ohio and Boston Heights, Ohio. We consider these assets to be non-core to our long term strategy. As of June 30, 2020, our Maple Heights, Ohio property was under contract to sell, and we had an executed letter of intent for our Boston Heights, Ohio property. At December 31, 2019, we had one property classified as held for sale, located in Charlotte, North Carolina. This property was sold during the six months ended June 30, 2020.

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):



	June 30, 2020		December 31, 2019
Assets Held for Sale
Real estate, at cost	$	18,204	$	7,411
Less: accumulated depreciation	6,539		3,421
Total real estate held for sale, net	11,665		3,990
Lease intangibles, net	171		—
Deferred rent receivable, net	3		—
Total Assets Held for Sale	$	11,839	$	3,990
Liabilities Held for Sale