good-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 SEPTEMBER 30, 2021


☐			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
(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

6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share

GOODN

Nasdaq Global Select Market

6.00% Series G Cumulative Redeemable Preferred Stock, par value $0.001 per share

GOODO

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 ☒ No ☐

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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 (§ 232.405 of this chapter) 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 November 1, 2021 was 37,268,416.

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GLADSTONE COMMERCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2021

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		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	4

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	46

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

SIGNATURES		50

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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)


	September 30, 2021		December 31, 2020
ASSETS
Real estate, at cost	$	1,172,548	$	1,128,683
Less: accumulated depreciation	257,050		228,468
Total real estate, net	915,498		900,215
Lease intangibles, net	111,782		117,379
Real estate and related assets held for sale	4,005		8,498
Cash and cash equivalents	10,230		11,016
Restricted cash	4,972		5,060
Funds held in escrow	8,888		9,145
Right-of-use assets from operating leases	5,432		5,582
Deferred rent receivable, net	38,203		36,555
Other assets	5,784		4,458
TOTAL ASSETS	$	1,104,794	$	1,097,908
LIABILITIES, MEZZANINE EQUITY AND EQUITY
LIABILITIES
Mortgage notes payable, net (1)	$	448,001	$	456,177
Borrowings under Revolver	2,100		53,312
Borrowings under Term Loan, net	223,951		159,203
Deferred rent liability, net	22,459		20,633
Operating lease liabilities	5,571		5,687
Asset retirement obligation	3,151		3,086
Accounts payable and accrued expenses	8,000		4,459
Liabilities related to assets held for sale	13		—
Due to Adviser and Administrator (1)	3,188		2,960
Other liabilities	16,554		17,068
TOTAL LIABILITIES	$	732,988	$	722,585
Commitments and contingencies (2)
MEZZANINE EQUITY
Series D, E and G redeemable preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 10,760,000 and 12,760,000 shares authorized; and 7,061,448 and 6,571,003 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (3)	$	170,264	$	159,286
TOTAL MEZZANINE EQUITY	$	170,264	$	159,286
EQUITY
Senior common stock, par value $0.001 per share; 950,000 shares authorized; and 634,179 and 750,372 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (3)	$	1	$	1
Common stock, par value $0.001 per share, 62,290,000 and 60,290,000 shares authorized; and 36,880,119 and 35,331,970 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (3)	37		35
Series F redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 26,000,000 shares authorized and 335,162 and 116,674 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (3)	—		—
Additional paid in capital	656,790		626,533
Accumulated other comprehensive income	(2,075)		(4,345)
Distributions in excess of accumulated earnings	(454,494)		(409,041)
TOTAL STOCKHOLDERS' EQUITY	$	200,259	$	213,183
OP Units held by Non-controlling OP Unitholders (3)	1,283		2,854
TOTAL EQUITY	$	201,542	$	216,037
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	1,104,794	$	1,097,908

(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 September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Operating revenues
Lease revenue	$	34,334	$	33,142	$	102,381	$	100,287
Total operating revenues	$	34,334	$	33,142	$	102,381	$	100,287
Operating expenses
Depreciation and amortization	$	14,760	$	13,798	$	45,661	$	42,076
Property operating expenses	6,807		6,590		20,278		19,098
Base management fee (1)	1,472		1,418		4,369		4,219
Incentive fee (1)	1,266		1,128		3,540		3,301
Administration fee (1)	382		361		1,016		1,194
General and administrative	811		775		2,540		2,406
Impairment charge	—		1,184		—		2,905
Total operating expense before incentive fee waiver	$	25,498	$	25,254	$	77,404	$	75,199
Incentive fee waiver (1)	$	—	$	—	$	(16)	$	—
Total operating expenses	$	25,498	$	25,254	$	77,388	$	75,199
Other (expense) income
Interest expense	$	(6,688)	$	(6,444)	$	(20,338)	$	(20,411)
Gain (loss) on sale of real estate, net	—		1,196		(882)		1,184
Other income	2,350		204		2,884		209
Total other expense, net	$	(4,338)	$	(5,044)	$	(18,336)	$	(19,018)
Net income	$	4,498	$	2,844	$	6,657	$	6,070
Net (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders	(21)		2		42		39
Net income attributable to the Company	$	4,477	$	2,846	$	6,699	$	6,109
Distributions attributable to Series D, E, F, and G preferred stock	(2,868)		(2,771)		(8,571)		(8,137)
Series D preferred stock offering costs write off	—		—		(2,141)		—
Distributions attributable to senior common stock	(170)		(203)		(534)		(615)
Net income (loss) available (attributable) to common stockholders	$	1,439	$	(128)	$	(4,547)	$	(2,643)
Earnings (loss) per weighted average share of common stock - basic & diluted
Income (loss) available (attributable) to common shareholders	$	0.04	$	(0.004)	$	(0.13)	$	(0.08)
Weighted average shares of common stock outstanding
Basic and Diluted	36,768,779		34,075,147		36,296,414		33,884,007
Earnings per weighted average share of senior common stock	$	0.26	$	0.26	$	0.78	$	0.79
Weighted average shares of senior common stock outstanding - basic	642,742		768,550		680,878		779,526
Comprehensive income
Change in unrealized gain (loss) related to interest rate hedging instruments, net	$	421	$	276	$	2,125	$	(2,733)
Other Comprehensive gain (loss)	421		276		2,125		(2,733)
Net income	$	4,498	$	2,844	$	6,657	$	6,070
Comprehensive income	$	4,919	$	3,120	$	8,782	$	3,337
Comprehensive (income) loss available (attributable) to OP Units held by Non-controlling OP Unitholders	(21)		2		42		39
Total comprehensive income available to the Company	$	4,898	$	3,122	$	8,824	$	3,376

(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 nine months ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	6,657	$	6,070
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	45,661		42,076
Impairment charge	—		2,905

Loss (gain) on sale of real estate, net	882		(1,184)
Amortization of deferred financing costs	1,175		1,156
Amortization of deferred rent asset and liability, net	(2,702)		(1,472)
Amortization of discount and premium on assumed debt, net	40		43
Asset retirement obligation expense	78		72
Amortization of right-of-use asset from operating leases and operating lease liabilities, net	34		39
Operating changes in assets and liabilities
Decrease in other assets	114		2,397
Increase in deferred rent receivable	(1,907)		(1,042)
Increase in accounts payable and accrued expenses	4,071		1,960
Increase in amount due to Adviser and Administrator	228		68


Increase in other liabilities	1,016		660
Tenant inducement payments	(20)		—
Leasing commissions paid	(1,634)		(1,364)
Net cash provided by operating activities	$	53,693	$	52,384
Cash flows from investing activities:
Acquisition of real estate and related intangible assets	$	(45,879)	$	(82,098)
Improvements of existing real estate	(4,752)		(5,112)
Proceeds from sale of real estate	5,106		14,363
Receipts from lenders for funds held in escrow	1,948		171
Payments to lenders for funds held in escrow	(1,691)		(1,881)
Receipts from tenants for reserves	3,035		1,740
Payments to tenants from reserves	(3,223)		(1,507)
Deposits on future acquisitions	(500)		(1,575)
Deposits applied against acquisition of real estate investments	—		2,891
Net cash used in investing activities	$	(45,956)	$	(73,008)
Cash flows from financing activities:
Proceeds from issuance of equity	$	129,992	$	39,624
Offering costs paid	(4,304)		(559)

Redemption of Series D perpetual preferred stock	(87,739)		—
Borrowings under mortgage notes payable	5,500		35,855
Payments for deferred financing costs	(614)		(422)
Principal repayments on mortgage notes payable	(14,336)		(31,667)

Borrowings from revolving credit facility	19,100		95,600
Repayments on revolving credit facility	(70,900)		(104,200)
Borrowings on term loan	65,000		37,700
Increase (decrease) in security deposits	83		(1)
Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders	(50,393)		(47,532)
Net cash (used in) provided by financing activities	$	(8,611)	$	24,398
Net (decrease) increase in cash, cash equivalents, and restricted cash	$	(874)	$	3,774
Cash, cash equivalents, and restricted cash at beginning of period	$	16,076	$	11,488
Cash, cash equivalents, and restricted cash at end of period	$	15,202	$	15,262
SUPPLEMENTAL AND NON-CASH INFORMATION

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Tenant funded fixed asset improvements included in deferred rent liability, net	$	4,905	$	1,972
Acquisition of real estate and related intangible assets	$	300	$	—



Unrealized gain (loss) related to interest rate hedging instruments, net	$	2,125	$	(2,733)


Capital improvements and leasing commissions included in accounts payable and accrued expenses	$	539	$	670

Non-controlling OP Units issued in connection with acquisition	$	—	$	502
Series D Preferred Stock offering cost write off	$	2,141	$	—

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 nine months ended September 30,
	2021		2020
Cash and cash equivalents	$	10,230	$	10,370
Restricted cash	4,972		4,892
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows	$	15,202	$	15,262

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. 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, 2020, as filed with the U.S. Securities and Exchange Commission on February 16, 2021. The results of operations for the three and nine months ended September 30, 2021 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, 2020. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2021.

Recently Issued Accounting Pronouncements

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

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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.

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 the executive vice president of commercial and 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 September 30, 2021 and December 31, 2020, $3.2 million and $3.0 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 2021 meeting, our Board of Directors reviewed and renewed the Administration Agreement for an additional year, through August 31, 2022.

Base Management Fee

Under the previous version of the Advisory Agreement (that which was in place prior to the most recent amendment on July 14, 2020), the calculation of the annual base management fee equaled 1.5% of our Total Equity, which was 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. 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.

On July 14, 2020, we amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between us and the Adviser (the “Sixth Amended Advisory Agreement”), which replaced the previous calculation of the base management fee with a calculation based on Gross Tangible Real Estate. The revised base management fee will be payable quarterly in arrears and 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 Sixth Amended Advisory Agreement as the current gross value of our 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 Advisory Agreement remain unchanged. The revised base management fee calculation began with the fee calculations for the quarter ended September 30, 2020.

For the three and nine months ended September 30, 2021, we recorded a base management fee of $1.5 million and $4.4 million, respectively. For the three and nine months ended September 30, 2020, we recorded a base management fee of $1.4 million and $4.2 million, respectively.

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

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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 nine months ended September 30, 2021, we recorded an incentive fee of $1.3 million and $3.5 million, respectively, partially offset by credits related to unconditional voluntary and irrevocable waivers issued by the Adviser of $0.00 million and $0.02 million, respectively, resulting in a net incentive fee for the three and nine months ended September 30, 2021 of $1.3 million and $3.5 million, respectively. For the three and nine months ended September 30, 2020, we recorded an incentive fee of $1.1 million and $3.3 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and nine months ended September 30, 2020.

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 nine months ended September 30, 2021 or 2020.

Termination Fee

The Advisory Agreement includes a termination fee clause 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 that the methodology of allocating the Administrator’s total expenses by approximate percentage of time services were performed among all companies serviced by our Administrator more closely approximates fees paid to actual services performed. For the three and nine months ended September 30, 2021, we recorded an administration fee of $0.4 million and $1.0 million, respectively. For the three and nine months ended September 30, 2020, we recorded an administration fee of $0.4 million and $1.2 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.

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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 1.00% 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 September 30, 2021, but we paid financing fees to Gladstone Securities of $14,000 during the nine months ended September 30, 2021, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% of the mortgage principal secured. We did not pay financing fees to Gladstone Securities during the three months ended September 30, 2020, but we paid financing fees to Gladstone Securities of $89,637 during the nine months ended September 30, 2020, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% of the mortgage principal secured. Our Board of Directors renewed the agreement for an additional year, through August 31, 2022, at its July 2021 meeting.

Dealer Manager Agreement

On February 20, 2020 we entered into a dealer manager agreement (the “Dealer Manager Agreement”), whereby Gladstone Securities will act as the 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, 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, Gladstone Securities, as dealer manager, will provide certain sales, promotional and marketing services to us in connection with the Offering, and we will pay Gladstone Securities (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. Gladstone Securities may, in its sole discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. We paid fees of $0.5 million to Gladstone Securities during the nine months ended September 30, 2021 in connection with the Offering.

3. Earnings (Loss) Per Share of Common Stock

The following tables set forth the computation of basic and diluted earnings (loss) per share of common stock for the three and nine months ended September 30, 2021 and 2020. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted earnings (loss) per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of earnings (loss) would also be added back to net income (loss). Net income (loss) figures are presented net of such non-controlling interests in the earnings (loss) per share calculation.

We computed basic earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020 using the weighted average number of shares outstanding during the respective periods. Diluted earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020 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 income (loss) attributable to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).

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	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Calculation of basic earnings (loss) per share of common stock:
Net income (loss) attributable to common stockholders	$	1,439	$	(128)	$	(4,547)	$	(2,643)
Denominator for basic weighted average shares of common stock (1)	36,768,779		34,075,147		36,296,414		33,884,007
Basic earnings (loss) per share of common stock	$	0.04	$	(0.004)	$	(0.13)	$	(0.08)
Calculation of diluted earnings (loss) per share of common stock:
Net income (loss) attributable to common stockholders	$	1,439	$	(128)	$	(4,547)	$	(2,643)

Net income (loss) attributable to common stockholders plus assumed conversions (2)	$	1,439	$	(128)	$	(4,547)	$	(2,643)
Denominator for basic weighted average shares of common stock (1)	36,768,779		34,075,147		36,296,414		33,884,007
Effect of convertible Senior Common Stock (2)	—		—		—		—
Denominator for diluted weighted average shares of common stock (2)	36,768,779		34,075,147		36,296,414		33,884,007
Diluted earnings (loss) per share of common stock	$	0.04	$	(0.004)	$	(0.13)	$	(0.08)

(1)The weighted average number of OP Units held by Non-controlling OP Unitholders was 256,994 and 337,205 for the three and nine months ended September 30, 2021, respectively, and 503,033 and 502,435 for the three and nine months ended September 30, 2020, respectively.

(2)We excluded convertible shares of Senior Common Stock of 532,785 and 641,430 from the calculation of diluted earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020, 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 September 30, 2021 and December 31, 2020, excluding real estate held for sale as of September 30, 2021 and December 31, 2020, respectively (dollars in thousands):


	September 30, 2021		December 31, 2020
Real estate:
Land (1)	$	146,684	$	142,853
Building and improvements	955,233		916,601
Tenant improvements	70,631		69,229
Accumulated depreciation	(257,050)		(228,468)
Real estate, net	$	915,498	$	900,215

(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 $9.8 million and $30.0 million for the three and nine months ended September 30, 2021, respectively. Real estate depreciation expense on building and tenant improvements was $9.0 million and $27.2 million for the three and nine months ended September 30, 2020, respectively.

Acquisitions

We acquired eight properties during the nine months ended September 30, 2021, and six properties during the nine months ended September 30, 2020. The acquisitions are summarized below (dollars in thousands):


Nine Months Ended		Aggregate Square Footage	Weighted Average Lease Term	Aggregate Purchase Price		Aggregate Capitalized Acquisition Costs
September 30, 2021	(1)	367,716	15.5 years	$	46,225	$	370
September 30, 2020	(2)	1,043,638	14.2 years	$	82,599	$	339

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(1)On January 22, 2021, we acquired a 180,152 square foot property in Findlay, Ohio for $11.1 million. The property is fully leased to one tenant for 14.2 years at time we acquired the property. On June 17, 2021, we acquired a 25,200 square foot property in Baytown, Texas for $8.2 million. The property is fully leased to one tenant for 12.6 years at time we acquired the property. On July 21, 2021, we acquired an 80,604 square foot, four-property portfolio in Pacific, Missouri for $22.1 million. These properties are fully leased to one tenant for 17.4 years at time we acquired the portfolio. On August 20, 2021, we acquired an 81,760 square foot, two-property portfolio in Peru, Illinois for $4.8 million. These properties are fully leased to one tenant for 15.0 years at time we acquired the portfolio.

(2)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 at time we acquired the property. 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 at time we acquired the portfolio. On March 9, 2020, we acquired a 504,400 square foot property in Crandall, Georgia, for $32.0 million. The property is fully leased to one tenant for 10.5 years at time we acquired the property. On September 1, 2020, we acquired a 153,600 square foot property in Indianapolis, Indiana for $10.6 million. The property is fully leased to one tenant for 9.7 years at time we acquired the property.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2021 and 2020, respectively, as follows (dollars in thousands):


	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Acquired assets and liabilities	Purchase price		Purchase price
Land	$	4,116	$	7,798	(1)
Building	33,113		61,930
Tenant Improvements	860		1,431
In-place Leases	3,336		5,411
Leasing Costs	3,198		4,664
Customer Relationships	1,458		2,808
Above Market Leases	410		309		(2)
Below Market Leases	(266)		(1,752)		(3)


Total Purchase Price	$	46,225	$	82,599

(1)This amount includes $2,711 of land value subject to a land lease agreement, which we may purchase for a nominal fee.

(2)This amount includes $46 and $53 of loans receivable included in Other assets on the condensed consolidated balance sheets, respectively.

(3)This amount includes $62 of prepaid rent included in Other liabilities on the condensed consolidated balance sheets.

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the three months ending December 31, 2021 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
Three Months Ending 2021	$	28,699
2022	115,625
2023	108,691
2024	102,252
2025	95,813
2026	86,921
Thereafter	309,507
	$	847,508

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant directly, or reimbursed to us from the tenant; however, we would be required to pay operating expenses on the respective properties in the event the tenants fail to pay them.

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Lease Revenue Reconciliation

The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the three and nine months ended September 30, 2021 and 2020, respectively (dollars in thousands):


	For the three months ended September 30,
	(Dollars in Thousands)
Lease revenue reconciliation	2021		2020		$ Change		% Change
Fixed lease payments	$	30,230	$	29,116	$	1,114	3.8	%
Variable lease payments	4,104		4,026		78		1.9	%
	$	34,334	$	33,142	$	1,192	3.6	%


	For the nine months ended September 30,
	(Dollars in Thousands)
Lease revenue reconciliation	2021		2020		$ Change		% Change
Fixed lease payments	$	90,331	$	88,286	$	2,045	2.3	%
Variable lease payments	12,050		12,001		49		0.4	%
	$	102,381	$	100,287	$	2,094	2.1	%

Legal Settlements

In August 2021, we reached separate legal settlements through which we recognized $2.4 million, net, recorded in other income on the condensed consolidated statement of operations and comprehensive income.

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 September 30, 2021 and December 31, 2020, excluding real estate held for sale as of September 30, 2021 and December 31, 2020, respectively (dollars in thousands):


	September 30, 2021				December 31, 2020
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	102,796	$	(60,713)	$	99,254	$	(54,168)
Leasing costs	78,755		(42,536)		73,707		(37,801)
Customer relationships	70,016		(36,536)		68,268		(31,881)
	$	251,567	$	(139,785)	$	241,229	$	(123,850)

	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	15,460	$	(11,312)	$	15,076	$	(10,670)
Below market leases and deferred revenue	(43,152)		20,693		(38,319)		17,686

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $5.0 million and $15.7 million for the three and nine months ended September 30, 2021, respectively, and $4.8 million and $14.9 million for the three and nine months ended September 30, 2020, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and comprehensive income.

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Total amortization related to above-market lease values was $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, 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 $0.9 million and $3.3 million for the three and nine months ended September 30, 2021, respectively, and $0.7 million and $2.1 million for the three and nine months ended September 30, 2020, 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 and liabilities assumed during the nine months ended September 30, 2021 and 2020, respectively, were as follows:


Intangible Assets & Liabilities	2021	2020
In-place leases	15.0	15.7
Leasing costs	15.0	15.7
Customer relationships	21.2	18.9
Above market leases	14.0	16.6
Below market leases	17.4	14.2
All intangible assets & liabilities	16.5	16.3

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

Real Estate Dispositions

During the nine months ended September 30, 2021, we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed 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. During the nine months ended September 30, 2021, we sold two non-core properties, located in Rancho Cordova, California and Champaign, Illinois, which are summarized in the table below (dollars in thousands):


Aggregate Square Footage Sold	Aggregate Sales Price		Aggregate Sales Costs		Aggregate loss on Sale of Real Estate, net
81,758	$	5,473	$	367	$	(882)

Our dispositions during the nine months ended September 30, 2021 were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will such dispositions have a major effect on our operations and financial results. Accordingly, the operating results of these properties are 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 nine months ended September 30, 2021, and 2020 (dollars in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021			2020
Operating revenue	$	—	$	319	$	240		$	773
Operating expense	—		1,561		117			1,926
Other expense, net	—		(59)		(1,622)		(1)	(177)
Loss from real estate and related assets sold	$	—	$	(1,301)	$	(1,499)		$	(1,330)

(1)Includes a $0.9 million loss on sale of real estate, net, on two property sales.

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Real Estate Held for Sale

As of September 30, 2021, we had one property classified as held for sale, located in Richmond, Virginia. We consider this asset to be non-core to our long term strategy. At December 31, 2020, we had three properties classified as held for sale, located in Boston Heights, Ohio, Rancho Cordova, California, and Champaign, Illinois. Two of the properties were sold during the nine months ended September 30, 2021. Our Boston Heights, Ohio property is classified as held and used as of September 30, 2021, as this property no longer meets the held for sale criteria.

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):


	September 30, 2021		December 31, 2020
Assets Held for Sale


Total real estate held for sale	$	4,005	$	8,114
Lease intangibles, net	—		384


Total Assets Held for Sale	$	4,005	$	8,498
Liabilities Held for Sale

Asset retirement obligation	13		—


Total Liabilities Held for Sale	$	13	$	—

Impairment Charges

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the nine months ended September 30, 2021 and did not recognize an impairment charge. We recognized an aggregate impairment charge of $2.9 million during the nine months ended September 30, 2020 on three held and used assets, located in Blaine, Minnesota, Champaign, Illinois, and Rancho Cardova, California. In performing our impairment testing, the undiscounted cash flows for this asset were below the carrying value, so we impaired the asset and wrote it down to its fair value, which we determined using third party purchase offers.

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.

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6. Mortgage Notes Payable and Credit Facility

Our $100.0 million unsecured revolving credit facility (“Revolver”), $160.0 million term loan facility (“Term Loan A”), and $65.0 million term loan facility (“Term Loan B”), are collectively referred to herein as the Credit Facility.

Our mortgage notes payable and Credit Facility as of September 30, 2021 and December 31, 2020 are summarized below (dollars in thousands):


	Encumbered properties at	Carrying Value at				Stated Interest Rates at	Scheduled Maturity Dates at
	September 30, 2021	September 30, 2021		December 31, 2020		September 30, 2021	September 30, 2021
Mortgage and other secured loans:
Fixed rate mortgage loans	61	$	426,933	$	435,029	(1)	(2)
Variable rate mortgage loans	7	24,069		24,809		(3)	(2)
Premiums and discounts, net	-	(142)		(182)		N/A	N/A
Deferred financing costs, mortgage loans, net	-	(2,859)		(3,479)		N/A	N/A
Total mortgage notes payable, net	68	$