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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 MARCH 31, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-33097
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Maryland | | 02-0681276 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
1521 Westbranch Drive, | Suite 100 | | 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 | | The Nasdaq Stock Market LLC |
6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share | | GOODN | | The Nasdaq Stock Market LLC |
6.00% Series G Cumulative Redeemable Preferred Stock, par value $0.001 per share | | GOODO | | The Nasdaq Stock Market LLC |
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 (§ 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 May 3, 2023 was 39,998,775.
GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
March 31, 2023
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Gladstone Commercial Corporation
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
ASSETS | | | | |
Real estate, at cost | | $ | 1,285,539 | | | $ | 1,287,297 | |
Less: accumulated depreciation | | 294,773 | | | 286,994 | |
Total real estate, net | | 990,766 | | | 1,000,303 | |
Lease intangibles, net | | 107,778 | | | 111,622 | |
Real estate and related assets held for sale | | 4,722 | | | 3,013 | |
Cash and cash equivalents | | 14,286 | | | 11,653 | |
Restricted cash | | 4,505 | | | 4,339 | |
Funds held in escrow | | 5,925 | | | 8,818 | |
Right-of-use assets from operating leases | | 5,071 | | | 5,131 | |
Deferred rent receivable, net | | 39,663 | | | 38,884 | |
Other assets | | 13,867 | | | 17,746 | |
TOTAL ASSETS | | $ | 1,186,583 | | | $ | 1,201,509 | |
LIABILITIES, MEZZANINE EQUITY AND EQUITY | | | | |
LIABILITIES | | | | |
Mortgage notes payable, net (1) | | $ | 354,556 | | | $ | 359,389 | |
Borrowings under Revolver | | 26,250 | | | 23,250 | |
Borrowings under Term Loan A, Term Loan B and Term Loan C, net | | 366,740 | | | 366,567 | |
Deferred rent liability, net | | 38,799 | | | 39,997 | |
Operating lease liabilities | | 5,255 | | | 5,308 | |
Asset retirement obligation | | 4,824 | | | 4,793 | |
Accounts payable and accrued expenses | | 9,822 | | | 9,606 | |
| | | | |
Due to Adviser and Administrator (1) | | 2,457 | | | 3,356 | |
Other liabilities | | 17,211 | | | 14,617 | |
TOTAL LIABILITIES | | $ | 825,914 | | | $ | 826,883 | |
Commitments and contingencies (2) | | | | |
MEZZANINE EQUITY | | | | |
Series E and G redeemable preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 10,750,886 and 10,751,486 shares authorized; and 7,052,334 and 7,052,934 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (3) | | $ | 170,041 | | | $ | 170,056 | |
TOTAL MEZZANINE EQUITY | | $ | 170,041 | | | $ | 170,056 | |
EQUITY | | | | |
Senior common stock, par value $0.001 per share; 950,000 shares authorized; and 407,092 and 431,064 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (3) | | $ | 1 | | | $ | 1 | |
Common stock, par value $0.001 per share, 62,309,915 and 62,305,727 shares authorized; and 39,998,220 and 39,744,359 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (3) | | 40 | | | 39 | |
Series F redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 25,989,199 and 25,992,787 shares authorized and 694,489 and 670,895 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (3) | | 1 | | | 1 | |
Additional paid in capital | | 725,874 | | | 721,327 | |
Accumulated other comprehensive income | | 6,008 | | | 11,640 | |
Distributions in excess of accumulated earnings | | (542,937) | | | (530,228) | |
TOTAL STOCKHOLDERS' EQUITY | | $ | 188,987 | | | $ | 202,780 | |
OP Units held by Non-controlling OP Unitholders (3) | | 1,641 | | | 1,790 | |
TOTAL EQUITY | | $ | 190,628 | | | $ | 204,570 | |
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | | $ | 1,186,583 | | | $ | 1,201,509 | |
(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.
Gladstone Commercial Corporation
Condensed Consolidated Statements of Operations and Comprehensive Income
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | | |
| | 2023 | | 2022 | | | | |
Operating revenues | | | | | | | | |
Lease revenue | | $ | 36,554 | | | $ | 35,531 | | | | | |
Total operating revenues | | $ | 36,554 | | | $ | 35,531 | | | | | |
Operating expenses | | | | | | | | |
Depreciation and amortization | | $ | 15,474 | | | $ | 14,689 | | | | | |
Property operating expenses | | 6,727 | | | 6,623 | | | | | |
Base management fee (1) | | 1,605 | | | 1,547 | | | | | |
Incentive fee (1) | | — | | | 1,340 | | | | | |
Administration fee (1) | | 565 | | | 462 | | | | | |
General and administrative | | 1,063 | | | 997 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total operating expenses | | $ | 25,434 | | | $ | 25,658 | | | | | |
Other income (expense) | | | | | | | | |
Interest expense | | $ | (8,828) | | | $ | (6,586) | | | | | |
| | | | | | | | |
Other income | | 105 | | | 104 | | | | | |
Total other income (expense), net | | $ | (8,723) | | | $ | (6,482) | | | | | |
Net income | | $ | 2,397 | | | $ | 3,391 | | | | | |
Net loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders | | 7 | | | (2) | | | | | |
Net income attributable to the Company | | $ | 2,404 | | | $ | 3,389 | | | | | |
Distributions attributable to Series E, F, and G preferred stock | | (3,022) | | | (2,946) | | | | | |
| | | | | | | | |
Distributions attributable to senior common stock | | (109) | | | (116) | | | | | |
Loss on extinguishment of Series F preferred stock | | (5) | | | (5) | | | | | |
Gain on repurchase of Series G preferred stock | | 3 | | | — | | | | | |
Net (loss) income (attributable) available to common stockholders | | $ | (729) | | | $ | 322 | | | | | |
(Loss) income per weighted average share of common stock - basic & diluted | | | | | | | | |
(Loss) income (attributable) available to common shareholders | | $ | (0.02) | | | $ | 0.01 | | | | | |
Weighted average shares of common stock outstanding | | | | | | | | |
Basic and Diluted | | 39,922,359 | | | 37,902,653 | | | | | |
Earnings per weighted average share of senior common stock | | $ | 0.26 | | | $ | 0.26 | | | | | |
Weighted average shares of senior common stock outstanding - basic | | 420,521 | | | 449,442 | | | | | |
Comprehensive income | | | | | | | | |
Change in unrealized (loss) gain related to interest rate hedging instruments, net | | $ | (5,895) | | | $ | 4,267 | | | | | |
Other Comprehensive (loss) gain | | (5,895) | | | 4,267 | | | | | |
Net income | | $ | 2,397 | | | $ | 3,391 | | | | | |
Comprehensive (loss) income | | $ | (3,498) | | | $ | 7,658 | | | | | |
Comprehensive loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders | | 7 | | | (2) | | | | | |
Total comprehensive (loss) income available to the Company | | $ | (3,491) | | | $ | 7,656 | | | | | |
(1)Refer to Note 2 “Related-Party Transactions”
The accompanying notes are an integral part of these condensed consolidated financial statements.
Gladstone Commercial Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | | |
| | 2023 | | 2022 | | |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 2,397 | | | $ | 3,391 | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 15,474 | | | 14,689 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Amortization of deferred financing costs | | 410 | | | 369 | | | |
Amortization of deferred rent asset and liability, net | | (1,761) | | | (615) | | | |
Amortization of discount and premium on assumed debt, net | | 11 | | | 12 | | | |
Asset retirement obligation expense | | 31 | | | 21 | | | |
Amortization of right-of-use asset from operating leases and operating lease liabilities, net | | 7 | | | 7 | | | |
Operating changes in assets and liabilities | | | | | | |
Decrease (increase) in other assets | | 924 | | | (372) | | | |
(Decrease) increase in deferred rent receivable | | (938) | | | 1,156 | | | |
Decrease in accounts payable and accrued expenses | | (502) | | | (1,508) | | | |
(Decrease) increase in amount due to Adviser and Administrator | | (899) | | | 143 | | | |
| | | | | | |
| | | | | | |
Increase in other liabilities | | 166 | | | 856 | | | |
| | | | | | |
Leasing commissions paid | | (401) | | | (962) | | | |
Net cash provided by operating activities | | $ | 14,919 | | | $ | 17,187 | | | |
Cash flows from investing activities: | | | | | | |
Acquisition of real estate and related intangible assets | | $ | — | | | $ | (13,463) | | | |
Improvements of existing real estate | | (1,961) | | | (942) | | | |
| | | | | | |
Receipts from lenders for funds held in escrow | | 3,218 | | | 28 | | | |
Payments to lenders for funds held in escrow | | (325) | | | (2,544) | | | |
Receipts from tenants for reserves | | 451 | | | 875 | | | |
Payments to tenants from reserves | | — | | | (1,016) | | | |
Deposits on future acquisitions | | (709) | | | (509) | | | |
| | | | | | |
Net cash provided by (used in) investing activities | | $ | 674 | | | $ | (17,571) | | | |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of equity | | $ | 4,630 | | | $ | 22,166 | | | |
Offering costs paid | | (80) | | | (395) | | | |
Redemption of Series F preferred stock | | (91) | | | (55) | | | |
Retirement of Senior Common stock | | (55) | | | — | | | |
Repurchase of Series G preferred stock | | (12) | | | — | | | |
| | | | | | |
| | | | | | |
Payments for deferred financing costs | | (70) | | | — | | | |
Principal repayments on mortgage notes payable | | (5,002) | | | (3,460) | | | |
| | | | | | |
Borrowings from revolving credit facility | | 13,000 | | | 23,100 | | | |
Repayments on revolving credit facility | | (10,000) | | | (22,100) | | | |
| | | | | | |
| | | | | | |
Increase (decrease) in security deposits | | — | | | (25) | | | |
Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders | | (15,114) | | | (17,365) | | | |
Net cash (used in) provided by financing activities | | $ | (12,794) | | | $ | 1,866 | | | |
Net increase in cash, cash equivalents, and restricted cash | | $ | 2,799 | | | $ | 1,482 | | | |
Cash, cash equivalents, and restricted cash at beginning of period | | $ | 15,992 | | | $ | 13,178 | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 18,791 | | | $ | 14,660 | | | |
SUPPLEMENTAL AND NON-CASH INFORMATION | | | | | | |
Tenant funded fixed asset improvements included in deferred rent liability, net | | $ | 722 | | | $ | 3,340 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Unrealized gain related to interest rate hedging instruments, net | | $ | (5,895) | | | $ | 4,267 | | | |
| | | | | | |
| | | | | | |
Capital improvements and leasing commissions included in accounts payable and accrued expenses | | $ | 2,350 | | | $ | 497 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Dividends paid on Series F Preferred Stock via additional share issuances | | $ | 112 | | | $ | 88 | | | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (dollars in thousands):
| | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | 2023 | | 2022 |
Cash and cash equivalents | | $ | 14,286 | | | $ | 9,585 | |
Restricted cash | | 4,505 | | | 5,075 | |
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows | | $ | 18,791 | | | $ | 14,660 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, 2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 22, 2023. The results of operations for the three months ended March 31, 2023 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, 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, 2022. There were no material changes to our critical accounting policies during the three months ended March 31, 2023.
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 chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Arthur “Buzz” Cooper, is also 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 March 31, 2023 and December 31, 2022, $2.5 million and $3.4 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 2022 meeting, our Board of Directors reviewed and renewed each of the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2023.
Base Management Fee
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 is 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 remains unchanged.
For the three months ended March 31, 2023 and 2022, we recorded a base management fee of $1.6 million and $1.5 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 net (loss) income (attributable) 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 (loss) income (attributable) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.
On January 10, 2023, the Company amended and restated the Sixth Amended Advisory Agreement by entering into the Seventh Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Seventh Amended Advisory Agreement”). The Company’s entrance into the Amended Agreement was approved unanimously by our board of directors, including specifically, our independent directors. The Seventh Amended Advisory Agreement contractually eliminated the payment of the incentive fee for the quarters ending March 31, 2023 and June 30, 2023. The calculation of the other fees remains unchanged.
For the three months ended March 31, 2022, we recorded an incentive fee of $1.3 million. The Adviser did not waive any portion of the incentive fee for the three months ended March 31, 2022.
Capital Gain Fee
Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three months ended March 31, 2023 or 2022.
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 months ended March 31, 2023 and 2022, we recorded an administration fee of $0.6 million and $0.5 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 1.00% 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 March 31, 2023 and 2022. Our Board of Directors renewed the agreement for an additional year, through August 31, 2023, at its July 2022 meeting.
Dealer Manager Agreement
On February 20, 2020 we entered into a dealer manager agreement, as amended on February 9, 2023 (together, the “Dealer Manager Agreement”), whereby Gladstone Securities acts 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 an automatic registration statement on Form S-3 (File No. 333-268549), as the same may be amended and/or supplemented (the “2022 Registration Statement”), under the Securities Act of 1933, as amended, and will be offered and sold pursuant to a prospectus supplement, dated February 9, 2023, and a base prospectus dated November 23, 2022 relating to the 2022 Registration Statement. During the years ended December 31, 2020, 2021 and 2022, the Series F Preferred Stock was registered with the SEC pursuant to a registration statement on Form S-3 (File No. 333-236143) (the “2020 Registration Statement”), and offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020.
Under the Dealer Manager Agreement, Gladstone Securities, as dealer manager, provides certain sales, promotional and marketing services to us in connection with the Offering, and we 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 are paid with respect to shares sold pursuant to the DRIP. Gladstone Securities may, in its sole discretion, re-allow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. We paid fees of $0.03 million and $0.1 million to Gladstone Securities during the three months ended March 31, 2023 and 2022, respectively, in connection with the Offering.
3. (Loss) Earnings Per Share of Common Stock
The following tables set forth the computation of basic and diluted (loss) earnings per share of common stock for the three months ended March 31, 2023 and 2022. The operating partnership units in the Operating Partnership (“OP Units”) held by holders who do not control the Operating Partnership (“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) earnings would also be added back to net (loss) income. Net (loss) income figures are presented net of such non-controlling interests in the (loss) earnings per share calculation.
We computed basic (loss) earnings per share for the three months ended March 31, 2023 and 2022 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings per share for the three months ended March 31, 2023 and 2022 reflects additional shares of common stock related to our convertible senior common stock (the “Senior Common Stock”), if the effect of conversion would be dilutive, that would have been outstanding if such 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 March 31, | | |
| | 2023 | | 2022 | | | | |
Calculation of basic (loss) earnings per share of common stock: | | | | | | | | |
Net (loss) income (attributable) available to common stockholders | | $ | (729) | | | $ | 322 | | | | | |
Denominator for basic weighted average shares of common stock (1) | | 39,922,359 | | | 37,902,653 | | | | | |
Basic (loss) earnings per share of common stock | | $ | (0.02) | | | $ | 0.01 | | | | | |
Calculation of diluted (loss) earnings per share of common stock: | | | | | | | | |
Net (loss) income (attributable) available to common stockholders | | $ | (729) | | | $ | 322 | | | | | |
| | | | | | | | |
Net (loss) income (attributable) available to common stockholders plus assumed conversions (2) | | $ | (729) | | | $ | 322 | | | | | |
Denominator for basic weighted average shares of common stock (1) | | 39,922,359 | | | 37,902,653 | | | | | |
Effect of convertible Senior Common Stock (2) | | — | | | — | | | | | |
Denominator for diluted weighted average shares of common stock (2) | | 39,922,359 | | | 37,902,653 | | | | | |
Diluted (loss) earnings per share of common stock | | $ | (0.02) | | | $ | 0.01 | | | | | |
(1)The weighted average number of OP Units held by Non-controlling OP Unitholders was 391,468 and 256,994 for the three months ended March 31, 2023 and 2022, respectively.
(2)We excluded convertible shares of Senior Common Stock of 345,687 and 374,123 from the calculation of diluted earnings per share for the three months ended March 31, 2023 and 2022, respectively, because they were anti-dilutive.
4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of our investments in real estate as of March 31, 2023 and December 31, 2022, respectively, excluding real estate held for sale as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Real estate: | | | | |
Land (1) | | $ | 152,695 | | | $ | 152,916 | |
Building and improvements | | 1,067,950 | | | 1,069,407 | |
Tenant improvements | | 64,894 | | | 64,974 | |
Accumulated depreciation | | (294,773) | | | (286,994) | |
Real estate, net | | $ | 990,766 | | | $ | 1,000,303 | |
(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 $11.3 million and $9.9 million for the three months ended March 31, 2023 and 2022, respectively.
Acquisitions
We did not acquire any properties during the three months ended March 31, 2023, and acquired two industrial properties during the three months ended March 31, 2022. The acquisitions are summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | Aggregate Square Footage | | Weighted Average Lease Term | | Aggregate Purchase Price | | Aggregate Capitalized Acquisition Costs | | | | | |
| | | | | | | | | | | | | |
March 31, 2022 | (1) | 136,000 | | | 10.2 years | | $ | 13,463 | | | $ | 163 | | | | | | |
(1)On February 24, 2022, we acquired an 80,000 square foot property in Wilkesboro, North Carolina for $7.5 million. The property is fully leased to one tenant and had 12.7 years of remaining lease term at the time we acquired the property. On March 11, 2022, we acquired a 56,000 square foot property in Oklahoma City, Oklahoma for $6.0 million. The property is fully leased to one tenant and had 7.0 years of remaining lease term at the time we acquired the property.
We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the three months ended March 31, 2022 as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 | |
Acquired assets and liabilities | | | | Purchase price | |
Land | | | | $ | 816 | | |
Building | | | | 10,250 | | |
Tenant Improvements | | | | 196 | | |
In-place Leases | | | | 847 | | |
Leasing Costs | | | | 525 | | |
Customer Relationships | | | | 567 | | |
Above Market Leases | | | | 279 | | |
Below Market Leases | | | | (17) | | (1) |
| | | | | |
| | | | | |
Total Purchase Price | | | | $ | 13,463 | | |
(1)This amount includes $17 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 nine months ending December 31, 2023 and each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of March 31, 2023 (dollars in thousands):
| | | | | |
Year | Tenant Lease Payments |
Nine Months Ending December 31, 2023 | $ | 87,845 | |
2024 | 112,991 | |
2025 | 109,942 | |
2026 | 102,756 | |
2027 | 85,936 | |
2028 | 70,416 | |
Thereafter | 299,003 | |
| |
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.
Lease Revenue Reconciliation
The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the three months ended March 31, 2023 and 2022, respectively (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, |
| | (Dollars in Thousands) |
Lease revenue reconciliation | | 2023 | | 2022 | | $ Change | | % Change |
Fixed lease payments | | $ | 32,141 | | | $ | 31,332 | | | $ | 809 | | | 2.6 | % |
Variable lease payments | | 4,413 | | | 4,199 | | | 214 | | | 5.1 | % |
| | $ | 36,554 | | | $ | 35,531 | | | $ | 1,023 | | | 2.9 | % |
Intangible Assets
The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of March 31, 2023 and December 31, 2022, respectively, excluding real estate held for sale as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Lease Intangibles | | Accumulated Amortization | | Lease Intangibles | | Accumulated Amortization |
In-place leases | | $ | 104,394 | | | $ | (64,967) | | | $ | 104,394 | | | $ | (63,240) | |
Leasing costs | | 85,162 | | | (46,807) | | | 85,038 | | | (45,501) | |
Customer relationships | | 69,485 | | | (39,489) | | | 69,586 | | | (38,655) | |
| | $ | 259,041 | | | $ | (151,263) | | | $ | 259,018 | | | $ | (147,396) | |
| | | | | | | | |
| | Deferred Rent Receivable/(Liability) | | Accumulated (Amortization)/Accretion | | Deferred Rent Receivable/(Liability) | | Accumulated (Amortization)/Accretion |
Above market leases | | $ | 14,637 | | | $ | (11,334) | | | $ | 15,371 | | | $ | (11,909) | |
Below market leases and deferred revenue | | (64,346) | | | 25,547 | | | (66,138) | | | 26,141 | |
| | | | | | | | |
Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.1 million and $4.7 million for the three months ended March 31, 2023 and 2022, 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 $0.2 million for the three months ended March 31, 2023 and 2022, 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 $1.9 million and $0.8 million for the three months ended March 31, 2023 and 2022, 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 three months ended March 31, 2022, were as follows:
| | | | | | | | | | |
Intangible Assets & Liabilities | | | | March 31, 2022 |
In-place leases | | | | 10.7 |
Leasing costs | | | | 10.7 |
Customer relationships | | | | 16.1 |
Above market leases | | | | 12.7 |
Below market leases | | | | 7.1 |
All intangible assets & liabilities | | | | 11.9 |
5. Real Estate Dispositions, Held for Sale and Impairment Charges
Real Estate Dispositions
We did not sell any properties during the three months ended March 31, 2023 and 2022. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available, and use the sales proceeds to acquire properties in our target, secondary growth markets, or pay down outstanding debt.
Real Estate Held for Sale
At March 31, 2023, we had two properties classified as held for sale, located in Columbia, South Carolina and Baytown, Texas. We consider these assets to be non-core to our long term strategy. At December 31, 2022, we had one property classified as held for sale, located in Columbia, South Carolina.
The table below summarizes the components of the assets and liabilities held for sale at March 31, 2023 and December 31, 2022 reflected on the accompanying condensed consolidated balance sheets (dollars in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Assets Held for Sale | | | | |
Total real estate held for sale | | $ | 4,681 | | | $ | 3,013 | |
Lease intangibles, net | | 41 | | | — | |
| | | | |
| | | | |
Total Assets Held for Sale | | $ | 4,722 | | | $ | 3,013 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Impairment Charges
We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the three months ended March 31, 2023 and 2022, and did not recognize an impairment charge.
6. Mortgage Notes Payable and Credit Facility
Our $125.0 million unsecured revolving credit facility (“Revolver”), $160.0 million term loan facility (“Term Loan A”), $60.0 million term loan facility (“Term Loan B”), and $150.0 million term loan facility (“Term Loan C”), are collectively referred to herein as the Credit Facility.
Our mortgage notes payable and Credit Facility as of March 31, 2023 and December 31, 2022 are summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Encumbered properties at | | Carrying Value at | | Stated Interest Rates at | | Scheduled Maturity Dates at |
| | March 31, 2023 | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | March 31, 2023 |
Mortgage and other secured loans: | | | | | | | | | | |
Fixed rate mortgage loans | | 50 | | | $ | 357,034 | | | $ | 362,037 | | | (1) | | (2) |
Variable rate mortgage loans | | — | | | — | | | — | | | N/A | | (2) |
Premiums and discounts, net | | — | | | (72) | | | (83) | | | N/A | | N/A |
Deferred financing costs, mortgage loans, net | | — | | | (2,406) | | | (2,565) | | | N/A | | N/A |
Total mortgage notes payable, net | | 50 | | | $ | 354,556 | | | $ | 359,389 | | | (3) | | |
Variable rate revolving credit facility | | 84 | | (6) | $ | 26,250 | | | $ | 23,250 | | | SOFR + 1.50% | (4) | 8/18/2026 |
| | | | | | | | | | |
Total revolver | | 84 | | | $ | 26,250 | | | $ | 23,250 | | | | | |
Variable rate term loan facility A | | — | | (6) | $ | 160,000 | | | $ | 160,000 | | | SOFR + 1.45% | (4) | 8/18/2027 |
Variable rate term loan facility B | | — | | (6) | 60,000 | | | 60,000 | | | SOFR + 1.45% | (4) | 2/11/2026 |
Variable rate term loan facility C | | — | | (6) | 150,000 | | | 150,000 | | | SOFR + 1.45% | (4) | 2/18/2028 |
Deferred financing costs, term loan facility | | — | | | (3,260) | | | (3,433) | | | N/A | | N/A |
Total term loan, net | | N/A | | $ | 366,740 | | | $ | 366,567 | | | | | |
Total mortgage notes payable and credit facility | | 134 | | | $ | 747,546 | | | $ | 749,206 | | | (5) | | |
(1)Interest rates on our fixed rate mortgage notes payable vary from 2.80% to 6.63%.
(2)We have 44 mortgage notes payable with maturity dates ranging from April 6, 2023 through August 1, 2037.
(3)The weighted average interest rate on the mortgage notes outstanding as of March 31, 2023 was approximately 4.24%.
(4)As of March 31, 2023, Secured Overnight Financing Rate (“SOFR”) was approximately 4.87%.
(5)The weighted average interest rate on all debt outstanding as of March 31, 2023 was approximately 5.33%.
(6)The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 84 unencumbered properties as of March 31, 2023.
N/A - Not Applicable
Mortgage Notes Payable
As of March 31, 2023, we had 44 mortgage notes payable, collateralized by a total of 50 properties with a net book value of $550.1 million. We have limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. As of March 31, 2023, we did not have any mortgages subject to recourse. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property.
During the three months ended March 31, 2023, we did not issue or repay any mortgages.
We made payments of $0.1 million for deferred financing costs during the three months ended March 31, 2023. We did not make any payments for deferred financing costs during the three months ended March 31, 2022.
Scheduled principal payments of mortgage notes payable for the nine months ending December 31, 2023, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):
| | | | | | | | | | | |
Year | | Scheduled Principal Payments | |
Nine Months Ending December 31, 2023 | | $ | 64,537 | | |
2024 | | 20,508 | | |
2025 | | 36,559 | | |
2026 | | 42,379 | | |
2027 | | 94,848 | | |
2028 | | 28,858 | | |
Thereafter | | 69,345 | | |
Total | | $ | 357,034 | | (1) |
(1)This figure does not include $(0.1) million of premiums and (discounts), net, and $2.4 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets.
We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility.
Interest Rate Cap and Interest Rate Swap Agreements
We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps and interest rate swaps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At March 31, 2023 and December 31, 2022, our interest rate cap agreements and interest rate swaps were valued using Level 2 inputs.
The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our condensed consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Aggregate Cost | | Aggregate Notional Amount | | Aggregate Fair Value | | Aggregate Notional Amount | | Aggregate Fair Value |
$ | 620 | | (1) | $ | 225,000 | | | $ | 3,264 | | | $ | 225,000 | | | $ | 4,629 | |
(1)We have entered into various interest rate cap agreements on variable rate debt with LIBOR caps ranging from 1.50% to 2.50%.
We have assumed or entered into interest rate swap agreements in connection with certain of our mortgage financings and Credit Facility, whereby we will pay our counterparty a fixed rate interest rate on a monthly basis and receive payments from our counterparty equivalent to the stipulated floating rate. The fair value of our interest rate swap agreements is recorded in
other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | December 31, 2022 |
Aggregate Notional Amount | | Aggregate Fair Value Asset | | Aggregate Fair Value Liability | | Aggregate Notional Amount | | Aggregate Fair Value Asset | | Aggregate Fair Value Liability |
$ | 362,545 | | | $ | 5,353 | | | $ | (2,876) | | | $ | 362,832 | | | $ | 8,264 | | | $ | (897) | |
The following table presents the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | Amount of (loss) gain, net, recognized in Comprehensive Income |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Derivatives in cash flow hedging relationships | | | | | | | | |
Interest rate caps | | $ | (1,006) | | | $ | 1,624 | | | | | |
Interest rate swaps | | (4,889) | | | 2,643 | | | | | |
Total | | $ | (5,895) | | | $ | 4,267 | | | | | |
The following table presents the reclassifications of our derivative instruments out of accumulated other comprehensive income into interest expense in the condensed consolidated financial statements (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | Amount reclassified out of Accumulated Other Comprehensive Income |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Interest rate caps | | $ | 263 | | | $ | — | | | | | |
Total | | $ | 263 | | | $ | — | | | | | |
The following table sets forth certain information regarding our derivative instruments (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Asset (Liability) Derivatives Fair Value at |
Derivatives Designated as Hedging Instruments | | Balance Sheet Location | | March 31, 2023 | | December 31, 2022 |
Interest rate caps | | Other assets | | $ | 3,264 | | | $ | 4,629 | |
Interest rate swaps | | Other assets | | 5,353 | | | 8,264 | |
Interest rate swaps | | Other liabilities | | (2,876) | | | (897) | |
Total derivative liabilities, net | | | | $ | 5,741 | | | $ | 11,996 | |
The fair value of all mortgage notes payable outstanding as of March 31, 2023 was $329.6 million, as compared to the carrying value stated above of $354.6 million. The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”
Credit Facility
On August 18, 2022, we amended, extended and upsized our Credit Facility, increasing our Revolver from $100.0 million to $120.0 million (and its term to August 2026), adding the new $140.0 million Term Loan C, decreasing the principal balance of Term Loan B to $60.0 million and extending the maturity date of Term Loan A to August 2027. Term Loan C has a maturity date of February 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. On September 27, 2022 we further increased the Revolver to $125.0 million and Term Loan C to $150.0 million, as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates from 3.15% to 3.75%. We incurred fees of approximately $4.2 million in connection with extending and upsizing
our Credit Facility. As of March 31, 2023, there was $150.0 million outstanding under Term Loan C, and we used all net proceeds to repay all outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility’s current bank syndicate is comprised of KeyBank, Fifth Third Bank, The Huntington National Bank, Bank of America, Synovus Bank, United Bank, First Financial Bank, and S&T Bank.
As of March 31, 2023, there was $396.3 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 6.32%, and $14.4 million outstanding under letters of credit, at a weighted average interest rate of 1.50%. As of March 31, 2023, the maximum additional amount we could draw under the Credit Facility was $77.5 million. We were in compliance with all covenants under the Credit Facility as of March 31, 2023.
The amount outstanding under the Credit Facility approximates fair value as of March 31, 2023.
7. Commitments and Contingencies
Ground Leases
We are obligated as lessee under four ground leases. Future minimum rental payments due under the terms of these leases for the nine months ending December 31, 2023 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):
| | | | | | | | |
Year | | Future Lease Payments Due Under Operating Leases |
Nine Months Ending December 31, 2023 | | $ | 369 | |
2024 | | 493 | |
2025 | | 494 | |
2026 | | 498 | |
2027 | | 506 | |
2028 | | 510 | |
Thereafter | | 5,790 | |
Total anticipated lease payments | | $ | 8,660 | |
Less: amount representing interest | | (3,405) | |
Present value of lease payments | | $ | 5,255 | |
Rental expense incurred for properties with ground lease obligations during the three months ended March 31, 2023 and 2022 was $0.1 million and $0.1 million, respectively. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the condensed consolidated statements of operations and comprehensive income. Our ground leases have a weighted average remaining lease term of 18.3 years and a weighted average discount rate of 5.33%.
Letters of Credit
As of March 31, 2023, there was $14.4 million outstanding under letters of credit. These letters of credit are not reflected on our condensed consolidated balance sheets.
8. Equity and Mezzanine Equity
Stockholders’ Equity
The following table summarizes the changes in our equity for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | |
| 2023 | 2022 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Senior Common Stock | | | | | |
Balance, beginning of period | $ | 1 | | $ | 1 | | | | |
Issuance of senior common stock, net | — | | — | | | | |
| | | | | | | | | | | |
Balance, end of period | $ | 1 | | $ | 1 | | | | |
Common Stock | | | | | |
Balance, beginning of period | $ | 39 | | $ | 37 | | | | |
Issuance of common stock, net | 1 | | 1 | | | | |
Balance, end of period | $ | 40 | | $ | 38 | | | | |
Series F Preferred Stock | | | | | |
Balance, beginning of period | $ | 1 | | $ | — | | | | |
Issuance of Series F preferred stock, net | — | | — | | | | |
Redemption of Series F preferred stock, net | — | | — | | | | |
Balance, end of period | $ | 1 | | $ | — | | | | |
Additional Paid in Capital | | | | | |
Balance, beginning of period | $ | 721,327 | | $ | 671,134 | | | | |
Issuance of common stock and Series F preferred stock, net | 4,385 | | 21,749 | | | | |
| | | | | |
Redemption of Series F preferred stock, net | 86 | | 55 | | | | |
Retirement of senior common stock, net | 52 | | — | | | | |
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership | 24 | | (143) | | | | |
Balance, end of period | $ | 725,874 | | $ | 692,795 | | | | |
Accumulated Other Comprehensive Income | | | | | |
Balance, beginning of period | $ | 11,640 | | $ | (1,346) | | | | |
Comprehensive (loss) income | (5,895) | | 4,267 | | | | |
Reclassification into interest expense | 263 | | — | | | | |
Balance, end of period | $ | 6,008 | | $ | 2,921 | | | | |
Distributions in Excess of Accumulated Earnings | | | | | |
Balance, beginning of period | $ | (530,228) | | $ | (468,523) | | | | |
Distributions declared to common, senior common, and preferred stockholders | (15,108) | | (17,354) | | | | |
| | | | | |
Redemption of Series F preferred stock, net | (5) | | (5) | | | | |
Net income attributable to the Company | 2,404 | | 3,389 | | | | |
Balance, end of period | $ | (542,937) | | $ | (482,493) | | | | |
Total Stockholders' Equity | | | | | |
Balance, beginning of period | $ | 202,780 | | $ | 201,303 | | | | |
Issuance of common stock and Series F preferred stock, net | 4,386 | | 21,750 | | | | |
| | | | | |
| | | | | |
Redemption of Series F preferred stock, net | 81 | | 50 | | | | |
Retirement of senior common stock, net | 52 | | — | | | | |
Distributions declared to common, senior common, and preferred stockholders | (15,108) | | (17,354) | | | | |
Comprehensive (loss) income | (5,895) | | 4,267 | | | | |
Reclassification into interest expense | 263 | | — | | | | |
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership | 24 | | (143) | | | | |
Net income attributable to the Company | 2,404 | | 3,389 | | | | |
Balance, end of period | $ | 188,987 | | $ | 213,262 | | | | |
Non-Controlling Interest | | | | | |
Balance, beginning of period | $ | 1,790 | | $ | 1,259 | | | | |
Distributions declared to Non-controlling OP Unit holders | (118) | | (96) | | | | |
| | | | | |
| | | | | |
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership | (24) | | |