Gladstone Commercial Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

9 Months Ended

Sep. 30, 2012

Real Estate and Intangible Assets [Abstract]

Real Estate and Intangible Assets

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, 2012 and December 31, 2011:


	September 30, 2012			December 31, 2011
Real estate:
Land	$	66,258		$	60,602
Building and improvements		409,167			367,605
Tenant improvements		19,153			14,314
Accumulated depreciation		(62,459	)		(53,784	)

Real estate, net	$	432,119		$	388,737

New Real Estate Activity

During the nine months ended September 30, 2012, we acquired six properties, which are summarized below:


Location	Acquisition Date		Square Footage		Lease Term	Renewal Options	Total Purchase Price		Acquistion Expenses		Annualized Straight Line Rent		Debt Issued / Assumed
Ashburn, VA		1/25/2012		52,130	15 years	2 (5 years each)	$	10,775	$	102	$	989		N/A
Ottumwa, IA		5/30/2012		352,860	11.5 years	3 (5 years each)		7,100		47		684		5,000
New Albany, OH		6/5/2012		89,000	10.5 years	2 (5 years each)		13,333		188		1,361		N/A
Columbus, GA		6/21/2012		32,000	11.5 years	2 (5 years each)		7,320		126		656		4,750
Columbus, OH		6/28/2012		31,293	10 years	N/A		4,037		59		342		N/A
Jupiter, FL		9/26/2012		60,000	10.5 years	2 (5 years each)		15,500		55		1,372		10,758

In accordance with ASC 805, we determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the nine months ended September 30, 2012 as follows:


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Discount on Assumed Debt			Total Purchase Price
Ashburn, VA	$	706	$	6,551	$	1,307	$	804	$	908	$	499	$	—	$	—		$	—		$	10,775
Ottumwa, IA		212		4,743		329		940		484		499		—		(107	)		—			7,100
New Albany, OH		1,658		7,511		1,235		1,122		857		903		47		—			—			13,333
Columbus, GA		1,378		3,894		626		574		473		375		—		—			—			7,320
Columbus, OH		542		1,856		597		391		213		325		113		—			—			4,037
Jupiter, FL		1,160		11,249		745		1,603		701		909		—		—			(867	)		15,500

	$	5,656	$	35,804	$	4,839	$	5,434	$	3,636	$	3,510	$	160	$	(107	)	$	(867	)	$	58,065

Below is a summary of the total revenue and net income recognized on the properties acquired during the nine months ended September 30, 2012:


		Rental Revenue				Net Income
Location	Acquisition Date	For the three months ended September 30, 2012		For the nine months ended September 30, 2012		For the three months ended September 30, 2012⁽¹⁾		For the nine months ended September 30, 2012⁽¹⁾
Ashburn, VA	1/25/2012	$	247	$	678	$	147	$	409
Ottumwa, IA	5/30/2012		173		235		85		116
New Albany, OH	6/5/2012		339		437		197		248
Columbus, GA	6/21/2012		164		182		88		98
Columbus, OH	6/28/2012		83		86		31		34
Jupiter, FL	9/26/2012		19		19		10		10

		$	1,025	$	1,637	$	558	$	915

⁽¹⁾	Does not include interest expense or acquisition related costs that are required to be expensed under ASC 805.

We acquired six properties during the nine months ended September 30, 2012. The following table reflects pro-forma condensed consolidated statements of operations as if the properties were acquired as of the beginning of the earliest periods presented, which was January 1, 2011. The pro-forma earnings for the three and nine months ended September 30, 2012, were adjusted to exclude $0.6 million of acquisition-related costs incurred in 2012 related to the six properties acquired. The pro-forma earnings for the three and nine months ended September 30, 2011, were adjusted to include these charges:


	For the three months ended September 30,						For the nine months ended September 30,
	2012			2011			2012			2011
Operating Data:
Total operating revenue	$	13,294		$	12,520		$	39,862		$	36,521
Total operating expenses		(6,161	)		(5,971	)		(18,804	)		(18,304	)
Other expense		(5,948	)		(4,735	)		(17,350	)		(14,013	)

Net income		1,185			1,814			3,708			4,204
Dividends attributable to preferred and senior common stock		(1,053	)		(1,039	)		(3,141	)		(3,117	)

Net income available to common stockholders	$	132		$	775		$	567		$	1,087

Share and Per Share Data:
Basic earnings per share of common stock	$	0.01		$	0.07		$	0.05		$	0.11
Diluted earnings per share of common stock	$	0.01		$	0.07		$	0.05		$	0.11
Weighted average shares outstanding-basic		10,945			10,936			10,945			9,998
Weighted average shares outstanding-diluted		11,039			10,988			11,023			10,050

The weighted average amortization period for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2012, were as follows:


Intangible assets & liabilities	Years
In-place leases		10.7
Leasing costs		10.7
Customer relationships		15.1
Above market leases		10.1
Below market leases		11.3

All intangible assets & liabilities		12.1

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2012 and each of the five succeeding fiscal years and thereafter is as follows:


Year	Tenant Lease Payments
Three months ending December 31, 2012	$	12,318
2013		48,041
2014		44,784
2015		40,920
2016		36,514
2017		34,232
Thereafter		217,580

In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, we would be required to pay property taxes on the respective properties in the event the tenants fail to pay them. The total annualized property taxes for all properties owned by us at September 30, 2012, were $8.2 million.

Existing Real Estate Activity

On February 14, 2012, we extended the lease with the tenant occupying our property located in San Antonio, Texas. The lease covering this property was extended for an additional seven-year period, through November 2021. The lease was originally set to expire in February 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.8 million. Furthermore, the lease grants the tenant two options to extend the lease for a period of five years each. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.6 million, payable over two years, and paid $0.3 million in leasing commissions.

On February 27, 2012, we extended the lease with the tenant occupying our property located in Roseville, Minnesota. The new lease covers approximately one-third of this property and was extended for an additional five-year period, through December 2017. The lease was originally set to expire in December 2012. The tenant in this property will pay rent on the entire building through the end of 2012, and we continue to search for new tenants to lease the remainder of the building. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $2.9 million for the remainder of 2012 and annualized straight line rents beginning in 2013 of $1.2 million. Furthermore, the lease grants the tenant one option to extend the lease for a period of five years. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.4 million, payable over two years, and paid $0.8 million in leasing commissions.

On June 25, 2012, we extended the lease with the tenant occupying our property located in Hialeah, Florida. The lease covering this property was extended for an additional five-year period, through March 2027. The lease was originally set to expire in March 2022. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.1 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.3 million.

On August 7, 2012, we extended the lease with the tenant occupying our property located in Wichita, Kansas. The lease covering this property was extended for an additional five-year period, through September 2017. The lease was originally set to expire in September 2012. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.8 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.2 million in leasing commissions.

On September 10, 2012, we extended the lease with the tenant occupying our property located in South Hadley, Massachusetts. The lease covering this property was extended for an additional one-year period, through January 2014. The lease was originally set to expire in February 2013. The lease provides for annual rents of approximately $0.3 million.

On September 11, 2012, we extended the lease with the tenant occupying our property located in Mason, Ohio. The lease covering this property was extended for almost an additional seven-year period, through June 2020. The lease was originally set to expire in January 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.6 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.5 million, and paid $0.3 million in leasing commissions.

On September 27, 2012, our tenant occupying our property located in Arlington, Texas, exercised its option to extend the lease covering this property for an additional five-year period, through March 2018. The lease was originally set to expire in April 2013. The lease provides that the option period rent be at fair market rent, but not less than the current rental rate.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class:


	September 30, 2012					December 31, 2011
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	30,052	$	(11,577	)	$	24,620	$	(10,181	)
Leasing costs		20,245		(6,676	)		15,013		(5,663	)
Customer relationships		24,236		(7,932	)		20,725		(6,844	)

	$	74,533	$	(26,185	)	$	60,358	$	(22,688	)

The estimated aggregate amortization expense for the remainder of 2012 and each of the five succeeding fiscal years and thereafter is as follows:


Year	Estimated Amortization Expense
Three months ending December 31, 2012		1,803
2013		6,015
2014		5,352
2015		4,938
2016		4,323
2017		4,144
Thereafter		21,773

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

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