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

Quarterly report pursuant to Section 13 or 15(d)

Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions, Held for Sale and Impairment Charges

9 Months Ended

Sep. 30, 2017

Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions

During the nine months ended September 30, 2017, we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to fund property acquisitions in our target secondary growth markets, as well as repay outstanding debt. During the nine months ended September 30, 2017, we sold four non-core properties located in Franklin, New Jersey, Hazelwood, Missouri, Concord Township, Ohio, and Newburyport, Massachusetts, which are summarized below (dollars in thousands):



Aggregate Square Footage Sold	Aggregate Sales Price		Aggregate Sales Costs		Aggregate Impairment Charge for the Nine Months Ended September 30, 2017		Aggregate Gain on Sale of Real Estate, net
593,763	$	30,302	$	803	$	3,999	$	3,993

Our dispositions during the nine months ended September 30, 2017 were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will they 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, 2017, and 2016 (dollars in thousands):



	For the three months ended September 30,							For the nine months ended September 30,
	2017			2016				2017			2016
Operating revenue	$	—		$	642			$	1,280	(1)	$	1,932
Operating expense	31			962			(4)	4,446		(2)	1,626			(4)
Other (expense) income, net	1			(183		)		3,831		(3)	(253		)
Income (loss) from real estate and related assets sold	$	(30	)	$	(503	)		$	665		$	53


(1)	Includes a $0.6 million lease termination revenue from canceling a lease obligation with a tenant that acquired one property from us during the nine months ended September 30, 2017. This fee is recorded as rental revenue on the condensed consolidated statement of operations and other comprehensive income (loss).


(2)	Includes a $4.0 million impairment charge.


(3)	Includes a $4.0 million net gain on sale on four properties.


(4)	Includes a $0.7 million impairment charge.

Real Estate Held for Sale

At September 30, 2017, we did not have any properties classified as held for sale. At December 31, 2016, we had two properties classified as held for sale, located in Hazelwood, Missouri and Franklin, New Jersey. Both of these properties were sold during the nine months ended September 30, 2017.

The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheet (dollars in thousands):



	September 30, 2017		December 31, 2016
Assets Held for Sale
Real estate, at cost	$	—	$	11,454
Less: accumulated depreciation	—		2,668
Total real estate held for sale, net	—		8,786
Lease intangibles, net	—		200
Deferred rent receivable, net	—		575
Other assets	—		1
Total Assets Held for Sale	$	—	$	9,562
Liabilities Held for Sale
Deferred rent liability, net	$	—	$	755
Asset retirement obligation	—		286
Total Liabilities Held for Sale	$	—	$	1,041

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, 2017 and identified two held and used assets which were impaired during first quarter 2017. We did not identify any impairment on held and used assets during the second or third quarter of 2017. For these properties, during first quarter 2017, we received unsolicited interest from potential buyers, and as a result, we included a sale scenario and shortened our hold period when comparing the undiscounted cash flows against the respective carrying values. Based upon our analysis, we concluded that the undiscounted cash flows for these properties were below their respective carrying values indicating that these assets were impaired as of March 31, 2017, and accordingly, we recorded an impairment charge of $3.7 million during the three months ended March 31, 2017. During the three months ended June 30, 2017, we sold one of these impaired properties to the tenant for a further loss on sale of $1.8 million. During the second quarter of 2017, we became aware of a decline in the tenant's financial results. The tenant expressed interest in acquiring our property as part of their corporate reorganization. Due to the re-tenanting risk of the property if it were to go vacant and as the location was in a non-core market, we executed a sale with this tenant. We sold the other impaired property during the three months ended September 30, 2017, recognizing a gain on sale of $1,000.

We did not classify any properties as held for sale at September 30, 2017. During our previous two quarters where we had held for sale activity, we performed an analysis of all properties classified as held for sale, and compared the fair market value of the asset less selling costs against the carrying value of assets available for sale. We recorded an impairment charge of $0.3 million during the three months ended June 30, 2017 to reduce the carrying value equal to the sales price per the executed purchase and sale agreement, less estimated selling costs.

Fair market value for these assets was calculated using Level 3 inputs, which were determined using comparable asset sale data from the respective asset locations, as well as sales prices from an executed purchase and sale agreement. 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 we are 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.

We recognized $2.0 million of impairment charges on five properties during the nine months ended September 30, 2016. These properties were impaired through our held for sale carrying value analysis, during the three and nine months ended September 30, 2016, and we concluded that the fair market value less selling costs was below the carrying value of this property. We have sold four of these properties, and one of these properties is classified as a held and used asset during the three and nine months ended September 30, 2017.

The fair values for the above held for sale property was calculated using Level 3 inputs which were calculated using an estimated sales price, less estimated costs to sell. The estimated sales price was determined using an executed purchase and sale agreement.