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, 2022

Real Estate

The following table sets forth the components of our investments in real estate as of September 30, 2022 and December 31, 2021, respectively, excluding real estate held for sale as of September 30, 2022 (dollars in thousands):


	September 30, 2022		December 31, 2021
Real estate:
Land (1)	$	147,706	$	149,773
Building and improvements	1,064,363		1,004,362
Tenant improvements	67,386		71,123
Accumulated depreciation	(284,802)		(266,672)
Real estate, net	$	994,653	$	958,586

(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 $11.0 million and $31.1 million for the three and nine months ended September 30, 2022, respectively. 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.

Acquisitions

We acquired 11 industrial properties during the nine months ended September 30, 2022, and eight industrial properties during the nine months ended September 30, 2021. 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, 2022	(1)	1,105,006	13.8 years	$	98,276	$	776
September 30, 2021	(2)	367,716	15.5 years	$	46,225	$	370

(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. On May 4, 2022, we acquired a two-property, 260,719 square foot portfolio in Cleveland, Ohio and Fort Payne, Alabama for $19.5 million. The properties are fully leased to one tenant and had 11.4 years of remaining lease term at the time we acquired the properties. On May 12, 2022, we acquired a three-property, 345,584 square foot portfolio in Wilmington, North Carolina for $18.9 million. The properties are fully leased to one tenant and had 13.1 years of remaining lease term at the time we acquired the properties. On August 5, 2022, we acquired a two-property, 246,000 square foot portfolio in Bridgeton, New Jersey and Vineland, New Jersey for $32.7 million. The properties are fully leased to one tenant and had 15.1 years of remaining lease term at the time we acquired the properties. On September 16, 2022, we acquired a 67,328 square foot property in Jacksonville, Florida for $8.1 million. The property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. On September 20, 2022, we acquired a 49,375 square foot property in Fort Payne, Alabama for $5.6 million. The property is fully leased to one tenant and had 14.8 years of remaining lease term at the time we acquired the property.

(2)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 and had 14.2 years of remaining lease term at the 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 and had 12.6 years of remaining lease term at the 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.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2022 and 2021, respectively, as follows (dollars in thousands):


	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Acquired assets and liabilities	Purchase price			Purchase price
Land	$	5,949		$	4,116
Building	77,903			33,113
Tenant Improvements	1,468			860
In-place Leases	4,907			3,336
Leasing Costs	5,387			3,198
Customer Relationships	2,937			1,458
Above Market Leases	328		(1)	410		(1)
Below Market Leases	(603)		(2)	(266)


Total Purchase Price	$	98,276		$	46,225

(1)This amount includes $9 and $46 of loans receivable included in Other assets on the condensed consolidated balance sheets, respectively.

(2)This amount includes $32 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, 2022 and each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of September 30, 2022 (dollars in thousands):


Year	Tenant Lease Payments
Three Months Ending 2022	$	30,721
2023	115,501
2024	110,495
2025	106,966
2026	99,570
2027	82,711
Thereafter	343,771

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 and nine months ended September 30, 2022 and 2021, respectively (dollars in thousands):


	For the three months ended September 30,
	(Dollars in Thousands)
Lease revenue reconciliation	2022		2021		$ Change		% Change
Fixed lease payments	$	35,752	$	30,230	$	5,522	18.3	%
Variable lease payments	4,082		4,104		(22)		(0.5)	%
	$	39,834	$	34,334	$	5,500	16.0	%


	For the nine months ended September 30,
	(Dollars in Thousands)
Lease revenue reconciliation	2022		2021		$ Change		% Change
Fixed lease payments	$	98,961	$	90,331	$	8,630	9.6	%
Variable lease payments	12,803		12,050		753		6.2	%
	$	111,764	$	102,381	$	9,383	9.2	%

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, 2022 and December 31, 2021, respectively, excluding real estate held for sale as of September 30, 2022 (dollars in thousands):


	September 30, 2022				December 31, 2021
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	105,827	$	(63,850)	$	105,891	$	(62,604)
Leasing costs	84,802		(45,430)		81,487		(43,982)
Customer relationships	71,090		(39,446)		71,922		(38,220)
	$	261,719	$	(148,726)	$	259,300	$	(144,806)

	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	15,371	$	(11,707)	$	15,538	$	(11,520)
Below market leases and deferred revenue	(64,907)		24,206		(48,241)		21,471

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.7 million and $14.5 million for the three and nine months ended September 30, 2022, respectively, and $5.0 million and $15.7 million for the three and nine months ended September 30, 2021, 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 $0.6 million for the three and nine months ended September 30, 2022, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, 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 $1.5 million and $3.1 million for the three and nine months ended September 30, 2022, respectively, and $0.9 million and $3.3 million for the three and nine months ended September 30, 2021, 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, 2022 and 2021, respectively, were as follows:


Intangible Assets & Liabilities	2022	2021
In-place leases	14.2	15.0
Leasing costs	14.2	15.0
Customer relationships	20.2	21.2
Above market leases	15.7	14.0
Below market leases	13.0	17.4
All intangible assets & liabilities	15.7	16.5