Gladstone Commercial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate Dispositions, Held for Sale, and Impairment Charges

Real Estate Dispositions, Held for Sale, and Impairment Charges

12 Months Ended

Dec. 31, 2016

Real Estate Dispositions, Held for Sale, and Impairment Charges

Real Estate Dispositions

During the year ended December 31, 2016, we continued to execute our capital recycling program, whereby we opportunistically sold properties outside of our core markets and redeployed proceeds to fund property acquisitions in our target secondary growth markets. During the year ended December 31, 2016, we sold six non-core properties located in Dayton, Ohio, Rock Falls, Illinois, Angola, Indiana (2 properties), Montgomery, Alabama, and Toledo, Ohio, which are summarized below (dollars in thousands):



Aggregate Square Footage Sold	Aggregate Sales Price		Aggregate Sales Costs		Aggregate Impairment Charge for the Year Ended December 31, 2016		Aggregate Gain on Real Estate, net
266,814	$	7,106	$	433	$	230	$	242

Our 2016 dispositions were not classified as discontinued operations because they do not represent a strategic shift in operations, nor will they have a major effect on our operations and financial results. Accordingly, the 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 years ended December 31, 2016, 2015, and 2014, respectively (dollars in thousands):



	For the year ended December 31,
	2016		2015			2014
Operating revenue	$	647	$	1,045		$	1,272
Operating expense	469		1,071			564
Other income (expense)	47		(353		)	(406		)
Income (loss) from real estate and related assets sold	$	225	$	(379	)	$	302

Real Estate Held for Sale

During the year ended December 31, 2016, we had 10 properties classified as held for sale at any point throughout the year. We considered all assets classified as held for sale at any point during the year ended December 31, 2016 to be non-core to our long term strategy. Of the 10 properties classified as held for sale at any point during the year ended December 31, 2016, we sold 6 of these properties during the year ended December 31, 2016, and 2 of these properties were classified as held for sale as of December 31, 2016, and the assets and liabilities of these properties are presented separately in our consolidated balance sheet. Two of these properties no longer met the held for sale criteria as of December 31, 2016, and as a result, both of these properties are classified as held and used as of December 31, 2016. These properties were available for sale at fair market value, but we were unable to identify a buyer and consummate a sale. As both of these properties are fully occupied and performing assets, we elected to cease marketing these properties for sale, and thus both properties are classified as held and used as of December 31, 2016. Upon meeting the held and used criteria, we recorded both properties at the lesser of fair value, or carrying value less depreciation recapture.

Our assets classified as held for sale at any point during December 31, 2016 were not classified as discontinued operations because they do not represent a strategic shift in our operations, nor will they have a major effect on our operations and financial results.

The table below summarizes the components of income from real estate and related assets held for sale (dollars in thousands):



	For the year ended December 31,
	2016			2015			2014
Operating revenue	$	1,214		$	1,227		$	1,205
Operating expense	974			348			327
Other expense	(397		)	(547		)	(555		)
(Loss) income from real estate and related assets held for sale	$	(157	)	$	332		$	323

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



	December 31, 2016		December 31, 2015
ASSETS HELD FOR SALE
Real estate, at cost	$	11,454	$	1,899
Less: accumulated depreciation	2,668		846
Total real estate held for sale, net	8,786		1,053
Lease intangibles, net	200		—
Deferred rent receivable, net	575		—
Other assets	1		24
TOTAL ASSETS HELD FOR SALE	$	9,562	$	1,077
LIABILITIES HELD FOR SALE
Deferred rent liability, net	$	755	$	—
Asset retirement obligation	286		75
Accounts payable and accrued expenses	—		1
Other liabilities	—		792
TOTAL LIABILITIES HELD FOR SALE	$	1,041	$	868

Impairment Charges

We performed an evaluation and analysis of our entire portfolio to determine if any of our held and used assets were impaired during the year ended December 31, 2016, and we had determined that none of our held and used assets were impaired. 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 flows of our properties over the period in which we plan to hold our properties.

As part of our held for sale process, we perform an analysis of all properties classified as held for sale at any point during December 31, 2016, and compare the fair market value of the asset less selling costs against the carrying value of assets available for sale. As a result of this analysis, we recorded impairment charges of $2.0 million on seven properties classified as held for sale during any point of the year ended December 31, 2016. Five of the seven impaired properties were sold during the year ended December 31, 2016. As of December 31, 2016, one of the impaired properties is classified as held for sale on the consolidated balance sheet, and one of the properties is classified as held and used. We have recorded the held and used asset at fair market value, as the fair market value was less than the carrying value of assets available for sale.

We recognized $0.6 million of impairment charges on one property during the year ended December 31, 2015. This property was classified as held for sale during the year ended December 31, 2015, and through our held for sale analysis, we concluded that the fair market value less selling costs was below the carrying value of this property. This property was sold in May 2016.

We recognized $14.2 million of impairment charges on one property during the year ended December 31, 2014. As part of the evaluation and analysis on our portfolio during the year ended December 31, 2014, we had shortened our hold period on this property and determined the undiscounted cash flows on this property were below the carrying value, resulting in impairment. This property was conveyed to the lender in a deed in lieu transaction in November 2014.

The fair values for the above properties were 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, auction house price ranges or real estate broker guidance.