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

Annual report pursuant to Section 13 and 15(d)

Real Estate and Intangible Assets (Tables)

Real Estate and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2015

Components of Investments in Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2015 and December 31, 2014 (dollars in thousands):


	December 31, 2015⁽¹⁾			December 31, 2014
Real estate:
Land	$	97,117		$	88,394
Building and improvements		635,728			593,155
Tenant improvements		47,532			41,016
Accumulated depreciation		(112,243	)		(92,133	)

Real estate, net	$	668,134		$	630,432

⁽¹⁾	Does not include real estate held for sale as of December 31, 2015.

Summary of Properties Acquired

2015 Real Estate Activity

During the year ended December 31, 2015, we acquired six properties, which are summarized below (dollars in thousands):


Location	Acquisition Date		Square Footage (unaudited)		Lease Term			Renewal Options		Total Purchase Price		Acquisition Expenses		Annualized GAAP Rent		Debt Issued
Richardson, TX ⁽¹⁾		3/6/2015		155,984		9.5 Years			2 (5 years each)	$	24,700	$	112	$	2,708	$	14,573
Birmingham, AL		3/20/2015		30,850		8.5 Years			1 (5 years)		3,648		76		333		N/A
Columbus, OH		5/28/2015		78,033		15.0 Years			2 (5 years each)		7,700		72		637		4,466
Salt Lake City, UT ⁽¹⁾		5/29/2015		86,409		6.5 Years			1 (5 years)		22,200		152		2,411		13,000
Atlanta, GA ⁽²⁾		7/15/2015		78,151		Multiple	⁽²⁾		2 (5 years)		13,000		109		1,291		7,540
Villa Rica, GA		10/20/2015		90,626		18 Years			2 (5 years)		6,550		65		604		3,800

Total				520,053						$	77,798	$	586	$	7,984	$	43,379

⁽¹⁾	The tenant occupying this property is subject to a gross lease.

⁽²⁾	This building is 100% leased to one tenant through two leases. 30% of this space is leased for 15 years, while the remaining space is leased for 7 years.

2014 Real Estate Activity

During the year ended December 31, 2014, we completed 10 acquisitions of 11 properties and completed an expansion of one property, which is summarized in the table below (dollars in thousands):


Location	Acquisition Date		Square Footage (unaudited)		Lease Term			Renewal Options		Total Purchase Price/Expansion Funded		Acquisition Expenses		Annualized Straight Line Rent			Debt Issued & Assumed
Allen, TX		3/27/2014		21,154		12 Years			4 (5 years each)	$	5,525	$	33	$	570		$	3,481
Colleyville, TX		3/27/2014		20,355		12 Years			4 (5 years each)		4,523		33		467			2,849
Rancho Cordova, CA ⁽⁴⁾		4/22/2014		61,358		10 Years			1 (5 year)		8,225		73		902			4,935
Coppell, TX		5/8/2014		21,171		12 Years			4 (5 years each)		5,838		26		601			3,816
Columbus, OH		5/13/2014		114,786		9.5 Years	⁽¹⁾		N/A ⁽¹⁾		11,800		70		1,278	⁽³⁾		N/A
Taylor, PA		6/9/2014		955,935		10 Years			4 (5 years each)		39,000		730		3,400			22,600
Aurora, CO		7/1/2014		124,800		15 Years			2 (5 years each)		8,300		93		768			N/A
Indianapolis, IN ⁽⁴⁾		9/3/2014		86,495		11.5 Years	⁽²⁾		2 (5 years each) ⁽²⁾		10,500		63		1,504	⁽³⁾		6,100
Denver, CO		10/31/2014		189,120		10 Years			2 (10 years each)		10,000		103		860			N/A
Canton, NC ⁽⁵⁾		11/1/2014		365,960		20 Years			2 (10 years each)		5,550		N/A		1,343			N/A
Monroe, MI ⁽⁶⁾		12/23/2014		535,500		8.5 Years			2 (5 years each)		30,750		68		2,523			18,450

Total				2,496,634						$	140,011	$	1,292	$	14,216		$	62,231

⁽¹⁾	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in November 2016 and contains no renewal options.

⁽²⁾	Lease term and renewal options are reflective of the largest tenant. The other tenants in the building have varying lease expirations from December 2015 to October 2018. No other tenants have renewal options.

⁽³⁾	Rent figure is reflective of aggregate rent among all tenants occupying the building.

⁽⁴⁾	Tenants occupying these properties are subject to a gross lease. The largest tenant in this property occupies 61,306 square feet.

⁽⁵⁾	The Canton, NC property was originally acquired in July 2004 for $5.2 million. After the expansion was completed in November 2014, our total investment in the property is $10.8 million.

⁽⁶⁾	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

Fair Value of Acquired Assets and Liabilities Assumed

In accordance with Accounting Standards Codification, or ASC, 805, “Business Combinations,” we determined the fair value of the acquired assets and liabilities related to the six properties acquired during the year ended December 31, 2015, as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Total Purchase Price
Richardson, TX	$	2,728	$	12,591	$	2,781	$	2,060	$	1,804	$	1,929	$	807	$	—		$	24,700
Birmingham, AL		650		1,683		351		458		146		360		—		—			3,648
Columbus, OH		1,338		3,511		1,547		1,144		672		567		—		(1,079	)		7,700
Salt Lake City, UT		3,248		11,861		1,268		2,396		981		1,678		821		(53	)		22,200
Atlanta, GA		2,271		7,862		916		750		548		723		44		(114	)		13,000
Villa Rica, GA		293		5,144		133		602		187		151		40		—			6,550

	$	10,528	$	42,652	$	6,996	$	7,410	$	4,338	$	5,408	$	1,712	$	(1,246	)	$	77,798

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the 11 properties acquired during the year ended December 31, 2014 as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Premium on Assumed Debt			Total Purchase Price
Allen, TX	$	874	$	3,509	$	125	$	598	$	273	$	218	$	—	$	—		$	(72	)	$	5,525
Colleyville, TX		1,277		2,307		117		486		220		181		—		(6	)		(59	)		4,523
Rancho Cordova, CA		752		5,898		278		473		546		278		—		—			—			8,225
Coppell, TX		1,448		3,221		128		636		293		230		—		—			(118	)		5,838
Columbus, OH		990		6,080		1,937		823		719		990		261		—			—			11,800
Taylor, PA		3,102		24,449		956		6,171		1,452		2,870		—		—			—			39,000
Aurora, CO		2,882		3,825		92		413		806		282		—		—			—			8,300
Indianapolis, IN		502		5,334		1,088		1,990		741		732		126		(13	)		—			10,500
Denver, CO		1,621		6,503		568		1,152		721		652		—		(1,217	)		—			10,000
Monroe, MI⁽¹⁾		1,118		23,890		942		1,497		1,350		1,953		—		—			—			30,750

	$	14,566	$	85,016	$	6,231	$	14,239	$	7,121	$	8,386	$	387	$	(1,236	)	$	(249	)	$	134,461

⁽¹⁾	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

Schedule of Revenue and Earnings Recognized on Properties Acquired

Below is a summary of the total revenue and earnings recognized on the six properties acquired during the year ended December 31, 2015 (dollars in thousands):


			For the year ended December 31,
			2015
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾
Richardson, TX		3/6/2015	$	2,152	$	590
Birmingham, AL		3/20/2015		260		105
Columbus, OH		5/28/2015		421		181
Salt Lake City, UT		5/29/2015		1,368		344
Atlanta, GA		7/15/2015		598		345
Villa Rica, GA		10/20/2015		120		70

			$	4,919	$	1,635

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Below is a summary of the total revenue and earnings recognized on the 11 properties acquired during the year ended December 31, 2014 (dollars in thousands):


			For the year ended December 31,
			Jul-05
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾
Allen, TX		3/27/2014	$	435	$	249
Colleyville, TX		3/27/2014		357		206
Rancho Cordova, CA		4/22/2014		625		239
Coppell, TX		5/8/2014		390		226
Columbus, OH⁽²⁾		5/13/2014		790		272
Taylor, PA		6/9/2014		1,908		890
Aurora, CO		7/1/2014		384		253
Indianapolis, IN⁽²⁾		9/3/2014		489		44
Denver, CO		10/31/2014		166		82
Monroe, MI⁽³⁾		12/23/2014		61		31

			$	5,605	$	2,492

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

⁽²⁾	Rental revenue and earnings is reflective of aggregated rent and operating expenses among all tenants occupying the building.

⁽³⁾	We acquired two properties and two leases with this acquisition. Rental revenue and earnings is reflective of aggregate rent and operating expenses among both properties.

Pro-Forma Condensed Consolidated Statements of Operations

The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the years ended December 31, 2015, and 2014, respectively, were acquired as of January 1, 2014. The table also assumes that properties acquired during the years ended December 31, 2014 and 2013, respectively, were acquired January 1, 2013. The pro-forma earnings for the years ended December 31, 2015, 2014 and 2013 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the earliest period presented (dollars in thousands, except per share amounts):


	For the year ended December 31, (unaudited)
	2015			2014			2013
Operating Data:
Total operating revenue	$	86,321		$	87,439		$	80,081
Total operating expenses		(51,725	)		(66,052	)		(46,223	)
Other expenses		(29,926	)		(26,014	)		(32,929	)

Net income (loss)		4,670	⁽¹⁾		(4,627	)⁽²⁾		929
Dividends attributable to preferred and senior common stock		(5,101	)		(4,636	)		(4,394	)

Net loss attributable to common stockholders	$	(431	)	$	(9,263	)	$	(3,465	)

Share and Per Share Data:
Basic and diluted loss per share of common stock—pro forma	$	(0.02	)	$	(0.54	)	$	(0.26	)
Basic and diluted loss per share of common stock—actual	$	(0.07	)	$	(0.61	)	$	(0.22	)
Weighted average shares outstanding-basic and diluted		21,159,597			17,253,503			13,164,244

(1)	We recognized a $0.6 million impairment loss on our Dayton, Ohio property during the year ended December 31, 2015.

(2)	We recognized a $14.2 million impairment loss and a $5.3 million gain on debt extinguishment as a result of our Roseville, Minnesota deed-in-lieu transaction during the year ended December 31, 2014.

Future Operating Lease Payments from Tenants under Non-Cancelable Leases

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


Year	Tenant Lease Payments (1)
2016	$	78,908
2017		79,913
2018		79,638
2019		79,494
2020		72,333
Thereafter		306,741

(1)	Does not include real estate held for sale as of December 31, 2015.

Carrying Value of Intangible Assets and Accumulated Amortization

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of December 31, 2015 and 2014 respectively (in thousands):


	December 31, 2015 ⁽¹⁾					December 31, 2014
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	66,244	$	(22,679	)	$	59,233	$	(17,379	)
Leasing costs		44,360		(14,774	)		38,305		(11,411	)
Customer relationships		46,485		(14,722	)		41,243		(11,177	)

	$	157,089	$	(52,175	)	$	138,781	$	(39,967	)


	Deferred Rent Receivable/(Liability)		Accumulated Amortization			Deferred Rent Receivable/(Liability)		Accumulated Amortization
Above market leases	$	10,176	$	(6,818	)	$	8,314	$	(6,384	)
Below market leases		17,951		(8,294	)		15,939		(7,345	)

	$	28,127	$	(15,112	)	$	24,253	$	(13,729	)

Total	$	185,216	$	(67,287	)	$	163,034	$	(53,696	)

⁽¹⁾	Does not include real estate held for sale as of December 31, 2015.

Weighted Average Amortization Period for Intangible Assets Acquired and Liabilities Assumed

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2015 and 2014, respectively, were as follows:


Intangible Assets & Liabilities	2015		2014
In-place leases		13.0		10.1
Leasing costs		13.0		10.1
Customer relationships		17.5		15.1
Above market leases		18.6		9.3
Below market leases		13.5		10.0

All intangible assets & liabilities		14.3		11.5

Estimated Aggregate Amortization Expense

The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs and customer relationships for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Estimated Amortization Expense of In-Place Leases, Leasing Costs and Customer Relationships
2016 ⁽¹⁾	$	17,440
2017		14,813
2018		13,410
2019		13,403
2020		11,851
Thereafter		33,997

Total	$	104,914

(1)	Does not include real estate held for sale as of December 31, 2015.

Summary of Estimated Aggregate Rental Income

The estimated aggregate rental income to be recorded for the amortization of both above and below market leases for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Net Increase to Rental Income Related to Above and Below Market Leases
2016 ⁽¹⁾	$	192
2017		414
2018		457
2019		457
2020		493
Thereafter		4,286

Total	$	6,299

(1)	Does not include real estate held for sale as of December 31, 2015.