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, 2018

Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions

During the nine months ended September 30, 2018, we continued to execute our capital recycling program, whereby we sold non-core properties 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, 2018, we sold two non-core properties, located in Arlington, Texas and Tewksbury, Massachusetts, which are summarized in the table below (dollars in thousands):



Aggregate Square Footage Sold	Aggregate Sales Price		Aggregate Sales Costs		Aggregate Gain on Sale of Real Estate, net
166,200	$	11,100	$	327	$	1,844

Our dispositions during the nine months ended September 30, 2018 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, 2018, and 2017 (dollars in thousands):



	For the three months ended September 30,					For the nine months ended September 30,
	2018		2017			2018			2017
Operating revenue	$	—	$	173		$	93		$	698
Operating expense	—		212			161			528
Other income, net	—		—			1,844		(1)	—
(Expense) income from real estate and related assets sold	$	—	$	(39	)	$	1,776		$	170


(1)	Includes a $1.8 million gain on sale of real estate, net on two properties.

Real Estate Held for Sale

At September 30, 2018, we had one property classified as held for sale, located in South Hadley, Massachusetts. We have identified a prospective buyer for this property, and have executed a purchase and sale agreement. At December 31, 2017, we had two properties classified as held for sale, located in Arlington, Texas and Tewksbury, Massachusetts. Both of these properties were sold during the nine months ended September 30, 2018.

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



	September 30, 2018		December 31, 2017
Assets Held for Sale
Real estate, at cost	$	2,287	$	12,997
Less: accumulated depreciation	857		3,970
Total real estate held for sale, net	1,430		9,027
Lease intangibles, net	6		9
Deferred rent receivable, net	—		10
Total Assets Held for Sale	$	1,436	$	9,046
Liabilities Held for Sale
Asset retirement obligation	$	297	$	114
Total Liabilities Held for Sale	$	297	$	114

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, 2018 and did not identify any held and used assets which were impaired.

We classified one property as held for sale at September 30, 2018. We performed an analysis of the property 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 did not record an impairment charge during the three and nine months ended September 30, 2018, as the fair market value was greater than the carrying value.

Fair market value for this asset was calculated using Level 3 inputs (defined in Note 6 “Mortgage Notes Payable and Credit Facility”), which were determined using a negotiated sales price from an executed purchase and sale agreement with a third party. 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 $4.0 million of impairment charges on two properties during the nine months ended September 30, 2017. These properties were impaired through our held for sale carrying value analysis, during the three and nine months ended September 30, 2017, and we concluded that the fair market value less selling costs was below the carrying value of the respective properties. We sold both of these properties during the year ended December 31, 2017.