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

3 Months Ended

Mar. 31, 2019

Real Estate

The following table sets forth the components of our investments in real estate as of March 31, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):



	March 31, 2019			December 31, 2018
Real estate:
Land	$	126,698		$	125,905
Building and improvements	762,026			755,584
Tenant improvements	65,254			65,160
Accumulated depreciation	(186,107		)	(178,257		)
Real estate, net	$	767,871		$	768,392

Real estate depreciation expense on building and tenant improvements was $8.0 million and $7.3 million for the three months ended March 31, 2019 and 2018, respectively.

Acquisitions

We acquired two properties during the three months ended March 31, 2019, and one property during the three months ended March 31, 2018. The acquisitions are summarized below (dollars in thousands):



Three Months Ended		Square Footage	Lease Term	Purchase Price		Acquisition Expenses			Annualized GAAP Rent
March 31, 2019	(1)	60,850	12.2 Years	$	6,315	$	130	(3)	$	516
March 31, 2018	(2)	127,444	9.8 Years	14,341		91		(3)	1,087


(1)	On February 8, 2019, we acquired a 26,050 square foot property in a suburb of Philadelphia, Pennsylvania, for $2.7 million. The annualized GAAP rent on the 15.1 year lease is $0.2 million. On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $3.6 million. The annualized GAAP rent on the 10.0 year lease is $0.3 million.


(2)	On March 9, 2018, we acquired a 127,444 square foot property in Vance, Alabama for $14.3 million. The annualized GAAP rent on the 9.8 year lease is $1.1 million.

(3)

We accounted for these transactions under ASU 2017-01, “Clarifying the Definition of a Business.” As a result, we treated our acquisitions during the three months ended March 31, 2019 and 2018 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.1 million and $0.1 million, respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the three months ended March 31, 2019 and 2018 as follows (dollars in thousands):



	Three months ended March 31, 2019		Three months ended March 31, 2018
Acquired assets and liabilities	Purchase price		Purchase price
Land	$	723	$	459
Building	4,541		11,609
Tenant Improvements	93		615
In-place Leases	432		509
Leasing Costs	307		534
Customer Relationships	196		566
Above Market Leases	23		49
Total Purchase Price	$	6,315	$	14,341

Significant Real Estate Activity on Existing Assets

During the three months ended March 31, 2019 and 2018, we executed two and one new leases, respectively, which are summarized below (dollars in thousands):



Three Months Ended	Aggregate Square Footage	Weighted Average Remaining Lease Term	Aggregate Annualized GAAP Rent		Aggregate Leasing Commissions
March 31, 2019	130,240	6.2 years	$	1,187	$	71
March 31, 2018	34,441	3.6 years	97		14

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the nine months ending December 31, 2019 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):



Year	Tenant Lease Payments
Nine Months Ending 2019	$	77,289
2020	97,758
2021	90,374
2022	83,723
2023	75,744
2024	66,554
Thereafter	217,638
	$	709,080

We account for all of our real estate leasing arrangements as operating leases. A majority of our leases are subject to fixed rental increases, but a small subset of our lease portfolio has variable lease payments that are driven by the consumer price index. Many of our tenants have renewal options in their respective leases, but we seldom include option periods in the determination of lease term as we generally will not enter into leasing arrangements with bargain renewal options. A small number of tenants have termination options.

Future minimum lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and excluding real estate held for sale as of December 31, 2018, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):



Year	Tenant Lease Payments
2019	$	103,322
2020	97,302
2021	89,057
2022	82,336
2023	74,337
Thereafter	279,424
	$	725,778

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay operating expenses on the respective properties in the event the tenants fail to pay them.

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 March 31, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):



	March 31, 2019						December 31, 2018
	Lease Intangibles			Accumulated Amortization			Lease Intangibles			Accumulated Amortization
In-place leases	$	84,326		$	(42,388	)	$	83,894		$	(40,445	)
Leasing costs	60,049			(29,436		)	59,671			(28,092		)
Customer relationships	60,650			(25,154		)	60,455			(24,035		)
	$	205,025		$	(96,978	)	$	204,020		$	(92,572	)

	Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion			Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion
Above market leases	$	14,575		$	(9,208	)	$	14,551		$	(8,981	)
Below market leases and deferred revenue	(30,822		)	13,051			(29,807		)	12,502
	$	(16,247	)	$	3,843		$	(15,256	)	$	3,521

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $5.0 million and $4.2 million for the three months ended March 31, 2019 and 2018, 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 $0.3 million and $0.2 million for the three months ended March 31, 2019 and 2018, 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 $0.6 million and $0.5 million for the three months ended March 31, 2019 and 2018, 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 during the three months ended March 31, 2019 and 2018 were as follows:



Intangible Assets & Liabilities	2019	2018
In-place leases	13.0	9.8
Leasing costs	13.0	9.8
Customer relationships	17.9	14.8
Above market leases	10.0	9.8
All intangible assets & liabilities	14.5	11.1