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

6 Months Ended

Jun. 30, 2019

Real Estate

The following table sets forth the components of our investments in real estate as of June 30, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):



	June 30, 2019			December 31, 2018
Real estate:
Land	$	128,965		$	125,905
Building and improvements	794,053			755,584
Tenant improvements	66,018			65,160
Accumulated depreciation	(194,202		)	(178,257		)
Real estate, net	$	794,834		$	768,392

Real estate depreciation expense on building and tenant improvements was $8.1 million and $16.1 million for the three and six months ended June 30, 2019, respectively, and $7.5 million and $14.8 million for the three and six months ended June 30, 2018, respectively.

Acquisitions

We acquired six properties during the six months ended June 30, 2019, and one property during the six months ended June 30, 2018. The acquisitions are summarized below (dollars in thousands):



Six Months Ended		Aggregate Square Footage	Weighted Average Lease Term	Aggregate Purchase Price		Acquisition Expenses			Aggregate Annualized GAAP Rent		Aggregate Debt Issued or Assumed
June 30, 2019	(1)	1,174,311	13.7 Years	$	46,557	$	452	(3)	$	3,819	$	8,900
June 30, 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. On April 5, 2019, we acquired a 207,000 square foot property in Ocala, Florida, for $11.9 million. The annualized GAAP rent on the 20.1 year lease is $0.8 million. On April 5, 2019, we acquired a 176,000 square foot property in Ocala, Florida, for $7.3 million. The annualized GAAP rent on the 20.1 year lease is $0.7 million. On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio, for $3.2 million. The annualized GAAP rent on the 7.0 year lease is $0.2 million. On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $17.9 million. The annualized GAAP rent on the 8.5 year lease is $1.6 million. We issued $8.9 million of mortgage debt with a fixed interest rate of 4.35% in connection with this acquisition.


(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 six months ended June 30, 2019 and 2018 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.5 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 six months ended June 30, 2019 and 2018 as follows (dollars in thousands):



	Six months ended June 30, 2019			Six months ended June 30, 2018
Acquired assets and liabilities	Purchase price			Purchase price
Land	$	3,047		$	459
Building	34,670			11,609
Tenant Improvements	858			615
In-place Leases	3,177			509
Leasing Costs	2,982			534
Customer Relationships	1,491			566
Above Market Leases	1,865			49
Below Market Leases	(1,533		)	—
Total Purchase Price	$	46,557		$	14,341

Significant Real Estate Activity on Existing Assets

During the six months ended June 30, 2019 and 2018, we executed five leases and one new lease, respectively, which are summarized below (dollars in thousands):



Six Months Ended	Aggregate Square Footage	Weighted Average Remaining Lease Term	Aggregate Annualized GAAP Rent		Aggregate Tenant Improvement		Aggregate Leasing Commissions
June 30, 2019	230,264	8.8 years	$	3,366	$	727	$	470
June 30, 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 six 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
Six Months Ending 2019	$	53,530
2020	101,453
2021	94,333
2022	87,744
2023	79,827
2024	70,653
Thereafter	254,743
	$	742,283

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 June 30, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):



	June 30, 2019						December 31, 2018
	Lease Intangibles			Accumulated Amortization			Lease Intangibles			Accumulated Amortization
In-place leases	$	87,071		$	(44,375	)	$	83,894		$	(40,445	)
Leasing costs	63,563			(30,817		)	59,671			(28,092		)
Customer relationships	61,946			(26,314		)	60,455			(24,035		)
	$	212,580		$	(101,506	)	$	204,020		$	(92,572	)

	Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion			Deferred Rent Receivable/(Liability)			Accumulated (Amortization)/Accretion
Above market leases	$	16,417		$	(9,442	)	$	14,551		$	(8,981	)
Below market leases and deferred revenue	(32,985		)	13,673			(29,807		)	12,502
	$	(16,568	)	$	4,231		$	(15,256	)	$	3,521

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.5 million and $9.5 million for the three and six months ended June 30, 2019, respectively, and $4.3 million and $8.6 million for the three and six months ended June 30, 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 $0.2 million and $0.5 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 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 $1.2 million for the three and six months ended June 30, 2019, respectively, and $0.5 million and $1.0 million for the three and six months ended June 30, 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 six months ended June 30, 2019 and 2018 were as follows:



Intangible Assets & Liabilities	2019	2018
In-place leases	15.5	9.8
Leasing costs	15.5	9.8
Customer relationships	20.5	14.8
Above market leases	9.3	9.8
Below market leases	7.8	0.0
All intangible assets & liabilities	17.0	11.1