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

Real Estate and Intangible Assets

12 Months Ended

Dec. 31, 2021

Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2021 and 2020, respectively, excluding real estate held for sale as of December 31, 2020 (dollars in thousands):


	December 31, 2021		December 31, 2020
Real estate:
Land (1)	$	149,773	$	142,853
Building and improvements	1,004,362		916,601
Tenant improvements	71,123		69,229
Accumulated depreciation	(266,672)		(228,468)
Real estate, net	$	958,586	$	900,215

(1)This amount includes $4,436 of land value subject to land lease agreements which we may purchase at our option for a nominal fee.

Real estate depreciation expense on building and tenant improvements was $39.6 million, $36.0 million, and $32.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Acquisitions

During the year ended December 31, 2021 and 2020 we acquired 11 and nine properties, respectively, which are summarized below (dollars in thousands):


Year Ended		Aggregate Square Footage	Weighted Average Lease Term	Aggregate Purchase Price		Aggregate Capitalized Acquisition Costs
December 31, 2021	(1)	949,174	13.4 years	$	100,453	$	798
December 31, 2020	(2)	1,717,502	12.2 years	$	129,974	$	814

(1)On January 22, 2021, we acquired a 180,152 square foot property in Findlay, Ohio for $11.1 million. The property is fully leased to one tenant and had 14.2 years of remaining lease term at the time we acquired the property. On June 17, 2021, we acquired a 25,200 square foot property in Baytown, Texas for $8.2 million. The property is fully leased to one tenant and had 12.6 years remaining lease term at the time we acquired the property. On July 21, 2021, we acquired an 80,604 square foot, four-property portfolio in Pacific, Missouri for $22.1 million. These properties are fully leased to one tenant and had 17.4 years remaining lease term at the time we acquired the portfolio. On August 20, 2021, we acquired an 81,760 square foot, two-property portfolio in Peru, Illinois for $4.8 million. These properties are fully leased to one tenant and had 15.0 years remaining lease term at the time we acquired the portfolio. On November 3, 2021, we acquired a 161,458 square foot property in Charlotte, North Carolina for $12.9 million. This property is fully leased to one tenant and had 7.9 years remaining lease term at the time we acquired the property. On December 21, 2021, we acquired a 120,000 square foot property in Atlanta, Georgia for $12.1 million. This property is fully leased to one tenant and had 15.0 years of remaining lease term at the time we acquired the property. On December 21, 2021, we acquired a 300,000 square foot property in Crossville, Tennessee for $29.2 million. This property is fully leased to one tenant and had 11.0 years remaining lease term at the time we acquired the property.

(2)On January 8, 2020, we acquired a 64,800 square foot property in Indianapolis, Indiana for $5.3 million. The property is leased to three tenants and had a weighted average lease term of 7.2 years at the time we acquired the property. On January 27, 2020, we acquired a 320,838 square foot, three-property portfolio in Houston, Texas, Charlotte, North Carolina, and St. Charles, Missouri for $34.7 million. The portfolio had a weighted average lease term of 20.0 years at the time we acquired the portfolio. On March 9, 2020, we acquired a 504,400 square foot property in Crandall, Georgia for $32.0 million. The property is fully leased to one tenant and had 10.5 years remaining lease term at the time we acquired the property. On September 1, 2020, we acquired a 153,600 square foot property in Indianapolis, Indiana, for $10.6 million. The property is fully leased to one tenant and had 9.7 years remaining lease term at the time we acquired the property. On October 14, 2020, we acquired a 240,714 square foot property in Montgomery, Alabama, for $14.3 million. The property is fully leased to one tenant and had 7.2 years remaining lease term at the time we acquired the property. On December 18, 2020, we acquired a 277,883 square foot property in Huntsville, Alabama, for $20.0 million. The property is fully leased to one tenant and had 9.2 years remaining lease term at the time we acquired the property. On December 21, 2020, we acquired a 155,267 square foot property in Pittsburgh, Pennsylvania, for $13.0 million. The property is fully leased to one tenant and had 10.0 years remaining lease term at the time we acquired the property.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2021 and 2020, respectively, as follows (dollars in thousands):


	Year ended December 31, 2021		Year ended December 31, 2020
Acquired assets and liabilities	Purchase price		Purchase price
Land	$	7,205	$	11,264	(1)
Building	76,611		97,101
Tenant Improvements	1,353		2,684
In-place Leases	6,431		9,076
Leasing Costs	5,779		6,352
Customer Relationships	3,364		5,239
Above Market Leases	777		529		(2)
Below Market Leases	(1,067)		(2,271)		(3)


Total Purchase Price	$	100,453	$	129,974

(1)This amount includes $2,711 of land value subject to a land lease agreement, which we may purchase for a nominal fee.

(2)This amount includes $336 and $53 of loans receivable included in Other assets on the consolidated balance sheets, respectively.

(3)This amount includes $62 of prepaid rent included in Other liabilities on the consolidated balance sheets.

Future Lease Payments

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
2022	$	118,225
2023	111,338
2024	104,947
2025	98,833
2026	90,258
Thereafter	337,516
	$	861,117

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.

Lease Revenue Reconciliation

The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the years ended December 31, 2021, 2020, and 2019, respectively (dollars in thousands):


	For the twelve months ended December 31,
	(Dollars in Thousands)
Lease revenue reconciliation	2021		2020		2019
Fixed lease payments	$	121,303	$	117,248	$	110,273
Variable lease payments	16,385		15,904		4,114
	$	137,688	$	133,152	$	114,387

At December 31, 2021 and 2020, accounts receivable from tenants totaled $1.4 million and $1.7 million, respectively, included in other assets on the consolidated balance sheets.

Legal Settlements

In August 2021, we reached separate legal settlements through which we recognized $2.4 million, net, recorded in other income on the consolidated statement of operations and comprehensive income.

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 December 31, 2021 and 2020, excluding real estate held for sale as of December 31, 2020 (dollars in thousands):


	December 31, 2021				December 31, 2020
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	105,891	$	(62,604)	$	99,254	$	(54,168)
Leasing costs	81,487		(43,982)		73,707		(37,801)
Customer relationships	71,922		(38,220)		68,268		(31,881)
	$	259,300	$	(144,806)	$	241,229	$	(123,850)
	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	15,538	$	(11,520)	$	15,076	$	(10,670)
Below market leases and deferred revenue	(48,241)		21,471		(38,319)		17,686

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $20.7 million, $19.4 million, and $19.2 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in depreciation and amortization expense in the consolidated statement of operations and comprehensive income.

Total amortization related to above-market lease values was $0.8 million, $0.8 million, and $1.1 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in lease revenue in the consolidated statement of operations and comprehensive income.

Total amortization related to below-market lease values was $4.1 million, $2.8 million, and $2.5 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in lease revenue in the consolidated statement of operations and comprehensive income.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2021 and 2020, respectively, were as follows:


Intangible Assets & Liabilities	2021	2020
In-place leases	14.0	14.2
Leasing costs	14.0	14.2
Customer relationships	19.5	17.8
Above market leases	13.8	14.8
Below market leases	14.4	13.3
All intangible assets & liabilities	15.3	15.0

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
2022	$	19,692
2023	16,496
2024	14,382
2025	12,825
2026	11,182
Thereafter	39,917
	$	114,494

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, excluding real estate held for sale as of December 31, 2021 (dollars in thousands):


Year	Net Increase to Rental Income Related to Above and Below Market Leases (1)
2022	$	4,053
2023	3,982
2024	3,829
2025	3,533
2026	2,078
Thereafter	5,113
	$	22,588

(1)Does not include ground lease amortization of $164.