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, 2024

Real Estate

The following table sets forth the components of our investments in real estate as of June 30, 2024 and December 31, 2023, respectively, excluding real estate held for sale (dollars in thousands):


	June 30, 2024		December 31, 2023
Real estate:
Land (1)	$	142,501	$	143,442
Building and improvements	1,031,562		1,020,661
Tenant improvements	56,143		57,261
Accumulated depreciation	(311,433)		(299,662)
Real estate, net	$	918,773	$	921,702

(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 $10.2 million and $20.1 million for the three and six months ended June 30, 2024, respectively. Real estate depreciation expense on building and tenant improvements was $11.8 million and $22.3 million for the three and six months ended June 30, 2023, respectively.

Acquisitions

We acquired five industrial properties during the six months ended June 30, 2024, and acquired one industrial property during the six months ended June 30, 2023. The acquisitions are summarized below (dollars in thousands):


Six Months Ended		Square Footage	Lease Term	Purchase Price		Capitalized Acquisition Expenses
June 30, 2024	(1)	142,125	25.1 years	$	11,954	$	267
June 30, 2023	(2)	76,089	20.0 years	$	5,363	$	98

(1)On May 7, 2024, we acquired a five-property, 142,125 square foot portfolio in Warfordsburg, Pennsylvania for $12.0 million. The property is fully leased to one tenant and had 25.1 years of remaining lease term at the time we acquired the property.

(2)On April 14, 2023, we acquired a 76,089 square foot property in Riverdale, Illinois for $5.4 million. The property is fully leased to one tenant and had 20.0 years of 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 six months ended June 30, 2024 and 2023 as follows (dollars in thousands):


	Six Months Ended June 30, 2024			Six Months Ended June 30, 2023
Acquired assets and liabilities	Purchase price			Purchase price
Land	$	1,169		$	675
Building	7,990			3,678
Tenant Improvements	277			184
In-place Leases	917			307
Leasing Costs	1,386			405
Customer Relationships	125			114
Above Market Leases	90		(1)	—



Total Purchase Price	$	11,954		$	5,363

(1)This amount includes $90 of loans receivable included in Other assets on the condensed consolidated balance sheets.

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, 2024 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
Six Months Ending December 31, 2024	$	58,568
2025	120,366
2026	113,941
2027	98,860
2028	86,308
2029	78,182
Thereafter	372,072

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant directly, or reimbursed to us from 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 three and six months ended June 30, 2024 and 2023, respectively (dollars in thousands):


	For the three months ended June 30,
Lease revenue reconciliation	2024		2023		$ Change		% Change
Fixed lease payments	$	33,084	$	34,380	$	(1,296)	(3.8)	%
Variable lease payments	3,973		4,278		(305)		(7.1)	%
	$	37,057	$	38,658	$	(1,601)	(4.1)	%


	For the six months ended June 30,
Lease revenue reconciliation	2024		2023		$ Change		% Change
Fixed lease payments	$	64,874	$	66,521	$	(1,647)	(2.5)	%
Variable lease payments	7,905		8,691		(786)		(9.0)	%
	$	72,779	$	75,212	$	(2,433)	(3.2)	%

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, 2024 and December 31, 2023, respectively, excluding real estate held for sale (dollars in thousands):


	June 30, 2024				December 31, 2023
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	97,508	$	(64,208)	$	98,615	$	(63,269)
Leasing costs	86,415		(48,347)		84,844		(46,096)
Customer relationships	62,048		(37,481)		63,185		(36,231)
	$	245,971	$	(150,036)	$	246,644	$	(145,596)

	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	12,747	$	(10,362)	$	13,431	$	(10,675)
Below market leases and deferred revenue	(58,132)		32,648		(59,411)		30,087

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $5.8 million and $9.3 million for the three and six months ended June 30, 2024, respectively, and $5.2 million and $9.3 million for the three and six months ended June 30, 2023, 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 $0.1 million and $0.3 million for the three and six months ended June 30, 2024, respectively, and $0.1 million and $0.3 million for the three and six months ended June 30, 2023, 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 $2.1 million and $3.8 million for the three and six months ended June 30, 2024, respectively, and $2.5 million and $4.4 million for the three and six months ended June 30, 2023, 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 and liabilities assumed during the six months ended June 30, 2024 and 2023, were as follows:


Intangible Assets & Liabilities	June 30, 2024	June 30, 2023
In-place leases	25.1	20.1
Leasing costs	25.1	20.1
Customer relationships	25.1	25.1
Above market leases	25.1	0.0

All intangible assets & liabilities	25.1	21.7