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, 2024

Real Estate

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


	December 31, 2024		December 31, 2023
Real estate:
Land (1)	$	139,743	$	143,442
Building and improvements	1,017,534		1,020,661
Tenant improvements	54,516		57,261
Accumulated depreciation	(319,646)		(299,662)
Real estate, net	$	892,147	$	921,702

(1)This amount includes $2,711 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 $39.5 million, $41.2 million, and $41.1 million for the years ended December 31, 2024, 2023, and 2022, respectively.

Acquisitions

During the years ended December 31, 2024 and 2023, we acquired seven and five 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, 2024	(1)	316,727	20.8 years	$	27,357	$	570
December 31, 2023	(2)	321,432	19.3 years	$	30,018	$	528

(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. On August 29, 2024, we acquired a 50,102 square foot property in Midland, Texas for $10.2 million. The property is fully leased to one tenant and had 15.0 years of remaining lease term at the time we acquired the property. On November 15, 2024, we acquired a 124,500 square foot property in St. Clair, Missouri for $5.2 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.

(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. On July 10, 2023, we acquired a 7,714 square foot property in Dallas-Fort Worth, Texas for $3.0 million. The property is fully leased to one tenant and had 9.9 years of remaining lease term at the time we acquired the property. On July 28, 2023, we acquired a 100,000 square foot property in Dallas-Fort Worth, Texas for $9.2 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. On October 12, 2023, we acquired a 69,920 square foot property in Allentown, Pennsylvania for $7.9 million. The property is fully leased to one tenant and had 20.1 years of remaining lease term at the time we acquired the property. On November 3, 2023, we acquired a 67,709 square foot property in Indianapolis, Indiana for $4.6 million. The property is fully leased to one tenant and had 20.1 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 years ended December 31, 2024 and 2023, respectively, as follows (dollars in thousands):


	Year ended December 31, 2024			Year ended December 31, 2023
Acquired assets and liabilities	Purchase price			Purchase price
Land	$	2,862		$	4,629
Building	18,919			19,726
Tenant Improvements	613			997
In-place Leases	1,921			1,642
Leasing Costs	2,580			2,733
Customer Relationships	527			684
Above Market Leases	90		(1)	—
Below Market Leases	(155)		(2)	(393)		(2)


Total Purchase Price	$	27,357		$	30,018

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

(2)This amount includes $155 and $393 of prepaid rent included in Other liabilities on the consolidated balance sheets, respectively.

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
2025	$	121,496
2026	117,748
2027	103,289
2028	90,869
2029	82,912
Thereafter	400,392
	$	916,706

Future sales-types lease payments from tenants under non-cancelable leases and reasonably certain purchase options, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
2025	$	19,722
2026	—
2027	—
2028	—
2029	—
Thereafter	—
	$	19,722
Difference between undiscounted cash flow and present value	1,086
Sales-type lease receivable	$	18,636

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 lease payments and variable lease payments for the years ended December 31, 2024, 2023, and 2022, respectively (dollars in thousands):


	For the year ended December 31,
Lease revenue reconciliation	2024		2023		2022
Fixed lease payments	$	132,272	$	130,551	$	132,032
Variable lease payments	17,116		17,033		16,949
	$	149,388	$	147,584	$	148,981

Sales-Type Leases

For the year ended December 31, 2024, we had one lease classified as a sales-type lease. We recorded a sales-type lease receivable of $18.6 million in the consolidated balance sheet, net of $0.02 million in allowance for credit loss, and derecognized the carry value of $14.6 million in the consolidated balance sheet. We recognized a $3.9 million selling profit from sale-type leases, net, that was included in gain on sale of real estate, net, in the consolidated statements of operations. For the year ended December 31, 2024, the interest income earned from sales-types leases of $0.1 million was included in other income in the consolidated statements of operations. There was no sales-type lease activity in the years ended December 31, 2023 and 2022. In developing the expected credit loss, we reviewed the tenant’s credit rating, which is AA- stable, and performed a

collectibility analysis, confirming they were current on payments as of December 31, 2024. The sales-type lease receivable, net, approximates fair value as of December 31, 2024.

Accounts Receivable

At December 31, 2024 and 2023, accounts receivable from tenants totaled $1.4 million and $1.5 million, respectively, included in other assets on the consolidated balance sheets.

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


	December 31, 2024				December 31, 2023
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	96,392	$	(64,830)	$	98,615	$	(63,269)
Leasing costs	89,093		(48,963)		84,844		(46,096)
Customer relationships	60,377		(36,962)		63,185		(36,231)
	$	245,862	$	(150,755)	$	246,644	$	(145,596)
	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	13,718	$	(11,582)	$	13,431	$	(10,675)
Below market leases and deferred revenue	(56,616)		34,620		(59,411)		30,087

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $16.3 million, $16.7 million, and $19.1 million for the years ended December 31, 2024, 2023, and 2022, 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 $0.5 million, $0.6 million, and $0.8 million for the years ended December 31, 2024, 2023, and 2022, 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 $7.3 million, $8.0 million, and $5.1 million for the years ended December 31, 2024, 2023, and 2022, 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, 2024 and 2023, respectively, were as follows:


Intangible Assets & Liabilities	2024	2023
In-place leases	20.9	18.9
Leasing costs	20.9	18.9
Customer relationships	26.9	26.3
Above market leases	25.1	0.0
Below market leases	20.1	20.1
All intangible assets & liabilities	22.3	21.1

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, excluding real estate held for sale as of December 31, 2024 (dollars in thousands):


Year	Estimated Amortization Expense of In-Place Leases, Leasing Costs and Customer Relationships
2025	$	15,229
2026	13,546
2027	11,896
2028	9,744
2029	8,976
Thereafter	35,716
	$	95,107

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, 2024 (dollars in thousands):


Year	Net Increase to Rental Income Related to Above and Below Market Leases (1)
2025	$	5,862
2026	3,771
2027	2,479
2028	2,468
2029	2,420
Thereafter	2,761
	$	19,761

(1)Does not include ground lease amortization of $99.