Gladstone Commercial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate Dispositions, Held for Sale, and Impairment Charges

Real Estate Dispositions, Held for Sale, and Impairment Charges

12 Months Ended

Dec. 31, 2019

Real Estate Dispositions, Held for Sale, and Impairment Charges

Real Estate Dispositions

During the year ended December 31, 2019, we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the year ended December 31, 2019, we sold one non-core property, located in Maitland, Florida, which is detailed in the table below (dollars in thousands):



Square Footage Sold	Sales Price		Sales Costs		Gain on Sale of Real Estate, net
50,000	$	6,850	$	532	$	2,952

Our 2019 disposition was not classified as discontinued operations because it did not represent a strategic shift in operations, nor will it have a major effect on our operations and financial results. Accordingly, the operating results of this property are included within continuing operations for all periods reported.

The table below summarizes the components of operating income from the real estate and related assets disposed of during the years ended December 31, 2019, 2018, and 2017, respectively (dollars in thousands):



	For the year ended December 31,
	2019			2018			2017
Operating revenue	$	245		$	1,007		$	416
Operating expense	786			1,004			471
Other income, net	2,614		(1)	(334		)	(142		)
Income (expense) from real estate and related assets sold	$	2,073		$	(331	)	$	(197	)

(1) Includes $3.0 million gain on sale of real estate, net.

Real Estate Held for Sale

At December 31, 2019, we had one property classified as held for sale, located in Charlotte, North Carolina. We considered the asset to be non-core to our long term strategy.

At December 31, 2018, we had one property classified as held for sale, located in Maitland, Florida. This property was sold during the year ended December 31, 2019.

Our asset classified as held for sale at December 31, 2019 was not classified as discontinued operations because it does not represent a strategic shift in our operations, and it does not have a major effect on our financial results.

The table below summarizes the components of income from real estate and related assets held for sale at December 31, 2019 (dollars in thousands):



	For the year ended December 31,
	2019				2018			2017
Operating revenue	$	600			$	1,167		$	1,156
Operating expense	2,220			(1)	307			291
Other income, net	323				(36		)	(240		)
Income (expense) from real estate and related assets sold	$	(1,297	)		$	824		$	625

(1) Includes $1.8 million impairment charge.

The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying consolidated balance sheet (dollars in thousands):



	December 31, 2019		December 31, 2018
Assets Held for Sale
Real estate, at cost	$	7,411	$	3,173
Less: accumulated depreciation	3,421		218
Total real estate held for sale, net	3,990		2,955
Lease intangibles, net	—		1,105
Deferred rent receivable, net	—		91
Total Assets Held for Sale	$	3,990	$	4,151
Liabilities Held for Sale
Asset retirement obligation	$	21	$	—
Total Liabilities Held for Sale	$	21	$	—

Impairment Charges

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the year ended December 31, 2019 and did not identify any impaired held and used assets during the fourth quarter of 2019.

We classified one property as held for sale at December 31, 2019. We performed an analysis of the property classified as held for sale, and compared the fair market value of the asset less selling costs against the carrying value of the asset available for sale. As a result of this analysis, we recorded an impairment charge of $1.8 million during the year ended December 31, 2019, as the fair market value less selling costs was less than the carrying value.

We classified one property as held for sale at December 31, 2018. We performed an analysis of the property classified as held for sale, and compared the fair market value of the asset less selling costs against the carrying value of the asset available for sale. We did not record an impairment charge during the year ended December 31, 2018, as the fair market value less selling costs was greater than the carrying value.

Fair market value for this asset was calculated using Level 3 inputs (defined in Note 6 “Mortgage Notes Payable and Credit Facility”), which were determined using a negotiated sales price from an executed purchase and sale agreement with a third party. We continue to evaluate our properties on a quarterly basis for changes that could create the need to record impairment. Future impairment losses may result, and could be significant, should market conditions deteriorate in the markets in which we hold our assets or we are unable to secure leases at terms that are favorable to us, which could impact the estimated cash flow of our properties over the period in which we plan to hold our properties. Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis.

We recognized $6.8 million of impairment charges on three properties during the year ended December 31, 2017. These properties were impaired through our held for sale carrying value analysis during the year ended December 31, 2017, and we concluded that the fair market value less selling costs was below the carrying value of the respective properties. We sold two of these properties during the year ended December 31, 2017, and one of these properties during the year ended December 31, 2018.

The fair values for the above properties were calculated using Level 3 inputs which were calculated using an estimated sales price, less estimated costs to sell. The estimated sales price was determined using executed purchase and sale agreements.