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 (Tables)

Real Estate and Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2015

The following table sets forth the components of our investments in real estate as of March 31, 2015 and December 31, 2014 (dollars in thousands):


	March 31, 2015⁽¹⁾			December 31, 2014
Real estate:
Land	$	91,343		$	88,394
Building and improvements		605,375			593,155
Tenant improvements		44,124			41,016
Accumulated depreciation		(96,760	)		(92,133	)

Real estate, net	$	644,082		$	630,432

⁽¹⁾	Does not include real estate held for sale as of March 31, 2015.

Summary of Properties Acquired

2015 Real Estate Activity

During the three months ended March 31, 2015, we acquired two properties, which are summarized below (dollars in thousands):


Location	Acquisition Date		Square Footage (unaudited)		Lease Term		Renewal Options		Total Purchase Price/Expansion Funded		Acquisition Expenses		Annualized Straight Line Rent		Debt Issued
Richardson, TX ⁽¹⁾		3/6/2015		155,984		9.5 Years		2 (5 years each)	$	24,700	$	103	$	2,708	$	14,573
Birmingham, AL		3/20/2015		30,850		8.5 Years		1 (5 years)		3,648		66		333		N/A

Total				186,834					$	28,348	$	169	$	3,041	$	14,573

⁽¹⁾	The tenant occupying this property is subject to a gross lease.

2014 Real Estate Activity

During the three months ended March 31, 2014, we acquired two properties, which are summarized in the table below (dollars in thousands):


Location	Acquisition Date		Square Footage		Lease Term		Renewal Options		Total Purchase Price		Acquisition Expenses		Annualized Straight Line Rent		Debt Assumed
Allen, TX		3/27/2014		21,154		12 Years		4 (5 years each)	$	5,525	$	26	$	570	$	3,481
Colleyville, TX		3/27/2014		20,355		12 Years		4 (5 years each)		4,523		26		467		2,849

Total				41,509					$	10,048	$	52	$	1,037	$	6,330

Fair Value of Acquired Assets and Liabilities Assumed

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the two properties acquired during the three months ended March 31, 2015, as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Total Purchase Price
Richardson, TX	$	2,709	$	12,503	$	2,761	$	2,046	$	1,791	$	1,915	$	975	$	24,700
Birmingham, AL		650		1,683		351		458		146		360		—		3,648

	$	3,359	$	14,186	$	3,112	$	2,504	$	1,937	$	2,275	$	975	$	28,348

In accordance with ASC 805, we determined the fair value of the acquired assets related to the two properties acquired during the three months ended March 31, 2014 as follows (in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Below Market Leases		Discount on Assumed Debt		Total Purchase Price
Allen, TX	$	874	$	3,509	$	125	$	598	$	273	$	218	$	—	$	72	$	5,525
Colleyville, TX		1,277		2,307		117		486		220		181		6		59	$	4,523

	$	2,151	$	5,816	$	242	$	1,084	$	493	$	399	$	6	$	131	$	10,048

Schedule of Revenue and Earnings Recognized on Properties Acquired

Below is a summary of the total revenue and earnings recognized on the two properties acquired during the three months ended March 31, 2015 (dollars in thousands):


		For the three months ended March 31,
		2015
Location	Acquisition Date	Rental Revenue		Earnings ⁽¹⁾
Richardson, TX	3/6/2015	$	182	$	51
Birmingham, AL	3/20/2015		11		4

		$	193	$	55

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Below is a summary of the total revenue and earnings recognized on the two properties acquired during the three months ended March 31, 2014 (dollars in thousands):


			For the three months ended March 31,
			2014
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾
Allen, TX		3/27/2014	$	8	$	5
Colleyville, TX		3/27/2014		6		4

			$	14	$	9

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Pro-Forma Condensed Consolidated Statements of Operations

The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the three months ended March 31, 2015 and the twelve months ended December 31, 2014, respectively were acquired as of January 1, 2014. The pro-forma earnings for the three months ended March 31, 2015 and 2014 were adjusted to assume that acquisition-related costs were incurred as of the previous period (dollars in thousands, except per share amounts):


	For the three months ended March 31, (unaudited)
	2015			2014
Operating Data:
Total operating revenue	$	20,318		$	20,789
Total operating expenses		(11,920	)		(26,282	)⁽¹⁾
Other expenses		(7,546	)		(7,914	)

Net income (loss)		852			(13,407	)
Dividends attributable to preferred and senior common stock		(1,247	)		(1,123	)

Net loss attributable to common stockholders	$	(395	)	$	(14,530	)

Share and Per Share Data:
Basic and diluted loss per share of common stock	$	(0.02	)	$	(0.92	)
Weighted average shares outstanding-basic and diluted		20,210,975			15,746,714

⁽¹⁾	$14.0 million relates to the impairment charge recorded in operating expenses during the three months ended March 31, 2014.

Future Operating Lease Payments from Tenants under Non-Cancelable Leases

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2015 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
Nine Months ending December 31, 2015	$	55,082	⁽¹⁾
2016		72,558
2017		72,269
2018		71,974
2019		72,429
2020		64,164
Thereafter		254,615

⁽¹⁾	Does not include real estate held for sale as of March 31, 2015.

Carrying Value of Intangible Assets and Accumulated Amortization

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of March 31, 2015 and December 31, 2014 respectively (in thousands):


	March 31, 2015 ⁽¹⁾					December 31, 2014
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	61,622	$	(18,583	)	$	59,233	$	(17,379	)
Leasing costs		40,361		(12,119	)		38,305		(11,411	)
Customer relationships		43,518		(11,991	)		41,243		(11,177	)

	$	145,501	$	(42,693	)	$	138,781	$	(39,967	)


	Deferred Rent Receivable/Liability		Accumulated Amortization			Deferred Rent Receivable/Liability		Accumulated Amortization
Above market leases	$	8,894	$	(6,096	)	$	8,314	$	(6,384	)
Below market leases		15,938		(7,564	)		15,939		(7,345	)

	$	24,832	$	(13,660	)	$	24,253	$	(13,729	)

Total	$	170,333	$	(56,353	)	$	163,034	$	(53,696	)

⁽¹⁾	Does not include real estate held for sale as of March 31, 2015.

Weighted Average Amortization Period for Intangible Assets Acquired and Liabilities Assumed

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the three months ended March 31, 2015 and 2014, respectively, were as follows:


Intangible Assets & Liabilities	2015		2014
In-place leases		9.1		11.9
Leasing costs		9.1		11.9
Customer relationships		14.1		16.9
Above market leases		9.7		—
Below market leases		—		11.9

All intangible assets & liabilities		10.5		13.3

Estimated Aggregate Amortization Expense and Net Increase to Rental Income

The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs, customer relationships and amortization of both above and below market leases for the remainder of 2015 and 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		Net Increase to Rental Income Related to Above and Below Market Leases
Nine Months Ending December 31, 2015 ⁽¹⁾	$	13,962	$	228
2016		13,648		307
2017		12,167		429
2018		12,058		429
2019		12,051		429
Thereafter		38,922		3,754

Total	$	102,808	$	5,576

⁽¹⁾	Does not include real estate held for sale as of March 31, 2015.