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)

9 Months Ended

Sep. 30, 2015

Components of Investments in Real Estate

The following table sets forth the components of our investments in real estate as of September 30, 2015 and December 31, 2014 (dollars in thousands):


	September 30, 2015⁽¹⁾			December 31, 2014
Real estate:
Land	$	93,265		$	88,394
Building and improvements		620,794			593,155
Tenant improvements		47,399			41,016
Accumulated depreciation		(104,877	)		(92,133	)

Real estate, net	$	656,581		$	630,432

⁽¹⁾	Does not include real estate held for sale as of September 30, 2015.

Summary of Properties Acquired

2015 Real Estate Activity

During the nine months ended September 30, 2015, we acquired five properties, which are summarized below (dollars in thousands):


Location	Acquisition Date		Square Footage (unaudited)		Lease Term	Renewal Options	Total Purchase Price		Acquisition Expenses		Annualized GAAP Rent		Debt Issued
Richardson, TX ⁽¹⁾		3/6/2015		155,984	9.5 Years	2 (5 years each)	$	24,700	$	108	$	2,708	$	14,573
Birmingham, AL		3/20/2015		30,850	8.5 Years	1 (5 years)		3,648		76		333		N/A
Columbus, OH		5/28/2015		78,033	15.0 Years	2 (5 years each)		7,700		72		637		4,466
Salt Lake City, UT ⁽¹⁾		5/29/2015		86,409	6.5 Years	1 (5 years)		22,200		149		2,411		13,000
Atlanta, GA ⁽²⁾		7/15/2015		78,151	Multiple⁽²⁾	2 (5 years)		13,000		109		1,291		7,540

Total				429,427			$	71,248	$	514	$	7,380	$	39,579

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

⁽²⁾	This building is 100% leased to one tenant through two leases. 30% of this space is leased for 15 years, while the remaining space is leased for 7 years.

2014 Real Estate Activity

During the nine months ended September 30, 2014, we acquired eight properties, which are summarized in the table below (dollars in thousands):


					Lease				Total Purchase		Acquisition		Annualized Straight			Debt Issued &
Location	Acquisition Date		Square Footage		Term	Renewal Options			Price		Expenses		Line Rent			Assumed
Allen, TX		3/27/2014		21,154	12 Years		4 (5 years each)		$	5,525	$	33	$	570		$	3,481
Colleyville, TX		3/27/2014		20,355	12 Years		4 (5 years each)			4,523		33		467			2,849
Rancho Cordova, CA ⁽⁴⁾		4/22/2014		61,358	10 Years		1 (5 year)			8,225		73		902			4,935
Coppell, TX		5/8/2014		21,171	12 Years		4 (5 years each)			5,838		26		601			3,816
Columbus, OH		5/13/2014		114,786	9.5 Years ⁽¹⁾		N/A	⁽¹⁾		11,800		70		1,278	⁽³⁾		N/A
Taylor, PA		6/9/2014		955,935	10 Years		4 (5 years each)			39,000		730		3,400			22,600
Aurora, CO		7/1/2014		124,800	15 Years		2 (5 years each)			8,300		91		768			N/A
Indianapolis, IN ⁽⁴⁾		9/3/2014		86,495	11.5 Years ⁽²⁾		2 (5 years each)	⁽²⁾		10,500		58		1,504	⁽³⁾		6,100

Total				1,406,054					$	93,711	$	1,114	$	9,490		$	43,781

⁽¹⁾	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in November 2016 and contains no renewal options.

⁽²⁾	Lease term and renewal options are reflective of the largest tenant. The other tenants in the building have varying lease expirations from December 2015 to October 2018. No other tenants have renewal options.

⁽³⁾	Rent figure is reflective of aggregate rent among all tenants occupying the building.

⁽⁴⁾	Tenants occupying these properties are subject to a gross lease.

Fair Value of Acquired Assets

In accordance with Accounting Standards Codification, or ASC, 805, “Business Combinations,” we determined the fair value of the acquired assets related to the five properties acquired during the nine months ended September 30, 2015, as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below 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
Columbus, OH		1,338		3,511		1,547		1,144		672		567		—		(1,079	)		7,700
Salt Lake City, UT		3,248		11,861		1,268		2,396		981		1,678		821		(53	)		22,200
Atlanta, GA		2,271		7,862		916		750		548		723		44		(114	)		13,000

	$	10,216	$	37,420	$	6,843	$	6,794	$	4,138	$	5,243	$	1,840	$	(1,246	)	$	71,248

In accordance with ASC 805, we determined the fair value of the acquired assets related to the eight properties acquired during the nine months ended September 30, 2014 as follows (in thousands):


					Tenant		In-place				Customer		Above Market		Below Market			Premium on			Total Purchase
	Land		Building		Improvements		Leases		Leasing Costs		Relationships		Leases		Leases			Assumed Debt			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
Rancho Cordova, CA		752		5,898		278		473		546		278		—		—			—			8,225
Coppell, TX		1,448		3,221		128		636		293		230		—		—			(118	)		5,838
Columbus, OH		990		6,080		1,937		823		719		990		261		—			—			11,800
Taylor, PA		3,102		24,449		956		6,171		1,452		2,870		—		—			—			39,000
Aurora, CO		2,882		3,825		92		413		806		282		—		—			—			8,300
Indianapolis, IN		502		5,334		1,088		1,990		741		732		126		(13	)		—			10,500

	$	11,827	$	54,623	$	4,721	$	11,590	$	5,050	$	5,781	$	387	$	(19	)	$	(249	)	$	93,711

Schedule of Revenue and Earnings Recognized on Properties Acquired

Below is a summary of the total revenue and earnings recognized on the five properties acquired during the nine months ended September 30, 2015 (dollars in thousands):


			For the three months ended September 30,					For the nine months ended September 30,
			2015					2015
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾			Rental Revenue		Earnings ⁽¹⁾
Richardson, TX		3/6/2015	$	656	$	96		$	1,496	$	423
Birmingham, AL		3/20/2015		83		(22	)		177		84
Columbus, OH		5/28/2015		177		18			244		166
Salt Lake City, UT		5/29/2015		572		163			780		441
Atlanta, GA		7/15/2015		274		214			274		214

			$	1,762	$	469		$	2,971	$	1,328

⁽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 eight properties acquired during the three and nine months ended September 30, 2014 (dollars in thousands):


			For the three months ended September 30,				For the nine months ended September 30,
			2014				2014
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾		Rental Revenue		Earnings ⁽¹⁾
Allen, TX		3/27/2014	$	143	$	101	$	293	$	167
Colleyville, TX		3/27/2014		117		83		240		138
Rancho Cordova, CA		4/22/2014		226		104		399		168
Coppell, TX		5/8/2014		150		116		239		139
Columbus, OH ⁽²⁾		5/13/2014		311		115		479		184
Taylor, PA		6/9/2014		850		395		1,058		493
Aurora, CO		7/1/2014		192		124		192		124
Indianapolis, IN ⁽²⁾		9/3/2014		116		9		116		9

			$	2,105	$	1,047	$	3,016	$	1,422

⁽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.

⁽²⁾	Rental revenue and earnings is reflective of aggregate rent and operating expenses among all tenants occupying the building.

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 and nine months ended September 30, 2015 and the twelve months ended December 31, 2014, respectively were acquired as of January 1, 2014. The pro-forma earnings for the three and nine months ended September 30, 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 September 30, (unaudited)						For the nine months ended September 30, (unaudited)
	2015			2014			2015			2014
Operating Data:
Total operating revenue	$	21,402		$	21,624		$	64,059		$	65,425
Total operating expenses		(13,539	)		(13,222	)		(38,651	)		(53,311	)
Other expenses		(7,820	)		(8,029	)		(23,485	)		(23,120	)⁽¹⁾

Net income (loss)		43			373			1,923			(11,006	)
Dividends attributable to preferred and senior common stock		(1,286	)		(1,160	)		(3,818	)		(3,417	)

Net loss attributable to common stockholders	$	(1,243	)	$	(787	)	$	(1,895	)	$	(14,423	)

Share and Per Share Data:
Basic (loss) earnings per share of common stock - pro forma	$	(0.06	)	$	(0.04	)	$	(0.09	)	$	(0.86	)
Diluted (loss) earnings per share of common stock - pro forma	$	(0.06	)	$	(0.04	)	$	(0.09	)	$	(0.86	)
Basic (loss) earnings per share of common stock - actual	$	(0.06	)	$	(0.05	)	$	(0.13	)	$	(0.93	)
Diluted (loss) earnings per share of common stock - actual	$	(0.06	)	$	(0.05	)	$	(0.13	)	$	(0.93	)
Weighted average shares outstanding-basic		21,403,808			17,739,084			20,820,559			16,685,162
Weighted average shares outstanding-diluted		21,403,808			17,739,084			20,820,559			16,685,162

⁽¹⁾	$14.0 million of other expenses relates to the impairment charge recorded in operating expenses during the nine months ended September 30, 2014.

Carrying Value of Intangible Assets, Liabilities and Accumulated Amortization

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of September 30, 2015 and December 31, 2014 respectively (in thousands):


	September 30, 2015 ⁽¹⁾					December 31, 2014
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	65,642	$	(21,198	)	$	59,233	$	(17,379	)
Leasing costs		42,936		(13,803	)		38,305		(11,411	)
Customer relationships		46,230		(13,844	)		41,243		(11,177	)

	$	154,808	$	(48,845	)	$	138,781	$	(39,967	)


	Deferred Rent Receivable/(Liability)		Accumulated Amortization			Deferred Rent Receivable/(Liability)		Accumulated Amortization
Above market leases	$	9,591	$	(6,307	)	$	8,314	$	(6,384	)
Below market leases		16,946		(7,932	)		15,939		(7,345	)

	$	26,537	$	(14,239	)	$	24,253	$	(13,729	)

Total	$	181,345	$	(63,084	)	$	163,034	$	(53,696	)

⁽¹⁾	Does not include real estate held for sale as of September 30, 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 nine months ended September 30, 2015 and 2014, respectively, were as follows:


Intangible Assets & Liabilities	2015		2014
In-place leases		11.5		10.2
Leasing costs		11.5		10.2
Customer relationships		16.1		14.6
Above market leases		17.2		9.3
Below market leases		13.5		9.9

All intangible assets & liabilities		12.9		11.5