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, 2012

Real Estate and Intangible Assets [Abstract]

Real Estate and Intangible Assets

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2012 and 2011 (in thousands):


	December 31, 2012			December 31, 2011
Real estate:
Land	$	69,126		$	60,602
Building and improvements		442,451			367,605
Tenant improvements		22,176			14,314
Accumulated depreciation		(65,730	)		(53,784	)

Real estate, net	$	468,023		$	388,737

New Real Estate Activity

During the year ended December 31, 2012, we acquired eight properties, which are summarized below (dollars in thousands):


Location	Acquisition Date		Square Footage		Lease Term		Renewal Options	Total Purchase Price		Acquisition Expenses		Annualized Straight Line Rent		Debt Issued / Assumed
Ashburn, VA		1/25/2012		52,130		15 years	2 (5 years each)	$	10,775	$	102	$	989		N/A
Ottumwa, IA		5/30/2012		352,860		11.5 years	3 (5 years each)		7,100		49		684		5,000
New Albany, OH		6/5/2012		89,000		10.5 years	2 (5 years each)		13,333		196		1,361		N/A
Columbus, GA		6/21/2012		32,000		11.5 years	2 (5 years each)		7,320		71		656		4,750
Columbus, OH		6/28/2012		31,293		10 years	N/A		4,037		66		342		N/A
Jupiter, FL		9/26/2012		60,000		10.5 years	2 (5 years each)		15,500		61		1,372		10,758	⁽¹⁾
Fort Worth, TX		11/8/2012		208,234		14 years	N/A		19,950		128		1,628		14,168	⁽¹⁾
Columbia, SC		11/21/2012		146,483		10 years	3 (5 years each)		29,150		105		2,614		19,000

Total				972,000				$	107,165	$	778	$	9,646	$	53,676

⁽¹⁾	Debt assumed as part of acquisition

In accordance with ASC 805, we determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the year ended December 31, 2012 as follows (in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Discount/ (Premium) on Assumed Debt			Total Purchase Price
Ashburn, VA	$	706	$	6,551	$	1,307	$	804	$	908	$	499	$	—	$	—		$	—		$	10,775
Ottumwa, IA		212		4,743		329		940		484		499		—		(107	)		—			7,100
New Albany, OH		1,658		7,511		1,235		1,122		857		903		47		—			—			13,333
Columbus, GA		1,378		3,894		626		574		473		375		—		—			—			7,320
Columbus, OH		542		1,856		597		391		213		325		113		—			—			4,037
Jupiter, FL		1,160		11,249		745		1,603		701		909		—		—			(867	)		15,500
Fort Worth, TX		963		15,507		140		1,579		2,107		517		—		—			(863	)		19,950
Columbia, SC		1,905		17,765		2,883		2,454		1,490		1,919		734		—			—			29,150

	$	8,524	$	69,076	$	7,862	$	9,467	$	7,233	$	5,946	$	894	$	(107	)	$	(1,730	)	$	107,165

Below is a summary of the total revenue and net income recognized on the properties acquired during the year ended December 31, 2012 (in thousands):


			For the Year Ended December 31,
	Acquisition Date		2012		2012
Location	Acquisition Date		Rental Revenue		Net Income ⁽¹⁾
Ashburn, VA		1/25/2012	$	925	$	555
Ottumwa, IA		5/30/2012		408		200
New Albany, OH		6/5/2012		776		445
Columbus, GA		6/21/2012		346		186
Columbus, OH		6/28/2012		168		65
Jupiter, FL		9/26/2012		362		191
Fort Worth, TX		11/8/2012		240		118
Columbia, SC		11/21/2012		282		123

			$	3,507	$	1,883

⁽¹⁾	Does not include interest expense or acquisition related costs that are required to be expensed under ASC 805.

We acquired eight properties during the year ended December 31, 2012, seven properties during the year ended December 31, 2011, and one property during the year ended December 31, 2010. The following table reflects pro-forma consolidated statements of operations as if the properties were acquired as of the beginning of the previous period. The pro-forma earnings for the year ended December 31, 2012, were adjusted to exclude $0.8 million of acquisition-related costs incurred in 2012, and the pro-forma earnings related to the eight properties acquired. The pro-forma earnings for the year ended December 31, 2012, were adjusted to include these charges (dollars in thousands):


	For the year ended December 31,
	2012			2011			2010
	(unaudited)
Operating Data:
Total operating revenue	$	55,849		$	56,414		$	47,968
Total operating expenses		(27,571	)		(29,182	)		(27,566	)
Other expense		(25,040	)		(21,709	)		(15,465	)

Net income		3,238			5,523			4,937
Dividends attributable to preferred and senior common stock		(4,206	)		(4,156	)		(4,114	)

Net (loss) income available to common stockholders	$	(968	)	$	1,367		$	823

Share and Per Share Data:
Basic & diltued (loss) earnings per share of common stock	$	(0.09	)	$	0.13		$	0.10
Weighted average shares outstanding-basic (in thousands)		10,953,325			10,236,859			8,576,303
Weighted average shares outstanding-diluted (in thousands)		10,953,325			10,288,711			8,601,153

The weighted average amortization period for the intangible assets acquired and liabilities assumed during the years ended December 31, 2012 and 2011, respectively, were as follows:


Intangible Assets & Liabilities	2012		2011
In-place leases		11.2		16.4
Leasing costs		11.2		16.4
Customer relationships		14.6		19.2
Above market leases		10.1		8.8
Below market leases		11.3		20.9

All intangible assets & liabilities		12.1		17.1

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:


Year	Tenant Lease Payments
2013	$	50,534
2014		49,719
2015		46,431
2016		42,240
2017		40,239
Thereafter		266,545

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 property taxes on the respective properties in the event the tenants fail to pay them. The total annual property taxes for all properties owned by us at December 31, 2012, were $8.9 million.

Existing Real Estate Activity

On February 14, 2012, we extended the lease with the tenant occupying our property located in San Antonio, Texas. The lease covering this property was extended for an additional seven-year period, through November 2021. The lease was originally set to expire in February 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.8 million. Furthermore, the lease grants the tenant two options to extend the lease for a period of five years each. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.6 million, payable over two years, and paid $0.3 million in leasing commissions.

On February 27, 2012, we extended the lease with the tenant occupying our property located in Roseville, Minnesota. The new lease covers approximately one-third of this property and was extended for an additional five-year period, through December 2017. The lease was originally set to expire in December 2012. The tenant in this property paid rent on the entire building through the end of 2012, and we continue to search for new tenants to lease the remainder of the building. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $2.9 million for the remainder of 2012 and annualized straight line rents beginning in 2013 of $1.2 million. Furthermore, the lease grants the tenant one option to extend the lease for a period of five years. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.4 million, payable over two years, and paid $0.8 million in leasing commissions.

On June 29, 2012, we extended the lease with the tenant occupying our property located in Hialeah, Florida. The lease covering this property was extended for an additional five-year period, through March 2027. The lease was originally set to expire in March 2022. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.1 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.3 million.

On August 7, 2012, we extended the lease with the tenant occupying our property located in Wichita, Kansas. The lease covering this property was extended for an additional five-year period, through September 2017. The lease was originally set to expire in September 2012. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.8 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.2 million in leasing commissions.

On September 10, 2012, we extended the lease with the tenant occupying our property located in South Hadley, Massachusetts. The lease covering this property was extended for an additional one-year period, through January 2014. The lease was originally set to expire in February 2013. The lease provides for annual rents of approximately $0.3 million.

On September 11, 2012, we extended the lease with the tenant occupying our property located in Mason, Ohio. The lease covering this property was extended for almost an additional seven-year period, through June 2020. The lease was originally set to expire in January 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.6 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.5 million, and paid $0.3 million in leasing commissions.

On September 27, 2012, our tenant occupying our property located in Arlington, Texas, exercised its option to extend the lease covering this property for an additional five-year period, through March 2018. The lease was originally set to expire in April 2013. The lease provides that the option period rent be at fair market rent, but not less than the current rental rate.

On October 5, 2012, we modified and extended the lease with the tenant occupying our property located in Concord Township, Ohio. The lease covering this property was extended for an additional six-year period, through August 2034, in exchange for a reduction in rent payable over the next two years. The lease was originally set to expire in March 2028. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.7 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.2 million.

On November 8, 2012, we extended the lease with the tenant occupying our property located in Big Flats, New York. The lease covering this property was extended for an additional 10 years, through September 2023. The lease was originally set to expire in September 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.5 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.2 million in leasing commissions.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class (in thousands):


	December 31, 2012					December 31, 2011
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	34,085	$	(12,125	)	$	24,620	$	(10,181	)
Leasing costs		24,071		(7,103	)		15,013		(5,663	)
Customer relationships		26,671		(8,345	)		20,725		(6,844	)

	$	84,827	$	(27,573	)	$	60,358	$	(22,688	)

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows (in thousands):


Year	Estimated Amortization Expense
2013	$	7,545
2014		6,282
2015		5,854
2016		5,223
2017		5,039
Thereafter		27,311

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

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