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, 2022

Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2022 and 2021, respectively, excluding real estate held for sale as of December 31, 2022 (dollars in thousands):


	December 31, 2022		December 31, 2021
Real estate:
Land (1)	$	152,916	$	149,773
Building and improvements	1,069,407		1,004,362
Tenant improvements	64,974		71,123
Accumulated depreciation	(286,994)		(266,672)
Real estate, net	$	1,000,303	$	958,586

(1)This amount includes $4,436 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 $42.6 million, $39.6 million, and $36.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Acquisitions

During the year ended December 31, 2022 and 2021 we acquired 13 and 11 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, 2022	(1)	1,238,680	14.5 years	$	115,364	$	1,014
December 31, 2021	(2)	949,174	13.4 years	$	100,453	$	798

(1)On February 24, 2022, we acquired an 80,000 square foot property in Wilkesboro, North Carolina for $7.5 million. The property is fully leased to one tenant and had 12.7 years of remaining lease term at the time we acquired the property. On March 11, 2022, we acquired a 56,000 square foot property in Oklahoma City, Oklahoma for $6.0 million. The property is fully leased to one tenant and had 7.0 years of remaining lease term at the time we acquired the property. On May 4, 2022, we acquired a 260,719 square foot, two-property portfolio in Cleveland, Ohio and Fort Payne, Alabama for $19.5 million. These properties are fully leased to one tenant and had 11.4 years of remaining lease term at the time we acquired the portfolio. On May 12, 2022, we acquired a 345,584 square foot, three-property portfolio in Wilmington, North Carolina for

$18.9 million. These properties are fully leased to one tenant and had 13.1 years of remaining lease term at the time we acquired the portfolio. On August 5, 2022, we acquired a 246,000 square foot, two-property portfolio in Bridgeton, New Jersey and Vineland, New Jersey for $32.7 million. These properties are fully leased to one tenant and had 15.1 years of remaining lease term at the time we acquired the portfolio. On September 16, 2022, we acquired a 67,328 square foot property in Jacksonville, Florida for $8.1 million. This property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. On September 20, 2022, we acquired a 49,375 square foot property in Fort Payne, Alabama for $5.6 million. This property is fully leased to one tenant and had 14.8 years of remaining lease term at the time we acquired the property. On October 26, 2022, we acquired a 68,674 square foot property in Denver, Colorado for $12.1 million. This property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. On December 21, 2022, we acquired a 65,000 square foot property in Greenville, South Carolina for $5.0 million. The property is fully leased to one tenant and had 12.0 years of remaining lease term at the time we acquired the property.

(2)On January 22, 2021, we acquired a 180,152 square foot property in Findlay, Ohio for $11.1 million. The property is fully leased to one tenant and had 14.2 years of remaining lease term at the time we acquired the property. On June 17, 2021, we acquired a 25,200 square foot property portfolio in Baytown, Texas for $8.2 million. The property is fully leased to one tenant and had 12.6 years of remaining lease term at the time we acquired the portfolio. On July 21, 2021, we acquired an 80,604 square foot, four-property portfolio in Pacific, Missouri for $22.1 million. These properties are fully leased to one tenant and had 17.4 years of remaining lease term at the time we acquired the portfolio. On August 20, 2021, we acquired an 81,760 square foot, two-property portfolio in Peru, Illinois, for $4.8 million. These properties are fully leased to one tenant and had 15.0 years of remaining lease term at the time we acquired the portfolio. On November 3, 2021, we acquired a 161,458 square foot property in Charlotte, North Carolina, for $12.9 million. The property is fully leased to one tenant and had 7.9 years of remaining lease term at the time we acquired the property. On December 21, 2021, we acquired a 120,000 square foot property in Atlanta, Georgia for $12.1 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 December 21, 2021, we acquired a 300,000 square foot property in Crossville, Tennessee, for $29.2 million. The property is fully leased to one tenant and had 11.0 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 year ended December 31, 2022 and 2021, respectively, as follows (dollars in thousands):


	Year ended December 31, 2022			Year ended December 31, 2021
Acquired assets and liabilities	Purchase price			Purchase price
Land	$	11,587		$	7,205
Building	85,774			76,611
Tenant Improvements	1,939			1,353
In-place Leases	5,927			6,431
Leasing Costs	6,888			5,779
Customer Relationships	3,352			3,364
Above Market Leases	500		(1)	777		(1)
Below Market Leases	(603)		(2)	(1,067)


Total Purchase Price	$	115,364		$	100,453

(1)This amount includes $181 and $336 of loans receivable included in Other assets on the consolidated balance sheets, respectively.

(2)This amount includes $32 of prepaid rent included in Other liabilities on the consolidated balance sheets.

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
2023	$	116,756
2024	112,119
2025	109,068
2026	101,879
2027	85,085
Thereafter	368,613
	$	893,520

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 payments and variable lease payments for the years ended December 31, 2022, 2021, and 2020, respectively (dollars in thousands):


	For the twelve months ended December 31,
	(Dollars in Thousands)
Lease revenue reconciliation	2022		2021		2020
Fixed lease payments	$	132,032	$	121,303	$	117,248
Variable lease payments	16,949		16,385		15,904
	$	148,981	$	137,688	$	133,152

At December 31, 2022 and 2021, accounts receivable from tenants totaled $1.1 million and $1.4 million, respectively, included in other assets on the consolidated balance sheets.

Legal Settlements

In August 2021, we reached separate legal settlements through which we recognized $2.4 million, net, recorded in other income on the consolidated statement of operations and comprehensive income.

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, 2022 and 2021, excluding real estate held for sale as of December 31, 2022 (dollars in thousands):


	December 31, 2022				December 31, 2021
	Lease Intangibles		Accumulated Amortization		Lease Intangibles		Accumulated Amortization
In-place leases	$	104,394	$	(63,240)	$	105,891	$	(62,604)
Leasing costs	85,038		(45,501)		81,487		(43,982)
Customer relationships	69,586		(38,655)		71,922		(38,220)
	$	259,018	$	(147,396)	$	259,300	$	(144,806)
	Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion		Deferred Rent Receivable/(Liability)		Accumulated (Amortization)/Accretion
Above market leases	$	15,371	$	(11,909)	$	15,538	$	(11,520)
Below market leases and deferred revenue	(66,138)		26,141		(48,241)		21,471

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $19.1 million, $20.7 million, and $19.4 million for the years ended December 31, 2022, 2021, and 2020, 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 $0.8 million, $0.8 million, and $0.8 million for the years ended December 31, 2022, 2021, and 2020, 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 $5.1 million, $4.1 million, and $2.8 million for the years ended December 31, 2022, 2021, and 2020, 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, 2022 and 2021, respectively, were as follows:


Intangible Assets & Liabilities	2022	2021
In-place leases	14.8	14.0
Leasing costs	14.8	14.0
Customer relationships	20.5	19.5
Above market leases	16.3	13.8
Below market leases	13.0	14.4
All intangible assets & liabilities	16.2	15.3

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, 2022 (dollars in thousands):


Year	Estimated Amortization Expense of In-Place Leases, Leasing Costs and Customer Relationships
2023	$	18,191
2024	15,251
2025	14,164
2026	12,356
2027	10,544
Thereafter	41,116
	$	111,622

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, 2022 (dollars in thousands):


Year	Net Increase to Rental Income Related to Above and Below Market Leases (1)
2023	$	7,117
2024	7,243
2025	6,870
2026	4,405
2027	2,772
Thereafter	7,975
	$	36,382

(1)Does not include ground lease amortization of $153.