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 (Tables)

Real Estate and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2014

Property, Plant and Equipment [Abstract]

The following table sets forth the components of our investments in real estate as of December 31, 2014 and 2013 (dollars in thousands):


	December 31, 2014			December 31, 2013
Real estate:
Land	$	88,394		$	79,153
Building and improvements		593,155			527,230
Tenant improvements		41,016			35,970
Accumulated depreciation		(92,133	)		(81,241	)

Real estate, net	$	630,432		$	561,112

Summary of Properties Acquired

2014 Real Estate Activity

During the year ended December 31, 2014, we completed 10 acquisitions of 11 properties and completed an expansion of one property, 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 & 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		93		768			N/A
Indianapolis, IN	⁽⁴	⁾		9/3/2014		86,495	11.5 Years ⁽²⁾		2 (5 years each)	⁽²⁾		10,500		63		1,504	⁽³⁾		6,100
Denver, CO				10/31/2014		189,120	10 Years		2 (10 years each)			10,000		103		860			N/A
Canton, NC	⁽⁵	⁾		11/1/2014		365,960	20 Years		2 (10 years each)			5,550		N/A		1,343			N/A
Monroe, MI	⁽⁶	⁾		12/23/2014		535,500	8.5 Years		2 (5 years each)			30,750		68		2,523			18,450

Total						2,496,634					$	140,011	$	1,292	$	14,216		$	62,231

⁽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. The largest tenant in this property occupies 61,306 square feet.

⁽⁵⁾	The Canton, NC property was originally acquired in July 2004 for $5.2 million. After the expansion was completed in November 2014, our total investment in the property is $10.8 million.

⁽⁶⁾	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

2013 Real Estate Activity

During the year ended December 31, 2013, we acquired seven properties, and completed an expansion of one property, which are summarized below (dollars in thousands):


Location	Acquisition/ Expansion Date		Square Footage (unaudited)		Lease Term	Renewal Options		Total Purchase/ Expansion Price		Acquisition Expenses		Annualized Straight Line Rent		Debt Issued
Egg Harbor Township, NJ		3/28/2013		29,257	10 years		1 (5 years)	$	5,650	$	152	$	490	$	3,700
Clintonville, WI ⁽¹⁾		4/11/2013		102,400	15 years		N/A		3,250		N/A		961		—
Vance, AL		5/9/2013		170,000	10 years		2 (5 years)		13,388		186		1,173		—
Blaine, MN		5/10/2013		92,275	7 years		2 (5 years)		14,450		79		1,475		8,200
Austin, TX		7/9/2013		320,000	7 years		3 (3 years)		57,000		155		4,641		35,300
Allen, TX		7/10/2013		115,200	9 years		2 (5 years)		15,150		81		1,478		8,900
Englewood, CO		12/11/2013		99,797	8 years		2 (5 years)		18,250		66		1,497		11,315
Novi, MI		12/27/2013		156,200	10 years		1 (5 years)		7,300		42		684		4,380

Total				1,085,129				$	134,438	$	761	$	12,399	$	71,795

⁽¹⁾	The Clintonville, WI property was originally acquired in November 2005 for $5.3 million. After the expansion was completed in April 2013, the total investment in the property is $8.6 million.

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 11 properties acquired during the year ended December 31, 2014 as follows (dollars in thousands):


			Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Premium 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
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
Denver, CO				1,621		6,503		568		1,152		721		652		—		(1,217	)		—			10,000
Monroe, MI	⁽¹	⁾		1,118		23,890		942		1,497		1,350		1,953		—		—			—			30,750

			$	14,566	$	85,016	$	6,231	$	14,239	$	7,121	$	8,386	$	387	$	(1,236	)	$	(249	)	$	134,461

⁽¹⁾	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

In accordance with ASC 805, we determined the fair value of acquired assets related to the seven properties acquired during the year ended December 31, 2013 as follows (dollars in thousands):


					Tenant		In-place				Customer		Above Market		Below Market			Total Purchase
	Land		Building		Improvements		Leases		Leasing Costs		Relationships		Leases		Leases			Price
Egg Harbor Township, NJ	$	1,627	$	2,735	$	282	$	558	$	189	$	259	$	—	$	—		$	5,650
Vance, AL		457		9,721		808		1,097		678		627		—		—			13,388
Blaine, MN		1,060		9,347		1,172		1,361		694		816		—		—			14,450
Austin, TX		2,330		37,207		6,814		6,118		1,906		3,793		—		(1,168	)		57,000
Allen, TX		2,699		5,758		2,187		1,525		1,146		1,499		336		—			15,150
Englewood, CO		1,503		9,889		1,850		2,036		1,178		1,850		—		(56	)		18,250
Novi, MI		352		5,354		272		663		434		225		—		—			7,300

	$	10,028	$	80,011	$	13,385	$	13,358	$	6,225	$	9,069	$	336	$	(1,224	)	$	131,188

Schedule of Revenue and Earnings Recognized on Properties Acquired

Below is a summary of the total revenue and earnings recognized on the 11 properties acquired during the year ended December 31, 2014 (dollars in thousands):


					For the year ended December 31,
					2014
Location			Acquisition Date		Rental Revenue		Earnings ⁽¹⁾
Allen, TX				3/27/2014	$	435	$	249
Colleyville, TX				3/27/2014		357		206
Rancho Cordova, CA				4/22/2014		625		239
Coppell, TX				5/8/2014		390		226
Columbus, OH	⁽²	⁾		5/13/2014		790		272
Taylor, PA				6/9/2014		1,908		890
Aurora, CO				7/1/2014		384		253
Indianapolis, IN	⁽²	⁾		9/3/2014		489		44
Denver, CO				10/31/2014		166		82
Monroe, MI	⁽³	⁾		12/23/2014		61		31

					$	5,605	$	2,492

⁽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.

⁽³⁾	We acquired two properties and two leases with this acquisition. Rental revenue and earnings is reflective of aggregate rent and operating expenses among both properties.

Below is a summary of the total revenue and earnings recognized on the seven properties acquired during the year ended December 31, 2013 (dollars in thousands):


			For the year ended December 31,
			2013
	Acquisition
Location	Date		Rental Revenue		Earnings ⁽¹⁾
Egg Harbor Township, NJ		3/28/2013	$	373	$	209
Vance, AL		5/9/2013		757		363
Blaine, MN		5/10/2013		947		424
Austin, TX		7/9/2013		2,299		655
Allen, TX		7/10/2013		685		300
Englewood, CO		12/11/2013		85		25
Novi, MI		12/27/2013		9		5

			$	5,155	$	1,981

⁽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 years ended December 31, 2014 and 2013, respectively were acquired as of January 1, 2013. The table also assumes that properties acquired during the years ended December 31, 2013 and 2012, respectively, were acquired as of January 1, 2012. The pro-forma earnings for the years ended December 31, 2014, 2013 and 2012 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the earliest period presented (dollars in thousands, except per share amounts):


	For the year ended December 31, (unaudited)
	2014			2013			2012
Operating Data:
Total operating revenue	$	80,759		$	80,081		$	68,940
Total operating expenses		(60,728	)		(46,223	)		(37,457	)
Other expenses		(24,290	)		(32,929	)		(28,754	)

Net income (loss)		(4,259	)⁽¹⁾		929			2,729
Dividends attributable to preferred and senior common stock		(4,636	)		(4,394	)		(4,206	)

Net loss attributable to common stockholders	$	(8,895	)	$	(3,465	)	$	(1,477	)

Share and Per Share Data:
Basic and diluted loss per share of common stock	$	(0.52	)	$	(0.26	)	$	(0.13	)
Weighted average shares outstanding-basic and diluted		17,253,503			13,164,244			10,953,325

⁽¹⁾	We recognized a $14.2 million impairment loss and a $5.3 million gain on debt extinguishment as a result of our Roseville, MN deed in lieu transaction during the year ended December 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 each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
2015	$	70,794
2016		68,669
2017		68,290
2018		67,983
2019		68,405
Thereafter		312,030

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 (in thousands):


	December 31, 2014					December 31, 2013
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	59,233	$	(17,379	)	$	47,442	$	(15,158	)
Leasing costs		38,305		(11,411	)		31,339		(9,323	)
Customer relationships		41,243		(11,177	)		35,739		(10,407	)

	$	138,781	$	(39,967	)	$	114,520	$	(34,888	)


	Deferred Rent Receivable/Liability		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
Above market leases	$	8,314	$	(6,384	)	$	7,928	$	(6,085	)
Below market leases	$	15,939	$	(7,345	)	$	12,672	$	(6,657	)

	$	24,253	$	(13,729	)	$	20,600	$	(12,742	)

Total	$	163,034	$	(53,696	)	$	135,120	$	(47,630	)

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 years ended December 31, 2014 and 2013, respectively, were as follows:


Intangible Assets & Liabilities	2014		2013
In-place leases		10.1		8.9
Leasing costs		10.1		8.9
Customer relationships		15.1		13.7
Above market leases		9.3		8.8
Below market leases		10.0		7.5

All intangible assets & liabilities		11.5		10.0

Estimated Aggregate Amortization Expense

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 (dollars in thousands):


	Estimated
Year	Amortization Expense
2015	$	12,801
2016		11,972
2017		11,733
2018		11,633
2019		11,610
Thereafter		39,065

Total	$	98,814

Summary of Estimated Aggregate Rental Income

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 (dollars in thousands):


	Estimated Rental
Year	Income
2015	$	557
2016		438
2017		432
2018		432
2019		432
Thereafter		4,374

Total	$	6,665