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

Real Estate and Intangible Assets

9 Months Ended

Sep. 30, 2014

Property, Plant and Equipment [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 September 30, 2014 and December 31, 2013 (dollars in thousands):


	September 30, 2014			December 31, 2013
Real estate:
Land	$	86,737		$	79,153
Building and improvements		573,149			527,230
Tenant improvements		40,688			35,970
Accumulated depreciation		(93,401	)		(81,241	)

Real estate, net	$	607,173		$	561,112

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):


Location	Acquisition Date		Square Footage		Lease Term			Renewal Options			Total Purchase Price		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		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.

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

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

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,
	Acquisition		2014				2014
Location	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

The following table reflects pro-forma consolidated statements of operations as if the eight properties acquired during the three and nine months ended September 30, 2014 were acquired as of the beginning of the previous period. The pro-forma earnings for the three and nine months ended September 30, 2014 and 2013 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the previous period (dollars in thousands, except per share amounts):


	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Operating Data:
Total operating revenue	$	19,086		$	19,060		$	58,050		$	56,906
Total operating expenses		(11,434	)		(10,538	)		(47,780	)⁽¹⁾		(32,479	)
Other expenses		(7,283	)		(8,215	)		(21,269	)		(24,347	)

Net income (loss)		369			307			(10,999	)		80
Dividends attributable to preferred and senior common stock		(1,160	)		(1,106	)		(3,417	)		(3,274	)

Net loss attributable to common stockholders	$	(791	)	$	(799	)	$	(14,416	)	$	(3,194	)

Share and Per Share Data:
Basic and diluted loss per share of common stock	$	(0.04	)	$	(0.06	)	$	(0.86	)	$	(0.25	)
Weighted average shares outstanding-basic		17,739,084			14,196,423			16,685,162			12,613,354
Weighted average shares outstanding-diluted		17,739,084			14,196,423			16,685,162			12,613,354

⁽¹⁾	$14.2 million relates to the impairment charge recorded in operating expenses during the nine months ended September 30, 2014.

2013 Real Estate Activity

During the nine months ended September 30, 2013, we acquired five properties and completed an expansion of one property, which are summarized below (dollars in thousands):


Location	Acquisition/ Expansion Date		Square Footage		Lease Term			Renewal Options			Total Purchase/ Expansion Price		Acquistion 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		5/8/2013		170,000		10 years			2 (5 year options)			13,388		186		1,173			—
Blaine, MN		5/10/2013		92,275		6.9 years			2 (5 year options)			14,450		79		1,475			8,200
Austin, TX		7/9/2013		320,000		8 years			3 (3 year options)			57,000		155		4,641			35,300
Allen, TX ⁽⁴⁾		7/10/2013		115,200		11.5 years	⁽²⁾		2 (5 year options)	⁽²⁾		15,150		81		1,918	⁽³⁾		8,900

Total				829,132							$	108,888	$	653	$	10,658		$	56,100

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

⁽²⁾	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in August 2021 and contains 2 (5 year) renewal options.

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

⁽⁴⁾	The larger tenant occupying this property is subject to a gross lease. The smaller tenant occupying this property is subject to a triple net lease.

In accordance with ASC 805, we determined the fair value of acquired assets related to the five properties acquired during the nine months ended September 30, 2013 as follows (in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Total Purchase 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

	$	8,173	$	64,768	$	11,263	$	10,659	$	4,613	$	6,994	$	336	$	(1,168	)	$	105,638

Below is a summary of the total revenue and earnings recognized on the five properties acquired during the three and nine months ended September 30, 2013 (dollars in thousands):


			Rental Revenue				Net Income
Location	Acquisition Date		For the three months ended September 30, 2013		For the nine months ended September 30, 2013		For the three months ended September 30, 2013⁽¹⁾		For the nine months ended September 30, 2013⁽¹⁾
Egg Harbor Township, NJ		3/28/2013	$	122	$	250	$	61	$	130
Vance, AL		5/8/2013		293		464		147		218
Blaine, MN		5/10/2013		369		579		161		256
Austin, TX		7/9/2013		1,098		1,098		297		297
Allen, TX		7/10/2013		325		325		136		136

			$	2,207	$	2,716	$	802	$	1,037

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

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2014 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
Three Months ending December 31, 2014	$	16,929
2015		68,254
2016		65,416
2017		64,689
2018		64,103
2019		64,403
Thereafter		290,868

Significant Existing Real Estate Activity

On April 4, 2014, our tenant occupying our Newburyport, Massachusetts property notified us of their intention not to exercise their renewal option, as the tenant is relocating to Rhode Island. The tenant will continue paying rent and operating expenses through the lease termination date of April 30, 2015.

On May 6, 2014, we extended the lease with the tenant occupying our property located in Austin, Texas. The lease covering this property was extended for an additional eight years, through June 2022. The lease was originally set to expire in June 2015. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.7 million. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.2 million in leasing commissions, and will pay a total of approximately $1.3 million in tenant improvements between now and second quarter 2015.

On June 11, 2014, we extended the lease with the tenant occupying our property located in Burnsville, Minnesota. The new lease covers approximately two-thirds of the space and was extended for an additional eight years, through January 2023. The lease was originally set to expire in June 2015. The tenant in this property will continue to pay rent on the entire building through June 2015, and we are working to identify tenants to lease the remaining one-third of the building. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1.0 million. Rental income per square foot increased 14% from the previous lease. The lease grants the tenant two options to extend the lease for an additional three years each. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.5 million in leasing commissions, and will pay $3.3 million in tenant improvements between now and first quarter 2015.

On July 7, 2014, we extended the lease with one of the tenants occupying our property located in Akron, Ohio. The new lease covers approximately two-thirds of the space and was extended for an additional five years, through March 2020. The lease was originally set to expire in March 2015. This tenant will continue to pay its existing rent through March 2015. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.6 million. The lease grants the tenant two options to extend the lease for an additional five years each. 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, and $0.9 million in tenant improvements.

On August 1, 2014, we modified the leases with the tenants occupying our properties located in Austin and San Antonio, Texas. The leases covering these respective properties were adjusted to defer rental payments covering the period September 1, 2014 through November 30, 2014. The tenants are current on their rental payments through the quarter ended September 30, 2014.

On September 25, 2014, we modified the lease with the tenant occupying our property located in Concord Township, Ohio. The lease covering this property was adjusted to defer a portion of rental payments covering the period August 2014 through December 2014. The tenant will repay the deferred rent balance monthly during calendar year 2015. This rental deferral has no impact on the annualized straight line rents recognized on this property. The tenant is current on its rental payments through the quarter ended September 30, 2014.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of September 30, 2014 and December 31, 2013, respectively (dollars in thousands):


	September 30, 2014					December 31, 2013
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	58,925	$	(18,391	)	$	47,442	$	(15,158	)
Leasing costs		36,969		(11,419	)		31,339		(9,323	)
Customer relationships		40,909		(12,351	)		35,739		(10,407	)

	$	136,803	$	(42,161	)	$	114,520	$	(34,888	)

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2014 and 2013, respectively, were as follows


Intangible Assets & Liabilities	2014		2013
In-place leases		10.2		8.8
Leasing costs		10.2		8.8
Customer relationships		14.6		13.5
Above market leases		9.3		8.8
Below market leases		9.9		7.2

All intangible assets & liabilities		11.5		9.9

The estimated aggregate amortization expense for the remainder of 2014 and for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Estimated Amortization Expense
Three Months ending December 31, 2014	$	3,049
2015		11,931
2016		11,224
2017		11,018
2018		10,719
2019		10,711
Thereafter		35,990