e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 |
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 001-33097
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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MARYLAND
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02-0681276 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 287-5800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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(Title of Each Class)
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(Name of exchange on which registered) |
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Common Stock, par value $0.001 per share
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NASDAQ Global Select Market |
7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share
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NASDAQ Global Select Market |
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.001 per share
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ.
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this 10-K or
any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o. |
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(Do not check if smaller Reporting Company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ .
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30,
2010, based on the closing price on that date of $16.34 on the NASDAQ Global Select Market, was
$130,865,524. For the purposes of calculating this amount only, all directors and executive
officers of the registrant have been deemed to be affiliates.
The number of shares of the registrants Common Stock, $0.001 par value, outstanding as of March 8,
2011 was 9,571,379.
Documents Incorporated by Reference: Portions of the registrants Proxy Statement relating to the
Registrants 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K.
GLADSTONE COMMERCIAL CORPORATION
FORM 10-K FOR THE YEAR ENDED
DECMBER 31, 2010
TABLE OF CONTENTS
2
Forward-Looking Statements
Our disclosure and analysis in this Annual Report on Form 10-K, or Form 10-K, and the documents
that are incorporated by reference herein contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements provide
our current expectations or forecasts of future events and are not statements of historical fact.
These forward-looking statements include information about possible or assumed future events,
including, among other things, discussion and analysis of our future financial condition, results
of operations and funds from operations, or FFO, our strategic plans and objectives, cost
management, occupancy and leasing rates and trends, liquidity and ability to refinance our
indebtedness as it matures, anticipated capital expenditures (and access to capital) required to
complete projects, amounts of anticipated cash distributions to our stockholders in the future and
other matters. Words such as anticipates, expects, intends, plans, believes, seeks,
estimates and variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. Statements regarding the following subjects, among
others, are forward-looking by their nature:
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our business and financing strategy; |
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our ability to implement our business plan; |
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pending transactions; |
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our projected operating results; |
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our ability to obtain future financing arrangements; |
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estimates relating to our future distributions; |
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our understanding of our competition and our ability to compete effectively; |
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market and industry trends; |
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interest and insurance rates; |
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estimates of our future operating expenses, including payments to our
Adviser (as defined herein) under the terms of our Advisory Agreement (as defined
herein); |
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projected capital expenditures; and |
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use of the proceeds of our New Line of Credit (as defined herein), mortgage
notes payable and other future capital resources, if any. |
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or
false. You are cautioned to not place undue reliance on forward-looking statements. Except as
otherwise may be required by law, we undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated events or actual
operating results. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including, but not limited to:
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the loss of any of our key employees, such as Mr. David Gladstone, our
Chairman and Chief Executive Officer, Mr. Terry Lee Brubaker, our Vice Chairman and
Chief Operating Officer, or Mr. George Stelljes III, our President and Chief Investment
Officer; |
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general volatility of the capital markets and the market price of our common
and preferred stock; |
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risks associated with negotiation and consummation of pending and future
transactions; |
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changes in our business strategy; |
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the adequacy of our cash reserves and working capital; |
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our failure to successfully integrate and operate acquired properties and
operations; |
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defaults upon or non-renewal of leases by tenants; |
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decreased rental rates or increased vacancy rates; |
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the degree and nature of our competition; |
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availability, terms and deployment of capital, including the ability to
maintain and borrow under our New Line of Credit, arrange for long-term mortgages on our
properties, secure one or more additional long-term lines of credit and raise equity
capital; |
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our ability to identify, hire and retain highly-qualified personnel in the
future; |
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changes in our industry or the general economy; |
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changes in real estate and zoning laws and increases in real property tax
rates; |
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changes in governmental regulations, tax rates and similar matters; and |
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environmental uncertainties and risks related to natural disasters. |
This list of risks and uncertainties, however, is only a summary of some of the most important
factors to us and is not intended to be exhaustive. You should carefully review the risks set forth
herein under the caption Item 1A. Risk Factors. New factors may also emerge from time to time
that could materially and adversely affect us.
Overview
Gladstone Commercial Corporation (which we refer to as we, us, or the Company,) is a
real estate investment trust, or REIT, that was incorporated under the General Corporation Laws of
the State of Maryland on February 14, 2003 primarily for the purpose of investing in and owning net
leased industrial and commercial real property and selectively making long-term industrial and
commercial mortgage loans. Most of our portfolio of real estate we currently own is leased to a
wide cross section of tenants ranging from small businesses to large public companies, many of
which are corporations that do not have publicly rated debt. We have in the past entered into, and
intend in the future to enter into, purchase agreements for real estate having triple net leases
with terms of approximately 10 to 15 years and built in rental increases. Under a triple net
lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate
taxes with respect to the leased property. We currently own a total of 65 properties.
We conduct substantially all of our activities, including the ownership of all of our properties,
through Gladstone Commercial Limited Partnership, a Delaware limited partnership, which we refer to
as our Operating Partnership. We control our Operating Partnership through our ownership of GCLP
Business Trust II, a Massachusetts business trust, which is the general partner of our Operating
Partnership, and of
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GCLP Business Trust I, a Massachusetts business trust, which currently holds
all of the limited partnership units of our Operating Partnership. We expect that our Operating
Partnership may issue limited partnership units from time to time in exchange for industrial and
commercial real property. Limited partners who hold limited partnership units in our Operating
Partnership will be entitled to redeem these units for cash or, at our election, shares of our
common stock on a one-for-one basis at any time.
Our Operating Partnership is also the sole member of Gladstone Commercial Lending, LLC, which we
refer to as Gladstone Commercial Lending. Gladstone Commercial Lending is a Delaware limited
liability company that was formed to hold all of our real estate mortgage loans.
Our Investment Objectives and Our Strategy
Our principal investment objectives are to generate income from rental properties and, to a much
lesser extent, mortgage loans, which we use to fund our continuing operations and to pay out
monthly cash distributions to our stockholders. We intend to grow the distribution to stockholders
over time, and to increase the value of our common stock. Our primary strategy to achieve our
investment objectives is to invest in and own a diversified portfolio of leased industrial and
commercial real estate that we believe will produce stable cash flow and increase in value. We
expect to sell some of our real estate assets from time to time when our Adviser determines
that doing so would be advantageous to us and our stockholders. We also expect to occasionally make
mortgage loans secured by income-producing commercial or industrial real estate, which loans may
have some form of equity participation. As of December 21, 2010, we had no investments in mortgage
loans.
Our strategy includes the use of leverage so that we may make more investments than would otherwise
be possible in order to maximize potential returns to stockholders. We are not limited with
respect to the amount of leverage that we may use for the acquisition of any specific property. We
intend to use non-recourse mortgage financing that will allow us to limit our loss exposure on any
property to the amount of equity invested in such property. However, the market for long-term
mortgages has been limited, as the collateralized mortgage-backed securities, or CMBS, market has
experienced significant disruption. With the stresses upon the CMBS market, many banks are not
lending on industrial and commercial real estate as they are no longer able to sell these loans to
the CMBS market and are not willing or able to keep these loans on their balance sheets. In
addition, many banks have significantly curtailed their general lending practices, as they are
having difficulty valuing the underlying real estate in this market. We are, however, beginning to
see banks that are willing to issue medium-term mortgages, between two and five years, on
substantially less favorable terms than were previously available. Consequently, we continue to
focus on using medium-term mortgages to finance our real estate activities until the market for
long-term mortgages returns.
Investment Policies and Policies with Respect to Certain Activities
Types of Investments
Overview
We intend that substantially all of our investments will be generated from the ownership of
income-producing real property or, to a much lesser extent, mortgage loans secured by real
property. We expect that the vast majority of our investments will be structured as net leases, but
if a net lease would have an adverse impact on a potential tenant, or would otherwise be
inappropriate for us, we may structure our investment as a mortgage loan. Investments are not
restricted to geographical areas, but we expect that most of our investments in real estate will be
made within the continental United States. Some of our investments may also be made through joint
ventures that would permit us to own interests in large properties without restricting the
diversity of our portfolio. Our stockholders are not afforded the opportunity to evaluate the
economic merits of our investments or the terms of any dispositions of properties. See Risk
FactorsOur success depends on the performance of our Adviser, and, if our Adviser
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inadvisable investment or management decisions, our operations could be materially adversely
impacted.
We anticipate that we will make substantially all of our investments through our Operating
Partnership and Gladstone Commercial Lending. Our Operating Partnership and Gladstone Commercial
Lending may acquire interests in real property or mortgage loans in exchange for the issuance of
limited partnership units, for cash or through a combination of both. Units issued by our Operating
Partnership generally will be redeemable for cash or, at our election, shares of our common stock
on a one-for-one basis. However, we may in the future also conduct some of our business and hold
some of our interests in real properties or mortgage loans through one or more wholly-owned
subsidiaries that are not owned, directly or indirectly, through our Operating Partnership.
Property Acquisitions and Net Leasing
To date, a majority of our properties have been purchased from owners that have leased their
properties to non-affiliated tenants, and while we have engaged in some transactions with tenants
who have consummated sale-leaseback transactions, these transactions do not comprise the dominant
portion of our portfolio. We expect that some of our sale-leaseback transactions will be in
conjunction with acquisitions, recapitalizations or other corporate transactions affecting our
tenants. In these transactions, we may act as one of several sources of financing for these
transactions by purchasing one or more properties from the tenant and by net leasing it to the
tenant or its successor in interest. For a discussion of the risks associated with leasing property
to leveraged tenants, see Risk FactorsHighly leveraged tenants or borrowers may be
unable to pay rent or make mortgage payments, which could adversely affect our cash available to
make distributions to our stockholders.
In limited circumstances, we have granted tenants an option to purchase the leased property, and we
anticipate granting these options to select tenants in the future. In these cases, we generally
seek to fix the option purchase price at the greater of our purchase price for the property and the
fair market value of the property at the time the option is exercised.
Our portfolio consists primarily of single-tenant commercial and industrial real property; however,
we also consider multi-tenant commercial and industrial properties, as well as retail and medical
properties. Generally, we lease properties to tenants that our Adviser deems creditworthy under
leases that will be full recourse obligations of our tenants or their affiliates. In most cases,
our leases will be triple net leases that require the tenant to pay all the operating costs, costs of
maintenance, insurance and real estate taxes on the property. We seek to obtain lease terms of
approximately 10 to 15 years with built-in rental increases.
Investments in Mortgage Loans
Although we expect such investments to be made sparingly, we may elect to structure our investment
in a particular property as a mortgage loan secured by the property in situations where a standard
net lease transaction would have an adverse tax impact on the seller of a property or would
otherwise be inappropriate for us. We anticipate that most of our lending transactions will be
loans secured by industrial or commercial property. Our Adviser will attempt to structure mortgage
loans in a manner that would provide us with current income substantially similar to that which we
could expect to receive had the investment been structured as a net lease transaction.
To the extent that we invest in mortgage loans, we will generally originate those loans. However,
we may also purchase mortgage loans from banks, CMBS pools, or other lenders if such transactions
are consistent with our investment objectives. Our Adviser will service the mortgage loans in our
portfolio by monitoring the collection of monthly principal and interest payments on our behalf.
There were no mortgage loans outstanding as of December 31, 2010.
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Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
We consider underwriting of the real estate and the tenant for the property (or the borrower in the
case of a mortgage loan) to be the most important aspects of making an investment. Evaluating the
creditworthiness of the tenant or borrower and its ability to generate sufficient cash flow to make
payments to us pursuant to the lease or the mortgage loan is the most important aspect of our
underwriting procedures. In analyzing potential acquisitions of properties and leases, our Adviser
reviews all aspects of the potential transaction, including tenant and real estate fundamentals, to
determine whether potential acquisitions and leases can be structured to satisfy our acquisition
criteria. The criteria listed below provide general guideposts that our Adviser may consider when
underwriting leases and mortgage loans:
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Credit Evaluation. Our Adviser evaluates each potential tenant for its
creditworthiness, considering factors such as management experience,
industry position and fundamentals, operating history and capital
structure. A prospective tenant that is deemed creditworthy does not
necessarily mean that we will consider the tenants property to be
investment grade. Our Adviser seeks tenants that range from small
businesses, many of which do not have publicly rated debt, to large
public companies. Our Advisers investment professionals have
substantial experience in locating and financing these types of
companies. By leasing properties to these tenants, we believe that we
will generally be able to charge rent that is higher than the rent
charged to tenants with unleveraged balance sheets and recognized
credit, thereby enhancing current return from these properties as
compared with properties leased to companies whose credit potential
has already been recognized by the market. Furthermore, if a tenants
credit does improve, the value of our lease or investment will likely
increase (if all other factors affecting value remain unchanged). In
evaluating a possible investment, we believe that the creditworthiness
of a prospective tenant is normally a more significant factor than the
unleased value of the property itself. While our Adviser selects
tenants it believes to be creditworthy, tenants are not required to
meet any minimum rating established by an independent credit rating
agency. Our Advisers standards for determining whether a particular
tenant is creditworthy vary in accordance with a variety of factors
relating to specific prospective tenants. The creditworthiness of a
tenant is determined on a tenant by tenant and case by case basis.
Therefore, general standards for creditworthiness cannot be applied.
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Leases with Increasing Rent. Our Adviser seeks to include a clause in
each lease that provides for annual rent escalations over the term of
the lease. These increases will generally be fixed; however certain
leases are tied to increases in indices such as the consumer price
index. |
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Diversification. Our Adviser attempts to diversify our portfolio to
avoid dependence on any one particular tenant, facility type,
geographic location or tenant industry. By diversifying our portfolio,
our Adviser intends to reduce the adverse effect on our portfolio of a
single under-performing investment or a downturn in any particular
industry or geographic region. Total rental income consisted of the
following tenant industry classifications as of December 31, 2010 and
December 31, 2009:
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December 31, 2010 |
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December 31, 2009 |
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Percentage of |
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Percentage of |
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Industry Classification |
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Rental Income |
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Rental Income |
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Rental Income |
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Rental Income |
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Electronics |
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$ |
6,165,788 |
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15.0 |
% |
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$ |
6,164,789 |
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14.9 |
% |
Healthcare, Education & Childcare |
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6,145,415 |
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14.9 |
% |
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6,145,415 |
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14.8 |
% |
Telecommunications |
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5,447,365 |
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13.3 |
% |
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5,447,033 |
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13.1 |
% |
Diversified/Conglomerate Manufacturing |
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3,664,686 |
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8.9 |
% |
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3,664,686 |
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8.8 |
% |
Chemicals, Plastics & Rubber |
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3,130,133 |
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7.6 |
% |
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3,173,514 |
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7.6 |
% |
Machinery |
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2,332,672 |
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5.7 |
% |
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2,389,607 |
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5.8 |
% |
Containers, Packaging & Glass |
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2,330,715 |
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5.7 |
% |
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2,330,246 |
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5.6 |
% |
Beverage, Food & Tobacco |
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2,188,793 |
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5.2 |
% |
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2,188,755 |
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5.3 |
% |
Printing & Publishing |
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2,187,504 |
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5.3 |
% |
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2,189,033 |
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5.3 |
% |
Buildings and Real Estate |
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2,075,103 |
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5.0 |
% |
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2,025,668 |
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4.9 |
% |
Oil & Gas |
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1,282,582 |
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3.1 |
% |
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1,138,136 |
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2.7 |
% |
Personal & Non-Durable Consumer
Products |
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1,228,100 |
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2.9 |
% |
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1,354,721 |
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3.3 |
% |
Automobile |
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1,166,654 |
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2.8 |
% |
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1,166,654 |
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2.8 |
% |
Personal, Food & Miscellaneous Services |
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575,006 |
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1.4 |
% |
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575,006 |
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1.4 |
% |
Home & Office Furnishings |
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529,743 |
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1.3 |
% |
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529,743 |
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1.3 |
% |
Insurance |
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421,672 |
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1.0 |
% |
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722,866 |
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1.7 |
% |
Diversified/Conglomerate Services |
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308,105 |
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0.9 |
% |
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308,105 |
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0.7 |
% |
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$ |
41,180,036 |
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100.0 |
% |
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$ |
41,513,977 |
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100.0 |
% |
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Property Valuation. The business prospects and the financial strength
of the tenant are important aspects of the evaluation of any sale and
leaseback of property, or acquisition of property subject to a net
lease, particularly a property that is specifically suited to the
needs of the tenant. We generally require quarterly unaudited and
annual audited financial statements of the tenant in order to
continuously monitor the financial performance of the property. We
evaluate the financial capability of the tenant and its ability to
perform per the terms of the lease. We may also examine the available
operating results of prospective investment properties to determine
whether or not projected rental levels are likely to be met. We then
compute the value of the property based on historical and projected
operating results. In addition, each property that we propose to
purchase will be appraised by an independent appraiser. These
appraisals may take into consideration, among other things, the terms
and conditions of the particular lease transaction, the quality of the
tenants credit and the conditions of the credit markets at the time
the lease transaction is negotiated. The appraised value may be
greater than the construction cost or the replacement cost of a
property, and the actual sale price of a property, if we resell the
property in the future, may be greater or less than its appraised
value. We generally limit our property acquisition cost or value to
between $3 million and $30 million. |
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Properties Important to Tenant Operations. Our Adviser generally seeks
to acquire investment properties that are essential or important to
the ongoing operations of the prospective tenant. We believe that
these investment properties provide better protection in the event a
tenant becomes bankrupt, as leases on properties essential or
important to the operations of a bankrupt tenant are typically less
likely to be rejected in the bankruptcy or otherwise terminated. |
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Lease Provisions that Enhance and Protect Value. When appropriate, our
Adviser attempts to include provisions in our leases that require our
consent to specified tenant activity or require the tenant to satisfy
specific operating tests. These provisions may include, for example,
operational or financial covenants of the tenant, as well as
indemnification of us by the tenant against environmental and other
contingent liabilities. We believe that these provisions serve to
protect our investments from changes in the operating and financial
characteristics of a tenant that may impact its ability to satisfy its
obligations to us or that could reduce the value of our properties. We
generally also seek covenants requiring tenants to receive our consent
prior to any change in control of the tenant. |
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Credit Enhancement. Our Adviser may also seek to enhance the
likelihood of a tenants lease obligations being satisfied through a
cross-default with other tenant obligations, a letter of credit or a
guaranty of lease obligations from each tenants corporate parent. We
believe that this type of credit enhancement, if obtained, provides us
with additional financial security. |
Underwriting of the Real Estate and Due Diligence Process
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In addition to underwriting the tenant or borrower, we also underwrite the real estate to be
acquired or secured by one of our mortgages. On our behalf, our Adviser performs a due diligence
review with respect to each property, such as evaluating the physical condition of a property,
zoning and site requirements to ensure the property is in conformance with all zoning regulations
as well as an environmental site assessment, in an attempt to determine potential environmental
liabilities associated with a property prior to its acquisition, although there can be no assurance
that hazardous substances or wastes (as defined by present or future federal or state laws or
regulations) will not be discovered on the property after we acquire it. See Risk
FactorsPotential liability for environmental matters could adversely affect our
financial condition.
Our Adviser also reviews the structural soundness of the improvements on the property and may
engage a structural engineer to review all aspects of the structures in order to determine the
longevity of each building on the property. This review normally also includes the components of
each building, such as the roof, the electrical wiring, the heating and air-conditioning system,
the plumbing, parking lot and various other aspects such as compliance with state and federal
building codes.
Our Adviser also physically inspects the real estate and surrounding real estate as part of
determining the value of the real estate. All of our Advisers due diligence is aimed at arriving
at a valuation of the real estate under the assumption that it was not rented to the tenant that we
are considering. As part of this process, our Adviser may consider one or more of the following
items:
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The comparable value of similar real estate in the same general area of the prospective property. In this
regard, comparable property is difficult to define because each piece of real estate has its own distinct
characteristics. But to the extent possible, comparable property in the area that has sold or is for sale
will be used to determine if the price to be paid for the property is reasonable. The question of
comparable properties sale prices is particularly relevant if a property might be sold by us at a later
date. |
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The comparable real estate rental rates for similar properties in the same area of the prospective property. |
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Alternative property uses that may offer higher value. |
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The cost of replacing the property if it were to be sold. |
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The assessed value as determined by the local real estate taxing authority. |
In addition, our Adviser supplements its valuation with a real estate appraisal in connection with
each investment that we consider. When appropriate, our Adviser may engage experts to undertake
some or all of the due diligence efforts described above.
Additional Investment Considerations
Terms of Mortgage Loans
Some of the mortgage loans that we may make, purchase or otherwise acquire in the future, in
addition to providing for base interest at a fixed or variable rate, may allow us to participate in
the economic benefits of any increase in the value of the property securing repayment of the loan
as though we were an equity owner of a portion of the property. In addition, it is possible that
participation may take other forms where our Adviser deems participation available or otherwise
appropriate, provided that such participation does not jeopardize our REIT tax status. The form and
extent of our participation, if any, will vary with each transaction depending on factors such as
credit support provided by the borrower, the interest rate on our mortgage loans and the
anticipated and actual cash flow from the underlying real property. Our mortgage loans may include
first mortgage loans, leasehold mortgage loans or conventional mortgage loans without
9
equity
enhancements. We have not in the past, nor do we intend in the future to make or invest in
sub-prime mortgage loans.
Except as described below, any mortgage loan in our portfolio will generally be secured by real
property with a demonstrable income-producing potential as well as a security interest in personal
or mixed property connected with the real property.
In the event that we make or invest in a mortgage loan, we will generally require a mortgagees
title insurance policy or commitment as to the lien priority of a mortgage or the condition of
title in connection with each mortgage loan. We also may obtain an independent appraisal for
underlying real property, that our Adviser may consider when determining whether or not to make or
invest in a particular mortgage loan. In making mortgage loans that, when combined with existing
loans that are on a parity with or senior to our mortgage loan, exceed 85% of the appraised value
of any underlying real property, our Adviser considers additional underwriting
criteria such as the net worth of the borrower, the borrowers credit rating, if any, the
anticipated cash flow of the borrower, any additional collateral or other credit enhancements
provided by the borrower or its affiliates and other factors our Adviser deems appropriate. Where
we think it is appropriate, we may make mortgage loans that are subordinated to a first mortgage on
a property. For example, if the property is subject to an economic development loan as a first
mortgage at a particularly low interest rate, we may make a second mortgage loan on the property.
However, we will not make a second mortgage loan on any property that we would not consider owning,
subject to the existing senior financing, and leasing to the tenant.
From time to time, we may purchase mortgage loans, including loans being sold at a discount, from
banks and other financial institutions if the subject property otherwise satisfies our underwriting
criteria.
Other Investments
Under IRS REIT rules, we may invest up to an aggregate of 10% of our net equity in unimproved or
non-income-producing real property and in equity interests. Equity interests are defined
generally to mean stock, warrants or other rights to purchase the stock of, or other equity
interests in, a tenant of a property, an entity to which we lend money or a parent or controlling
person of a borrower or tenant, and we will not acquire equity interests in any entity other than
in connection with a lease or mortgage loan transaction. We anticipate that equity interests will
not exceed 5% of our net equity in the aggregate, and we will not make any such investment in
equity interests if such investment would adversely affect our qualification as a REIT for tax
purposes. To the extent that we hold equity interests in tenants or borrowers, we anticipate that
they will generally be restricted securities as defined in Rule 144 under the Securities Act.
Under this rule, we may be prohibited from reselling the equity securities without limitation until
we have fully paid for and held any such securities for one year. The issuer of equity interests,
in which we invest, may never register these interests under the federal securities laws, since any
decision of an issuer to register its securities may depend on any number of factors, including the
success of its operations.
We will generally invest in unimproved or non-income-producing property only when our Adviser
believes that such property will appreciate in value or will increase the value of an adjoining or
neighboring property that we own.
We might use taxable REIT subsidiaries to acquire or hold property, including equity interests that
may not be deemed to be REIT-qualified assets. Taxable REIT subsidiaries are taxed as ordinary
corporations and any taxes paid by such entity will reduce cash available to us for payment of
distributions to our stockholders.
Joint Ventures
In the future, we may also enter into joint ventures, partnerships and other mutual arrangements
with real estate developers, property owners and others for the purpose of obtaining an equity
interest in a property
10
in accordance with our investment policies. Joint venture investments could
permit us to own interests in large properties without unduly restricting the diversity of our
portfolio. We will not enter into a joint venture to make an investment that we would not otherwise
be permitted to make on our own.
Use of Leverage
Non-recourse Financing
Our strategy is to use long-term mortgage borrowings as a financing mechanism in amounts that
we believe will maximize the return to our stockholders. As discussed above in Our Investment
Objectives and Our Strategy, long-term mortgages are currently unavailable to us, and we will
focus on medium-term mortgages until the market returns. Currently, all of our long-term mortgage
borrowings are structured as non-recourse to us, and we intend to structure any medium-term
mortgages in the same manner, with limited exceptions that would trigger recourse to us only upon
the occurrence of certain fraud, misconduct, environmental or bankruptcy events. The use
of non-recourse financing allows us to limit our exposure to the amount of equity invested in the
properties pledged as collateral for our borrowings. Non-recourse financing generally restricts a
lenders claim on the assets of the borrower, and as a result, the lender generally may look only
to the property securing the debt for satisfaction of the debt. We believe that this financing
strategy, to the extent available, protects our other assets. However, we can provide no assurance
that non-recourse financing will be available on terms acceptable to us, or at all, and there may
be circumstances where lenders have recourse to our other assets. There is no limitation on the
amount we may borrow against any single investment property.
We believe that, by operating on a leveraged basis, we will have more funds available and,
therefore, will make more investments than would otherwise be possible if we operated on a
non-leveraged basis. We believe that this creates a more diversified portfolio and maximizes
potential returns to our stockholders. We may refinance properties during the term of a loan when
we believe it is advantageous.
Recourse Financing
Borrowings under our $50.0 million line of credit, which is secured by those properties pledged to
the borrowing base under the line of credit are considered recourse financing, which means that our
lenders have a claim against our assets. We intend to use our existing line of credit as a
warehouse line of credit whereby we borrow on a short-term basis until long-term financing can be
arranged.
Other Investment Policies
Working Capital Reserves
We may establish a working capital reserve, which we would anticipate to be sufficient to
satisfy our liquidity requirements. Our liquidity could be adversely affected by unanticipated
costs, greater-than-anticipated operating expenses or cash shortfalls in funding our distributions
to stockholders. To the extent that the working capital reserve is insufficient to satisfy our cash
requirements, additional funds may be produced from cash generated from operations or through
short-term borrowings. In addition, subject to limitations described in this Form 10-K, we may
incur indebtedness in connection with:
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the acquisition of any property; |
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the refinancing of the debt upon any property; or |
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the leveraging of any previously unleveraged property. |
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For additional information regarding our borrowing strategy, see Investment Policies and Policies
with Respect to Certain ActivitiesUse of Leverage.
Holding Period for and Sale of Investments; Reinvestment of Sale Proceeds
We intend to hold each property we acquire for an extended period. However, circumstances might
arise which could result in the early sale of some properties if, in the judgment of our Adviser,
the sale of the property is in the best interests of us and our stockholders.
The determination of whether a particular property should be sold or otherwise disposed of will be
made after consideration of all relevant factors, including prevailing economic conditions, with a
view to achieving maximum capital appreciation. The selling price of a property which is subject to
a net lease will be determined in large part by the amount of rent payable under the lease, the
remaining term of the lease, and the creditworthiness of the tenant. In connection with our sales
of properties, we may lend the purchaser all or a portion of the purchase price. In these
instances, our taxable income may exceed the cash received by us in connection with any such sale,
which could cause us to delay required distributions to our stockholders.
The terms of any sale will be dictated by custom in the area in which the property being sold is
located and the then-prevailing economic conditions. A decision to provide financing to any
purchaser would be made only after an investigation into and consideration of the same factors
regarding the purchaser, such as creditworthiness and likelihood of future financial stability, as
are undertaken when we consider a net lease or mortgage loan transaction.
We may continually reinvest the proceeds of property sales in investments that either we or our
Adviser believe will satisfy our investment policies.
Investment Limitations
There are numerous limitations on the manner in which we may invest our funds, which unless
otherwise noted below, may be amended or waived by the Board of Directors at anytime. The Board of
Directors has adopted a policy that we will not:
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invest in real property owned by our Adviser, any of its affiliates or any business in which our Adviser or any of its subsidiaries have invested except that
we may lease property to existing and prospective portfolio companies of current or future affiliates, such as Gladstone Capital Corporation, Gladstone
Investment Corporation and entities advised by our Adviser, so long as that entity does not control the portfolio company and the transaction is approved by
both companies board of directors (this policy may not be changed without the approval of our stockholders); |
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invest in commodities or commodity futures contracts, with this limitation not being applicable to futures contracts when used solely for the purpose of
hedging in connection with our ordinary business of investing in properties and making mortgage loans; |
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invest in contracts for the sale of real estate unless the contract is appropriately recorded in the chain of title; |
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invest in any individual property with a cost in excess of 20% of our total assets at the time of investment; |
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make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10% of our total
assets. Unimproved real property is property which has the following three characteristics: |
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the property was not acquired for the purpose of producing rental or other operating income; |
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no development or construction is in process on the property; and |
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no development or construction on the property is planned in good faith to commence on the
property within one year of acquisition; |
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issue equity securities on a deferred payment basis or other similar arrangement; |
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issue debt securities in the absence of adequate cash flow to cover debt service; |
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issue redeemable securities as defined in Section 2(a)(32) of the Investment Company Act of 1940; |
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grant warrants or options to purchase shares of our stock to our Adviser or its affiliates; |
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engage in trading, as compared with investment activities, or engage in the business of underwriting, or the agency distribution of, securities issued by
other persons; |
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acquire securities in any company holding investments or engaging in activities prohibited in the foregoing clauses; or |
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make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our affiliates. |
Conflict of Interest Policy
We have adopted policies to reduce potential conflicts of interest. In addition, our directors are
subject to certain provisions of Maryland law that are designed to minimize conflicts. However, we
cannot assure you that these policies or provisions of law will reduce or eliminate the influence
of these conflicts.
Under our current conflict of interest policy, without the approval of a majority of our
disinterested directors, we will not:
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acquire from or sell to any of our officers, directors or our
Advisers employees, or any entity in which any of our officers,
directors or employees has an interest of more than 5%, any assets or
other property; |
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borrow from any of our directors, officers or employees, or any
entity, in which any of our officers, directors or employees has an
interest of more than 5% or; |
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engage in any other transaction with any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees has an interest of more than 5% (except that our Adviser may
lease office space in a building that we own, provided that the rental
rate under the lease is determined by our independent directors to be
at a fair market rate). |
Our policy also prohibits us from purchasing any real property owned by or co-investing with our
Adviser, any of its affiliates or any business in which our Adviser or any of its subsidiaries have
invested, except that we may lease property to existing and prospective portfolio companies of
current or future affiliates, such as Gladstone Capital Corporation or Gladstone Investment
Corporation and other entities advised by our Adviser, so long as that entity does not control the
portfolio company and the transaction is approved by both companies board of directors. If we decide to change this policy on co-investments with our
Adviser or its affiliates, we will seek our stockholders approval.
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Future Revisions in Policies and Strategies
Our independent directors periodically review our investment policies to evaluate whether they are
in the best interests of us and our stockholders. Our investment procedures, objectives and
policies may vary as new investment techniques are developed or as regulatory requirements change,
and except as otherwise provided in our charter or bylaws, may be altered by a majority of our
directors (including a majority of our independent directors) without the approval of our
stockholders, to the extent that our board of directors determines that such modification is in the
best interest of our stockholders. Among other factors, developments in the market which affect the
policies and strategies described in this report or which change our assessment of the market may
cause our board of directors to revise our investment policies and strategies.
Our Adviser and Administrator
Our business is managed by our Adviser. The officers, directors and employees of our Adviser have
significant experience in making investments in and lending to businesses of all sizes, including
investing in real estate and making mortgage loans. We have entered into the Advisory Agreement (as
defined below) with our Adviser under which our Adviser is responsible for managing our assets and
liabilities, for operating our business on a day-to-day basis and for identifying, evaluating,
negotiating and consummating investment transactions consistent with our investment policies as
determined by our board of directors from time to time. Our Administrator employs our chief
financial officer, chief compliance officer, internal counsel, treasurer, investor relations and
their respective staffs.
David Gladstone, our chairman and chief executive officer, is also the chairman, chief executive
officer and the controlling stockholder of our Adviser. Terry Lee Brubaker, our vice chairman,
secretary and chief operating officer and a member of our board of directors, also serves in the
same capacities for our Adviser. George Stelljes III, our president and chief investment officer
and a member of our board of directors, also serves in the same capacities for our Adviser.
Our Adviser maintains an investment committee that approves each of our investments. This
investment committee is comprised of Messrs. Gladstone, Brubaker and Stelljes. We believe that our
Advisers investment committee review process gives us a unique competitive advantage over other
REITs because of the substantial experience and perspective that the members possess in evaluating
the blend of corporate credit, real estate and lease terms that combine to provide an acceptable
risk for our investments.
Our Advisers board of directors has empowered its investment committee to authorize and approve
our investments, subject to the terms of the advisory agreement. Before we acquire any property,
the transaction is reviewed by our Advisers investment committee to ensure that, in its view, the
proposed transaction satisfies our investment criteria and is within our investment policies.
Approval by our Advisers investment committee is generally the final step in the property
acquisition approval process, although the separate approval of our board of directors is required
in certain circumstances described below. For further detail on this process, please see
Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions.
Our Adviser is headquartered in McLean, Virginia, a suburb of Washington D.C., and also has offices
in New York, Connecticut, Illinois, Texas and Georgia.
Investment Advisory and Administration Agreements
Many of the services performed by our Adviser and Administrator in managing our day-to-day
activities are summarized below. This summary is provided to illustrate the material functions
which our Adviser and Administrator perform for us pursuant to the terms of the Advisory and
Administration Agreements (as defined below), respectively, but it is not intended to include all
of the services which may be provided to us by third parties.
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Investment Advisory Agreement
We have an advisory agreement with our Adviser, or the Advisory Agreement, and an administration
agreement with our Administrator, or the Administration Agreement.
Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our
direct benefit. Examples of these expenses include legal, accounting, interest on short-term debt
and mortgages, tax preparation, directors and officers insurance, stock transfer services, stockholder-related fees, consulting and related fees. All of these charges are
incurred directly by us rather than by our Adviser for our benefit. Accordingly, we did not make
any reimbursements to our Adviser for these amounts.
In addition, we are also responsible for all fees charged by third parties that are directly
related to our business, which may include real estate brokerage fees, mortgage placement fees,
lease-up fees and transaction structuring fees (although we may be able to pass some or all of such
fees on to our tenants and borrowers). In the event that any of these expenses are incurred on our
behalf by our Adviser, we are required to reimburse our Adviser on a dollar-for-dollar basis for
all such amounts. During the years ended December 31, 2010, 2009 and 2008, none of these expenses
were incurred by our Adviser or by us directly. The actual amount of such fees that we incur in the
future will depend largely upon the aggregate costs of the properties we acquire, the aggregate
amount of mortgage loans we make, and the extent to which we are able to shift the burden of such
fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the
future is not determinable at this time.
Management Services and Fees under the Advisory Agreement
The Advisory Agreement provides for an annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any preferred stock, and an incentive fee based on
funds from operations, or FFO. Our Adviser does not charge acquisition or disposition fees when we
acquire or dispose of properties as is common in other externally managed REITs. Furthermore,
there are no fees charged when our Adviser secures long or short term credit or arranges mortgage
loans on our properties; however, our Adviser may earn fee income from our borrowers or tenants or
other sources. This fee income earned by our Adviser, or a portion thereof, may, at the sole
discretion of the Board of Directors, be credited against our base management fee as a rebate to
the base management fee.
For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital
losses, less any distributions paid on preferred stock and senior common stock, but FFO does not
include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our
quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%,
or the hurdle rate, of total stockholders equity, less the recorded value of any preferred stock.
We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO in each calendar
quarter as follows:
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no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized); |
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100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and |
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20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized). |
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Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
Percentage of pre-incentive fee FFO allocated to incentive fee
The incentive fee may be reduced because of our line of credit covenant which limits distributions
to our stockholders to 95% of FFO less those acquisition-related costs that are required to be
expensed under Accounting Standards Codification, or ASC, 805, Business Combinations.
Administration Agreement
Under the terms of the Administration Agreement, we pay separately for our allocable portion of our
Administrators overhead expenses in performing its obligations to us including, but not limited
to, rent, and our allocable portion of the salaries and benefits expenses of our Administrators
employees, including, but not limited to, our chief financial officer, chief compliance officer,
internal counsel, treasurer, investor relations and their respective staffs. Our allocable portion
of expenses is derived by multiplying our Administrators total expenses by the percentage of our
total assets at the beginning of each quarter in comparison to the total assets of all companies
managed by our Adviser under similar agreements.
Adviser Duties and Authority under the Advisory Agreement
Under the terms of the Advisory Agreement, our Adviser is required to use its best efforts to
present to us investment opportunities consistent with our investment policies and objectives as
adopted by our board of directors. In performing its duties, our Adviser, either directly or
indirectly by engaging an affiliate:
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finds, evaluates, and enters into contracts to purchase real estate
and make mortgage loans on our behalf in compliance with our
investment procedures, objectives and policies, subject to approval of
our board of directors, where required; |
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provides advice to us and acts on our behalf with respect to the
negotiation, acquisition, financing, refinancing, holding, leasing and
disposition of real estate investments; |
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takes the actions and obtains the services necessary to effect the
negotiation, acquisition, financing, refinancing, holding, leasing and
disposition of real estate investments; and |
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provides day-to-day management of our business activities and other
administrative services for us as requested by our board of directors. |
Our board of directors has authorized our Adviser to make investments in any property on our behalf
without the prior approval of our board if the following conditions are satisfied:
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our Adviser has obtained an independent appraisal for the property
indicating that the total cost of the property does not exceed its
appraised value; and |
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our Adviser has concluded that the property, in conjunction with our
other investments and proposed investments, is reasonably expected to
fulfill our investment objectives and policies as established by our
board of directors then in effect. |
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The actual terms and conditions of transactions involving investments in properties and mortgage
loans are determined in the sole discretion of our Adviser, subject at all times to compliance with
the foregoing requirements. Some types of transactions, however, require the prior approval of our
board of directors, including a majority of our independent directors, including the following:
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loans not secured or otherwise supported by real property; |
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any acquisition or mortgage loan which at the time of investment would have a cost exceeding 20% of our total assets; |
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transactions that involve conflicts of interest with our Adviser (other than reimbursement of expenses in accordance
with the Advisory Agreement); and |
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the lease of assets to our Adviser, its affiliates or any of our officers or directors. |
Our Adviser and Administrator also engage in other business ventures and, as a result, their
resources are not dedicated exclusively to our business. For example, our Adviser and Administrator
also serve as the external adviser to Gladstone Capital Corporation and Gladstone Investment
Corporation, both publicly traded business development companies affiliated with us, and Gladstone
Land Corporation, a private agricultural real estate company. However, under the Advisory
Agreement, our Adviser is required to devote sufficient resources to the administration of our
affairs to discharge its obligations under the agreement. The Advisory Agreement is not assignable
or transferable by either us or our Adviser without the consent of the other party, except that our
Adviser may assign the Advisory Agreement to an affiliate for whom our Adviser agrees to guarantee
its obligations to us. Either we or our Adviser may assign or transfer the Advisory Agreement to a
successor entity.
Employees
We do not currently have any employees and do not expect to have any employees in the foreseeable
future. Currently, services necessary for our business are provided by individuals who are
employees of our Adviser and our Administrator pursuant to the terms of the Advisory Agreement and
the Administration Agreement, respectively. Each of our executive officers is an employee or
officer, or both, of our Adviser or our Administrator. No employee of our Adviser or our
Administrator will dedicate all of his or her time to us. However, we expect that 15-20 full time
employees of our Adviser or our Administrator will spend substantial time on our matters during
calendar year 2011. To the extent that we acquire more investments, we anticipate that the number
of employees of our Adviser and our Administrator who devote time to our matters will increase.
As of December 31, 2010, our Adviser and our Administrator collectively had 51 full-time employees.
A breakdown of these employees is summarized by functional area in the table below:
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Functional Area |
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Executive Management |
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Investment Management, Portfolio Management and Due Diligence |
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Administration, Accounting, Compliance, Human Resources, Legal and Treasury |
Competition
We compete with a number of other real estate companies and traditional mortgage lenders, many of
whom have greater marketing and financial resources than we do. Principal factors of competition in
our primary
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business of investing in and owning leased industrial and commercial real property are
the quality of properties, leasing terms, attractiveness and convenience of location. Additionally,
our ability to compete depends upon, among other factors, trends of the national and local
economies, investment alternatives, financial condition and operating results of current and
prospective tenants and borrowers, availability and cost of capital, taxes and governmental
regulations.
Environmental Matters
As a current and prior owner of real estate, we are subject to various federal, state and local
environmental laws, regulations and ordinances and also could be liable to third parties resulting
from environmental contamination or noncompliance at our properties. Environmental laws often
impose liability without regard to whether the owner or operator knew of, or was responsible for,
the presence of the contaminants, and the costs of any required investigation or cleanup of these
substances can be substantial. The liability is generally not limited under such laws and could
exceed the propertys value and the aggregate assets of the liable party. The presence of
contamination or the failure to remediate contamination at our properties also may expose us to
third-party liability for personal injury or property damage, or adversely affect our ability to
sell, lease or develop the real property or to borrow using the real property as collateral. These
and other risks related to environmental matters are described in more detail in Item 1A. Risk
Factors below.
Available Information
We file annual, periodic, current and other reports and information with the SEC. All filings made
by us with the SEC may be copied or read at the SECs Public Reference Room at 100 F Street NE,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically
with the SEC. The website address is http://www.sec.gov.
Additionally, a copy of this Annual Report on Form 10-K, along with our Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, proxy statements and other information and any amendments to the
aforementioned filings, are available on our website, www.GladstoneCommercial.com, free of charge
as soon as reasonably practicable after we electronically file such reports or amendments with, or
furnish them to, the SEC. The filings can be found in the SEC filings section of our website. Our
website also contains our Code of Ethics and Business Conduct and the charters of the committees of
the Board of Directors. These items can be found in the Corporate Governance section of our
website. Reference to our website does not constitute incorporation by reference of the information
contained on the site and should not be considered part of this document. All of the aforementioned
materials may also be obtained free of charge by contacting Investor Relations, Gladstone
Commercial Corporation, 1521 Westbranch Drive, Suite 200, McLean, Virginia 22102, or by calling our
investor relations line at (703) 287-5893.
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Item 1A. Risk Factors
An investment in our securities involves a number of significant risks and other factors relating
to our structure and investment objectives. As a result, we cannot assure you that we will achieve
our investment objectives. You should consider carefully the following information before making an
investment in our securities.
Risk related to the economy
The current state of the economy and the capital markets increases the possibility of adverse
effects on our financial position, results of operations and the market price of our securities.
The United States is recovering from the recession that it entered into during late 2007, though it
continues to experience some disruptions in its financial and capital markets. As a result,
conditions within the U.S. capital markets generally, and the U.S. real estate capital markets
particularly, continue to experience dislocation and stress. We believe that it will be a few more
years before the United States fully recovers from the recession. As a result, the continued
challenging economic conditions could still materially and adversely impact the financial condition
of one or more of our tenants and, therefore, could increase the likelihood that a tenant may
declare bankruptcy or default upon its payment obligations arising under a related lease.
The recession generally, and the disruptions in the capital markets in particular, have decreased
liquidity and increased our cost of equity capital which impacted our ability to raise capital
during 2010 and in turn reduced our ability to make new investments. As a result we only acquired
one property during 2010, however, we were able to raise equity capital in February 2011, and
believe that our liquidity position is improving. The longer these conditions persist, the greater
the probability that these factors will have an adverse effect on our liquidity, financial
condition, results of operations, ability to pay distributions to stockholders and the market price
of our securities.
Risks related to our financing
Our line of credit contains various covenants which, if not complied with, could accelerate our
repayment obligations, thereby materially and adversely affecting our liquidity, financial
condition, results of operations and ability to pay distributions to stockholders.
The agreement governing our line of credit requires us to comply with certain financial and
operational covenants. These covenants require us to, among other things, maintain certain
financial ratios, including fixed charge coverage, debt service coverage and a minimum net worth.
We are also required to limit our distributions to stockholders to 95% of our FFO, and continued
compliance with this covenant may require us to limit our distributions to stockholders. As of
December 31, 2010, we were in compliance with these covenants. However, our continued compliance
with these covenants depends on many factors, and could be impacted by current or future economic
conditions, and thus there are no assurances that we will continue to comply with these covenants.
In addition, we have $48.0 million of mortgage debt maturing in October 2013. Under the terms of
the line of credit, we must refinance, extend or have enough cash on hand, including availability
under our line of credit, as of April 2013 or we would be considered in default. Failure to comply
with these covenants would result in a default which, if we were unable to obtain a waiver from the
lenders, could accelerate our repayment obligations under the line of credit and thereby have a
material adverse impact on our liquidity, financial condition, results of operations and ability to
pay distributions to stockholders.
Our business strategy relies heavily on external financing, which may expose us to risks associated
with leverage such as restrictions on additional borrowing and payment of distributions to
stockholders, risks associated with balloon payments, and risk of loss of our equity upon
foreclosure.
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Our current business strategy involves the use of leverage so that we may make more investments
than would otherwise be possible in order to maximize potential returns to stockholders. If the
income generated by our properties and other assets fails to cover our debt service, we could be
forced to reduce or eliminate distributions to our stockholders and may experience losses.
Our ability to achieve our investment objectives will be affected by our ability to borrow money in
sufficient amounts and on favorable terms. We expect that we will borrow money that will be secured
by our properties and that these financing arrangements will contain customary covenants such as
those that limit our ability, without the prior consent of the lender, to further mortgage the
applicable property or to discontinue insurance coverage. Accordingly, we may be unable to obtain
the degree of leverage we believe to be optimal, which may cause us to have less cash for
distribution to stockholders than we would have with an optimal amount of leverage. Our use of
leverage could also make us more vulnerable to a downturn in our business or the economy, as it may
become difficult to meet our debt service obligations if our cash flows are reduced due to tenant
defaults. There is also a risk that a significant increase in the ratio of our indebtedness to the
measures of asset value used by financial analysts may have an adverse effect on the market price
of our securities.
Some of our debt financing arrangements may require us to make lump-sum or balloon payments at
maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our
ability to obtain additional financing or to sell the financed property. At the time the balloon
payment is due, we may not be able to refinance the balloon payment on terms as favorable as the
original loan or sell the property at a price sufficient to make the balloon payment, which could
adversely affect the amount of distributions to our stockholders.
We intend to acquire additional properties by using our line of credit and by continuing to seek
long-term financing, where we will borrow all or a portion of the purchase price of a potential
acquisition and securing the loan with a mortgage on some or all of our existing real property.
However, the market for long-term mortgages has been limited, as the collateralized mortgage-backed
securities, or CMBS, market has experienced significant disruption. We are, however, beginning to
see banks that are willing to issue medium-term mortgages, between two and five years, on
substantially less favorable terms than were previously available. Consequently, we continue to
focus on using medium-term mortgages to finance our real estate activities until the market for
long-term mortgages returns. To date we have obtained approximately $260 million in long-term
financing, which we have used to acquire additional properties. If we are unable to make our debt
payments as required, a lender could foreclose on the property securing its loan. This could cause
us to lose part or all of our investment in such property which in turn could cause the value of
our securities or the amount of distributions to our stockholders to be reduced.
A change in the value of our assets could cause us to experience a cash shortfall, be in default of
our loan covenants, lose management control or incur a charge for the impairment of assets.
We borrow on a secured basis under the New Line of Credit. A significant reduction in value of the
assets secured as collateral could require us to post additional assets or pay down the balance of
the New Line of Credit. Although we believe that we have significant excess collateral and
capacity, future asset values are uncertain. If we were unable to meet a request to add collateral
to the New Line of Credit, this inability would have a material adverse affect on our liquidity and
our ability to meet our loan covenants. We may determine that the value of an individual asset, or
group of assets, was irrevocably impaired, and that we may need to record a charge to write-down
the value of the asset to reflect its current estimated value based upon its intended use.
Interest rate changes may adversely affect our results of operations.
We may experience interest rate volatility in connection with mortgage loans on our properties or
other variable-rate debt that we may obtain from time to time. Certain of our leases contain
escalations based on market interest rates and the interest rate on our existing line of credit is
variable. Although we seek to mitigate this risk by structuring such provisions to contain a
minimum interest rate or escalation rate, as
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applicable, these features do not eliminate this risk. We are also exposed to the effects of
interest rate changes as a result of the holding of our cash and cash equivalents in short-term,
interest-bearing investments. We have not entered into any derivative contracts to attempt to
further manage our exposure to interest rate fluctuations. A significant change in interest rates
could have an adverse impact on our results of operations.
Risks related to the real estate industry
We are subject to certain risks associated with real estate ownership and lending which could
reduce the value of our investments.
Our investments include net leased industrial and commercial property and mortgage loans secured by
industrial and commercial real estate. Our performance, and the value of our investments, is
subject to risks inherent to the ownership and operation of these types of properties, including:
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changes in the general economic climate; |
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changes in local conditions such as an oversupply of space or reduction in demand for real estate; |
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changes in interest rates and the availability of financing; |
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competition from other available space; and |
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changes in laws and governmental regulations, including those governing real estate usage, zoning
and taxes. |
The debt obligations of our tenants and borrowers are dependent upon certain factors which neither
we nor our tenants or borrowers control, such as national, local and regional business and economic
conditions, government economic policies, and the level of interest rates. As discussed in Risk
related to the economy above, the credit markets have tightened resulting in a significant
contraction in available liquidity. Accordingly, the credit market constraints and recession may
increase the operating expenses of our tenants and borrowers and decrease their ability to make
lease or mortgage payments, and thereby adversely affect our liquidity, financial condition,
results of operations and ability to pay distributions to our stockholders.
Competition for the acquisition of real estate may impede our ability to make acquisitions or
increase the cost of these acquisitions.
We compete for the acquisition of properties with many other entities engaged in real estate
investment activities, including financial institutions, institutional pension funds, other REITs,
other public and private real estate companies and private real estate investors. These competitors
may prevent us from acquiring desirable properties or may cause an increase in the price we must
pay for real estate. Our competitors may have greater resources than we do, and may be willing to
pay more for certain assets or may have a more compatible operating philosophy with our acquisition
targets. In particular, larger REITs may enjoy significant competitive advantages that result from,
among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors
may also adopt transaction structures similar to ours, which would decrease our competitive
advantage in offering flexible transaction terms. In addition, the number of entities and the
amount of funds competing for suitable investment properties may increase, resulting in increased
demand and increased prices paid for these properties.
Our ownership of properties through ground leases exposes us to risks which are different than
those resulting from our ownership of fee title to other properties.
We have acquired an interest in certain of our properties by acquiring a leasehold interest in the
land underlying the property, and we may acquire additional properties in the future that are
subject to similar ground leases. In this situation, we have no economic interest in the land
underlying the property and do not control this land. Because we do not control the underlying
land, this type of ownership interest poses potential risks for our business because (i) if the
ground lease terminates for any reason, we will lose our
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interest in the property, including any investment that we made in the property, (ii) if our tenant
defaults under the previously existing lease, we will continue to be obligated to meet the terms
and conditions of the ground lease without the annual amount of ground lease payments reimbursable
to us by the tenant, and (iii) if the third party owning the land under the ground lease disrupts
our use either permanently or for a significant period of time, then the value of our assets could
be impaired and our results of operations could be adversely affected.
Risks related to our tenants, borrowers and properties
Highly leveraged tenants and borrowers may be unable to pay rent or make mortgage payments, which
could adversely affect our cash available to make distributions to our stockholders.
Some of our tenants and borrowers may have recently been either restructured using leverage, or
acquired in a leveraged transaction. Tenants and borrowers that are subject to significant debt
obligations may be unable to make their rent or mortgage payments if there are adverse changes to
their businesses or because of the impact of the recession discussed in Risk related to the
economy. Tenants that have experienced leveraged restructurings or acquisitions will generally
have substantially greater debt and substantially lower net worth than they had prior to the
leveraged transaction. In addition, the payment of rent and debt service may reduce the working
capital available to leveraged entities and prevent them from devoting the resources necessary to
remain competitive in their industries.
In situations where management of the tenant or borrower will change after a transaction, it may be
difficult for our Adviser to determine with certainty the likelihood of the tenants or borrowers
business success and of its ability to pay rent or make mortgage payments throughout the lease or
loan term. These companies generally are more vulnerable to adverse economic and business
conditions, and increases in interest rates.
Leveraged tenants and borrowers are more susceptible to bankruptcy than unleveraged tenants.
Bankruptcy of a tenant or borrower could cause:
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the loss of lease or mortgage payments to us; |
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an increase in the costs we incur to carry the property occupied by such tenant; |
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a reduction in the value of our securities; or |
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a decrease in distributions to our stockholders. |
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of
continuing or terminating any unexpired lease. If a bankrupt tenant terminates a lease with us, any
claim we might have for breach of the lease (excluding a claim against collateral securing the
claim) will be treated as a general unsecured claim. Our claim would likely be capped at the amount
the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the
greater of one years lease payments or 15% of the remaining lease payments payable under the lease
(but no more than three years lease payments). In addition, due to the long-term nature of our
leases and terms providing for the repurchase of a property by the tenant, a bankruptcy court could
re-characterize a net lease transaction as a secured lending transaction. If that were to occur, we
would not be treated as the owner of the property, but might have additional rights as a secured
creditor.
Net leases may not result in fair market lease rates over time.
We expect a large portion of our rental income to come from net leases and net leases frequently
provide the tenant greater discretion in using the leased property than ordinary property leases,
such as the right to sublease the property, subject to our approval, to make alterations in the
leased premises and to terminate the lease prior to its expiration under specified circumstances.
Further, net leases are typically for longer lease terms and, thus, there is an increased risk that
contractual rental increases in future years will fail to result in fair market rental rates during
those years. As a result, our income and distributions to our stockholders could be lower than they
would otherwise be if we did not engage in net leases.
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Many of our tenants are small and medium size businesses, which exposes us to additional risks
unique to these entities.
Leasing real property or making mortgage loans to small and medium-sized businesses exposes us to a
number of unique risks related to these entities, including the following:
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Small and medium-sized businesses may have limited financial resources and may not be able to make their lease
or mortgage payments on a timely basis, or at all. A small
or medium-sized tenant or borrower is more likely to have
difficulty making its lease or mortgage payments when it
experiences adverse events, such as the failure to meet its
business plan, a downturn in its industry or negative
economic conditions. In addition, because of the lack of
available credit in the current marketplace, as discussed
further in Risk related to the economy above, our tenants
might not be able to obtain the financing necessary to fund
their working capital, which could hinder their ability to
make their lease or mortgage payment on a timely basis, or
at all. |
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Small and medium-sized businesses typically have narrower
product lines and smaller market shares than large
businesses. Because our target tenants and borrowers are
smaller businesses, they will tend to be more vulnerable to
competitors actions and market conditions, as well as
general economic downturns. In addition, our target tenants
and borrowers may face intense competition, including
competition from companies with greater financial
resources, more extensive development, manufacturing,
marketing and other capabilities and a larger number of
qualified managerial and technical personnel. |
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There is generally little or no publicly available
information about our target tenants and borrowers. Many of
our tenants and borrowers are likely to be privately owned
businesses, about which there is generally little or no
publicly available operating and financial information. As
a result, we will rely on our Adviser to perform due
diligence investigations of these tenants and borrowers,
their operations and their prospects. We may not learn all
of the material information we need to know regarding these
businesses through our investigations. |
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Small and medium-sized businesses generally have less
predictable operating results. We expect that many of our
tenants and borrowers may experience significant
fluctuations in their operating results, may from time to
time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial
risk of obsolescence, may require substantial additional
capital to support their operations, to finance expansion
or to maintain their competitive positions, may otherwise
have a weak financial position or may be adversely affected
by changes in the business cycle. Our tenants and borrowers
may not meet net income, cash flow and other coverage tests
typically imposed by their senior lenders. The failure of a
tenant or borrower to satisfy financial or operating
covenants imposed by senior lenders could lead to defaults
and, potentially, foreclosure on credit facilities, which
could additionally trigger cross-defaults in other
agreements. If this were to occur, it is possible that the
ability of the tenant or borrower to make required payments
to us would be jeopardized. |
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Small and medium-sized businesses are more likely to be
dependent on one or two persons. Typically, the success of
a small or medium-sized business also depends on the
management talents and efforts of one or two persons or a
small group of persons. The death, disability or
resignation of one or more of these persons could have a
material adverse impact on our tenant or borrower and, in
turn, on us. |
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Small and medium-sized businesses may have limited
operating histories. While we intend to target as tenants
and borrowers stable companies with proven track records,
we may lease properties or lend money to new companies that
meet our other investment criteria. Tenants or borrowers
with limited operating histories will be exposed to all of
the operating risks that new businesses face and may be
particularly susceptible to, among other risks, market
downturns, competitive pressures and the departure of key
executive officers. |
We may not have funding for future tenant improvements.
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When a tenant at one of our properties does not renew its lease or otherwise vacates its space in
one of our buildings, it is likely that, in order to attract one or more new tenants, we will be
required to expend substantial funds for tenant improvements and tenant refurbishments to the
vacated space. We cannot assure you that we will have sufficient sources of funding available to us
for such purposes in the future.
Illiquidity of real estate investments may make it difficult for us to sell properties in response
to market conditions and could harm our financial condition and ability to make distributions.
To the extent the properties are not subject to triple-net leases, some significant expenditures
such as real estate taxes and maintenance costs are generally not reduced when circumstances cause
a reduction in income from the investment. Should these events occur, our income and funds
available for distribution could be adversely affected. In addition, as a REIT, we may be subject
to a 100% tax on net income derived from the sale of property considered to be held primarily for
sale to customers in the ordinary course of our business. We may seek to avoid this tax by
complying with certain safe harbor rules that generally limit the number of properties we may sell
in a given year, the aggregate expenditures made on such properties prior to their disposition, and
how long we retain such properties before disposing of them. However, we can provide no assurance
that we will always be able to comply with these safe harbors. If compliance is possible, the safe
harbor rules may restrict our ability to sell assets in the future and achieve liquidity that may
be necessary to fund distributions.
Our real estate investments may include special use and single or multi-tenant properties that may
be difficult to sell or re-lease upon tenant defaults or early lease terminations.
We focus our investments on commercial and industrial properties, a number of which include
manufacturing facilities, special use storage or warehouse facilities and special use single or
multi-tenant properties. These types of properties are relatively illiquid compared to other types
of real estate and financial assets. This illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. With these properties, if the
current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such
property in foreclosure, we may be required to renovate the property or to make rent concessions in
order to lease the property to another tenant or sell the property. In addition, in the event we
are forced to sell the property, we may have difficulty selling it to a party other than the tenant
or borrower due to the special purpose for which the property may have been designed.
These and other limitations may affect our ability to sell or re-lease properties without adversely
affecting returns to our stockholders.
Our real estate investments have a limited number of tenants and are concentrated in a limited
number of industries, which subjects us to an increased risk of significant loss if any one of
these tenants is unable to pay or if particular industries experience downturns.
As of December 31, 2010, we owned 65 properties and had 50 tenants in these properties, and our 5
largest tenants accounted for approximately 24.2% of our total rental income. A consequence of a
limited number of tenants is that the aggregate returns we realize may be substantially adversely
affected by the unfavorable performance of a small number of tenants. We do not have fixed
guidelines for industry concentration and our investments could potentially be concentrated in
relatively few industries. As of December 31, 2010, 15.0% of our total rental income was earned
from tenants in the electronic industry, 14.9% of our total rental income was earned from tenants
in the healthcare, education and childcare industries, and 13.3% of our total rental income was
earned from tenants in the telecommunications industry. As a result, a downturn in an industry in
which we have invested a significant portion of our total assets could have a material adverse
effect on us.
The inability of a tenant in a single tenant property to pay rent will reduce our revenues and
increase our carrying costs of the building.
Since most of our properties are occupied by a single tenant, the success of our investments will
be materially dependent on the financial stability of these tenants. If a tenant defaults, our
rental revenues would be reduced and our expenses associated with carrying the property would
increase, as we will be
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responsible for payments such as taxes and insurance. Lease payment defaults by these tenants could
adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders.
In the event of a default by a tenant, we may experience delays in enforcing our rights as landlord
and may incur substantial costs in protecting our investment and re-leasing our property. If a
lease is terminated, there is no assurance that we will be able to lease the property for the rent
previously received or sell the property without incurring a loss.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire, which
could adversely affect our business and our ability to make distributions to our stockholders.
If we cannot renew leases, we may be unable to re-lease our properties at rates equal to or above
the current rate. Even if we can renew leases, tenants may be able to negotiate lower rates as a
result of market conditions. Market conditions may also hinder our ability to lease vacant space in
newly developed or redeveloped properties. In addition, we may enter into or acquire leases for
properties that are specially suited to the needs of a particular tenant. Such properties may
require renovations, tenant improvements or other concessions in order to lease them to other
tenants if the initial leases terminate. Any of these factors could adversely impact our financial
condition, results of operations, cash flow, our ability to pay distributions to our stockholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be either uninsurable or
not insurable on economically viable terms. Should an uninsured loss occur, we could lose our
capital investment or anticipated profits and cash flow from one or more properties.
We could incur significant costs related to government regulation and private litigation over
environmental matters.
Under various environmental laws, including the Comprehensive Environmental Response, Compensation
and Liability Act, or CERCLA, a current or previous owner or operator of real property may be
liable for contamination resulting from the release or threatened release of hazardous or toxic
substances or petroleum at that property, and an entity that arranges for the disposal or treatment
of a hazardous or toxic substance or petroleum at another property may be held jointly and
severally liable for the cost to investigate and clean up such property or other affected property.
Such parties are known as potentially responsible parties, or PRPs. Environmental laws often impose
liability without regard to whether the owner or operator knew of, or was responsible for, the
presence of the contaminants, and the costs of any required investigation or cleanup of these
substances can be substantial. PRPs are liable to the government as well as to other PRPs who may
have claims for contribution. The liability is generally not limited under such laws and could
exceed the propertys value and the aggregate assets of the liable party. The presence of
contamination or the failure to remediate contamination at our properties also may expose us to
third-party liability for personal injury or property damage, or adversely affect our ability to
sell, lease or develop the real property or to borrow using the real property as collateral.
Environmental laws also impose ongoing compliance requirements on owners and operators of real
property. Environmental laws potentially affecting us address a wide variety of matters, including,
but not limited to, asbestos-containing building materials, storage tanks, storm water and
wastewater discharges, lead-based paint, wetlands and hazardous wastes. Failure to comply with
these laws could result in fines and penalties and/or expose us to third-party liability. Some of
our properties may have conditions that are subject to these requirements, and we could be liable
for such fines or penalties and/or liable to third parties for those conditions.
We could be exposed to liability and remedial costs related to environmental matters.
Certain of our properties may contain, or may have contained, asbestos-containing building
materials, or ACBMs. Environmental laws require that ACBMs be properly managed and maintained and
may impose fines and penalties on building owners and operators for failure to comply with these
requirements. Also,
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certain of our properties may contain, or may have contained, or are adjacent to or near other
properties that have contained or currently contain storage tanks for the storage of petroleum
products or other hazardous or toxic substances. These operations create a potential for the
release of petroleum products or other hazardous or toxic substances. Certain of our properties may
contain, or may have contained, elevated radon levels. Third parties may be permitted by law to
seek recovery from owners or operators for property damage and/or personal injury associated with
exposure to contaminants, including, but not limited to, petroleum products, hazardous or toxic
substances and asbestos fibers. Also, certain of our properties may contain regulated wetlands that
can delay or impede development or require costs to be incurred to mitigate the impact of any
disturbance. Absent appropriate permits, we can be held responsible for restoring wetlands and be
required to pay fines and penalties.
Certain of our properties may contain, or may have contained, microbial matter such as mold and
mildew. The presence of microbial matter could adversely affect our results of operations. In
addition, if any of our property is not properly connected to a water or sewer system, or if the
integrity of such systems are breached, or if water intrusion into our buildings otherwise occurs,
microbial matter or other contamination can develop. When excessive moisture accumulates in
buildings or on building materials, mold growth may occur, particularly if the moisture problem
remains undiscovered or is not addressed over a period of time. Some molds may produce airborne
toxins or irritants. If this were to occur, we could incur significant remedial costs and we may
also be subject to material private damage claims and awards. Concern about indoor exposure to
mold has been increasing, as exposure to mold may cause a variety of adverse health effects and
symptoms, including allergic or other reactions. If we become subject to claims in this regard, it
could materially and adversely affect us and our future insurability for such matters.
Independent environmental consultants conduct Phase I environmental site assessments on all of our
acquisitions. Phase I environmental site assessments are intended to evaluate information
regarding the environmental condition of the surveyed property and surrounding properties based
generally on visual observations, interviews and certain publicly available databases. These
assessments do not typically take into account all environmental issues including, but not limited
to, testing of soil or groundwater or the possible presence of asbestos, lead-based paint, radon,
wetlands or mold. The results of these assessments are addressed and could result in either a
cancellation of the purchase, the requirement of the seller to remediate issues, or additional
costs on our part to remediate the issue.
None of the previous site assessments revealed any past or present environmental liability that we
believe would be material to us. However, the assessments may have failed to reveal all
environmental conditions, liabilities or compliance concerns. Material environmental conditions,
liabilities or compliance concerns may have arisen after the assessments were conducted or may
arise in the future, and future laws, ordinances or regulations may impose material additional
environmental liability. We cannot assure you that costs of future environmental compliance will
not affect our ability to make distributions or that such costs or other remedial measures will not
be material to us.
If a sale-leaseback transaction is re-characterized in a tenants bankruptcy proceeding, our
financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease
the same property back to the person from whom we purchased it. In the event of the bankruptcy of a
tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing
or a joint venture, either of which outcomes could adversely affect our business. If the
sale-leaseback were re-characterized as a financing, we might not be considered the owner of the
property, and as a result would have the status of a creditor in relation to the tenant. In that
event, we would no longer have the right to sell or encumber our ownership interest in the
property. Instead, we would have a claim against the tenant for the amounts owed under the lease,
with the claim arguably secured by the property. The tenant/debtor might have the ability to
propose a plan restructuring the term, interest rate and amortization schedule of its outstanding
balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented
from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint
venture, we could be treated as a co-venturer with our lessee with regard to the property. As a
result, we could be held liable, under
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some circumstances, for debts incurred by the lessee relating to the property. Either of these
outcomes could adversely affect our cash flow and our ability to pay distributions to stockholders.
Risks related to our Adviser
We are dependent upon our key management personnel, who are employed by our Adviser, for our future
success, particularly David Gladstone, Terry Lee Brubaker and George Stelljes III.
We are dependent on our senior management and other key management members to carry out our
business and investment strategies. Our future success depends to a significant extent on the
continued service and coordination of our senior management team, particularly David Gladstone, our
chairman and chief executive officer, Terry Lee Brubaker, our vice chairman and chief operating
officer, and George Stelljes III, our president and chief investment officer, all of whom are
subject to an employment agreement with our Adviser. The departure of any of our executive officers
or key employees could have a material adverse effect on our ability to implement our business
strategy and to achieve our investment objectives.
Our success depends on the performance of our Adviser and if our Adviser makes inadvisable
investment or management decisions, our operations could be materially adversely impacted.
Our ability to achieve our investment objectives and to pay distributions to our stockholders is
dependent upon the performance of our Adviser in evaluating potential investments, selecting and
negotiating property purchases and dispositions and mortgage loans, selecting tenants and
borrowers, setting lease or mortgage loan terms and determining financing arrangements.
Accomplishing these objectives on a cost-effective basis is largely a function of our Advisers
marketing capabilities, management of the investment process, ability to provide competent,
attentive and efficient services and our access to financing sources on acceptable terms. Our
stockholders have no opportunity to evaluate the terms of transactions or other economic or
financial data concerning our investments and must rely entirely on the analytical and management
abilities of our Adviser and the oversight of our board of directors. If our Adviser or our board
of directors makes inadvisable investment or management decisions, our operations could be
materially adversely impacted. As we grow, our Adviser may be required to hire, train, supervise
and manage new employees. Our Advisers failure to effectively manage our future growth could have
a material adverse effect on our business, financial condition and results of operations.
We may have conflicts of interest with our Adviser and other affiliates.
Our Adviser manages our business and locates, evaluates, recommends and negotiates the acquisition
of our real estate investments. At the same time, our advisory agreement permits our Adviser to
conduct other commercial activities and provide management and advisory services to other entities,
including, but not limited to, Gladstone Capital Corporation, Gladstone Investment Corporation and
Gladstone Land Corporation, an entity affiliated with our chairman David Gladstone. Moreover, with
the exception of our chief financial officer, all of our officers and directors are also officers
and directors of Gladstone Capital Corporation and Gladstone Investment Corporation, which actively
make loans to and invest in small and medium-sized companies. As a result, we may from time to time
have conflicts of interest with our Adviser in its management of our business and with Gladstone
Capital and Gladstone Investment, which may arise primarily from the involvement of our Adviser,
Gladstone Capital, Gladstone Investment, Gladstone Land and their affiliates in other activities
that may conflict with our business.
Examples of these potential conflicts include:
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our Adviser may realize substantial compensation on account of its
activities on our behalf, and may,
therefore, be motivated to approve acquisitions solely on the basis of
increasing compensation to itself; |
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we may experience competition with our affiliates for financing transactions; |
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our Adviser may earn fee income from our borrowers or tenants; and |
27
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our Adviser and other affiliates such as Gladstone Capital,
Gladstone Investment and Gladstone Land could compete for the
time and services of our officers and directors. |
These and other conflicts of interest between us and our Adviser and other affiliates could have a
material adverse effect on the operation of our business and the selection or management of our
real estate investments.
Our Adviser is not obligated to provide a waiver of the incentive fee, which could negatively
impact our earnings and our ability to maintain our current level of, or increase, distributions to
our stockholders.
The Advisory Agreement contemplates a quarterly incentive fee based on our funds from operations.
Our Adviser has the ability to issue a full or partial waiver of the incentive fee for current and
future periods; however, our Adviser is not required to issue any waiver. Any waiver issued by our
Adviser is an unconditional and irrevocable waiver. For the years ended December 31, 2010, 2009
and 2008, an unconditional and irrevocable voluntary waiver was issued by our Adviser for
approximately $0.2 million, $0.7 million and $2.2 million, respectively. If our Adviser does not
issue this waiver in future quarters, it could negatively impact our earnings and may compromise
our ability to maintain our current level of, or increase, distributions to our stockholders, which
could have a material adverse impact on the market price of our securities.
We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
The Advisory Agreement entitles our Adviser to incentive compensation based on our FFO, which
rewards the Adviser if our quarterly FFO (before giving effect to any incentive fee) exceeds 1.75%
(7% annualized) of our total stockholders equity (less the recorded value of any preferred stock).
Our pre-incentive fee FFO for incentive compensation purposes excludes the effect of any unrealized
gains, losses or other items that do not affect realized net income that we may incur in the fiscal
quarter, even if such losses result in a net loss on our statement of operations for that quarter.
Thus, we may be required to pay our Adviser incentive compensation for a fiscal quarter even if we
incur a net loss for that quarter.
Risks Related to Qualification and Operation as a REIT
If we fail to qualify as a REIT, our operations and dividends to stockholders would be adversely
impacted.
We intend to continue to be organized and to operate so as to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the Code). A REIT generally is not taxed at the corporate
level on income it currently distributes to its stockholders. Qualification as a REIT involves the
application of highly technical and complex rules for which there are only limited judicial or
administrative interpretations. The determination of various factual matters and circumstances not
entirely within our control may affect our ability to continue to qualify as a REIT. In addition,
new legislation, new regulations, administrative interpretations or court decisions could
significantly change the tax laws, possibly with retroactive effect, with respect to qualification
as a REIT or the federal income tax consequences of such qualification.
If we were to fail to qualify as a REIT in any taxable year:
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we would not be allowed to deduct our distributions to stockholders when
computing our taxable income; |
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we would be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates; |
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we would be disqualified from being taxes as a REIT for the four taxable years
following the year during which qualification was lost unless entitled to relief under
certain statutory provisions; |
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our cash available for dividends to stockholders would be reduced; and
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28
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we may be required to borrow additional funds or sell some of our assets in
order to pay corporate tax obligations that we may incur as a result of our
disqualification. |
We may need to incur additional borrowings to meet the REIT minimum distribution requirement and to
avoid excise tax.
In order to maintain our qualification as a REIT, we are required to distribute to our stockholders
at least 90% of our annual real estate investment trust taxable income (excluding any net capital
gain and before application of the dividends paid deduction). To the extent that we satisfy this
distribution requirement, but distribute less than 100% of our taxable income, we will be subject
to U.S. federal corporate income tax on our undistributed taxable income. In addition, we are
subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid
by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for
that year, (ii) 95% of our net capital gain for that year and (iii) 100% of our undistributed
taxable income from prior years. Although we intend to pay dividends to our stockholders in a
manner that allows us to meet the 90% distribution requirement and avoid this 4% excise tax, we
cannot assure you that we will always be able to do so.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or
liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning,
among other things, the nature and diversification of our assets, the sources of our gross income,
the amounts we distribute to our stockholders and the ownership of our capital stock. In order to
meet these tests, we may be required to forgo investments we might otherwise make. Thus,
compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value
of our assets consists of cash, cash items, government securities and qualified real estate assets.
The remainder of our investment in securities (other than government securities, securities of
taxable REIT subsidiaries (each, a TRS) and qualified real estate assets) generally cannot
include more than 10% of the outstanding voting securities of any one issuer or more than 10% of
the total value of the outstanding securities of any one issuer. In addition, in general, no more
than 5% of the value of our assets (other than government securities, securities of TRSs and
qualified real estate assets) can consist of the securities of any one issuer, and no more than 25%
of the value of our total assets can be represented by the securities of one or more TRSs.
We also must ensure that (i) at least 75% of our gross income for each taxable year consists of
certain types of income that we derive, directly or indirectly, from investments relating to real
property or mortgages on real property or qualified temporary investment income and (ii) at least
95% of our gross income for each taxable year consists of income that is qualifying income for
purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or
disposition of stock or securities, or any combination of these.
In addition, we may be required to make distributions to our stockholders at disadvantageous times
or when we do not have funds readily available for distribution. If we fail to comply with these
requirements at the end of any calendar quarter, we must qualify for certain statutory relief
provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a
result, we may be required to liquidate otherwise attractive investments, and may be unable to
pursue investments that would otherwise be advantageous to us in order to satisfy the asset and
gross income requirements for qualifying as a REIT. These actions could have the effect of
reducing our income and the amounts available for distribution to our stockholders. Thus,
compliance with the REIT requirements may hinder our ability to make, and, in certain cases,
maintain ownership of certain attractive investments.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market
price of our securities.
29
At any time, the federal income tax laws governing REITs or the administrative interpretations of
those laws may be amended. We cannot predict when or if any new federal income tax law,
regulation, or administrative interpretation, or any amendment to any existing federal income tax
law, regulation or administrative interpretation, will be adopted, promulgated or become effective
and any such law, regulation, or interpretation may take effect retroactively. We and our
stockholders could be adversely affected by any such change in, or any new, federal income tax law,
regulation or administrative interpretation.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from qualified dividends payable to U.S. stockholders
that are individuals, trusts and estates has been reduced by legislation to 15% (currently through
the end of 2012). Dividends payable by REITs, however, generally are not eligible for the reduced
rates. Although this legislation does not adversely affect the taxation of REITs or dividends
payable by REITs, the more favorable rates applicable to regular corporate qualified dividends
could cause investors who are individuals, trusts and estates to perceive investments in REITs to
be relatively less attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of REITs, including our stock.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to
incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any
income from a hedging transaction that we enter into to manage risk of interest rate changes, price
changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry
real estate assets does not constitute gross income for purposes of the gross income
requirements. To the extent that we enter into other types of hedging transactions, the income
from those transactions is likely to be treated as non-qualifying income for purposes of both of
the gross income tests. As a result of these rules, we may need to limit our use of advantageous
hedging techniques or implement those hedges through TRSs. This could increase the cost of our
hedging activities because any TRS that we may form would be subject to tax on gains or expose us
to greater risks associated with changes in interest rates than we would otherwise want to bear.
In addition, losses incurred by a TRS generally will not provide any tax benefit, except for being
carried forward against future taxable income earned by the TRS.
To the extent that our distributions represent a return of capital for tax purposes, you could
recognize an increased capital gain upon a subsequent sale of your stock.
Distributions in excess of our current and accumulated earnings and profits and not treated by us
as a dividend will not be taxable to a U.S. stockholder to the extent such distributions do not
exceed the stockholders adjusted tax basis in its shares of our stock but instead will constitute
a return of capital and will reduce the stockholders adjusted tax basis in its shares of our
stock. If distributions by us result in a reduction of a stockholders adjusted basis in its
shares of our stock, subsequent sales by such stockholder of its shares of our stock potentially
will result in recognition of an increased capital gain or reduced capital loss due to the
reduction in such stockholders adjusted basis in its shares of our stock.
Other risks
If we invest in mortgage loans, such investments may be affected by unfavorable real estate market
conditions, including interest rate fluctuations, which could decrease the value of those loans and
our results of operations.
If we invest in mortgage loans, we will be at risk of defaults by the borrowers on those mortgage
loans as well as interest rate risks. To the extent we incur delays in liquidating such defaulted
mortgage loans, we may not be able to obtain sufficient proceeds to repay all amounts due to us
under the mortgage loans.
30
Further, we will not know whether the values of the properties securing the mortgage loans will
remain at the levels existing on the dates of origination of those mortgage loans. If the values of
the underlying properties fall, our risk will increase because of the lower value of the security
associated with such loans.
Recent accounting pronouncements may impact our results of operations.
Beginning January 1, 2009, Accounting Standards Codification, or ASC, 805, Business Combinations,
significantly changed the accounting for acquisitions involving business combinations, including
our acquisition of properties with existing leases in place, as it requires that the assets and
liabilities of all business combinations be recorded at fair value, with limited exceptions. ASC
805 requires that all expenses related to an acquisition be expensed as incurred, rather than
capitalized into the cost of the acquisition as had been required by the previous accounting. ASC
805 was effective on a prospective basis for all business combinations for which the acquisition
date is on or after the beginning of the first annual period subsequent to December 15, 2008. We
anticipate that approximately 1% of the total acquisition price will be expensed as part of the
acquisition; however, this amount could differ significantly. Because we only acquired one
property during 2010, this pronouncement did not have a significant impact on our operations during
2010. We expect, however, that the expensing of acquisition costs will lower our earnings during
2011 and any future years in which we acquire significant amounts of new properties.
We are subject to restrictions that may discourage a change of control. Certain provisions
contained in our articles of incorporation and Maryland law may prohibit or restrict a change of
control.
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Our articles of incorporation prohibit ownership of more than 9.8% of the outstanding
shares of our capital stock by one person. This restriction may discourage a change of
control and may deter individuals or entities from making tender offers for our capital
stock, which offers might otherwise be financially attractive to our stockholders or
which might cause a change in our management. |
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Our board of directors is divided into three classes, with the term of the directors in
each class expiring every third year. At each annual meeting of stockholders, the
successors to the class of directors whose term expires at such meeting will be elected
to hold office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. After election, a director may only be
removed by our stockholders for cause. Election of directors for staggered terms with
limited rights to remove directors makes it more difficult for a hostile bidder to
acquire control of us. The existence of this provision may negatively impact the price
of our securities and may discourage third-party bids to acquire our securities. This
provision may reduce any premiums paid to stockholders in a change in control
transaction. |
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Certain provisions of Maryland law applicable to us prohibit business combinations with: |
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any person who beneficially owns 10% or more of the voting
power of our common stock, referred to as an interested
stockholder; |
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an affiliate of ours who, at any time within the two-year
period prior to the date in question, was an interested
stockholder; or |
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an affiliate of an interested stockholder. |
These prohibitions last for five years after the most recent date on which the interested
stockholder became an interested stockholder. Thereafter, any business combination with the
interested stockholder must be recommended by our board of directors and approved by the
affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding
shares of common stock and two-thirds of the votes entitled to be cast by holders of our common
stock other than shares held by the interested stockholder. These requirements could have the
effect of inhibiting a change in control even if a change in control were in our stockholders
interest. These provisions of Maryland law do not apply, however, to business combinations that are
approved or exempted by our board of directors prior to the time that someone becomes an interested
stockholder.
31
Market conditions could adversely affect the market price and trading volume of our securities.
The market price of our common and preferred stock may be highly volatile and subject to wide
fluctuations, and the trading volume in our common and preferred stock may fluctuate and cause
significant price variations to occur. Due to market volatility, our common stock significantly
fluctuated during 2010. We cannot assure investors that the market price of our common and
preferred stock will not fluctuate or decline further in the future. Some market conditions that
could negatively affect our share price or result in fluctuations in the price or trading volume of
our securities include:
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price and volume fluctuations in the stock market from time to time, which are often unrelated to
the operating performance of particular companies; |
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significant volatility in the market price and trading volume of shares of REITs, real estate
companies or other companies in our sector, which is not necessarily related to the performance of
those companies; |
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price and volume fluctuations in the stock market as a result of terrorist attacks, or speculation
regarding future terrorist attacks, in the United States or abroad; |
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actual or anticipated variations in our quarterly operating results or distributions to stockholders; |
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changes in our funds from operations or earnings estimates or the publication of research reports
about us or the real estate industry generally; |
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actions by institutional stockholders; |
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speculation in the press or investment community; |
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changes in regulatory policies or tax guidelines, particularly with respect to REITs; and |
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investor confidence in the stock market. |
Shares of common stock eligible for future sale may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of common stock, or the availability of
shares for future sales, on the market price of our common stock. Sales of substantial amounts of
common stock (including shares of common stock issuable upon the conversion of units of our
operating partnership that we may issue from time to time or issuable upon conversion of our senior
common stock), or the perception that these sales could occur, may adversely affect prevailing
market prices for our common stock.
Legislative or regulatory action could adversely affect investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the
provisions of the federal and state income tax laws applicable to investments in REIT shares.
Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure
you that any such changes will not adversely affect the taxation of our stockholders. Any such
changes could have an adverse effect on an investment in our shares or on the market value or the
resale potential of our properties.
Compliance or failure to comply with laws requiring access to our properties by disabled persons
could result in substantial cost.
The Americans with Disabilities Act, or ADA, and other federal, state and local laws generally
require public accommodations be made accessible to disabled persons. Noncompliance could result in
the imposition of fines by the government or the award of damages to private litigants. These laws
may require us to modify our existing properties. These laws may also restrict renovations by
requiring improved access to such buildings by disabled persons or may require us to add other
structural features which increase our construction costs. Legislation or regulations adopted in
the future may impose further burdens or restrictions on us with respect to improved access by
disabled persons. We may incur unanticipated
32
expenses that may be material to our financial condition or results of operations to comply with
ADA and other federal, state and local laws, or in connection with lawsuits brought by private
litigants.
Our Board of Directors may change our investment policy without stockholders approval.
Subject to our co-investment policy, our Board of Directors will determine its investment and
financing policies, growth strategy and its debt, capitalization, distribution, acquisition,
disposition and operating policies. Our Board of Directors may revise or amend these strategies
and policies at any time without a vote by stockholders. Accordingly, stockholders control over
changes in our strategies and policies is limited to the election of directors, and changes made by
our Board of Directors may not serve the interests of stockholders and could adversely affect our
financial condition or results of operations, including our ability to distribute cash to
stockholders or qualify as a REIT.
If our Operating Partnership fails to maintain its status as a disregarded entity or partnership
for federal income tax purposes, its income may be subject to taxation.
As we hold all of the ownership interests in our Operating Partnership, it is currently disregarded
for income tax purposes. We intend that it will qualify as a partnership for income tax purposes
upon the admission of additional partners; however, if the IRS were to successfully challenge the
status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such
event, this would reduce the amount of distributions that our Operating Partnership could make to
us. This could also result in our losing REIT status and becoming subject to a corporate level tax
on our income. This would substantially reduce our cash available to pay distributions and the
return on your investment. In addition, if any of the entities through which our Operating
Partnership owns its properties, in whole or in part, loses its characterization as a disregarded
entity or a partnership for federal income tax purposes, it would be subject to taxation as a
corporation, thereby reducing distributions to our Operating Partnership. Such a
re-characterization of an underlying property owner could also threaten our ability to maintain
REIT status.
Joint venture investments could be adversely affected by our lack of sole decision making
authority, our reliance on co-venturers financial condition and disputes between our co-venturers
and us.
We may invest with third parties through partnerships, joint ventures or other entities, acquiring
non-controlling interests in or sharing responsibility for managing the affairs of a property,
partnership, joint venture or other entity. In such event, we will not have sole decision-making
authority regarding the property, partnership, joint venture or other entity. Investments in
partnerships, joint ventures or other entities may, under certain circumstances, involve risks not
present were a third party not involved, including the possibility that partners or co-venturers
may become bankrupt or fail to fund their share of required capital contributions. Partners or
co-venturers also may have economic or other business interests or goals that are inconsistent with
our business interests or goals and may be in a position to take actions contrary to our
preferences, policies or objectives. Such investments also will have the potential risk of our
reaching impasses with our partners or co-venturers on key decisions, such as a sale, because
neither we nor the partner or co-venturer would have full control over the partnership or joint
venture. Disputes between us and partners or co-venturers may result in litigation or arbitration
that would increase our expenses and prevent our management team from focusing its time and effort
exclusively on our business. In addition, we may in some circumstances be liable for the actions of
our third-party partners or co-venturers.
Our rights and the rights of our stockholders to take action against our directors and officers are
limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably believes to be advisable
and in our best interests and with the care that an ordinarily prudent person in a like position
would use under similar circumstances. In addition, our charter (i) eliminates our directors and
officers liability to us and our stockholders for money damages except for liability resulting
from actual receipt of an improper benefit in money, property or services or active and deliberate
dishonesty established by a final judgment and that is material to the cause of action and (ii)
requires us to indemnify directors and officers for liability resulting
33
from actions taken by them in those capacitates to the maximum extent permitted by Maryland law.
As a result, our stockholders and we may have more limited rights against our directors and
officers than might otherwise exist under common law. In addition, we may be obligated to fund the
defense costs incurred by our directors and officers.
Any weaknesses identified in our system of internal controls by us and our independent registered
public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an
adverse effect on our business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on
their systems of internal control over financial reporting. In addition, our independent registered
public accounting firm must report on managements evaluation of those controls. In future
periods, we may identify deficiencies in our system of internal controls over financial reporting
that may require remediation. There can be no assurances that any such future deficiencies
identified may not be material weaknesses that would be required to be reported in future periods.
Item 1B. Unresolved Staff Comments
None.
34
Item 2. Properties
The following table provides certain summary information about our 65 properties as of December 31,
2010.
35
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Total Rental |
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Total Rental Income for |
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Income per |
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Year of |
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Year Built/ |
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Rentable |
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the Year Ended |
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Occupied Square |
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|
Lease |
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Property |
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Improvements |
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Date of Purchase |
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Square Feet |
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Occupancy |
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December 31, 2010 (4) |
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Foot |
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|
Expiration |
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208 South Rogers Lane
(Raleigh NC) |
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1997 |
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|
12/23/2003 |
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|
58,926 |
|
|
|
100 |
% |
|
$ |
624,118 |
|
|
$ |
10.59 |
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|
|
2015 |
|
|
|
|
|
|
|
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3874 Highland Park NW
(Canton, OH) |
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1994 |
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1/30/2004 |
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|
|
54,018 |
|
|
|
100 |
% |
|
$ |
337,625 |
|
|
$ |
6.25 |
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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260 Springside Drive
(Akron, OH) |
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|
1968/1999 |
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4/29/2004 |
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|
83,891 |
|
|
|
100 |
% |
|
$ |
1,026,692 |
|
|
$ |
12.24 |
|
|
|
2015 |
(1) |
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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5815 Westpark Drive
(Charlotte, NC) |
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1984/1995 |
|
|
|
6/30/2004 |
|
|
|
64,500 |
|
|
|
100 |
% |
|
$ |
1,006,553 |
|
|
$ |
15.61 |
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2019 |
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171 Great Oak Drive
(Canton, NC) |
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1998 |
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7/6/2004 |
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228,000 |
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|
|
100 |
% |
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$ |
600,145 |
|
|
$ |
2.63 |
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2024 |
|
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Rt. 219, Tax Parcel No. 33-251-0246,
(Snyder Township, PA) |
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1991 |
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8/5/2004 |
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290,000 |
|
|
|
100 |
% |
|
$ |
930,522 |
|
|
$ |
3.21 |
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|
2014 |
|
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9698 Old US Hwy. 52
(Lexington, NC) |
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1986 |
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8/5/2004 |
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154,000 |
|
|
|
100 |
% |
|
$ |
424,964 |
|
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$ |
2.76 |
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2014 |
|
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9100 Highway 290 East
(Austin, TX) |
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2001 |
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9/16/2004 |
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51,933 |
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|
100 |
% |
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$ |
751,333 |
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$ |
14.47 |
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2015 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Industrial Park Drive
(Mt. Pocono, PA) |
|
|
1995-1999 |
|
|
|
10/15/2004 |
|
|
|
223,275 |
|
|
|
100 |
% |
|
$ |
637,025 |
|
|
$ |
2.85 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6550 First Park Ten Boulevard
(San Antonio, TX) |
|
|
1999 |
|
|
|
2/10/2005 |
|
|
|
60,245 |
|
|
|
100 |
% |
|
$ |
769,793 |
|
|
$ |
12.78 |
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4630 Journal Street
(Columbus, OH) |
|
|
1995 |
|
|
|
2/10/2005 |
|
|
|
39,000 |
|
|
|
100 |
% |
|
$ |
308,105 |
|
|
$ |
7.90 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199 Sing Sing Road
(Big Flats, NY) |
|
|
2001 |
|
|
|
4/15/2005 |
|
|
|
120,000 |
|
|
|
100 |
% |
|
$ |
644,252 |
|
|
$ |
5.37 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2525 North Woodlawn Avenue
(Wichita, KS) |
|
|
2000 |
|
|
|
5/18/2005 |
|
|
|
69,287 |
|
|
|
100 |
% |
|
$ |
1,109,217 |
|
|
$ |
16.01 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725 & 737 Great Southwest Pkwy
(Arlington, TX) |
|
|
1966 |
|
|
|
5/26/2005 |
|
|
|
64,000 |
|
|
|
100 |
% |
|
$ |
580,635 |
|
|
$ |
9.07 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4032 Linden Avenue
(Dayton, OH) |
|
|
1956 |
|
|
|
6/30/2005 |
|
|
|
59,894 |
|
|
|
100 |
% |
|
$ |
268,042 |
|
|
$ |
4.48 |
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81 Corbett Way
(Eatontown, NJ) |
|
|
1991 |
|
|
|
7/7/2005 |
|
|
|
30,268 |
|
|
|
100 |
% |
|
$ |
537,321 |
|
|
$ |
17.75 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 & 20 Veronica Avenue
(Franklin Township, NJ) |
|
|
1978 |
|
|
|
7/11/2005 |
|
|
|
183,000 |
|
|
|
100 |
% |
|
$ |
975,229 |
|
|
$ |
5.33 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 Ridgeview Center Drive
(Duncan, SC) |
|
|
1984/2001/2007 |
|
|
|
7/14/2005 |
|
|
|
222,670 |
|
|
|
100 |
% |
|
$ |
1,539,286 |
|
|
$ |
6.91 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 Ridgeview Center Drive
(Duncan, SC) |
|
|
1984/2001/2007 |
|
|
|
7/14/2005 |
|
|
|
55,350 |
|
|
|
100 |
% |
|
$ |
382,627 |
|
|
$ |
6.91 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5656 Campus Parkway
(Hazelwood, MO) |
|
|
1977 |
|
|
|
8/5/2005 |
|
|
|
51,155 |
|
|
|
100 |
% |
|
$ |
289,928 |
|
|
$ |
5.67 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914 Wohlert Street
(Angola, IN) |
|
|
1982 |
|
|
|
9/2/2005 |
|
|
|
52,080 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
2.40 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 Growth Parkway
(Angola, IN) |
|
|
1998 |
|
|
|
9/2/2005 |
|
|
|
50,000 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
2.50 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
802 East 11th Street
(Rock Falls, IL) |
|
|
1988 |
|
|
|
9/2/2005 |
|
|
|
52,000 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
2.41 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 Opportunity Way
(Newburyport, MA) |
|
|
1994 |
|
|
|
10/17/2005 |
|
|
|
86,308 |
|
|
|
100 |
% |
|
$ |
891,492 |
|
|
$ |
10.33 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255 Spring Street
(Clintonville, WI) |
|
|
1992 |
|
|
|
10/31/2005 |
|
|
|
291,142 |
|
|
|
100 |
% |
|
$ |
575,006 |
|
|
$ |
1.98 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5700 Lee Road
(Maple Heights, OH) |
|
|
1974 |
|
|
|
12/21/2005 |
|
|
|
347,218 |
|
|
|
100 |
% |
|
$ |
1,282,582 |
|
|
$ |
3.69 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7545 Midlothian Turnpike
(Richmond, VA) |
|
|
1972 |
|
|
|
12/30/2005 |
|
|
|
42,213 |
|
|
|
0 |
% |
|
$ |
421,672 |
|
|
$ |
9.99 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3930 Sunforest Court
(Toledo, OH) |
|
|
1979 |
|
|
|
12/30/2005 |
|
|
|
23,368 |
|
|
|
100 |
% |
|
$ |
327,152 |
|
|
$ |
14.00 |
|
|
|
2020 |
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental Income for |
|
|
Income per |
|
|
Year of |
|
|
|
Year Built/ |
|
|
|
|
|
|
Rentable |
|
|
|
|
|
|
the Year Ended |
|
|
Occupied Square |
|
|
Lease |
|
Property |
|
Improvements |
|
|
Date of Purchase |
|
|
Square Feet |
|
|
Occupancy |
|
|
December 31, 2010 (4) |
|
|
Foot |
|
|
Expiration |
|
75 Canal Street
(South Hadley, MA) |
|
|
1978 |
|
|
|
2/15/2006 |
|
|
|
150,000 |
|
|
|
0 |
% |
|
$ |
179,837 |
|
|
$ |
1.20 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2101 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
20,400 |
|
|
|
100 |
% |
|
$ |
295,220 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2109 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
40,000 |
|
|
|
100 |
% |
|
$ |
578,863 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2215 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
25,000 |
|
|
|
100 |
% |
|
$ |
361,790 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2301 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
22,862 |
|
|
|
100 |
% |
|
$ |
330,849 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2470 Highcrest Road
(Roseville, MN) |
|
|
1964 |
|
|
|
2/21/2006 |
|
|
|
359,540 |
|
|
|
100 |
% |
|
$ |
3,030,458 |
|
|
$ |
8.43 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12000 Portland Avenue South
(Burnsville, MN) |
|
|
1984 |
|
|
|
5/10/2006 |
|
|
|
114,100 |
|
|
|
100 |
% |
|
$ |
1,234,662 |
|
|
$ |
10.82 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14701 Anthony Avenue
(Menomonee Falls, WI) |
|
|
1986/2000 |
|
|
|
6/30/2006 |
|
|
|
125,692 |
|
|
|
100 |
% |
|
$ |
775,274 |
|
|
$ |
6.17 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1025 Birdsong Drive
(Baytown, TX) |
|
|
1997 |
|
|
|
7/11/2006 |
|
|
|
12,000 |
|
|
|
100 |
% |
|
$ |
254,121 |
|
|
$ |
21.18 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42400 Merrill Road
(Sterling Heights, MI) |
|
|
1979/1989 |
|
|
|
9/22/2006 |
|
|
|
532,869 |
|
|
|
100 |
% |
|
$ |
1,166,654 |
|
|
$ |
2.19 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2150, 2200 Pinson Valley Parkway
(Birmingham, AL) |
|
|
1961/1980 |
|
|
|
9/29/2006 |
|
|
|
63,514 |
|
|
|
100 |
% |
|
$ |
271,173 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2325 West Fairview Avenue
(Montgomery, AL) |
|
|
1962/1989 |
|
|
|
9/29/2006 |
|
|
|
29,472 |
|
|
|
100 |
% |
|
$ |
125,830 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5221 N Highway 763
(Columbia, MO) |
|
|
1978 |
|
|
|
9/29/2006 |
|
|
|
16,275 |
|
|
|
100 |
% |
|
$ |
69,486 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4690 Parkway Drive
(Mason, OH) |
|
|
2002 |
|
|
|
1/5/2007 |
|
|
|
60,000 |
|
|
|
100 |
% |
|
$ |
681,270 |
|
|
$ |
11.35 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 South Rogers Lane
(Raleigh, NC) |
|
|
1994 |
|
|
|
2/16/2007 |
|
|
|
115,500 |
|
|
|
100 |
% |
|
$ |
717,203 |
|
|
$ |
6.21 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1110 West Tenkiller
(Tulsa, OK) |
|
|
2004 |
|
|
|
3/1/2007 |
|
|
|
238,310 |
|
|
|
100 |
% |
|
$ |
1,565,794 |
|
|
$ |
6.57 |
|
|
|
2019 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3725 East 10th Court
(Hialeah, FL) |
|
|
1956/1992 |
|
|
|
3/9/2007 |
|
|
|
132,337 |
|
|
|
100 |
% |
|
$ |
995,048 |
|
|
$ |
7.52 |
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554 Clark Road
(Tewksbury, MA) |
|
|
1985/1989 |
|
|
|
5/17/2007 |
|
|
|
102,200 |
|
|
|
100 |
% |
|
$ |
922,926 |
|
|
$ |
9.03 |
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5324 Natorp Boulevard
(Mason, OH) |
|
|
2007 |
|
|
|
7/1/2007 |
|
|
|
21,264 |
|
|
|
100 |
% |
|
$ |
583,131 |
|
|
$ |
27.42 |
|
|
|
2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7282 Willam Barry Boulevard
(Cicero, NY) |
|
|
2005 |
|
|
|
9/6/2007 |
|
|
|
71,880 |
|
|
|
100 |
% |
|
$ |
529,743 |
|
|
$ |
7.37 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1515 Arboretum Drive SE
(Grand Rapids, MI) |
|
|
2001 |
|
|
|
9/28/2007 |
|
|
|
63,235 |
|
|
|
100 |
% |
|
$ |
1,068,550 |
|
|
$ |
16.90 |
|
|
|
2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Territorial Court
(Bollingbrook, IL) |
|
|
2002 |
|
|
|
9/28/2007 |
|
|
|
55,869 |
|
|
|
100 |
% |
|
$ |
619,296 |
|
|
$ |
11.08 |
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2349 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
16,740 |
|
|
|
100 |
% |
|
$ |
404,159 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2341 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
4,372 |
|
|
|
100 |
% |
|
$ |
105,555 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2339 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
5,488 |
|
|
|
100 |
% |
|
$ |
132,498 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 Phillip Boulevard
(Lawrenceville, GA) |
|
|
2005 |
|
|
|
12/13/2007 |
|
|
|
12,412 |
|
|
|
100 |
% |
|
$ |
349,871 |
|
|
$ |
28.19 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2096 McGee Road
(Snellville, GA) |
|
|
1986 |
|
|
|
12/13/2007 |
|
|
|
3,800 |
|
|
|
100 |
% |
|
$ |
90,815 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental Income for |
|
Income per |
|
Year of |
|
|
Year Built/ |
|
|
|
Rentable |
|
|
|
|
|
the Year Ended |
|
Occupied Square |
|
Lease |
Property |
|
Improvements |
|
Date of Purchase |
|
Square Feet |
|
Occupancy |
|
December 31, 2010 (4) |
|
Foot |
|
Expiration |
7174 Wheat Street
(Covington, GA)
|
|
|
2000 |
|
|
12/13/2007
|
|
|
5,000 |
|
|
|
100 |
% |
|
$ |
119,493 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1055 Haw Creek Parkway
(Cumming, GA)
|
|
|
2004 |
|
|
12/13/2007
|
|
|
13,919 |
|
|
|
100 |
% |
|
$ |
380,410 |
|
|
$ |
27.33 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1293 Wellbrook Circle
(Conyers, GA)
|
|
|
1994 |
|
|
12/13/2007
|
|
|
6,400 |
|
|
|
100 |
% |
|
$ |
152,951 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425 Gateway Drive
(Reading, PA)
|
|
|
2007 |
|
|
1/29/2008
|
|
|
42,900 |
|
|
|
100 |
% |
|
$ |
716,666 |
|
|
$ |
16.71 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6499 University Avenue NE
(Fridley, MN)
|
|
|
1985/2006 |
|
|
2/26/2008
|
|
|
74,160 |
|
|
|
100 |
% |
|
$ |
890,432 |
|
|
$ |
12.01 |
|
|
2013(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7528 Auburn Road
(Concord Township, OH)
|
|
|
1957/2008 |
|
|
3/31/2008
|
|
|
273,300 |
|
|
|
100 |
% |
|
$ |
1,724,133 |
|
|
$ |
6.31 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10021 Rodney Street
(Pineville, NC)
|
|
|
1985 |
|
|
4/30/2008
|
|
|
74,950 |
|
|
|
100 |
% |
|
$ |
431,424 |
|
|
$ |
5.76 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28305 State Route 7
(Marietta, OH)
|
|
|
1992/2007 |
|
|
8/29/2008
|
|
|
223,458 |
|
|
|
100 |
% |
|
$ |
896,743 |
|
|
$ |
4.01 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400 Highpoint Drive
(Chalfont, PA)
|
|
|
1987 |
|
|
8/29/2008
|
|
|
67,200 |
|
|
|
100 |
% |
|
$ |
757,571 |
|
|
$ |
11.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1520 Albany Place SE
(Orange City, Iowa)
|
|
|
1990 |
|
|
12/15/2010
|
|
|
487,121 |
|
|
|
100 |
% |
|
$ |
53,215 |
|
|
$ |
2.37 |
(2) |
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
|
|
6,791,280 |
|
|
|
|
|
|
$ |
41,180,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Two tenants occupy this building, each with separate leases ending in the
same year. |
|
(2) |
|
Rental income per occupied square foot
is annualized, as if the building were held for all
of 2010. |
|
(3) |
|
Property subject to a ground lease. |
|
(4) |
|
Total rental income included in this table is straight-line rental income calculated
in accordance with US GAAP. |
The following table summarizes the lease expirations by year for our properties for leases in
place as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue for |
|
|
Year of Lease |
|
|
|
|
|
Number of |
|
the Year Ended |
|
% of Annualized |
Expiration |
|
Square Feet |
|
Leases (1) |
|
December 31, 2010 |
|
Base Rent |
2010
|
|
|
192,213 |
|
|
|
2 |
|
|
$ |
601,509 |
|
|
|
1.5 |
% |
2011
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0.0 |
% |
2012
|
|
|
479,982 |
|
|
|
3 |
|
|
|
4,429,603 |
|
|
|
10.8 |
% |
2013
|
|
|
438,422 |
|
|
|
6 |
|
|
|
4,617,432 |
|
|
|
11.2 |
% |
2014
|
|
|
614,132 |
|
|
|
5 |
|
|
|
3,082,200 |
|
|
|
7.5 |
% |
2015
|
|
|
896,876 |
|
|
|
8 |
|
|
|
6,836,187 |
|
|
|
16.6 |
% |
2016
|
|
|
835,022 |
|
|
|
4 |
|
|
|
3,165,988 |
|
|
|
7.7 |
% |
2017
|
|
|
102,200 |
|
|
|
1 |
|
|
|
922,926 |
|
|
|
2.2 |
% |
2018
|
|
|
59,894 |
|
|
|
1 |
|
|
|
268,042 |
|
|
|
0.7 |
% |
2019+
|
|
|
3,172,539 |
|
|
|
22 |
|
|
|
17,256,149 |
|
|
|
41.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,791,280 |
|
|
|
52 |
|
|
$ |
41,180,036 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Two leases expired during the third quarter of 2010, and neither of these properties have yet to be re-leased. |
The following table summarizes the geographic locations of our properties for leases in
place as of December 31, 2010:
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue for |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
the Year Ended |
|
|
% of Annualized |
|
State |
|
Square Feet |
|
|
Leases(1) |
|
|
December 31, 2010 |
|
|
Base Rent |
|
Ohio |
|
|
1,185,411 |
|
|
|
11 |
|
|
|
7,435,475 |
|
|
|
18.1 |
% |
Minnesota |
|
|
547,800 |
|
|
|
3 |
|
|
|
5,155,552 |
|
|
|
12.5 |
% |
North Carolina |
|
|
695,876 |
|
|
|
6 |
|
|
|
3,804,407 |
|
|
|
9.2 |
% |
Pennsylvania |
|
|
623,375 |
|
|
|
4 |
|
|
|
3,041,784 |
|
|
|
7.4 |
% |
Texas |
|
|
188,178 |
|
|
|
4 |
|
|
|
2,355,882 |
|
|
|
5.7 |
% |
Michigan |
|
|
596,104 |
|
|
|
2 |
|
|
|
2,235,204 |
|
|
|
5.4 |
% |
Illinois |
|
|
164,131 |
|
|
|
2 |
|
|
|
2,186,018 |
|
|
|
5.3 |
% |
Massachusetts |
|
|
338,508 |
|
|
|
3 |
|
|
|
1,994,255 |
|
|
|
4.8 |
% |
All Other States |
|
|
2,451,897 |
|
|
|
17 |
|
|
|
12,971,459 |
|
|
|
31.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,791,280 |
|
|
|
52 |
|
|
$ |
41,180,036 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Two leases expired during the third quarter of 2010, and neither of these properties have yet to be re-leased. |
|
|
|
Item 3. |
|
Legal Proceedings |
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any
material legal proceeding threatened against us.
|
|
|
Item 4. |
|
Removed and Reserved |
39
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
Our common stock is traded on the Nasdaq Global Select Market under the symbol GOOD. The
following table reflects the range of the high and low sale prices of our common stock on the
Nasdaq Global Select Market and the distributions per share for the years ended December 31, 2010
and 2009. Distributions to stockholders are declared quarterly and paid monthly. Amounts
presented represent the cumulative amount of the distributions declared for the months composing
such quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price per share |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
Quarter Ended |
|
High |
|
Low |
|
Declared Per Share |
3/31/2009
|
|
$ |
10.20 |
|
|
$ |
5.36 |
|
|
$ |
0.375 |
|
6/30/2009
|
|
|
16.21 |
|
|
|
8.20 |
|
|
|
0.375 |
|
9/30/2009
|
|
|
14.50 |
|
|
|
11.26 |
|
|
|
0.375 |
|
12/31/2009
|
|
|
14.19 |
|
|
|
11.85 |
|
|
|
0.375 |
|
3/31/2010
|
|
|
14.87 |
|
|
|
13.05 |
|
|
|
0.375 |
|
6/30/2010
|
|
|
17.79 |
|
|
|
14.36 |
|
|
|
0.375 |
|
9/30/2010
|
|
|
17.30 |
|
|
|
15.61 |
|
|
|
0.375 |
|
12/31/2010
|
|
|
19.50 |
|
|
|
17.00 |
|
|
|
0.375 |
|
Since inception, we have never reduced our per-share distributions nor have we missed payment of a
scheduled distribution to our stockholders. Our Board of Directors regularly evaluates our per
share distribution payments as they monitor the capital markets and the impact that the economy has
upon us. The decision as to whether to authorize and pay distributions on shares of our common
stock in the future, as well as the timing, amount and composition of any such future
distributions, will be at the sole and absolute discretion of our Board of Directors in light of
conditions then existing, including our earnings, FFO, financial condition, liquidity, capital
requirements, debt maturities, the availability of capital, contractual prohibitions or other
restrictions, applicable REIT and legal restrictions and general overall economic conditions and
other factors. While the statements above concerning our distribution policy represent our current
expectations, any actual distribution payable will be determined by our Board of Directors based
upon the circumstances at the time of declaration and the actual number of shares then outstanding,
and any distribution payable may vary from such expected amounts.
In order to qualify as a REIT, we are required to make ordinary dividend distributions to our
stockholders. The amount of these distributions must equal at least:
|
|
|
the sum of (A) 90% of our REIT taxable income (computed without regard to the
dividends paid deduction and capital gain) and (B) 90% of the net income (after tax), if
any, from foreclosure property, less |
|
|
|
the sum of certain non-cash items. |
For federal income tax purposes, our distributions generally consist of ordinary income, capital
gains, nontaxable return of capital or a combination of those items. Distributions that exceed our
current and accumulated earnings and profits (calculated for tax purposes) constitute a return of
capital rather than a dividend, which reduces a stockholders basis in its shares of stock and will
not be taxable to the extent of the stockholders basis in its shares of our stock. To the extent
a distribution exceeds the stockholders share of both our current and accumulated earnings and
profits and the stockholders basis in its shares of our stock, that distribution will be treated
as a gain from the sale or exchange of that stockholders shares of our stock. Every year, we
notify stockholders of the taxability of distributions paid to stockholders during the preceding
year.
40
As of February 7, 2011, there were approximately 7,921 beneficial owners of our common stock.
On November 19, 2009, the Company entered into a dealer manager agreement, as amended and restated
on December 22, 2009, or the Dealer Manager Agreement, with Halcyon Capital Markets, LLC, or
Halcyon, pursuant to which Halcyon agreed to act as the Companys dealer manager in connection with
the Companys continuous private offering of up to 3,333,333 shares of its then newly-designated
unregistered senior common stock, par value $0.001 per share, at a price of $15.00 per share to
investors and a selling commission of $1.6125 per share. On October 19, 2010, the Company
terminated the private offering of unregistered senior common stock, including the related dividend
reinvestment plan for such senior common stock. The Company issued 59,057 shares of unregistered
senior common stock pursuant to the private offering and related dividend reinvestment plan. These
issuances were exempt from registration pursuant to the Securities Act and to Rule 506 thereunder,
among other exemptions, on the basis that the securities were sold in a private offering not
involving general solicitation and that the purchasers of the securities were accredited
investors. Net proceeds from these sales, after selling commissions and dealer manager fees, were
approximately $787,000.
41
|
|
|
Item 6. |
|
Selected Financial Data |
The following selected financial data for the fiscal years ended December 31, 2010, 2009, 2008,
2007 and 2006 is derived from our audited consolidated financial statements. Certain amounts from
prior years financial statements have been reclassified to discontinued operations and these
reclassifications had no effect on previously reported net income or stockholders equity. The
data should be read in conjunction with our consolidated financial statements and notes thereto,
included elsewhere in this report, and Managements Discussion and Analysis of Financial Condition
and Results of Operations included in Item 7 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
41,928,070 |
|
|
$ |
42,608,937 |
|
|
$ |
40,807,497 |
|
|
$ |
32,690,038 |
|
|
$ |
25,842,045 |
|
Total operating expenses |
|
|
(23,414,572 |
) |
|
|
(20,540,529 |
) |
|
|
(19,363,723 |
) |
|
|
(15,791,430 |
) |
|
|
(14,035,669 |
) |
Other expense |
|
|
(13,585,590 |
) |
|
|
(17,668,460 |
) |
|
|
(16,570,753 |
) |
|
|
(10,940,394 |
) |
|
|
(8,521,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,927,908 |
|
|
|
4,399,948 |
|
|
|
4,873,021 |
|
|
|
5,958,214 |
|
|
|
3,284,957 |
|
Discontinued operations |
|
|
|
|
|
|
203,100 |
|
|
|
39,926 |
|
|
|
182,015 |
|
|
|
1,087,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,927,908 |
|
|
$ |
4,603,048 |
|
|
$ |
4,912,947 |
|
|
$ |
6,140,229 |
|
|
$ |
4,372,828 |
|
Dividends attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
Dividends attributable to senior common stock |
|
|
(20,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of dividends attributable to preferred
stock) |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.22 |
|
|
$ |
0.14 |
|
Discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of dividends attributable to preferred
stock) |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.22 |
|
|
$ |
0.14 |
|
Discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
Weighted average shares outstanding-diluted |
|
|
8,601,153 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
Cash dividends declared per common share |
|
$ |
1.50 |
|
|
$ |
1.50 |
|
|
$ |
1.50 |
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
Real estate depreciation and amortization, including discontinued operations |
|
|
13,263,814 |
|
|
|
13,171,703 |
|
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,349,474 |
|
Less: Gain on sale of real estate, net of taxes paid |
|
|
|
|
|
|
(160,038 |
) |
|
|
|
|
|
|
(78,667 |
) |
|
|
(1,106,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to common stockholders (1) |
|
|
14,077,922 |
|
|
|
13,520,963 |
|
|
|
13,523,838 |
|
|
|
12,496,270 |
|
|
|
9,428,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges and preferred dividends (2) |
|
|
1.0x |
|
|
|
1.0x |
|
|
|
1.1x |
|
|
|
1.1x |
|
|
|
1.1x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, before accumulated depreciation |
|
$ |
401,016,940 |
|
|
$ |
390,753,892 |
|
|
$ |
390,562,138 |
|
|
$ |
340,500,406 |
|
|
$ |
243,713,542 |
|
Total assets |
|
$ |
410,608,602 |
|
|
$ |
416,865,373 |
|
|
$ |
429,098,785 |
|
|
$ |
378,902,689 |
|
|
$ |
315,766,022 |
|
Mortgage notes payable, term loan and borrowings under the line of credit |
|
$ |
287,869,463 |
|
|
$ |
285,961,651 |
|
|
$ |
286,611,173 |
|
|
$ |
226,520,471 |
|
|
$ |
154,494,438 |
|
Total stockholders equity |
|
$ |
111,374,307 |
|
|
$ |
118,450,542 |
|
|
$ |
130,495,260 |
|
|
$ |
142,368,068 |
|
|
$ |
152,224,176 |
|
Total common shares outstanding |
|
|
8,724,613 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
(1) FFO was developed by The National Association of Real Estate Investment Trusts
(NAREIT), as a relative non-GAAP (Generally Accepted Accounting Principles in the United
States) supplemental measure of operating performance of an equity REIT in order to recognize that
income-producing real estate historically has not depreciated on the basis determined under GAAP.
FFO, as defined by NAREIT, is net income (loss) (computed in accordance with GAAP), excluding gains
(or losses) from sales of property, plus depreciation and amortization of real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash
flows from operating activities in accordance with GAAP and should not be considered an alternative
to either net income (loss) as an indication of our performance or to cash flow from operations as
a measure of liquidity or ability to make distributions to stockholders. Comparison of FFO to
similarly titled measures for other REITs may not necessarily be meaningful due to possible
differences in the application of the NAREIT definition used by such REITs.
FFO available to common stockholders is FFO adjusted to subtract preferred share and senior common
share distributions. We believe that net income available to common stockholders is the most
directly comparable GAAP measure to FFO available to common stockholders.
Basic funds from operations per share, or Basic FFO per share, and diluted funds from operations
per share, or Diluted FFO per share, is FFO available to common stockholders divided by weighted
average common shares outstanding and FFO available to common stockholders divided by weighted
average common shares outstanding on a diluted basis, respectively, during a period. We believe
that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful
to investors because they provide investors with a further context for evaluating our
42
FFO results in the same manner that investors use net income and earnings per share, or EPS, in evaluating net
income available to common stockholders. In addition, since most REITs provide FFO available to
common stockholders, Basic FFO and Diluted FFO per share information to the investment community,
we believe these are useful supplemental measures for comparing us to other REITs. We believe
that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly
comparable GAAP measure to Basic FFO per share, and that diluted EPS is the most directly
comparable GAAP measure to Diluted FFO per share.
The following table provides a reconciliation of our FFO for the years ended December 31, 2010,
2009, 2008, 2007 and 2006 to the most directly comparable GAAP measure, net income, and a
computation of basic and diluted FFO per weighted average common share and basic and diluted net
income per weighted average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
4,927,908 |
|
|
$ |
4,603,048 |
|
|
$ |
4,912,947 |
|
|
$ |
6,140,229 |
|
|
$ |
4,372,828 |
|
Less: Distributions attributable to preferred and senior common stock |
|
|
(4,113,800 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
814,108 |
|
|
|
509,298 |
|
|
|
819,197 |
|
|
|
2,046,479 |
|
|
|
2,185,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Real estate depreciation and amortization, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued operations |
|
|
13,263,814 |
|
|
|
13,171,703 |
|
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,349,474 |
|
Less: Gain on sale of real estate |
|
|
|
|
|
|
(160,038 |
) |
|
|
|
|
|
|
(78,667 |
) |
|
|
(1,106,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders |
|
$ |
14,077,922 |
|
|
$ |
13,520,963 |
|
|
$ |
13,523,838 |
|
|
$ |
12,496,270 |
|
|
$ |
9,428,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
Weighted average shares outstanding diluted |
|
|
8,601,153 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per weighted average share of common stock |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per weighted average share of common stock |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic FFO per weighted average share of common stock |
|
$ |
1.64 |
|
|
$ |
1.58 |
|
|
$ |
1.58 |
|
|
$ |
1.46 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO per weighted average share of common stock |
|
$ |
1.64 |
|
|
$ |
1.58 |
|
|
$ |
1.58 |
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per share of common stock |
|
$ |
1.50 |
|
|
$ |
1.50 |
|
|
$ |
1.50 |
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFO paid per share of common stock |
|
|
91 |
% |
|
|
95 |
% |
|
|
95 |
% |
|
|
99 |
% |
|
|
120 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The calculation of the ratio of earnings to combined fixed charges and preferred
distributions is below. Earnings consist of net income from continuing operations before fixed
charges. Fixed charges consist of interest expense, amortization of deferred financing fees and
the portion of operating lease expense that represents interest. The portion of operating lease
expense that represents interest is calculated by dividing the amount of rent expense, allocated to
us by our Adviser as part of the administration fee payable under the Advisory Agreement, by three. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income from continuing operations |
|
$ |
4,927,908 |
|
|
$ |
4,399,948 |
|
|
$ |
4,873,021 |
|
|
$ |
5,958,214 |
|
|
$ |
3,284,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: fixed charges |
|
|
21,191,303 |
|
|
|
22,000,728 |
|
|
|
20,963,484 |
|
|
|
15,670,067 |
|
|
|
11,490,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: preferred and senior common distributions |
|
|
(4,113,800 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
22,005,411 |
|
|
$ |
22,306,926 |
|
|
$ |
21,742,755 |
|
|
$ |
17,534,531 |
|
|
$ |
12,588,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
16,031,755 |
|
|
|
16,398,938 |
|
|
|
15,574,735 |
|
|
|
10,847,346 |
|
|
|
8,041,412 |
|
Amortization of deferred financing fees |
|
|
1,030,982 |
|
|
|
1,495,598 |
|
|
|
1,283,952 |
|
|
|
717,195 |
|
|
|
1,207,198 |
|
Estimated interest component of rent |
|
|
14,766 |
|
|
|
12,442 |
|
|
|
11,047 |
|
|
|
11,776 |
|
|
|
54,976 |
|
Preferred and senior common distributions |
|
|
4,113,800 |
|
|
|
4,093,750 |
|
|
|
4,093,750 |
|
|
|
4,093,750 |
|
|
|
2,186,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges and preferred distributions |
|
|
21,191,303 |
|
|
|
22,000,728 |
|
|
|
20,963,484 |
|
|
|
15,670,067 |
|
|
|
11,490,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges and preferred distributions |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.1 |
|
43
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-K.
OVERVIEW
General
We were incorporated under the General Corporation Law of the State of Maryland on February 14,
2003, primarily for the purpose of investing in and owning net leased industrial and commercial
real property and selectively making long-term industrial and commercial mortgage loans. Most of
the portfolio of real estate that we currently own is leased to a wide cross section of tenants
ranging from small businesses to large public companies, many of which are corporations that do not
have publicly-rated debt. We have historically entered into, and intend in the future to enter
into, purchase agreements for real estate having triple net leases with terms of approximately 10
to 15 years and built in rental rate increases. Under a triple net lease, the tenant is required to
pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased
property. We are actively communicating with buyout funds, real estate brokers and other third
parties to locate properties for potential acquisition or to provide mortgage financing in an
effort to build our portfolio. At December 31, 2010, we owned 65 properties totaling approximately
6.8 million square feet. The total gross investment in these properties was approximately $446.4
million at December 31, 2010.
Business Environment
The United States is beginning to recover from the recession that it entered into during late 2007,
though it continues to experience pervasive and fundamental disruptions in its financial and
capital markets. Unemployment remains high and housing starts are low, and these key economic
indicators will need to improve in order for the economy to fully recover. As a result, conditions
within the U.S. capital markets generally, and the U.S. real estate capital markets particularly,
continue to experience significant dislocation and stress. While we are seeing signs of
stabilization in both the equity and debt capital markets, these markets remain challenging and we
do not know if adverse conditions will again intensify, nor are we able to gauge the full extent to
which the disruptions will affect us. We believe that it will take some time for the United States
to fully recover from the recession.
As a result, the continued challenging economic conditions could still materially and adversely
impact the financial condition of one or more of our tenants and, therefore, could increase the
likelihood that a tenant may declare bankruptcy or default upon its payment obligations arising
under a related lease.
Moreover, our ability to make new investments is highly dependent upon our ability to procure
external financing. Our principal sources of external financing generally include the issuance of
equity securities, long-term mortgages secured by properties, and borrowings under our line of
credit. The market for long-term mortgages has been limited, as the collateralized mortgage-backed
securities, or CMBS, market has experienced significant disruption. With the stresses upon the
CMBS market, many banks are not lending on industrial and commercial real estate as they are no
longer able to sell these loans to the CMBS market and are not willing or able to keep these loans
on their balance sheets. In addition, many banks have significantly curtailed their general lending
practices, as they are having difficulty valuing the underlying real estate in this market. We
are, however, beginning to see banks that are willing to issue medium-term mortgages, between two
and five years, on substantially less favorable terms than were previously available.
Consequently, we continue to focus on using medium-term mortgages to finance our real estate
activities until the market for long-term mortgages returns.
44
Recent Developments
Investment Activities:
On April 15, 2005, we originated a mortgage loan in the amount of $10.0 million that was
collateralized by an office building located in McLean, Virginia in which Gladstone Management
Corporation, or our Adviser, and Gladstone Administration LLC, or our Administrator, are
subtenants. The mortgage loan was originally set to mature in May 2017, though, on July 22, 2010,
it was fully repaid. We received $3.3 million of additional income and prepayment fees in
connection with the early payment and the proceeds were used to repay a portion of our line of
credit.
During the year ended December 31, 2010, we acquired one property. The property is a 487,121
square foot office/industrial building located in Orange City, Iowa for approximately $12.3
million, including related acquisition expenses. We funded this acquisition through a combination
of borrowings from the New Line of Credit and the assumption of approximately $10.8 million of
mortgage debt on the property. At closing, the seller assigned to us the existing triple net lease
with Staples Contract & Commercial, Inc., the commercial delivery and fulfillment division of
Staples, Inc. The existing triple net lease has a remaining term of approximately sixteen years,
and the mortgage debt related to the property matures in December 2026. The existing triple net
lease provides for aggregate rents of approximately $1.2 million in 2011 with prescribed annual
rental rate escalations commencing in 2012.
Financing Activities:
In December 2010, we procured a new line of credit, or the New Line of Credit, with Capital One,
N.A. serving as a revolving lender, a letter of credit issuer and as an administrative agent and
Branch Banking and Trust Company serving as a revolving lender and a letter of credit issuer, which
matures on December 28, 2013. The New Line of Credit replaced our prior $50.0 million senior
secured revolving credit facility which was scheduled to mature on December 29, 2010, or the Prior
Line of Credit. The New Line of Credit provides for a senior secured revolving credit facility of
up to $50.0 million, with a standby letter of credit sublimit of up to $20.0 million. The New Line
of Credit is subject to a maximum borrowing base calculation which may, from time to time, affect
the maximum amount available to be drawn. The New Line of Credit may, upon satisfaction of certain
conditions, be expanded up to $75.0 million.
In connection with procuring the New Line of Credit, we repaid the $29.8 million outstanding
balance of the Prior Line of Credit with funds drawn from the New Line of Credit and with existing
cash. We incurred no early termination penalties or fees in connection with the repayment of
outstanding balance of the Prior Line of Credit. There was $27.0 million outstanding under the
line at December 31, 2010, and we had an available borrowing capacity of $5.9 million thereunder at
December 31, 2010.
Debt Activities:
We had $48.0 million of balloon principal payments maturing under one of our long-term mortgages in
2010; however, the mortgage has three annual extension options through 2013, and we exercised one
of these options on September 30, 2010. In connection with the exercise of the option, the
interest rate reset from 6.85% to 4.58%. At the time of notification of extension, we remitted a
fee of 0.25% of the outstanding principal balance, or $120,000, and a certification to the lender
that our aggregate debt service coverage ratio is not less than 1.2. The interest rate for the two
additional extension periods will adjust based upon the 1-year swap rate at the time of extension
and a fixed spread of 4.29% and 4.41%, respectively. We expect to exercise our remaining two annual
extension options as they come due in 2011 and 2012. We have no other balloon principal payments
due under any of our mortgages until 2013.
45
Equity Activities:
We raised approximately $3.4 million in net proceeds during 2010 under our open market sale
agreement, or the Open Market Sale Agreement, with Jefferies & Company, Inc., or Jefferies. Under
this agreement we may, from time to time, offer to sell shares of our common stock with an
aggregate sales price of up to $25.0 million on the open market through Jefferies, as agent, or to
Jefferies, as principal based upon our instructions (including any price, time or size limits or
other customary parameters or conditions that we may impose). Sales of shares of our common stock
through Jefferies will be executed by means of ordinary brokers transactions on the NASDAQ Global
Select Market or otherwise at market prices, in privately negotiated transactions, crosses or block
transactions, as may be agreed between us and Jefferies, including a combination of any of these
transactions. We will pay Jefferies a commission equal to 2.0% of the gross sales proceeds of any
common stock sold through Jefferies as agent under the Open Market Sale Agreement, and currently we
have paid commission to Jefferies of approximately $65,000. To date, we have sold 192,365 shares of
common stock under the Open Market Sale Agreement. The proceeds were used to repay a portion of
our Prior Line of Credit and fund the acquisition of the property in Orange City, Iowa.
On November 19, 2009, we entered into a dealer manager agreement, or the Dealer Manager Agreement,
as amended and restated on December 22, 2009, with Halcyon Capital Markets, LLC, or Halcyon,
pursuant to which Halcyon agreed to act as our dealer manager in connection with our continuous
private offering of up to 3,333,333 shares of our then newly designated unregistered senior common
stock at $15.00 per share. Holders of the unregistered senior common stock have the right, but not
the obligation, following the fifth anniversary of the issuance of such shares, to exchange any or
all of such shares of senior common stock for shares of our common stock. On October 19, 2010, we
terminated the private offering of unregistered senior common stock, including the dividend
reinvestment plan for the senior common stock. In connection with the termination, we wrote-off
approximately $1.6 million of fees incurred in relation to the offering. The expenses consisted
primarily of legal, accounting and fees paid to Halcyon, and are recorded as professional fees in
our consolidated statement of operations. We issued 59,057 shares of unregistered senior common
stock pursuant to the private offering and related dividend reinvestment plan. Net proceeds from
these sales, after selling commissions and dealer manager fees, were approximately $787,000.
On February 2, 2011, we sold 725,000 shares of our common stock at $18.35 per share in an
underwritten public offering of our common stock. Subsequently, on February 16, 2011, we sold an
additional 108,750 shares of common stock on the same terms and conditions in connection with the
underwriters exercise of their over-allotment option. The net proceeds after deducting the
underwriting discount and estimated offering expenses were approximately $14.3 million. We used
the proceeds of the offering to repay a portion of the outstanding balance under our New Line of
Credit. The shares were issued under our effective shelf registration statement on file with the
Securities and Exchange Commission, or SEC.
Leasing Activities:
On May 4, 2010, we extended the lease with the tenant that occupies our property located in Grand
Rapids, Michigan for a period of 15 years, and the tenant has 2 options to extend the lease for
additional periods of 10 years each. The lease was originally set to expire in July 2016, and will
now expire in April 2025. The lease provides for prescribed rent escalations over the life of the
lease, with annualized straight line rents of approximately $1.1 million.
On June 30, 2010 and July 31, 2010, respectively, the leases with the tenants that occupied our
properties located in South Hadley, Massachusetts and Richmond, Virginia, respectively, expired and
currently remain vacant. These two leases comprised approximately 2.6% of our total annualized
rental income. We are actively seeking new tenants for these two properties while concurrently
researching alternative uses for these two properties.
On September 29, 2010, the tenant in our building located in Hazelwood, Missouri declared
bankruptcy. The lease for this property is scheduled to expire in January 2012, and rental income
from this tenant comprises less than 1% of our total annualized rental income. On March 2,
2011, the lease was rejected
46
in the bankruptcy proceedings of our tenant. We have been informed that the rent payments will
cease at the end of April 2011. We are taking the appropriate action to re-tenant the property.
On October 8, 2010, we extended the lease with the tenant that occupies our property located in
Toledo, Ohio for a period of 10 years, and the tenant has 2 options to extend the lease for
additional periods of 10 years each. The lease was originally set to expire in December 2010, and
will now expire in December 2020. The lease provides for prescribed rent escalations over the life
of the lease, with annualized straight line rents of approximately $276,000.
On December 14, 2010, we released the current tenant in our property located in Cumming, Georgia
from its obligations under their existing lease, and simultaneously signed a lease with a new
tenant under substantially the same terms. The new tenant is an Atlanta, Georgia based hospital
system that acquired part of the current tenants business, part of which is housed in our Cumming,
Georgia facility. The current tenant is a medical group that continues to lease the remainder of
our properties located in Georgia under a master lease. In connection with services provided
directly by our Adviser to the tenant, the tenant paid a real estate advisory fee to our Adviser,
in the amount of $450,000.
On December 30, 2010, we extended the lease with the tenant that occupies our property located in
Fridley, Minnesota for a period of 10 years, and the tenant has one option to extend the lease for
a period of 5 years. The lease was originally set to expire in January 2013 and will now expire in
July 2020. The lease provides for prescribed rent escalations over the life of the lease, with
annualized straight line rents of approximately $812,000.
On January 31, 2011, we extended the lease with our tenant occupying five of our properties located
in Decatur, Georgia, Lawrenceville, Georgia, Snellville, Georgia, Covington, Georgia, and Conyers,
Georgia. The lease covering all of these properties was extended for an additional five year
period, thereby extending the lease until December 2031. The lease was originally set to expire in
December 2026. The lease provides for prescribed rent escalations over the life of the lease, with
annualized straight line rents of approximately $1.6 million. Furthermore, the lease grants the
tenant four options to extend the lease for a period of five years each.
All of our remaining tenants are current and paying in accordance with their leases.
Diversity of Our Portfolio
Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid
dependence on any one particular tenant, geographic market or tenant industry. By diversifying our
portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single
under-performing investment or a downturn in any particular industry or geographic market. Our
largest tenant at December 31, 2010 comprised approximately 7.4% of our total rental income, and
our largest concentration of properties was located in Ohio, which accounted for approximately
18.1% of our total rental income. The table below reflects the breakdown of our total rental income
by tenant industry classification for the years ended December 31, 2010 and 2009, respectively:
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
Industry Classification |
|
Rental Income |
|
|
Rental Income |
|
|
Rental Income |
|
|
Rental Income |
|
Electronics |
|
$ |
6,165,788 |
|
|
|
15.0 |
% |
|
$ |
6,164,789 |
|
|
|
14.9 |
% |
Healthcare, Education & Childcare |
|
|
6,145,415 |
|
|
|
14.9 |
% |
|
|
6,145,415 |
|
|
|
14.8 |
% |
Telecommunications |
|
|
5,447,365 |
|
|
|
13.3 |
% |
|
|
5,447,033 |
|
|
|
13.1 |
% |
Diversified/Conglomerate Manufacturing |
|
|
3,664,686 |
|
|
|
8.9 |
% |
|
|
3,664,686 |
|
|
|
8.8 |
% |
Chemicals, Plastics & Rubber |
|
|
3,130,133 |
|
|
|
7.6 |
% |
|
|
3,173,514 |
|
|
|
7.6 |
% |
Machinery |
|
|
2,332,672 |
|
|
|
5.7 |
% |
|
|
2,389,607 |
|
|
|
5.8 |
% |
Containers, Packaging & Glass |
|
|
2,330,715 |
|
|
|
5.7 |
% |
|
|
2,330,246 |
|
|
|
5.6 |
% |
Beverage, Food & Tobacco |
|
|
2,188,793 |
|
|
|
5.2 |
% |
|
|
2,188,755 |
|
|
|
5.3 |
% |
Printing & Publishing |
|
|
2,187,504 |
|
|
|
5.3 |
% |
|
|
2,189,033 |
|
|
|
5.3 |
% |
Buildings and Real Estate |
|
|
2,075,103 |
|
|
|
5.0 |
% |
|
|
2,025,668 |
|
|
|
4.9 |
% |
Oil & Gas |
|
|
1,282,582 |
|
|
|
3.1 |
% |
|
|
1,138,136 |
|
|
|
2.7 |
% |
Personal & Non-Durable Consumer
Products |
|
|
1,228,100 |
|
|
|
2.9 |
% |
|
|
1,354,721 |
|
|
|
3.3 |
% |
Automobile |
|
|
1,166,654 |
|
|
|
2.8 |
% |
|
|
1,166,654 |
|
|
|
2.8 |
% |
Personal, Food & Miscellaneous Services |
|
|
575,006 |
|
|
|
1.4 |
% |
|
|
575,006 |
|
|
|
1.4 |
% |
Home & Office Furnishings |
|
|
529,743 |
|
|
|
1.3 |
% |
|
|
529,743 |
|
|
|
1.3 |
% |
Insurance |
|
|
421,672 |
|
|
|
1.0 |
% |
|
|
722,866 |
|
|
|
1.7 |
% |
Diversified/Conglomerate Services |
|
|
308,105 |
|
|
|
0.9 |
% |
|
|
308,105 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,180,036 |
|
|
|
100.0 |
% |
|
$ |
41,513,977 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Adviser and Administrator
Our Adviser is led by a management team which has extensive experience purchasing real estate and
originating mortgage loans. Our Adviser is controlled by Mr. David Gladstone, our chairman and
chief executive officer. Mr. Gladstone is also the chairman and chief executive officer of our
Adviser. Terry Lee Brubaker, our vice chairman, chief operating officer, secretary and director, is
a member of the board of directors of our Adviser as well as its vice chairman and chief operating
officer. George Stelljes III, our president, chief investment officer and director, is a member of
the board of directors of our Adviser and its president and chief investment officer. Gladstone
Administration, LLC, or our Administrator, employs our chief financial officer, chief compliance
officer, internal counsel, treasurer, investor relations and their respective staffs.
Our Adviser and Administrator also provide investment advisory and administrative services,
respectively, to our affiliates, Gladstone Capital Corporation and Gladstone Investment
Corporation, both publicly-traded business development companies, as well as Gladstone Land
Corporation, a private agricultural real estate company. With the exception of our chief financial
officer, all of our executive officers serve as either directors or executive officers, or both, of
Gladstone Capital Corporation and Gladstone Investment
Corporation. In the future, our Adviser may provide investment advisory services to other funds,
both public and private, of which it is the sponsor.
Advisory and Administration Agreements
We are externally managed pursuant to contractual arrangements with our Adviser and our
Administrator. Our Adviser and Administrator employ all of our personnel and pay their payroll,
benefits, and general expenses directly. We have an advisory agreement with our Adviser, or the
Advisory Agreement, and an administration agreement with our Administrator, or the Administration
Agreement.
Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our
direct benefit. Examples of these expenses include legal, accounting, interest on short-term debt
and mortgages, tax preparation, directors and officers insurance, stock transfer services,
stockholder-related fees, consulting and related fees. In addition, we are also responsible for
all fees charged by third parties that are directly related to our business, which may include real
estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees
(although we may be able to pass some or all of such fees on to our tenants and borrowers).
During the years ended December 31, 2010, 2009 and 2008, none of these third party expenses were
incurred by us directly. The actual amount of such fees that we incur in the future will depend
largely upon the aggregate costs of the properties that we acquire, the aggregate amount of
mortgage loans that we make
48
and the extent to which we are able to shift the burden of such fees to our tenants and borrowers.
Accordingly, the amount of these fees that we will pay in the future is not determinable at this
time.
Management Services and Fees under the Advisory Agreement
The Advisory Agreement provides for an annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any preferred stock, or total common stockholders
equity, and for an incentive fee based on funds from operations, or FFO. Our Adviser does not
charge acquisition or disposition fees when we acquire or dispose of properties as is common with
other externally-advised REITs. Furthermore, there are no fees charged when our Adviser secures
long or short term credit or arranges mortgage loans on our properties, however, our Adviser may
earn fee income from our borrowers or tenants or other sources. This fee income earned by our
Adviser, or a portion thereof, may, at the sole discretion of the Board of Directors, be credited
against our base management fee as a rebate to the base management fee.
For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital
losses, less any distributions paid on preferred stock and senior common stock, but FFO does not
include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our
quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%,
or the hurdle rate, of total common stockholders equity. We pay our Adviser an incentive fee with
respect to our pre-incentive fee FFO in each calendar quarter as follows:
|
|
|
no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized); |
|
|
|
|
100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and |
|
|
|
|
20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized). |
Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
Percentage of pre-incentive fee FFO allocated to incentive fee
The incentive fee may be reduced because of a covenant which exists in our line of credit agreement
which limits distributions to our stockholders to 95% of FFO. In order to comply with this
covenant, our board of directors accepted our Advisers offer to unconditionally, irrevocably and
voluntarily waive on a quarterly basis a portion of the incentive fee for the years ended December
31, 2010, 2009 and 2008, which allowed us to maintain the current level of distributions to our
stockholders. These waived fees may not be recouped by our Adviser in the future. Our Adviser has
indicated that it intends to continue to waive all or a portion of the incentive fee in order to
support the current level of distributions to our stockholders; however, our Adviser is not
required to issue any such waiver, either in whole or in part.
49
Administration Agreement
Pursuant to the Administration Agreement, we pay for our allocable portion of our Administrators
overhead expenses incurred while performing its obligations to us, including, but not limited to,
rent and the salaries and benefits expenses of our chief financial officer, chief compliance
officer, internal counsel, treasurer, investor relations and their respective staffs. Our
allocable portion of expenses is derived by multiplying our Administrators total expenses by the
percentage of our total assets at the beginning of each quarter in comparison to the total assets
of all companies managed by our Adviser under similar agreements.
Critical Accounting Policies
The preparation of our financial statements in accordance with generally accepted accounting
principles in the United States of America, or GAAP, requires management to make judgments that are
subjective in nature in order to make certain estimates and assumptions. Management relies on its
experience, collects historical and current market data, and analyzes this information in order to
arrive at what it believes to be reasonable estimates. Under different conditions or assumptions,
materially different amounts could be reported related to the accounting policies described below.
In addition, application of these accounting policies involves the exercise of judgment regarding
the use of assumptions as to future uncertainties, and as a result, actual results could materially
differ from these estimates. A summary of all of our significant accounting policies is provided
in Note 1 to our consolidated financial statements included elsewhere in this Form 10-K. Below is
a summary of accounting polices involving estimates and assumptions that require complex,
subjective or significant judgments in their application and that materially affect our results of
operations.
Allocation of Purchase Price
When we acquire real estate, we allocate the purchase price, less any expenses related to the
acquisition, to (i) the acquired tangible assets and liabilities, consisting of land, building,
tenant improvements, long-term debt and (ii) the identified intangible assets and liabilities,
consisting of the value of above-market and below-market leases, the value of in-place leases, the
value of unamortized lease origination costs, the value of tenant relationships and the value of
capital lease obligations, based in each case on their fair values. All expenses related to the
acquisition are expensed as incurred, rather than capitalized into the cost of the acquisition as
had been required by the previous accounting.
Managements estimates of value are made using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical expected lease-up periods, considering
current market conditions and costs to execute similar leases. We also consider information
obtained about each property as a result of our pre-acquisition due diligence, marketing and
leasing activities in estimating the fair value of the tangible and intangible assets and
liabilities acquired. In estimating carrying costs, management also includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, which primarily range from 9 to 18 months, depending on
specific local market conditions. Management also estimates costs to execute similar leases,
including leasing commissions, legal and other related expenses to the extent that such costs are
not already incurred in connection with a new lease origination as part of the transaction.
Management also considers the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the tenants credit quality
and managements expectations of lease renewals (including those existing under the terms of the
lease agreement), among other factors. A change in any of the assumptions above, which are very
subjective, could have a material impact on our results of operations.
The allocation of the purchase price directly affects the following in our consolidated financial
statements:
50
|
|
|
The amount of purchase price allocated to the various tangible and intangible assets on
our balance sheet; |
|
|
|
|
The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus, depending on the amounts allocated between
land and other depreciable assets, changes in the purchase price allocation among our
assets could have a material impact on our FFO, a metric which is used by many REIT
investors to evaluate our operating performance; and |
|
|
|
|
The period of time over which tangible and intangible assets are depreciated varies
greatly, and thus, changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years. Also, we
depreciate our buildings over 39 years, but do not depreciate our land. These differences
in timing could have a material impact on our results of operations. |
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if circumstances that
indicate impairment in the carrying value of the investment exist or that depreciation periods
should be modified. In determining if impairment exists, management considers such factors as our
tenants payment history, the financial condition of our tenants, including calculating the current
leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industry in
which our tenants operate and whether the carrying value of our real estate has decreased. If any
of the factors above support the possibility of impairment, we prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific property and determine if
the carrying amount in such property is recoverable. In preparing the projection of undiscounted
future cash flows, we estimate the holding periods of the properties and cap rates using
information that we obtain from market comparability studies and other comparable sources. If
impairment is indicated, the carrying value of the property would be written down to its estimated
fair value based on our best estimate of the propertys discounted future cash flows using
assumptions from market participants. Any material changes to the estimates and assumptions used
in this analysis could have a significant impact on our results of operations, as the changes would
impact our determination of whether impairment is deemed to have occurred and the amount of
impairment loss that we would recognize.
Using the methodology discussed above and in light of the current economic conditions discussed
above in Overview-Business Environment, we evaluated our entire portfolio as of December 31, 2010
for any impairment indicators and performed an impairment analysis on those select properties that
had an indication of impairment. Subsequent to this analysis, we concluded that none of our
properties were impaired, and we will continue to monitor our portfolio for any indicators that may
change our conclusion.
Provision for Loan Losses
Our accounting policies require that we reflect in our financial statements an allowance for
estimated credit losses with respect to mortgage loans that we have made based upon our evaluation
of known and inherent risks associated with our private lending assets. Management reflects
provisions for loan losses based upon our assessment of general market conditions, our internal
risk management policies and credit risk rating system, industry loss experience, our assessment of
the likelihood of delinquencies or defaults, and the value of the collateral underlying our
investments. Any material changes to the estimates and assumptions used in this analysis could
have a significant impact on our results of operations. We had no outstanding mortgage loans
receivable as of December 31, 2010.
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently
issued accounting pronouncements.
51
Results of Operations
Our weighted-average yield on our occupied portfolio as of December 31, 2010 was approximately
9.60%. The weighted-average yield on our occupied portfolio is calculated by taking the annualized
straight-line rents, reflected as rental income on our consolidated statements of operations, or
mortgage interest payments, reflected as interest income from mortgage notes receivable on our
consolidated statements of operations, of each acquisition or mortgage loan as a percentage of the
acquisition or loan price, as applicable. The weighted-average yield does not account for the
interest expense incurred on the mortgages placed on our properties.
A comparison of our operating results for the years ended December 31, 2010 and 2009 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
41,180,036 |
|
|
$ |
41,513,977 |
|
|
$ |
(333,941 |
) |
|
|
-1 |
% |
Interest income from mortgage note receivable |
|
|
420,833 |
|
|
|
760,417 |
|
|
|
(339,584 |
) |
|
|
-45 |
% |
Tenant recovery revenue |
|
|
327,201 |
|
|
|
334,543 |
|
|
|
(7,342 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
41,928,070 |
|
|
|
42,608,937 |
|
|
|
(680,867 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13,263,814 |
|
|
|
13,161,287 |
|
|
|
102,527 |
|
|
|
1 |
% |
Property operating expenses |
|
|
971,474 |
|
|
|
915,120 |
|
|
|
56,354 |
|
|
|
6 |
% |
Due diligence expense |
|
|
411,776 |
|
|
|
40,574 |
|
|
|
371,202 |
|
|
|
100 |
% |
Base management fee |
|
|
1,198,717 |
|
|
|
1,401,402 |
|
|
|
(202,685 |
) |
|
|
-14 |
% |
Incentive fee |
|
|
3,480,061 |
|
|
|
3,238,634 |
|
|
|
241,427 |
|
|
|
7 |
% |
Administration fee |
|
|
1,063,091 |
|
|
|
1,015,695 |
|
|
|
47,396 |
|
|
|
5 |
% |
Professional fees |
|
|
2,570,522 |
|
|
|
649,566 |
|
|
|
1,920,956 |
|
|
|
100 |
% |
Insurance expense |
|
|
213,103 |
|
|
|
203,682 |
|
|
|
9,421 |
|
|
|
5 |
% |
Directors fees |
|
|
196,735 |
|
|
|
198,882 |
|
|
|
(2,147 |
) |
|
|
-1 |
% |
General and administrative |
|
|
427,948 |
|
|
|
442,135 |
|
|
|
(14,187 |
) |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit
from Adviser |
|
|
23,797,241 |
|
|
|
21,266,977 |
|
|
|
2,530,264 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to base management fee |
|
|
(225,000 |
) |
|
|
|
|
|
|
(225,000 |
) |
|
|
100 |
% |
Credit to incentive fee |
|
|
(157,669 |
) |
|
|
(726,448 |
) |
|
|
568,779 |
|
|
|
-78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,414,572 |
|
|
|
20,540,529 |
|
|
|
2,874,043 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
8,035 |
|
|
|
20,748 |
|
|
|
(12,713 |
) |
|
|
-61 |
% |
Interest income employee loans |
|
|
150,882 |
|
|
|
192,350 |
|
|
|
(41,468 |
) |
|
|
-22 |
% |
Other income |
|
|
3,318,230 |
|
|
|
12,978 |
|
|
|
3,305,252 |
|
|
|
100 |
% |
Interest expense |
|
|
(17,062,737 |
) |
|
|
(17,894,536 |
) |
|
|
831,799 |
|
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(13,585,590 |
) |
|
|
(17,668,460 |
) |
|
|
4,082,870 |
|
|
|
-23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,927,908 |
|
|
|
4,399,948 |
|
|
|
527,960 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
43,062 |
|
|
|
(43,062 |
) |
|
|
-100 |
% |
Gain on sale of real estate |
|
|
|
|
|
|
160,038 |
|
|
|
(160,038 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
|
|
|
|
203,100 |
|
|
|
(203,100 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,927,908 |
|
|
|
4,603,048 |
|
|
|
324,860 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
304,810 |
|
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Operating Revenues
Rental income remained relatively flat for the year ended December 31, 2010, as compared to the
year ended December 31, 2009, as two of our tenants vacated their respective properties during
2010, slightly offset by the acquisition of a property in December 2010.
Interest income from mortgage notes receivable decreased for the year ended December 31, 2010, as
compared to the year ended December 31, 2009, as our only mortgage loan was fully repaid in July
2010.
Tenant recovery revenue decreased slightly for the year ended December 31, 2010, as compared to the
year ended December 31, 2009, because one of our tenants that vacated their property during 2010 no
longer reimburses us for insurance expense.
Operating Expenses
Depreciation and amortization expenses remained relatively flat for the year ended December 31,
2010, as compared to the year ended December 31, 2009, because we only acquired one property in
December 2010, which had a minimal impact on the expense.
Property operating expenses consist of franchise taxes, management fees, insurance, ground lease
payments and overhead expenses paid on behalf of certain of our properties. Property operating
expenses increased during the year ended December 31, 2010, as compared to the year ended December
31, 2009, because of overhead, insurance and franchise tax expenses for which we are now
responsible at the two properties where our leases expired and the tenants subsequently vacated
during 2010.
Due diligence expenses primarily consist of legal fees and fees incurred for third-party reports
prepared in connection with potential acquisitions and our due diligence analyses related thereto.
Due diligence expenses increased for the year ended December 31, 2010, as compared to the year
ended December 31, 2009, due to fees incurred in connection with the acquisition of the property in
Orange City, Iowa in December 2010. Total due diligence expenses remain relatively low; however,
with our adoption of Accounting Standards Codification, or ASC, 805 Business Combinations, on
January 1, 2009, which requires that we no longer capitalize due diligence costs into the price of
an acquisition, we expect that our due diligence expenses will increase significantly in 2011 as we
intend to acquire more properties.
The base management fee decreased for the year ended December 31, 2010, as compared to the year
ended December 31, 2009, due to a decrease in total common stockholders equity, the main component
of the calculation. Total common stockholders equity decreased because distributions to common
stockholders for the year ended December 31, 2010 exceeded net income during the period by
approximately $7.9 million. The calculation of the base management fee is described in detail
above under Advisory and Administration Agreements.
The incentive fee increased for the year ended December 31, 2010, as compared to the year ended
December 31, 2009, due to the increase in pre-incentive fee FFO caused by the $3.3 million of
additional income and prepayment fees we received in connection with the early repayment of our
mortgage loan, coupled with the decrease in total common stockholders equity. The calculation of
the incentive fee is described in detail above under Advisory and Administration Agreements.
The administration fee increased for the year ended December 31, 2010, as compared to the year
ended December 31, 2009, primarily as a result of an increase in the amount of the total expenses
allocated from our Administrator during the periods. The calculation of the administration fee is
described in detail above under Advisory and Administration Agreements.
Professional fees, consisting primarily of legal, consulting and accounting fees, increased during
the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to
the write-off of approximately $1.6 million of fees and expenses incurred in relation to the private offering
of unregistered senior common stock and related dividend reinvestment plan, discussed in Overview - Recent
53
Events-Equity Activities above. In addition, we wrote-off approximately $150,000 of fees incurred
in connection with the filing of our base registration statement on Form S-3 with the SEC in 2007.
These fees were written off in September 2010 when we filed a new base registration statement on
Form S-3 with the SEC.
Insurance expense consists of the premiums paid for directors and officers insurance, which is
renewed annually each September. Insurance expense increased for the year ended December 31, 2010,
as compared to the year ended December 31, 2009, because of an increase in the premiums for the
period from September 2009 through September 2010. Premiums for the period from September 2010
through September 2011 decreased by approximately 16%, thus we anticipate a decrease in insurance
expenses in 2011.
Directors fees remained relatively flat for the year ended December 31, 2010, as compared to the
year ended December 31, 2009, as we made no changes to the compensation paid to our non-employee
directors for 2010.
General and administrative expenses decreased for the year ended December 31, 2010, as compared to
the year ended December 31, 2009, primarily as a result of decreased costs associated with printing
and filing our proxy materials and annual report in 2010.
Other Income and Expense
Interest income from temporary investments decreased during the year ended December 31, 2010, as
compared to the year ended December 31, 2009, primarily because of lower interest rates earned on
our money market accounts, coupled with interest received during 2009 from funds held on deposit
for a prospective real estate acquisition.
Interest income on employee loans decreased during the year ended December 31, 2010, as compared to
the year ended December 31, 2009. This decrease was a result of loan payoffs made by employees
during 2009 and 2010, coupled with other principal repayments during 2010.
Other income increased during the year ended December 31, 2010, as compared to the year ended
December 31, 2009, because of the $3.3 million in additional income and prepayment fees we received
in connection with the early repayment of our mortgage loan in July 2010.
Interest expense decreased for the year ended December 31, 2010, as compared to the year ended
December 31, 2009. This decrease was primarily a result of the approximately 2.3% decrease in the
interest rate charged on our $48.0 million mortgage loan that was renewed in September 2010,
coupled with a decrease in the London Interbank Offered Rate, or LIBOR, from 2009, which reduced
our interest expense under our line of credit and reduced interest expense on our long-term
financings from amortizing principal payments made during 2009 and 2010.
Discontinued Operations
Income from discontinued operations for the year ended December 31, 2009 relates to the property
that we sold in July 2009, which was located in Norfolk, Virginia.
54
Net Income Available to Common Stockholders
Net income available to common stockholders increased for the year ended December 31, 2010, as
compared to the year ended December 31, 2009 primarily because of the $3.3 million in additional
income and prepayment fees we received in connection with the early repayment of our mortgage loan
in July 2010, partially offset by the write-off of $1.6 million in fees related to the termination
of our private offering of unregistered senior common stock.
A comparison of our operating results for the years ended December 31, 2009 and 2008 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
41,513,977 |
|
|
$ |
39,572,287 |
|
|
$ |
1,941,690 |
|
|
|
5 |
% |
Interest income from mortgage note receivable |
|
|
760,417 |
|
|
|
898,573 |
|
|
|
(138,156 |
) |
|
|
-15 |
% |
Tenant recovery revenue |
|
|
334,543 |
|
|
|
336,637 |
|
|
|
(2,094 |
) |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
42,608,937 |
|
|
|
40,807,497 |
|
|
|
1,801,440 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13,161,287 |
|
|
|
12,679,437 |
|
|
|
481,850 |
|
|
|
4 |
% |
Property operating expenses |
|
|
915,120 |
|
|
|
875,850 |
|
|
|
39,270 |
|
|
|
4 |
% |
Due diligence expense |
|
|
40,574 |
|
|
|
1,176,379 |
|
|
|
(1,135,805 |
) |
|
|
-97 |
% |
Base management fee |
|
|
1,401,402 |
|
|
|
1,637,851 |
|
|
|
(236,449 |
) |
|
|
-14 |
% |
Incentive fee |
|
|
3,238,634 |
|
|
|
2,831,722 |
|
|
|
406,912 |
|
|
|
14 |
% |
Administration fee |
|
|
1,015,695 |
|
|
|
954,635 |
|
|
|
61,060 |
|
|
|
6 |
% |
Professional fees |
|
|
649,566 |
|
|
|
521,410 |
|
|
|
128,156 |
|
|
|
25 |
% |
Insurance expense |
|
|
203,682 |
|
|
|
173,414 |
|
|
|
30,268 |
|
|
|
17 |
% |
Directors fees |
|
|
198,882 |
|
|
|
216,851 |
|
|
|
(17,969 |
) |
|
|
-8 |
% |
General and administrative |
|
|
442,135 |
|
|
|
493,119 |
|
|
|
(50,984 |
) |
|
|
-10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit
from Adviser |
|
|
21,266,977 |
|
|
|
21,560,668 |
|
|
|
(293,691 |
) |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee |
|
|
(726,448 |
) |
|
|
(2,196,945 |
) |
|
|
1,470,497 |
|
|
|
-67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
20,540,529 |
|
|
|
19,363,723 |
|
|
|
1,176,806 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
20,748 |
|
|
|
21,844 |
|
|
|
(1,096 |
) |
|
|
-5 |
% |
Interest income employee loans |
|
|
192,350 |
|
|
|
202,097 |
|
|
|
(9,747 |
) |
|
|
-5 |
% |
Other income |
|
|
12,978 |
|
|
|
63,993 |
|
|
|
(51,015 |
) |
|
|
-80 |
% |
Interest expense |
|
|
(17,894,536 |
) |
|
|
(16,858,687 |
) |
|
|
(1,035,849 |
) |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(17,668,460 |
) |
|
|
(16,570,753 |
) |
|
|
(1,097,707 |
) |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,399,948 |
|
|
|
4,873,021 |
|
|
|
(473,073 |
) |
|
|
-10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
43,062 |
|
|
|
39,926 |
|
|
|
3,136 |
|
|
|
8 |
% |
Gain on sale of real estate |
|
|
160,038 |
|
|
|
|
|
|
|
160,038 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
203,100 |
|
|
|
39,926 |
|
|
|
163,174 |
|
|
|
409 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,603,048 |
|
|
|
4,912,947 |
|
|
|
(309,899 |
) |
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
$ |
(309,899 |
) |
|
|
-38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Operating Revenues
Rental income increased for the year ended December 31, 2009, as compared to the year ended
December 31, 2008, primarily as a result of the properties acquired during the year ended December
31, 2008 that were held for the full year in 2009.
Interest income from mortgage notes receivable decreased for the year ended December 31, 2009, as
compared to the year ended December 31, 2008, primarily because interest income on our mortgage
loan is based on LIBOR, which has significantly decreased over the past two years.
Tenant recovery revenue decreased slightly for the year ended December 31, 2009, as compared to the
year ended December 31, 2008, primarily as a result of a decrease in the insurance premiums on some
of our properties in which the tenants reimburse us for insurance expense, partially offset by an
increase in the reimbursement of ground lease payments from a tenant.
Operating Expenses
Depreciation and amortization expenses increased during the year ended December 31, 2009, as
compared to the year ended December 31, 2008, as a result of the properties acquired during the
year ended December 31, 2008 that were held for the full year in 2009.
Property operating expenses consist of franchise taxes, management fees, insurance, ground lease
payments and overhead expenses paid on behalf of certain of our properties. Property operating
expenses increased slightly during the year ended December 31, 2009, as compared to the year ended
December 31, 2008, primarily because of an increase in ground lease payments coupled with repairs
and maintenance performed at certain of our properties.
Due diligence expense primarily consists of legal fees and fees incurred for third-party reports
prepared during our due diligence work. Due diligence expenses decreased significantly for the
year ended December 31, 2009, as compared to the year ended December 31, 2008, primarily because of
over $1.0 million of fees incurred related to a large potential acquisition that did not close
during 2008. However, with the adoption of ASC 805 Business Combinations, on January 1, 2009,
discussed in detail in Note 1 of the accompanying consolidated financial statements, which requires
us to no longer capitalize due diligence costs into the price of the acquisition, we expect our due
diligence expense to increase significantly once we begin to acquire properties again.
The base management fee decreased for the year ended December 31, 2009, as compared to the year
ended December 31, 2008, as a result of a decrease in total common stockholders equity, the main
component of the calculation. Total common stockholders equity decreased because distributions to
common stockholders for the year ended December 31, 2009 exceeded net income during the period by
approximately $8.2 million. The calculation of the base management fee is described in detail
above under Advisory and Administration Agreements.
The incentive fee increased for the year ended December 31, 2009, as compared to the year ended
December 31, 2008, due to the increase in pre-incentive fee FFO as a result of our increased rental
income discussed above, coupled with the decrease in total common stockholders equity. In
addition, the amount that was credited to the incentive fee during the year ended December 31, 2009
decreased, because of an increase in operating income and a decrease in operating expenses. The
calculation of the incentive fee is described in detail above under Advisory and Administration Agreements.
The administration fee increased for the year ended December 31, 2009, as compared to the year
ended December 31, 2008, primarily as a result of an increase in our total assets in comparison to
the total assets of all companies managed by our Adviser under similar agreements, coupled with
approximately $80,000 incurred by our Administrator, which was directly allocable to us, for the
implementation of real estate
software. The calculation of the administration fee is described in detail above under Advisory
and Administration Agreements.
56
Professional fees, consisting primarily of legal and accounting fees, increased during the year
ended December 31, 2009, as compared to the year ended December 31, 2008, primarily as a result of
an increase in legal and other professional fees relating to ongoing lease renegotiations and
reviews of our legal work with our existing tenants.
Insurance expense consists of the premiums paid for directors and officers insurance, which is
renewed annually each September. Insurance expense increased for the year ended December 31, 2009,
as compared to the year ended December 31, 2008, because of an increase in the premiums for the
periods from September 2008 through September 2009 and from September 2009 through September 2010.
Directors fees decreased during the year ended December 31, 2009, as compared to the year ended
December 31, 2008, primarily as a result of one of the independent directors becoming an interested
director in January 2008, and thus not being paid an annual stipend during 2009.
General and administrative expenses decreased for the year ended December 31, 2009, as compared to
the year ended December 31, 2008, primarily as a result of decreased costs associated with printing
and filing our proxy materials.
Other Income and Expense
Interest income from temporary investments decreased during the year ended December 31, 2009, as
compared to the year ended December 31, 2008, primarily because of lower interest rates earned on
our money market accounts, partially offset by interest received in 2009 from funds held on deposit
for a prospective real estate acquisition, coupled with interest earned on amounts held in reserve
accounts with our lenders.
Interest income on employee loans decreased during the year ended December 31, 2009, as compared to
the year ended December 31, 2008. This decrease was a result of loan payoffs by employees during
2008 and 2009, coupled with other partial principal repayments over the periods.
Other income decreased during the year ended December 31, 2009, as compared to the year ended
December 31, 2008, primarily because we no longer receive management fees from our tenant in our
Burnsville, Minnesota property.
Interest expense increased for the year ended December 31, 2009, as compared to the year ended
December 31, 2008. This was primarily a result of long-term financings, which closed during 2008,
that were held for the full period during 2009.
Discontinued Operations
Income from discontinued operations primarily relates to the property we sold, which was located in
Norfolk, Virginia, including a gain on the sale of the property of approximately $160,000. This is
partially offset by continuing expenses related to the two Canadian properties, which we sold in
July 2006. The expenses for the two Canadian properties relate to legal fees associated with the
dissolution of the entities, which sold the properties.
Net Income Available to Common Stockholders
Net income available to common stockholders decreased for the year ended December 31, 2009, as
compared to the year ended December 31, 2008. This decrease was primarily a result of increased
interest expense from the increased number of properties which have long-term financing partially
offset by the
gain on sale of our property in Norfolk, Virginia coupled with the growth of our portfolio of
investments in the past year and the corresponding increase in our revenues and the other events
described above.
57
Liquidity and Capital Resources
Future Capital Needs
Overview
As of December 31, 2010, we had approximately $7.0 million in cash and cash equivalents, had an
available borrowing capacity of $5.9 million under our New Line of Credit and had obtained
mortgages on 56 of our properties. As of December 31, 2010, we had investments in 65 real
properties having gross and net carrying values, including intangible assets, of approximately
$446.4 and $384.1 million, respectively.
As discussed in Overview Business Environment above, although it improved during 2010, the U.S.
economy generally, and the equity and debt capital markets specifically, continue to experience
pervasive and fundamental disruptions. Because of these capital market conditions, our ability to
issue equity securities, obtain additional mortgages and borrow debt proceeds, our three principal
sources of external financing, was affected during 2010. Therefore, we primarily focused upon
building the value of our existing portfolio of properties by renegotiating existing leases and
making capital improvements to our properties.
Equity Capital
Despite the aforementioned economic conditions, the equity capital markets did improve in the
latter half of 2010. As a result, we were able to raise approximately $3.4 million pursuant to our
Open Market Sales Agreement and approximately $787,000 pursuant to our continuous private placement
of unregistered senior common stock. In December 2010, we used a portion of these proceeds to
finance the acquisition of our property that is located Orange City, Iowa and the remainder for
general corporate and working capital needs. With the continued improvement of equity capital
market conditions, we were able to raise approximately $14.3 million of additional equity capital
in February 2011. See Overview Recent Events above. We used these proceeds to repay a portion
of the outstanding balance of the New Line of Credit and the remainder for general corporate and
working capital needs.
Currently, we have the ability to raise up to approximately $282.3 million of additional equity and
debt capital through the sale of securities that are registered under our universal shelf
registration statement on Form S-3 (the Universal Shelf) in one or more future public offerings.
Of the approximately $282.3 million of available capacity under our Universal Shelf, approximately
$21.6 million of common stock is reserved for sale under our Open Market Sale Agreement.
Debt Capital
Despite the disruptions in the CMBS market discussed in Overview Business Environment above, we
believe that banks are recommencing their general lending practices. Specifically, we are beginning
to see banks that are willing to issue medium-term mortgages, between two and five years, on
substantially less favorable terms than were previously available. Consequently, we will continue
to focus on using medium-term mortgages to finance our real estate activities until the market for
long-term mortgages returns. As of December 31, 2010, we had obtained approximately $260.9 million
in long-term financing which was secured by 56 of our properties. See Mortgage Notes Payable
below for a more detailed discussion of our mortgage notes payable.
On April 15, 2005, we originated a mortgage loan in the amount of $10.0 million that was
collateralized by an office building located in McLean, Virginia in which our Adviser, and our
Administrator, are subtenants. The mortgage loan was originally set to mature in May 2017, though,
on July 22, 2010, it was fully repaid. We received $3.3 million of additional income and
prepayment fees in connection with the early payment and the proceeds were used to repay a portion
of our Prior Line of Credit. In the future, we
intend to expand our mortgage lending activity to by generating additional mortgage loans and
purchasing mortgage loans from lenders, banks and CMBS pools. As of December 31, 2010, we had no
mortgage loans outstanding.
58
In December 2010, we procured our New Line of Credit which provides for a senior secured revolving
credit facility of up to $50.0 million with a standby letter of credit sublimit of up to $20.0
million. The New Line of Credit replaced our Prior Line of Credit which was scheduled to mature on
December 29, 2010. Upon procuring the New Line of Credit, we repaid the $29.8 million outstanding
balance of the Prior Line of Credit with funds drawn from the New Line of Credit and with existing
cash proceeds. We incurred no early termination penalties or fees in connection with the repayment
of outstanding balance of the Prior Line of Credit. As of December 31, 2010, we had an outstanding
principal balance of $27.0 million under the New Line of Credit at an interest rate of
approximately 3.3%, and we had remaining borrowing capacity of approximately $5.9 million. See
Line of Credit below for a more detailed discussion of our Prior Line of Credit and New Line of
Credit.
Future Capital Needs
We actively seek conservative investments that are likely to produce attractive long-term returns
for our stockholders. If we are able to raise, procure or borrow additional equity and debt
capital, we would intend to use the proceeds to continue to invest in industrial and commercial
real property as well as expand our investment portfolio into other real property sectors, such as
retail and medical properties, make mortgage loans, repurchase shares of our preferred stock on the
open market or pay down outstanding borrowings under our New Line of Credit. Accordingly, to ensure
that we are able to effectively execute our business strategy, we routinely review our liquidity
requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity
needs include proceeds necessary to fund our distributions to stockholders, pay the debt services
costs on our existing long-term mortgages, and fund our current operating costs. Our long-term
liquidity needs include proceeds necessary to grow and maintain our portfolio of investments.
We believe that our current cash flows from operations, coupled with borrowings from our New Line
of Credit, are sufficient to fund our distributions to stockholders, pay the debt service costs on
our existing long-term mortgages and fund our current operating costs in the near term. We further
believe that our cash flow from operations coupled with the potential financing capital available
to us in the future are sufficient to fund our long-term liquidity needs. Additionally, to satisfy
either our short-term or long-term obligations or both, we may require credits to our management
fees that are issued from our Adviser although our Adviser is under no obligation to provide any
such credits, either in whole or in part.
Operating Activities
Net cash provided by operating activities during the year ended December 31, 2010 was approximately
$18.1 million, as compared to net cash provided by operating activities of approximately $17.0
million for the year ended December 31, 2009. This increase was primarily a result of the
additional income and prepayment fees that we received in connection with the early repayment of
our mortgage loan in July 2010 coupled with reduced interest expense, partially offset by the
increase in the net incentive fee, administration fee and property operating expenses. The
majority of cash from operating activities is generated from the rental payments that we receive
from our tenants. We utilize this cash to fund our property-level operating expenses and use the
excess cash primarily for debt and interest payments on our mortgage notes payable, interest
payments on our line of credit, distributions to our stockholders, management fees to our Adviser,
and other entity-level expenses.
Investing Activities
Net cash provided by investing activities during the year ended December 31, 2010 was approximately
$8.0 million, which primarily consisted of the repayment of our $10.0 million mortgage loan,
partially offset by the acquisition of our property located in Orange City, Iowa, net payments to
our lenders for reserves and tenant improvements performed at certain of our properties, as
compared to net cash used in investing
activities during the year ended December 31, 2009 of approximately $830,000, which primarily
consisted of tenant improvements performed at our property located in Maple Heights, Ohio and net
payments to lenders for reserves and leasing commissions paid related to the extension of the lease
for our property
59
located in Eatontown, New Jersey, partially offset by proceeds from the sale of
our property located in Norfolk, Virginia. We have had limited acquisition activity since 2008
because of the lack of access to capital as discussed in Overview-Business Environment above,
which has resulted in a significant decrease in the cash used in investing activities.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2010 was approximately $22.2
million, which primarily consisted of distributions paid to our stockholders, principal repayments
on mortgage notes payable, payments for deferred financing costs and net repayments on our line of
credit, partially offset by proceeds from sales of common and senior common stock. Net cash used
in financing activities for the year ended December 31, 2009 was approximately $17.6 million, which
primarily consisted of repayment of our short-term loan, principal repayments on mortgage notes
payable and distributions paid to our stockholders, partially offset by net borrowings from our
line of credit.
Mortgage Notes Payable
As of December 31, 2010, we had 17 fixed-rate mortgage notes payable in the aggregate principal
amount of approximately $260.9 million, collateralized by a total of 56 properties with terms at
issuance ranging from 2 years to 25 years. The weighted-average interest rate on the mortgage
notes payable as of December 31, 2010 was approximately 5.65%.
As discussed in Overview-Recent Events above, we had $48.0 million of balloon principal payments
maturing under one of our long-term mortgages in 2010; however, the mortgage has three annual
extension options through 2013, and we exercised one of these options on September 30, 2010. In
connection with the exercise of the option, the interest rate reset from 6.85% to 4.58% through
September 30, 2011. At the time of notification of extension, we remitted a fee of 0.25% of the
outstanding principal balance, or approximately $120,000, and a certification to the lender that
our aggregate debt service coverage ratio was not less than 1.2. The interest rate for the two
additional extension periods will adjust based upon the 1-year swap rate at the time of extension
and a fixed spread of 4.29% and 4.41%, respectively. We have no other balloon principal payments
due under any of our mortgages until 2013.
Line of Credit
In December 2010, we procured a new $50.0 million line of credit, or the New Line of Credit, with
Capital One, N.A. serving as a revolving lender, a letter of credit issuer and as an administrative
agent and Branch Banking and Trust Company serving as a revolving lender and a letter of credit
issuer, which matures on December 28, 2013. The New Line of Credit replaced our prior $50.0
million senior secured revolving credit facility which was scheduled to mature on December 29,
2010, or the Prior Line of Credit. The New Line of Credit provides for a senior secured revolving
credit facility of up to $50.0 million, with a standby letter of credit sublimit of up to $20.0
million. The New Line of Credit is subject to a maximum borrowing base calculation which may, from
time to time, affect the maximum amount available to be drawn. The New Line of Credit may, upon
satisfaction of certain conditions, be expanded up to $75.0 million. Currently, eight of our
properties are pledged as collateral under our line of credit. The interest rate per annum
applicable to the New Line of Credit is equal to the London Interbank Offered Rate, or LIBOR, plus
an applicable margin of up to 3.00% depending upon our leverage. Our leverage ratio used in
determining the applicable margin for interest on the New Credit Line is recalculated quarterly.
We will be subject to an annual maintenance fee of 0.25% per year. Our ability to access this
source of financing is subject to our continued ability to meet customary lending requirements such
as compliance with financial and operating covenants and our meeting certain lending limits. One
such covenant requires us to limit distributions to our stockholders to 95% of our FFO, with
acquisition-related costs required to be expensed under ASC 805 added back to FFO. In addition, the
maximum amount that we may draw under this agreement is based on a percentage of the value of
properties pledged as collateral to the banks, which must
meet agreed upon eligibility standards. The maximum amount that we may currently draw under the New
Line of Credit is approximately $38.8 million. Furthermore, those eight properties that are pledged
as collateral to the banks are pledged through a perfected first priority lien in the equity
interest of the special
60
purpose entity, or SPE, that owns the property. In addition, our Operating
Partnership owns the SPEs, and our Operating Partnership is precluded from transferring the SPEs or
unconsolidated affiliates to us.
If and when long-term mortgages are arranged for these pledged properties, the banks will release
the properties from the line of credit and reduce the availability under the line of credit by the
advanced amount of the released property. Conversely, as we purchase new properties meeting the
eligibility standards, we may pledge these new properties to obtain additional advances under this
agreement. The availability under the line of credit will also be reduced by letters of credit
used in the ordinary course of business. We may use the advances under the line of credit for both
general corporate purposes and the acquisition of new investments.
At December 31, 2010, there was $27.0 million outstanding under the line of credit at an interest
rate of approximately 3.3% and approximately $5.9 million outstanding under letters of credit at a
weighted average interest rate of approximately 3.0%. At December 31, 2010, the remaining
borrowing capacity available under the line of credit was approximately $5.9 million. Our ability
to increase the availability under our line of credit is dependent upon our pledging additional
properties as collateral. Traditionally, we have pledged new properties to the line of credit as we
arrange for long-term mortgages for these pledged properties. Currently, only nine of our
properties do not have long-term mortgages, and eight of those are pledged as collateral under our
line of credit. Accordingly, we have only one property which is unencumbered, and which may be
pledged as collateral to increase the borrowing capacity available under the line of credit. We
were in compliance with all covenants under the New Line of Credit as of December 31, 2010.
61
Contractual Obligations
The following table reflects our material contractual obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 Years |
|
Debt Obligations (1) |
|
|
287,869,463 |
|
|
$ |
51,456,852 |
|
|
$ |
43,408,839 |
|
|
$ |
82,833,896 |
|
|
$ |
110,169,876 |
|
Interest on Debt Obligations (2) |
|
|
70,230,333 |
|
|
|
14,451,711 |
|
|
|
25,013,783 |
|
|
|
20,841,322 |
|
|
|
9,923,517 |
|
Capital Lease Obligations (3) |
|
|
300,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
Operating Lease Obligations (4) |
|
|
1,601,357 |
|
|
|
152,510 |
|
|
|
305,020 |
|
|
|
305,020 |
|
|
|
838,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
360,001,153 |
|
|
$ |
66,061,073 |
|
|
$ |
69,027,642 |
|
|
$ |
103,980,238 |
|
|
$ |
120,932,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt obligations represent borrowings under our line of credit, which represents $27.0 million of the debt obligation due in 2013,
and mortgage notes payable that were outstanding as of December 31, 2010. |
|
|
|
The $48.0 million mortgage note issued in September 2008 matures in October 2011, and we expect to exercise each of our options
to extend the maturity date until October 2013.
|
|
(2) |
|
Interest on debt obligations includes estimated interest on our borrowings under our line of credit.
The balance and interest rate on our line of credit is variable; thus, the amount of interest calculated for purposes of this table was based upon rates and
balances as of December 31, 2010.
|
|
(3) |
|
Capital lease obligations represent the obligation to purchase the land held under the ground lease on our property located in Fridley, Minnesota.
|
|
(4) |
|
Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021.
|
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2010.
62
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. The primary risk that we believe we are and will be exposed to is interest rate risk.
Certain of our leases contain escalations based on market interest rates, and the interest rate on
our existing line of credit is variable. Although we seek to mitigate this risk by structuring
such provisions of our loans and leases to contain a minimum interest rate or escalation rate, as
applicable, these features do not eliminate this risk. We have not entered into any derivative
contracts to attempt to further manage our exposure to interest rate fluctuations.
To illustrate the potential impact of changes in interest rates on our net income for the year
ended December 31, 2010, we have performed the following analysis, which assumes that our balance
sheet remains constant and that no further actions beyond a minimum interest rate or escalation
rate are taken to alter our existing interest rate sensitivity.
The following table summarizes the impact of a 1%, 2% and 3% increase in the one month LIBOR for
the year ended December 31, 2010. As of December 31, 2010, our effective average LIBOR was 0.26%;
thus, a 1% decrease could not occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to Rental |
|
|
Increase to Interest |
|
|
Net Decrease to |
|
Interest Rate Change |
|
& Interest Income |
|
|
Expense |
|
|
Net Income |
|
1% Increase to LIBOR |
|
$ |
|
|
|
$ |
279,000 |
|
|
$ |
(279,000 |
) |
2% Increase to LIBOR |
|
|
|
|
|
|
558,000 |
|
|
|
(558,000 |
) |
3% Increase to LIBOR |
|
|
959 |
|
|
|
837,000 |
|
|
|
(836,041 |
) |
As of December 31, 2010, the fair value of our fixed rate debt outstanding was approximately $252.5
million. Interest rate fluctuations may affect the fair value of our fixed rate debt instruments.
If interest rates on our fixed rate debt instruments, using rates at December 31, 2010, had been
one percentage point higher or lower, the fair value of those debt instruments on that date would
have decreased or increased by approximately $9.2 million and $9.8 million, respectively.
In the future, we may be exposed to additional effects of interest rate changes primarily as a
result of our line of credit or long-term mortgage debt which we use to maintain liquidity and fund
expansion of our real estate investment portfolio and operations. Our interest rate risk
management objectives are to limit the impact of interest rate changes on earnings and cash flows
and to lower overall borrowing costs. To achieve this objective, we will borrow primarily at fixed
rates or variable rates with the lowest margins available and, in some cases, with the ability to
convert variable rates to fixed rates. We may also enter into derivative financial instruments
such as interest rate swaps and caps in order to mitigate the interest rate risk on a related
financial instrument. We will not enter into derivative or interest rate transactions for
speculative purposes.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in local and regional economic conditions and changes in the creditworthiness of
lessees and borrowers, all of which may affect our ability to refinance debt if necessary.
63
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Management on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders Equity for the years ended December 31, 2010, 2009 and
2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
Notes to Financial Statements
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loans on Real Estate
64
Report of Management on Internal Controls over Financial Reporting
To the Stockholders and Board of Directors of Gladstone Commercial Corporation:
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles and include those policies and procedures that pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect our transactions and the dispositions of
our assets, provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance with appropriate
authorizations; and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we assessed the effectiveness
of our internal control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations (COSO). Based on our
assessment, management concluded that our internal control over financial reporting was effective
as of December 31, 2010.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
March 8, 2011
65
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Gladstone Commercial Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Gladstone Commercial Corporation and
its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010 based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these financial statements and financial statement schedules, for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying report of
Managements Annual Report on Internal Control Over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on these financial statements, on the financial statement
schedules, and on the Companys internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
66
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, VA
March 8, 2011
67
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate, at cost |
|
$ |
401,016,940 |
|
|
$ |
390,753,892 |
|
Less: accumulated depreciation |
|
|
43,659,456 |
|
|
|
34,111,952 |
|
|
|
|
|
|
|
|
Total real estate, net |
|
|
357,357,484 |
|
|
|
356,641,940 |
|
|
|
|
|
|
|
|
|
|
Lease intangibles, net |
|
|
26,746,992 |
|
|
|
28,177,461 |
|
Mortgage note receivable |
|
|
|
|
|
|
10,000,000 |
|
Cash and cash equivalents |
|
|
7,061,504 |
|
|
|
3,096,598 |
|
Restricted cash |
|
|
2,288,410 |
|
|
|
2,633,538 |
|
Funds held in escrow |
|
|
2,621,091 |
|
|
|
2,487,680 |
|
Deferred rent receivable |
|
|
10,373,508 |
|
|
|
8,975,196 |
|
Deferred financing costs, net |
|
|
3,325,740 |
|
|
|
3,136,055 |
|
Other assets |
|
|
833,873 |
|
|
|
1,716,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
410,608,602 |
|
|
$ |
416,865,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
260,869,463 |
|
|
$ |
252,761,651 |
|
Borrowings under line of credit |
|
|
27,000,000 |
|
|
|
33,200,000 |
|
Deferred rent liability |
|
|
2,276,033 |
|
|
|
3,213,195 |
|
Asset retirement obligation liability |
|
|
3,062,768 |
|
|
|
2,305,644 |
|
Accounts payable and accrued expenses |
|
|
2,682,915 |
|
|
|
2,086,741 |
|
Due to Adviser (1) |
|
|
965,373 |
|
|
|
1,213,640 |
|
Other liabilities |
|
|
2,377,743 |
|
|
|
3,633,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
299,234,295 |
|
|
|
298,414,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Redeemable preferred stock, $0.001 par value; $25 liquidation
preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding at December 31, 2010 and 2009, respectively |
|
|
2,150 |
|
|
|
2,150 |
|
Senior common stock, $0.001 par value; 7,500,000 shares
authorized and
59,057 and 0 shares issued and outstanding at December 31,
2010 and 2009, respectively |
|
|
59 |
|
|
|
|
|
Common stock, $0.001 par value, 40,200,000 shares authorized and
8,724,613 and 8,563,264 shares issued and outstanding at
December 31, 2010 and 2009, respectively |
|
|
8,725 |
|
|
|
8,563 |
|
Additional paid in capital |
|
|
174,260,531 |
|
|
|
170,622,581 |
|
Notes receivable employees |
|
|
(963,433 |
) |
|
|
(2,304,999 |
) |
Distributions in excess of accumulated earnings |
|
|
(61,933,725 |
) |
|
|
(49,877,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
111,374,307 |
|
|
|
118,450,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
410,608,602 |
|
|
$ |
416,865,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 2 Related-Party Transactions |
The accompanying notes are an integral part of these consolidated financial statements.
68
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
41,180,036 |
|
|
$ |
41,513,977 |
|
|
$ |
39,572,287 |
|
Interest income from mortgage note receivable |
|
|
420,833 |
|
|
|
760,417 |
|
|
|
898,573 |
|
Tenant recovery revenue |
|
|
327,201 |
|
|
|
334,543 |
|
|
|
336,637 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
41,928,070 |
|
|
|
42,608,937 |
|
|
|
40,807,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13,263,814 |
|
|
|
13,161,287 |
|
|
|
12,679,437 |
|
Property operating expenses |
|
|
971,474 |
|
|
|
915,120 |
|
|
|
875,850 |
|
Due diligence expense |
|
|
411,776 |
|
|
|
40,574 |
|
|
|
1,176,379 |
|
Base management fee (1) |
|
|
1,198,717 |
|
|
|
1,401,402 |
|
|
|
1,637,851 |
|
Incentive fee (1) |
|
|
3,480,061 |
|
|
|
3,238,634 |
|
|
|
2,831,722 |
|
Administration fee (1) |
|
|
1,063,091 |
|
|
|
1,015,695 |
|
|
|
954,635 |
|
Professional fees |
|
|
2,570,522 |
|
|
|
649,566 |
|
|
|
521,410 |
|
Insurance expense |
|
|
213,103 |
|
|
|
203,682 |
|
|
|
173,414 |
|
Directors fees |
|
|
196,735 |
|
|
|
198,882 |
|
|
|
216,851 |
|
General and administrative |
|
|
427,948 |
|
|
|
442,135 |
|
|
|
493,119 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credits from Adviser |
|
|
23,797,241 |
|
|
|
21,266,977 |
|
|
|
21,560,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to base management fee |
|
|
(225,000 |
) |
|
|
|
|
|
|
|
|
Credit to incentive fee |
|
|
(157,669 |
) |
|
|
(726,448 |
) |
|
|
(2,196,945 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,414,572 |
|
|
|
20,540,529 |
|
|
|
19,363,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
8,035 |
|
|
|
20,748 |
|
|
|
21,844 |
|
Interest income employee loans |
|
|
150,882 |
|
|
|
192,350 |
|
|
|
202,097 |
|
Other income |
|
|
3,318,230 |
|
|
|
12,978 |
|
|
|
63,993 |
|
Interest expense |
|
|
(17,062,737 |
) |
|
|
(17,894,536 |
) |
|
|
(16,858,687 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(13,585,590 |
) |
|
|
(17,668,460 |
) |
|
|
(16,570,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,927,908 |
|
|
|
4,399,948 |
|
|
|
4,873,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
43,062 |
|
|
|
39,926 |
|
Gain on sale of real estate |
|
|
|
|
|
|
160,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
|
|
|
|
203,100 |
|
|
|
39,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,927,908 |
|
|
|
4,603,048 |
|
|
|
4,912,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
Distributions attributable to senior common stock |
|
|
(20,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average share of common stock basic |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of distributions attributable to preferred stock) |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
Discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average share of common stock diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of dividends attributable to preferred stock) |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
Discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding basic |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding diluted |
|
|
8,601,153 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average share of senior common stock |
|
$ |
0.81 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of senior common stock outstanding basic |
|
|
24,850 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 2 Related-Party Transactions |
The accompanying notes are an integral part of these consolidated financial statements.
69
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
Notes |
|
|
Excess of |
|
|
Total |
|
|
|
Preferred |
|
|
Senior Common |
|
|
Common |
|
|
Excess of |
|
|
Receivable |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Par Value |
|
|
from Employees |
|
|
Earnings |
|
|
Equity |
|
Balance at December
31, 2007 |
|
$ |
2,150 |
|
|
|
|
|
|
$ |
8,565 |
|
|
$ |
170,640,979 |
|
|
$ |
(2,769,923 |
) |
|
$ |
(25,513,703 |
) |
|
$ |
142,368,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of
Common Stock |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(18,398 |
) |
|
|
|
|
|
|
|
|
|
|
(18,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of
Principal on Notes
Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,037 |
|
|
|
|
|
|
|
174,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
Declared to Common
and Preferred
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,941,392 |
) |
|
|
(16,941,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,912,947 |
|
|
|
4,912,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2008 |
|
$ |
2,150 |
|
|
$ |
|
|
|
$ |
8,563 |
|
|
$ |
170,622,581 |
|
|
$ |
(2,595,886 |
) |
|
$ |
(37,542,148 |
) |
|
$ |
130,495,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of
Principal on Notes
Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,887 |
|
|
|
|
|
|
|
45,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of
Loan Balance to
Other Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,000 |
|
|
|
|
|
|
|
245,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
Declared to Common
and Preferred
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,938,653 |
) |
|
|
(16,938,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,603,048 |
|
|
|
4,603,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2009 |
|
$ |
2,150 |
|
|
$ |
|
|
|
$ |
8,563 |
|
|
$ |
170,622,581 |
|
|
$ |
(2,304,999 |
) |
|
$ |
(49,877,753 |
) |
|
$ |
118,450,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of senior
common stock and
common stock |
|
|
|
|
|
|
59 |
|
|
|
180 |
|
|
|
3,881,832 |
|
|
|
|
|
|
|
|
|
|
|
3,882,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of
principal on notes
receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341,566 |
|
|
|
|
|
|
|
1,341,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
declared to common,
senior common and
preferred
stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,983,880 |
) |
|
|
(16,983,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of
common stock in
satisfaction of
employee note
receivable
(1) |
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
(243,882 |
) |
|
|
|
|
|
|
|
|
|
|
(243,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,927,908 |
|
|
|
4,927,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2010 |
|
$ |
2,150 |
|
|
$ |
59 |
|
|
$ |
8,725 |
|
|
$ |
174,260,531 |
|
|
$ |
(963,433 |
) |
|
$ |
(61,933,725 |
) |
|
$ |
111,374,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On February 1, 2010, the maturity date of an employee stock option loan to a former
employee of the Adviser was extended until August 2010. In connection with the extension of the
loan, the recourse provision of the loan was removed, and the former employee was granted the
option to either repay the principal and interest in full or return the 18,000 shares pledged
against the loan to the Company in full satisfaction of the loan. On March 8, 2010, the date that
the market price of the pledged shares equaled the balance of the outstanding loan, the pledged
shares were returned to the Company, and the loan was deemed paid in full. |
The accompanying notes are an integral part of these consolidated financial statements.
70
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,927,908 |
|
|
$ |
4,603,048 |
|
|
$ |
4,912,947 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including discontinued operations |
|
|
13,263,814 |
|
|
|
13,171,703 |
|
|
|
12,704,641 |
|
Amortization of deferred financing costs |
|
|
1,002,428 |
|
|
|
1,491,389 |
|
|
|
1,283,956 |
|
Amortization of deferred rent asset and liability, net |
|
|
(683,666 |
) |
|
|
(532,068 |
) |
|
|
(532,066 |
) |
Amortization of discount on assumed debt |
|
|
11,301 |
|
|
|
|
|
|
|
|
|
Asset retirement obligation expense, including discontinued operations |
|
|
143,060 |
|
|
|
143,550 |
|
|
|
133,244 |
|
Gain on sale of real estate |
|
|
|
|
|
|
(160,038 |
) |
|
|
|
|
Decrease (increase) in other assets |
|
|
389,133 |
|
|
|
(959,738 |
) |
|
|
172,096 |
|
Increase in deferred rent receivable |
|
|
(1,651,809 |
) |
|
|
(1,177,167 |
) |
|
|
(2,387,509 |
) |
Increase in accounts payable, accrued expenses, and amount due Adviser |
|
|
347,908 |
|
|
|
735,492 |
|
|
|
1,001,639 |
|
Increase (decrease) in other liabilities |
|
|
363,366 |
|
|
|
(302,914 |
) |
|
|
286,227 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,113,443 |
|
|
|
17,013,257 |
|
|
|
17,575,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments |
|
|
(2,418,534 |
) |
|
|
(1,139,711 |
) |
|
|
(49,359,852 |
) |
Leasing commissions paid |
|
|
(7,044 |
) |
|
|
(441,745 |
) |
|
|
|
|
Proceeds from sale of real estate |
|
|
|
|
|
|
1,089,269 |
|
|
|
|
|
Principal repayments on mortgage notes receivable |
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
Receipts from lenders for reserves held in escrow |
|
|
1,617,933 |
|
|
|
1,465,133 |
|
|
|
874,227 |
|
Payments to lenders for reserves held in escrow |
|
|
(1,751,344 |
) |
|
|
(1,801,894 |
) |
|
|
(1,623,452 |
) |
Decrease (increase) in restricted cash |
|
|
345,128 |
|
|
|
44,023 |
|
|
|
(763,494 |
) |
Deposits on future acquisitions |
|
|
|
|
|
|
(250,000 |
) |
|
|
(1,650,000 |
) |
Deposits refunded |
|
|
250,000 |
|
|
|
200,000 |
|
|
|
1,750,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
8,036,139 |
|
|
|
(834,925 |
) |
|
|
(50,772,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common and senior common stock |
|
|
4,126,690 |
|
|
|
|
|
|
|
|
|
Offering costs |
|
|
(248,829 |
) |
|
|
|
|
|
|
|
|
Borrowings under mortgage notes payable |
|
|
|
|
|
|
|
|
|
|
48,015,000 |
|
Principal repayments on mortgage notes payable |
|
|
(2,687,192 |
) |
|
|
(2,349,522 |
) |
|
|
(1,485,901 |
) |
Principal repayments on employee notes receivable |
|
|
1,341,566 |
|
|
|
290,887 |
|
|
|
155,637 |
|
Borrowings from line of credit |
|
|
32,794,746 |
|
|
|
57,600,000 |
|
|
|
76,900,000 |
|
Repayments on line of credit |
|
|
(38,994,746 |
) |
|
|
(35,900,000 |
) |
|
|
(69,800,000 |
) |
Repayment of short-term loan |
|
|
|
|
|
|
(20,000,000 |
) |
|
|
|
|
Receipts from tenants for reserves |
|
|
2,154,699 |
|
|
|
4,454,102 |
|
|
|
2,391,360 |
|
Payments to tenants from reserves |
|
|
(2,130,232 |
) |
|
|
(4,526,409 |
) |
|
|
(2,159,671 |
) |
(Decrease) increase in security deposits |
|
|
(369,595 |
) |
|
|
28,282 |
|
|
|
531,806 |
|
Payments for deferred financing costs |
|
|
(1,192,113 |
) |
|
|
(243,999 |
) |
|
|
(1,262,273 |
) |
Distributions paid for common and preferred |
|
|
(16,979,670 |
) |
|
|
(16,938,653 |
) |
|
|
(16,941,392 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(22,184,676 |
) |
|
|
(17,585,312 |
) |
|
|
36,344,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,964,906 |
|
|
|
(1,406,980 |
) |
|
|
3,147,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
3,096,598 |
|
|
|
4,503,578 |
|
|
|
1,356,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
7,061,504 |
|
|
$ |
3,096,598 |
|
|
$ |
4,503,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for interest |
|
$ |
17,969,864 |
|
|
$ |
16,558,955 |
|
|
$ |
14,337,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in asset retirement obligation |
|
$ |
614,064 |
|
|
$ |
|
|
|
$ |
245,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt assumed in connection with acquisitions |
|
$ |
10,795,004 |
|
|
$ |
|
|
|
$ |
6,461,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation under capital lease |
|
$ |
|
|
|
$ |
|
|
|
$ |
225,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of common stock in satisfaction of employee note receivable |
|
$ |
243,900 |
|
|
$ |
|
|
|
$ |
18,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior common dividend issued in the dividend reinvestment program |
|
$ |
4,210 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassificaton of principal on employee note (Refer to Note 8) |
|
$ |
|
|
|
$ |
245,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing commissions included in accounts payable |
|
$ |
457,939 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
71
GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Gladstone Commercial Corporation (the Company) was incorporated on February 14, 2003 under the
General Corporation Law of Maryland. The Company operates in a manner so as to qualify as a real
estate investment trust (REIT) for federal income tax purposes and exists primarily for the
purposes of engaging in the business of investing in real estate properties net leased to
creditworthy entities and making mortgage loans to creditworthy entities. Subject to certain
restrictions and limitations, the business of the Company is managed by Gladstone Management
Corporation, a Delaware corporation (the Adviser).
Subsidiaries
The Company conducts substantially all of its operations through a subsidiary, Gladstone Commercial
Limited Partnership, a Delaware limited partnership (the Operating Partnership). As the Company
currently owns all of the general and limited partnership interests of the Operating Partnership
through GCLP Business Trust I and II, as discussed in more detail below, the financial position and
results of operations of the Operating Partnership are consolidated with those of the Company.
Gladstone Commercial Lending, LLC, a Delaware limited liability company (Gladstone Commercial
Lending) and a subsidiary of the Company, was created to conduct all operations related to real
estate mortgage loans of the Company. As the Operating Partnership currently owns all of the
membership interests of Gladstone Commercial Lending, the financial position and results of
operations of Gladstone Commercial Lending are consolidated with those of the Company.
Gladstone Commercial Advisers, Inc., a Delaware corporation (Commercial Advisers) and a
subsidiary of the Company, is a taxable REIT subsidiary (TRS), which was created to collect all
non-qualifying income related to the Companys real estate portfolio. It is currently anticipated
that this income will predominately consist of fees received by the Company related to the leasing
of real estate. There have been no such fees earned to date. Since the Company owns 100% of the
voting securities of Commercial Advisers, the financial position and results of operations of
Commercial Advisers are consolidated with those of the Company.
GCLP Business Trust I and GCLP Business Trust II, each a subsidiary and business trust of the
Company, were formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. The
Company transferred its 99% limited partnership interest in the Operating Partnership to GCLP
Business Trust I in exchange for 100 trust shares. Commercial Partners transferred its 1% general
partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100
trust shares.
Investments in Real Estate
The Company records investments in real estate at cost and capitalizes improvements and
replacements when they extend the useful life or improve the efficiency of the asset. The Company
expenses costs of repairs and maintenance as such costs are incurred. The Company computes
depreciation using the straight-line method over the estimated useful life or 39 years for
buildings and improvements, 5 to 7 years for equipment and fixtures and the shorter of the useful
life or the remaining lease term for tenant improvements and leasehold interests.
The Company accounts for its acquisitions of real estate in accordance with Accounting Standards
Codification (ASC) 805, Business Combinations, which requires that the purchase price of real
estate be recorded at fair value and allocated to the acquired tangible assets and liabilities,
consisting of land, building, tenant improvements, long-term debt and identified intangible assets
and liabilities, consisting of the value of above-market and below-market leases, the value of
in-place leases, the value of unamortized lease origination costs, the value of tenant
relationships and the value of capital lease obligations, based in
72
each case on their fair values. ASC 805 also requires that all expenses related to the acquisition
be expensed as incurred, rather than capitalized into the cost of the acquisition as had been the
previous accounting.
Managements estimates of value are made using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by Management in its analysis
include an estimate of carrying costs during hypothetical expected lease-up periods considering
current market conditions and costs to execute similar leases. The Company also considers
information obtained about each property as a result of its pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of the tangible and intangible assets
and liabilities acquired. In estimating carrying costs, Management also includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, which primarily range from nine to eighteen months,
depending on specific local market conditions. Management also estimates costs to execute similar
leases, including leasing commissions, legal and other related expenses to the extent that such
costs are not already incurred in connection with a new lease origination as part of the
transaction.
The Company allocates purchase price to the fair value of the tangible assets of an acquired
property by valuing the property as if it were vacant. The as-if-vacant value is allocated to
land, building, and tenant improvements based on Managements determination of the relative fair
values of these assets. Real estate depreciation expense on these tangible assets, including
discontinued operations, was approximately $9.5 million, $9.4 million and $9.0 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
Above-market and below-market in-place lease values for owned properties are recorded based on the
present value (using an interest rate which reflects the risks associated with the leases acquired)
of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) Managements estimate of fair market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease values, included in the accompanying balance sheet as part of deferred rent
receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms
of the respective leases. Total amortization related to above-market lease values was approximately
$253,000 for each of the years ended December 31, 2010, 2009 and 2008, respectively. The
capitalized below-market lease values, included in the accompanying consolidated balance sheet as
deferred rent liability, are amortized as an increase to rental income over the remaining
non-cancelable terms of the respective leases. Total amortization related to below-market lease
values was approximately $937,000 for the year ended December 31, 2010, and $786,000 for each of
the years ending December 31, 2009 and 2008.
The total amount of the remaining intangible assets acquired, which consist of in-place lease
values, unamortized lease origination costs, and customer relationship intangible values, are
allocated based on Managements evaluation of the specific characteristics of each tenants lease
and the Companys overall relationship with that respective tenant. Characteristics to be
considered by Management in allocating these values include the nature and extent of our existing
business relationships with the tenant, growth prospects for developing new business with the
tenant, the tenants credit quality and the Companys expectations of lease renewals (including
those existing under the terms of the lease agreement), among other factors.
The value of in-place leases and unamortized lease origination costs are amortized to expense over
the remaining term of the respective leases, which generally range from 10 to 15 years. The value
of customer relationship intangibles, which is the benefit to the Company resulting from the
likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining
term and any anticipated renewal periods in the respective leases, but in no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of the above-market and below-market
lease values, in-place lease values, unamortized lease origination costs and customer relationship
intangibles will be immediately charged to the related income or expense. Total amortization
expense related to these intangible assets, including discontinued operations, was approximately
$3.7 million for each of the years ended December 31, 2010, 2009 and 2008, respectively.
73
Impairment
Investments in Real Estate
The Company accounts for the impairment of real estate, including intangible assets, in accordance
with ASC 360-10-35, Property, Plant, and Equipment, which requires the Company to periodically
review the carrying value of each property to determine if circumstances indicate impairment in the
carrying value of the investment exist or that depreciation periods should be modified. If
circumstances support the possibility of impairment, the Company prepares a projection of the
undiscounted future cash flows, without interest charges, of the specific property and determines
if the investment in such property is recoverable. If impairment is indicated, the carrying value
of the property would be written down to its estimated fair value based on the Companys best
estimate of the propertys discounted future cash flows. There have been no impairments recognized
on real estate assets in the Companys history.
In light of current economic conditions, the Company evaluated its entire portfolio as of December
31, 2010 for any impairment indicators and performed an impairment analysis on those select
properties that had an indication of impairment. In performing the analysis, the Company
considered such factors as the tenants payment history and financial condition, the likelihood of
lease renewal, business conditions in the industry in which the tenants operate and whether the
fair value of the real estate has decreased. The Company concluded that none of its properties
were impaired, and will continue to monitor its portfolio for any indicators that may change this
conclusion.
Provision for Loan Losses
The Companys accounting policies require it to reflect in its financial statements an allowance
for estimated credit losses with respect to mortgage loans receivable that it has made based upon
its evaluation of known and inherent risks associated with its private lending assets. Management
reflects provisions for loan losses based upon its assessment of general market conditions, its
internal risk management policies and credit risk rating system, industry loss experience, its
assessment of the likelihood of delinquencies or defaults, and the value of the collateral
underlying its investments. Actual losses, if any, could ultimately differ from these estimates.
There have been no provisions for loan losses in the Companys history and the Company currently
has no outstanding mortgage loans receivable.
Cash and Cash Equivalents
The Company considers cash equivalents to be all short-term, highly-liquid investments that are
both readily convertible to cash and have a maturity of three months or less at the time of
purchase, except that any such investments purchased with funds held in escrow or similar accounts
are classified as restricted cash. Items classified as cash equivalents include money-market
deposit accounts. All of the Companys cash and cash equivalents at December 31, 2010 were held in
the custody of two financial institutions, and the Companys balance at times may exceed federally
insurable limits.
Restricted Cash
Restricted cash consists of security deposits and funds held in escrow for certain tenants. These
funds will be released to the tenants upon completion of agreed upon tasks, as specified in the
lease agreements, mainly consisting of maintenance and repairs on the buildings and upon receipt by
the Company of evidence of insurance and tax payments.
Funds Held in Escrow
Funds held in escrow consist of funds held by certain of the Companys lenders for properties held
as collateral by these lenders. These funds will be released to the Company upon completion of
agreed upon tasks as specified in the mortgage agreements, mainly consisting of maintenance and
repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the
lenders.
74
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain financing, including legal fees,
origination fees and administrative fees. The costs are deferred and amortized using the
straight-line method, which approximates the effective interest method over the term of the secured
financing. The Company made payments of approximately $1.2 million, $244,000 and $1.3 million for
deferred financing costs during the years ended December 31, 2010, 2009 and 2008, respectively.
Total amortization expense related to deferred financing costs was approximately $1.0 million, $1.5
million and $1.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Obligation Under Capital Lease
In conjunction with the Companys acquisition of a building in Fridley, Minnesota in February 2008,
the Company acquired a ground lease on the parking lot of the building, which had a purchase
obligation to acquire the land under the ground lease at the end of the term in April 2014 for
$300,000. In accordance with ASC 840-10-25, Leases, the Company accounted for the ground lease as
a capital lease and recorded the corresponding present value of the obligation under the capital
lease. The Company recorded total interest expense related to the accretion of the capital lease
obligation of approximately $12,000, $12,000 and $10,000 for the years ended December 31, 2010,
2009 and 2008, respectively.
Revenue Recognition
Rental revenue includes rents that each tenant pays in accordance with the terms of its respective
lease reported evenly over the non-cancelable term of the lease. Most of the Companys leases
contain rental increases at specified intervals. The Company recognizes such revenues on a
straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred
rent receivable in the accompanying consolidated balance sheet includes the cumulative difference
between rental revenue as recorded on a straight line basis and rents received from the tenants in
accordance with the lease terms, along with the capitalized above-market lease values of certain
acquired properties. Accordingly, the Company determines, in its judgment, to what extent the
deferred rent receivable applicable to each specific tenant is collectable. The Company reviews
deferred rent receivable, as it relates to straight line rents, on a quarterly basis and takes into
consideration the tenants payment history, the financial condition of the tenant, business
conditions in the industry in which the tenant operates and economic conditions in the geographic
area in which the property is located. In the event that the collectability of deferred rent with
respect to any given tenant is in doubt, the Company records an allowance for uncollectable
accounts or records a direct write-off of the specific rent receivable. No such reserves have been
recorded as of December 31, 2010.
Management considers its loans and other lending investments to be held-for-investment. The
Company reflects loans classified as long-term investments at amortized cost, less allowance for
loan losses, acquisition premiums or discounts, and deferred loan fees. On occasion, the Company
may acquire loans at small premiums or discounts based on the credit characteristics of such loans.
These premiums or discounts are recognized as yield adjustments over the lives of the related
loans. Loan origination fees, as well as direct loan origination costs, are also deferred and
recognized over the lives of the related loans as yield adjustments. If loans with premiums,
discounts, or loan origination fees are prepaid, the Company immediately recognizes the unamortized
portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized
using the effective interest method applied on a loan-by-loan basis. Prepayment penalties or yield
maintenance payments from borrowers are recognized as additional income when received.
Tenant recovery revenue includes payments from tenants as reimbursements for franchises taxes,
management fees, insurance, and ground lease payments. The Company recognizes tenant recovery
revenue in the same periods that it incurs the related expenses.
75
Income Taxes
The Company has operated and intends to continue to operate in a manner that will allow it to
qualify as a REIT under the Internal Revenue Code of 1986, as amended, and, accordingly, will not
be subject to federal income taxes on amounts distributed to stockholders (except income from
foreclosure property), provided that it distributes at least 90% of its REIT taxable income to its
stockholders and meets certain other conditions. To the extent that the Company satisfies the
distribution requirement but distributes less than 100% of its taxable income, the Company will be
subject to federal corporate income tax on its undistributed income.
Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though
Commercial Advisers has had no activity to date, the Company would account for any future income
taxes in accordance with the provisions of ASC 740, Income Taxes. Under ASC 740-10-25, the
Company accounts for income taxes using the asset and liability method under which deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Segment Information
ASC 280, Segment Reporting, provides standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in financial statements.
Operating segments are defined as components of an enterprise for which separate financial
information is available and is evaluated regularly by the chief operating decision maker or
decision making group in determining how to allocate resources and in assessing performance.
Company Management is the chief decision making group. As discussed in Note 9, the Companys
operations are derived from two operating segments, one segment purchases real estate (land,
buildings and other improvements), which is simultaneously leased to existing users, and the other
segment originates mortgage loans and collects principal and interest payments. The Company had no
mortgage loans receivable outstanding as of December 31, 2010.
Asset Retirement Obligations
ASC 410, Asset Retirement and Environmental Obligation, requires an entity to recognize a
liability for a conditional asset retirement obligation when incurred if the liability can be
reasonably estimated. ASC 410-20-20 clarifies that the term Conditional Asset Retirement
Obligation refers to a legal obligation (pursuant to existing laws or by contract) to perform an
asset retirement activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity. ASC 410-20-25-6 clarifies
when an entity would have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company has accrued a liability and corresponding increase to the cost
of the related properties for disposal related to all properties constructed prior to 1985 that
have, or may have, asbestos present in the building. In that regard, the Company accrued a
liability of $615,000 during the years ended December 31, 2010, in relation to the acquisition of
one property in Orange City, Iowa. No such liability was accrued for the year ended December 31,
2009, as no acquisitions were made and no events occurred that would require an adjustment to the
Companys original estimate. The Company also recorded expenses of approximately $143,000,
$144,000 and $133,000 during the years ended December 31, 2010, 2009 and 2008 respectively, related
to the cumulative accretion of the obligation.
Stock Issuance Costs
The Company accounts for stock issuance costs in accordance with SEC Staff Accounting Bulletin
(SAB) Topic 5.A, which states that incremental costs directly attributable to a proposed or
actual offering of securities should be deferred and charged against the gross proceeds of the
offering. Accordingly, the Company records costs incurred related to its ongoing equity offerings
to other assets on its consolidated balance sheet and ratably applies these amounts to the cost of
equity as stock is issued. If an equity offering is subsequently terminated and there are amounts
remaining in other assets that have not been
76
allocated to the cost of the offering, the remaining amounts are recorded as an expense on the
consolidated income statement. Accordingly, in connection with the termination of the Companys
private offering of unregistered senior common stock, it wrote-off approximately $1.6 million of
fees and expenses incurred related to the offering. The expenses consisted primarily of legal,
accounting and fees paid to Halcyon, and are recorded as professional fees in the Companys
consolidated statement of operations.
Other Income
The Company records non-operating and unusual or infrequently earned income as other income on its
consolidated statement of operations. Accordingly, the Company recorded the $3.3 million of
prepayment fees it received in connection with the early payment of its mortgage loan as other
income.
Real Estate Held for Sale and Discontinued Operations
ASC 360-10, Property, Plant, and Equipment, requires that the results of operations of any
properties which have been sold, or are held for sale, be presented as discontinued operations in
the Companys consolidated financial statements in both current and prior periods presented.
Income items related to held for sale properties are listed separately on the Companys
consolidated income statement. Real estate assets held for sale are measured at the lower of the
carrying amount or the fair value, less the cost to sell, and are listed separately on the
Companys consolidated balance sheet. Once properties are listed as held for sale, no further
depreciation is recorded.
Recently Issued Accounting Pronouncements
ASC 810-10-25-38, Consolidation, amends the consolidation guidance for variable-interest entities
(VIE) and requires an enterprise to qualitatively assess the determination of the primary
beneficiary of a VIE based on whether the entity has the power to direct matters that most
significantly impact the activities of the VIE, and had the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. ASC 810 is
effective for the Companys fiscal year beginning January 1, 2010. The Company adopted this
pronouncement during the quarter ended March 31, 2010, and the adoption has had no impact on the
Companys financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires Management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could materially
differ from those estimates.
2. Related-Party Transactions
The Company is externally managed pursuant to contractual arrangements with its Adviser and
Gladstone Administration, LLC (the Administrator), which collectively employ all of the Companys
personnel and pays their payroll, benefits, and general expenses directly. The Company has an
advisory agreement with its Adviser (the Advisory Agreement) and an administration agreement with
its Administrator (the Administration Agreement). The management services and administrative fees
under the Advisory and Administration Agreements are described below. As of December 31, 2010 and
December 31, 2009, respectively, approximately $1.0 million and $1.2 million were due to the
Adviser.
Advisory Agreement
The Advisory Agreement provides for an annual base management fee equal to 2% of the Companys
total stockholders equity, less the recorded value of any preferred stock (common stockholders
equity), and an incentive fee based on funds from operations (FFO). For the years ended December
31, 2010, 2009 and 2008 the Company recorded a base management fee of approximately $1.2 million,
$1.4 million and
77
$1.6 million, respectively. The Advisors Board of Directors voted to give the Company a credit to
the base management fee for the year ended December 31, 2010 of $225,000.
For purposes of calculating the incentive fee, FFO includes any realized capital gains and
capital losses, less any distributions paid on preferred stock, but FFO does not include any
unrealized capital gains or losses. The incentive fee rewards the Adviser if the Companys
quarterly FFO, before giving effect to any incentive fee (pre-incentive fee FFO), exceeds 1.75%,
or 7% annualized (the hurdle rate), of total common stockholders equity. The Adviser receives
100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than
2.1875% of the Companys common stockholders equity. The Adviser also receives an incentive fee
of 20% of the amount of the Companys pre-incentive fee FFO that exceeds 2.1875% of common
stockholders equity.
For the years ended December 31, 2010, 2009 and 2008 the Company recorded an incentive fee of
approximately $3.5 million, $3.2 million and $2.8 million, respectively, offset by a credit related
to an unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $0.2,
$0.7 million and $2.2 million, respectively, resulting in a net incentive fee for the year ended
December 31, 2010, of approximately $3.3 million, $2.5 million and $0.6 million, respectively. The
board of directors of the Company accepted the Advisers offer to waive on a quarterly basis a
portion of the incentive fee for the years ended December 31, 2010, 2009 and 2008 in order to
support the current level of distributions to the Companys stockholders. These waivers may not be
recouped by the Adviser in the future.
Administration Agreement
Pursuant to the Administration Agreement, the Company pays for its allocable portion of the
Administrators overhead expenses in performing its obligations to the Company, including, but not
limited to, rent, and the salaries and benefits of its chief financial officer, chief compliance
officer, internal counsel, treasurer, investor relations and their respective staffs. The Companys
allocable portion of expenses is derived by multiplying the Administrators total allocable
expenses by the percentage of the Companys total assets at the beginning of each quarter in
comparison to the total assets of all companies managed by the Adviser under similar agreements.
For the years ended December 31, 2010, 2009 and 2008 the Company recorded an administration fee of
approximately $1.1 million, $1.0 million and $1.0 million, respectively.
3. Earnings per Share of Common Stock
The following tables set forth the computation of basic and diluted earnings per share of common
stock for the years ended December 31, 2010, 2009 and 2008. The Company computed basic earnings
per share for the year ended December 31, 2010, 2009 and 2008 using the weighted average number of
shares outstanding during the periods. Diluted earnings per share for the year ended December 31,
2010, reflects additional shares of common stock, related to our convertible senior common stock,
that would have been outstanding if dilutive potential shares of common stock had been issued, as
well as an adjustment to net income available to common stockholders as applicable to common
stockholders that would result from their assumed issuance.
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Calculation of basic earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic weighted average shares of common stock |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share of common stock |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of diluted earnings per share of comon stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
814,108 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
Add: Income impact of assumed conversion of senior common stock |
|
|
20,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders plus assumed conversions |
|
$ |
834,158 |
|
|
$ |
509,298 |
|
|
$ |
819,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic weighted average shares of common stock |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
Effect of convertible senior common stock |
|
|
24,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted weighted average shares of common stock |
|
|
8,601,153 |
|
|
|
8,563,264 |
|
|
|
8,565,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of the Companys investments in real estate,
including capitalized leases, as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
55,157,807 |
(1) |
|
$ |
55,025,707 |
(1) |
Building and
improvements |
|
|
335,575,857 |
|
|
|
325,907,479 |
|
Tenant improvements |
|
|
10,283,276 |
|
|
|
9,820,706 |
|
Accumulated
depreciation |
|
|
(43,659,456 |
) |
|
|
(34,111,952 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
$ |
357,357,484 |
|
|
$ |
356,641,940 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes land held under a capital lease carried at approximately $1.1 million. |
During the year ended December 31, 2010, the Company acquired one property, which is summarized
below:
On December 15, 2010, the Company acquired a 487,121 square foot office/industrial building located
in Orange City, Iowa for approximately $12.3 million, including related acquisition expenses of
$386,000. The Company funded this acquisition through a combination of borrowings from its line of
credit and the assumption of approximately $10.8 million of mortgage debt on the property. At
closing, the Company was assigned the existing triple net lease with Staples Contract & Commercial,
Inc., the commercial delivery and fulfillment division of Staples, Inc. The existing triple net
lease has a remaining term of approximately 16 years, and the mortgage debt related to the property
matures in December 2026. The tenant has four options to extend the lease for additional periods of
five years each. The existing triple net lease provides for aggregate rents of approximately $1.2
million in 2011 with prescribed annual rental rate escalations commencing in 2012.
In accordance with ASC 805 the Company allocated the purchase price of the property acquired during
the year ended December 31, 2010 as follows:
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
Discount on Assumed |
|
|
|
|
|
|
Land |
|
|
Building |
|
|
Tenant Improvements |
|
|
In-place Leases |
|
|
Leasing Costs |
|
|
Relationships |
|
|
Debt |
|
|
Total Purchase Price |
|
Orange City, Iowa |
|
$ |
132,100 |
|
|
$ |
8,306,160 |
|
|
$ |
462,570 |
|
|
$ |
1,076,020 |
|
|
$ |
245,583 |
|
|
$ |
499,255 |
|
|
$ |
1,285,757 |
|
|
$ |
12,007,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
132,100 |
|
|
$ |
8,306,160 |
|
|
$ |
462,570 |
|
|
$ |
1,076,020 |
|
|
$ |
245,583 |
|
|
$ |
499,255 |
|
|
$ |
1,285,757 |
|
|
$ |
12,007,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
Tenant |
|
Year |
|
Lease Payments |
|
2011 |
|
$ |
39,643,943 |
|
2012 |
|
|
39,768,059 |
|
2013 |
|
|
35,346,189 |
|
2014 |
|
|
31,246,937 |
|
2015 |
|
|
27,180,934 |
|
Thereafter |
|
|
174,244,975 |
|
In accordance with the lease terms, substantially all tenant expenses are required to be paid by
the tenant; however, the Company would be required to pay property taxes on the respective
properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the
tenant fails to pay them. The total annualized property taxes for all properties held by the
Company at December 31, 2010 was approximately $6.2 million, and the total annual ground lease
payments on the property located in Tulsa, Oklahoma was approximately $153,000.
On May 4, 2010, the Company extended the lease with the tenant that occupies its property located
in Grand Rapids, Michigan for a period of 15 years, and the tenant has two options to extend the
lease for additional periods of 10 years each. The lease was originally set to expire in July 2016,
and will now expire in April 2025. The lease provides for prescribed rent escalations over the life
of the lease, with annualized straight line rents of approximately $1.1 million.
On September 29, 2010, the tenant occupying the building located in Hazelwood, Missouri declared
bankruptcy. The lease for this property is scheduled to expire in January 2012, and rental income
from this tenant comprises less than 1% of the Companys total annualized rental income. On
March 2, 2011, the lease was rejected in the bankruptcy proceedings of the Companys tenant.
The Company has been informed that the rent payments will cease at the end of April 2011. The
Company is taking the appropriate action to re-tenant the property.
On October 8, 2010, the Company extended the lease with the tenant that occupies its property
located in Toledo, Ohio for a period of 10 years, and the tenant has two options to extend the
lease for additional periods of 10 years each. The lease was originally set to expire in December
2010, and will now expire in December 2020. The lease provides for prescribed rent escalations over
the life of the lease, with annualized straight line rents of approximately $276,000.
On December 14, 2010, the Company released the current tenant in its property located in Cumming,
Georgia from its obligations under their existing lease, and simultaneously signed a lease with a
new tenant under substantially the same terms. The new tenant is an Atlanta, Georgia based
hospital system that acquired part of the current tenants business, part of which is housed in the
Companys Cumming, Georgia facility. The current tenant is a medical group that continues to
lease the remainder of its properties
80
located in Georgia under a master lease. In connection with services provided directly by the
Companys Adviser to the tenant, the tenant paid a real estate advisory fee to the Companys
Adviser, in the amount of $450,000.
On December 30, 2010, the Company extended the lease with the tenant that occupies its property
located in Fridley, Minnesota for a period of 10 years, and the tenant has one option to extend the
lease for a period of 5 years. The lease was originally set to expire in January 2013 and will now
expire in July 2020. The lease provides for prescribed rent escalations over the life of the
lease, with annualized straight line rents of approximately $812,000.
Intangible Assets
The following table summarizes the net value of other intangible assets and the accumulated
amortization for each intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Lease Intangibles |
|
|
Amortization |
|
|
Lease Intangibles |
|
|
Amortization |
|
In-place leases |
|
$ |
17,011,466 |
|
|
$ |
(8,362,167 |
) |
|
$ |
15,935,445 |
|
|
$ |
(6,741,817 |
) |
Leasing costs |
|
|
10,763,570 |
|
|
|
(4,684,857 |
) |
|
|
10,053,004 |
|
|
|
(3,832,623 |
) |
Customer relationships |
|
|
17,635,756 |
|
|
|
(5,616,776 |
) |
|
|
17,136,501 |
|
|
|
(4,373,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,410,792 |
|
|
$ |
(18,663,800 |
) |
|
$ |
43,124,950 |
|
|
$ |
(14,947,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated aggregate amortization expense for each of the five succeeding fiscal years and
thereafter is as follows:
|
|
|
|
|
Year |
|
Estimated Amortization Expense |
|
2011 |
|
$ |
5,900,964 |
|
2012 |
|
|
4,617,520 |
|
2013 |
|
|
2,589,117 |
|
2014 |
|
|
2,343,203 |
|
2015 |
|
|
1,968,738 |
|
Thereafter |
|
|
9,327,450 |
|
5. Real Estate Held for Sale and Discontinued Operations
As of June 30, 2009, the Company classified its property in Norfolk, Virginia as held for sale
under the provisions of ASC 360-10, which requires that the results of operations of any properties
which have been sold, or are held for sale, be presented as discontinued operations in the
Companys consolidated financial statements in both current and prior periods presented. On July
17, 2009, the Company sold this property for $1.15 million, and recognized a gain on the sale of
approximately $160,000.
The table below summarizes the components of income from discontinued operations:
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating revenue |
|
$ |
|
|
|
$ |
56,202 |
|
|
$ |
103,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense |
|
|
|
|
|
|
(13,140 |
) |
|
|
(63,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
|
|
|
|
160,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations |
|
$ |
|
|
|
$ |
203,100 |
|
|
$ |
39,926 |
|
|
|
|
|
|
|
|
|
|
|
6. Mortgage Note Receivable
On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million that was
collateralized by an office building located in McLean, Virginia in which the Companys Adviser and
Administrator are subtenants. The mortgage loan was originally scheduled to mature in May 2017
but, on July 22, 2010 this mortgage was fully repaid. The Company received $3.3 million of
additional income and prepayment fees in connection with the early payment, which was recorded as
other income in the consolidated statement of operations.
82
7. Mortgage Notes Payable and Line of Credit
The Companys mortgage notes payable and line of credit as of December 31, 2010 and 2009 are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate at December |
|
|
|
|
|
|
|
|
|
Date of Issuance/ |
|
|
Principal Maturity |
|
|
31, 2010 |
|
|
Principal Balance Outstanding |
|
|
|
Assumption |
|
|
Date |
|
|
(1) |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
Fixed-Rate Mortgage Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/15/08 |
|
|
|
10/01/11 |
(2) |
|
|
4.58 |
% |
|
$ |
48,015,000 |
|
|
$ |
48,015,000 |
|
|
|
|
02/21/06 |
|
|
|
12/01/13 |
|
|
|
5.91 |
% |
|
|
9,021,517 |
|
|
|
9,188,044 |
|
|
|
|
02/21/06 |
|
|
|
06/30/14 |
|
|
|
5.20 |
% |
|
|
18,740,559 |
|
|
|
19,116,277 |
|
|
|
|
08/25/05 |
|
|
|
09/01/15 |
|
|
|
5.33 |
% |
|
|
20,771,247 |
|
|
|
21,093,917 |
|
|
|
|
09/12/05 |
|
|
|
09/01/15 |
|
|
|
5.21 |
% |
|
|
12,209,365 |
|
|
|
12,389,647 |
|
|
|
|
12/21/05 |
|
|
|
12/08/15 |
|
|
|
5.71 |
% |
|
|
18,727,935 |
|
|
|
18,991,934 |
|
|
|
|
09/06/07 |
|
|
|
12/11/15 |
|
|
|
5.81 |
% |
|
|
4,291,947 |
|
|
|
4,361,144 |
|
|
|
|
03/29/06 |
|
|
|
04/01/16 |
|
|
|
5.92 |
% |
|
|
17,000,000 |
|
|
|
17,000,000 |
|
|
|
|
04/27/06 |
|
|
|
05/05/16 |
|
|
|
6.58 |
% |
|
|
13,719,529 |
|
|
|
14,009,918 |
|
|
|
|
08/29/08 |
|
|
|
06/01/16 |
|
|
|
6.80 |
% |
|
|
6,162,508 |
|
|
|
6,296,505 |
|
|
|
|
11/22/06 |
|
|
|
12/01/16 |
|
|
|
5.76 |
% |
|
|
13,954,519 |
|
|
|
14,136,921 |
|
|
|
|
12/22/06 |
|
|
|
01/01/17 |
|
|
|
5.79 |
% |
|
|
21,329,510 |
|
|
|
21,605,106 |
|
|
|
|
02/08/07 |
|
|
|
03/01/17 |
|
|
|
6.00 |
% |
|
|
13,775,000 |
|
|
|
13,775,000 |
|
|
|
|
06/05/07 |
|
|
|
06/08/17 |
|
|
|
6.11 |
% |
|
|
14,240,000 |
|
|
|
14,240,000 |
|
|
|
|
10/15/07 |
|
|
|
11/08/17 |
|
|
|
6.63 |
% |
|
|
15,474,173 |
|
|
|
15,657,330 |
|
|
|
|
12/15/10 |
|
|
|
12/10/26 |
|
|
|
6.63 |
% |
|
|
10,795,004 |
|
|
|
|
|
|
|
|
03/16/05 |
|
|
|
04/01/30 |
|
|
|
6.33 |
% |
|
|
2,641,650 |
|
|
|
2,884,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed-Rate Mortgage Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,869,463 |
|
|
|
252,761,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Line of Credit: |
|
|
12/28/10 |
|
|
|
12/27/13 |
|
|
LIBOR +3.00% |
|
|
27,000,000 |
|
|
|
33,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Notes Payable and Line of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
287,869,463 |
|
|
$ |
285,961,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average interest rate on all debt outstanding at
December 31, 2010 was approximately 5.43%. |
|
(2) |
|
This note has three annual extension options, which gives the Company the
ability to extend the term of the note until October 1, 2013. The first of these options was
exercised on September 30, 2010. |
Mortgage Notes Payable
As of December 31, 2010, the Company had 17 fixed-rate mortgage notes payable, collateralized by a
total of 56 properties. The obligors under each of these notes are wholly-owned separate borrowing
entities, which own the real estate collateral. The Company is not a co-borrower, but has limited
recourse liabilities that could result from: a borrower voluntarily filing for bankruptcy, improper
conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation
of rents, security deposits, insurance proceeds or condemnation proceeds, and physical waste or
damage to the property, resulting from a borrowers gross negligence or willful misconduct. The
Company will also indemnify lenders against claims resulting from the presence of hazardous
substances or activity involving hazardous substances in violation of environmental laws on a
property. The weighted-average interest rate on the mortgage notes payable as of December 31, 2010
was approximately 5.65% and as of December 31, 2009 was approximately 6.00%.
The Company had $48.0 million of balloon principal payments maturing under one of its
long-term mortgages in 2010; however, the mortgage has three annual extension options through 2013,
and the Company exercised one of these options on September 30, 2010. In connection with the
exercise of the option, the interest rate reset from 6.85% to 4.58% through September 30, 2011. At
the time of notification of extension, the Company remitted a fee of 0.25% of the outstanding
principal balance, or approximately $120,000, which is recorded as a deferred financing cost in the
Companys consolidated balance sheet. The Company also remitted a certification to the lender that
its aggregate debt service coverage ratio is not less
83
than 1.2, thus the Company was in compliance
with all covenants under the mortgage loan. The interest rate for the two additional extension
periods will adjust based upon the 1-year swap rate at the time of extension and a fixed spread of
4.29% and 4.41%, respectively. In addition, one of the buildings pledged as collateral to the
$48.0 million mortgage is the building located in South Hadley, Massachusetts, in which the tenant
did not renew its lease. The Company has until May 31, 2011 to pay off the portion of the loan
allocated to the South Hadley property. The payoff amount is 115% of the allocated loan amount or
approximately $2.8 million.
On December 15, 2010, the Company assumed approximately $10.8 million of indebtedness pursuant
to a long-term note payable from Modern Woodmen of America, in connection with the Companys
acquisition, on the same date, of a property located in Orange City, Iowa. The note accrues
interest at a rate of 6.625% per year, and the Company may not repay this note prior to maturity,
or it would be subject to a substantial prepayment penalty. The note matures on December 10, 2026.
The fair market value of all fixed-rate mortgage notes payable outstanding as of December 31, 2010
was approximately $252.6 million, as compared to the carrying value stated above of approximately
$260.9 million. The fair market value is calculated based on a discounted cash flow analysis,
using interest rates based on Managements estimate of interest rates on long-term debt with
comparable terms.
Scheduled principal payments of mortgage notes payable for each of the five succeeding fiscal years
and thereafter are as follows:
|
|
|
|
|
Year |
|
Scheduled principal payments |
|
2011 |
|
$ |
51,456,852 |
(1) |
2012 |
|
|
3,792,260 |
|
2013 |
|
|
12,616,579 |
|
2014 |
|
|
21,251,589 |
|
2015 |
|
|
55,082,307 |
|
Thereafter |
|
|
116,669,876 |
|
|
|
|
|
|
|
$ |
260,869,463 |
|
|
|
|
|
|
|
|
(1) |
|
The $48.0 million mortgage note issued
in September 2008 was extended September 30, 2010 for one
year. The Company expects to exercise additional options
to extend the maturity date until October 2013. |
Line of Credit
In December 2010, the Company procured a new $50.0 million line of credit, or the New Line of
Credit, with Capital One, N.A. serving as a revolving lender, a letter of credit issuer and as an
administrative agent and Branch Banking and Trust Company serving as a revolving lender and a
letter of credit issuer, which matures on December 28, 2013. The New Line of Credit replaced the
Companys prior $50.0 million senior secured revolving credit facility which was scheduled to
mature on December 29, 2010, or the Prior Line of Credit. The New Line of Credit provides for a
senior secured revolving credit facility of up to $50.0 million, with a standby letter of credit
sublimit of up to $20.0 million. The New Line of Credit is subject to a maximum borrowing base
calculation which may, from time to time, affect the maximum amount available to be drawn. The New
Line of Credit may, upon satisfaction of certain conditions, be expanded up to $75.0 million.
Currently, eight of the Companys properties are pledged as collateral under its line of credit.
The interest rate per annum applicable to the New Line of Credit is equal to the London Interbank
Offered Rate, or LIBOR, plus an applicable margin of up to 3.00% depending upon the Companys
84
leverage. The leverage ratio used in determining the applicable margin for interest on the New
Credit Line is recalculated quarterly. The Company will be subject to an annual maintenance fee of
0.25% per year. The Companys ability to access this source of financing is subject to its
continued ability to meet
customary lending requirements such as compliance with financial and operating covenants and its
meeting certain lending limits. One such covenant requires the Company to limit distributions to
its stockholders to 95% of our FFO, with acquisition-related costs required to be expensed under
ASC 805 added back to FFO. In addition, the maximum amount the Company may draw under this
agreement is based on a percentage of the value of properties pledged as collateral to the banks,
which must meet agreed upon eligibility standards. The maximum amount that the Company may
currently draw under the New Line of Credit is approximately $38.8 million. Furthermore, those
eight properties that are pledged as collateral to the banks are pledged through a perfected first
priority lien in the equity interest of the special purpose entity, or SPE, that owns the property.
In addition, Gladstone Commercial Limited Partnership, a Delaware limited partnership that owns
the SPEs, or the Operating Partnership, is precluded from transferring the SPEs or unconsolidated
affiliates to the Company.
If and when long-term mortgages are arranged for these pledged properties, the banks will release
the properties from the line of credit and reduce the availability under the line of credit by the
advanced amount of the released property. Conversely, as the Company purchases new properties
meeting the eligibility standards, it may pledge these new properties to obtain additional
availability under this agreement. The availability under the line of credit will also be reduced
by letters of credit used in the ordinary course of business. The Company may use the advances
under the line of credit for both general corporate purposes and the acquisition of new
investments.
At December 31, 2010, there was $27.0 million outstanding under the line of credit at an interest
rate of approximately 3.3% and approximately $5.9 million outstanding under letters of credit at a
weighted average interest rate of approximately 3.0%. At December 31, 2010, the remaining
borrowing capacity available under the line of credit was approximately $5.9 million. The
Companys ability to increase the availability under its line of credit is dependent upon it
pledging additional properties as collateral. Traditionally, the Company has pledged new properties
to the line of credit as it arranges for long-term mortgages for these pledged properties.
Currently, only nine of the Companys properties do not have long-term mortgages, and eight of
those are pledged as collateral under its line of credit. Accordingly, the Company has only one
property which is unencumbered, and which may be pledged as collateral to increase the borrowing
capacity available under the line of credit. The Company was in compliance with all covenants
under the New Line of Credit as of December 31, 2010. The amount outstanding on the line of credit
as of December 31, 2010 approximates fair market value, because the debt is short-term and variable
rate.
8. Stockholders Equity
Distributions paid per common share for each of the years ended December 31, 2010, 2009 and 2008
were $1.50, per share. Distributions paid per share of Series A Preferred Stock for each of the
years ended December 31, 2010, 2009 and 2008 were approximately $1.94 per share. Distributions
paid per share of Series B Preferred Stock for each of the years ended December 31, 2010, 2009 and
2008 were approximately $1.88 per share. Distributions paid per share of senior common stock for
the year ended December 31, 2010 were $0.5979 per share. There were no distributions paid to
senior common stockholders for either of the years ended December 31, 2009 or 2008, as no senior
common stock was outstanding during this period.
For Federal income tax purposes, distributions paid to stockholders may be characterized as
ordinary income, capital gains or return of capital. The characterization of distributions during
each of the last three years is reflected in the table below:
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Capital |
|
|
Ordinary Income |
|
Return of Capital |
|
Gains |
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
9.26770 |
% |
|
|
90.73230 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2009
|
|
|
6.04080 |
% |
|
|
93.95920 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2010
|
|
|
15.76540 |
% |
|
|
84.23460 |
% |
|
|
0.00000 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2008
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2009
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2010
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2008
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2009
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2010
|
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
The following table is a summary of all outstanding notes issued to employees of the Adviser for
the exercise of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance |
|
Outstanding Balance |
|
|
|
|
|
|
Number of |
|
|
|
|
|
Amount of |
|
of Employee Loans |
|
of Employee Loans |
|
|
|
|
|
|
Options |
|
Strike Price of |
|
Promissory Note |
|
at December 31, |
|
at December 31, |
|
Maturity Date |
|
Interest Rate |
Date Issued |
|
Exercised |
|
Options Exercised |
|
Issued to Employees |
|
2010 |
|
2009 |
|
of Note |
|
on Note |
Sep 2004
|
|
|
25,000 |
|
|
$ |
15.00 |
|
|
$ |
375,000 |
|
|
$ |
20,253 |
|
|
$ |
358,405 |
|
|
Sep 2013
|
|
|
5.00 |
% |
Apr 2006
|
|
|
12,422 |
|
|
|
16.10 |
|
|
|
199,994 |
|
|
|
4,563 |
|
|
|
199,994 |
|
|
Apr 2015
|
|
|
7.77 |
% |
May 2006
|
|
|
50,000 |
|
|
|
16.85 |
|
|
|
842,500 |
|
|
|
531,417 |
|
|
|
842,500 |
|
|
May 2016
|
|
|
7.87 |
% |
May 2006
|
|
|
15,000 |
|
|
|
16.10 |
|
|
|
241,500 |
|
|
|
|
|
|
|
241,500 |
|
|
May 2016
|
|
|
7.87 |
% |
May 2006
|
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
May 2016
|
|
|
7.87 |
% |
May 2006
|
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
|
|
|
|
32,200 |
|
|
May 2016
|
|
|
7.87 |
% |
May 2006
|
|
|
2,000 |
|
|
|
15.00 |
|
|
|
30,000 |
|
|
|
|
|
|
|
30,000 |
|
|
May 2016
|
|
|
7.87 |
% |
Oct 2006
|
|
|
12,000 |
|
|
|
16.10 |
|
|
|
193,200 |
|
|
|
|
|
|
|
193,200 |
|
|
Oct 2015
|
|
|
8.17 |
% |
Nov 2006
|
|
|
25,000 |
|
|
|
15.00 |
|
|
|
375,000 |
|
|
|
375,000 |
|
|
|
375,000 |
|
|
Nov 2015
|
|
|
8.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,422 |
|
|
|
|
|
|
$ |
2,321,594 |
|
|
$ |
963,433 |
|
|
$ |
2,304,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 505-10-45-2, Equity, receivables from employees for the issuance of
capital stock to employees prior to the receipt of cash payment should be reflected in the balance
sheet as a reduction to stockholders equity. Therefore, these notes were recorded as full recourse
loans to employees and are included in the equity section of the accompanying consolidated balance
sheets. As of December 31, 2010, each loan maintained its full recourse status.
On November 4, 2009, the Company entered into an open market sale agreement, or the Open Market
Sale Agreement, with Jefferies & Company, Inc., or Jefferies, under which it may, from time to
time, offer to sell shares of its common stock with an aggregate sales price of up to $25.0 million
on the open market through Jefferies, as agent, or to Jefferies, as principal. During the year
ended December 31, 2010, the Company raised approximately $3.4 million in net proceeds, through the
sale of 192,365 shares of common stock under the Open Market Sale Agreement.
On November 19, 2009, the Company entered into a dealer manager agreement, or the Dealer Manager
Agreement, as amended and restated on December 22, 2009, with Halcyon Capital Markets, LLC, or
Halcyon, pursuant to which Halcyon agreed to act as its dealer manager in connection with its
continuous private offering of up to 3,333,333 shares of its then newly designated unregistered
senior common stock at $15.00 per share. Holders of the unregistered senior common stock have the
right, but not the obligation,
86
following the fifth anniversary of the issuance of such shares, to
exchange any or all of such shares of senior common stock for shares of the Companys common stock.
On October 19, 2010, the Company terminated the private offering of unregistered senior common
stock, including the dividend reinvestment plan for the senior common stock. In connection with the
termination, the Company wrote-off approximately $1.6 million of fees incurred in relation to the
offering. The expenses consisted primarily of legal, accounting and fees paid to Halcyon, and are
recorded as professional fees in the Companys consolidated statement of operations. The Company
issued 59,057 shares of unregistered senior common stock pursuant to the private offering and
related dividend reinvestment plan. Net proceeds from these sales, after selling commissions and
dealer manager fees, were approximately $787,000.
9. Segment Information
The Companys operations are comprised of two reportable segments. One segment purchases real
estate (land, buildings and other improvements), which is simultaneously leased to existing users,
and the other segment extends mortgage loans and collects principal and interest payments. As of
December 31, 2010, the Company had no mortgage loans receivable outstanding. The amounts included
under the Other column in the tables below include other income, which consists of interest
income from temporary investments and employee loans and any other miscellaneous income earned, and
operating and other expenses that were not specifically derived from either operating segment.
87
The following table summarizes the Companys consolidated operating results and total assets
by segment as of and for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2010 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
41,507,237 |
|
|
$ |
420,833 |
|
|
$ |
|
|
|
$ |
41,928,070 |
|
Operating expenses |
|
|
(14,790,124 |
) |
|
|
|
|
|
|
(8,624,448 |
) (1) |
|
|
(23,414,572) |
|
Other expense |
|
|
(16,065,957 |
) |
|
|
|
|
|
|
2,480,367 |
(2) |
|
|
(13,585,590) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,651,156 |
|
|
$ |
420,833 |
|
|
$ |
(6,144,081 |
) |
|
$ |
4,927,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
400,616,254 |
|
|
$ |
|
|
|
$ |
9,992,348 |
|
|
$ |
410,608,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2009 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
41,848,520 |
|
|
$ |
760,417 |
|
|
$ |
|
|
|
$ |
42,608,937 |
|
Operating expenses |
|
|
(14,260,070 |
) |
|
|
|
|
|
|
(6,280,459 |
) (1) |
|
|
(20,540,529) |
|
Other expense |
|
|
(16,480,535 |
) |
|
|
|
|
|
|
(1,187,925 |
) (2) |
|
|
(17,668,460) |
|
Discontinued
operations |
|
|
203,100 |
|
|
|
|
|
|
|
|
|
|
|
203,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,311,015 |
|
|
$ |
760,417 |
|
|
$ |
(7,468,384 |
) |
|
$ |
4,603,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
399,867,563 |
|
|
$ |
10,000,000 |
|
|
$ |
6,997,810 |
|
|
$ |
416,865,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2008 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
39,908,924 |
|
|
$ |
898,573 |
|
|
$ |
|
|
|
$ |
40,807,497 |
|
Operating expenses |
|
|
(14,863,138 |
) |
|
|
|
|
|
|
(4,500,585 |
) (1) |
|
|
(19,363,723) |
|
Other expense |
|
|
(13,769,417 |
) |
|
|
|
|
|
|
(2,801,336 |
) (2) |
|
|
(16,570,753) |
|
Discontinued
operations |
|
|
39,926 |
|
|
|
|
|
|
|
|
|
|
|
39,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,316,295 |
|
|
$ |
898,573 |
|
|
$ |
(7,301,921 |
) |
|
$ |
4,912,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
413,760,683 |
|
|
$ |
10,000,000 |
|
|
$ |
5,338,102 |
|
|
$ |
429,098,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses includes base management fees, incentive fees, administration fees,
professional fees, insurance expense, directors fees, stockholder-related expenses and general and
administrative expenses that are not practicable to allocate to either operating segment; thus,
these expenses are included in the Other column. |
|
(2) |
|
It is not practicable to allocate the interest expense from the line of credit or the
short-term loan to either operating segment; thus, the interest is included in the Other column. |
88
10. Pro Forma Financial Information (unaudited)
The Company acquired one property during the year ended December 31, 2010. The following table
reflects pro-forma condensed consolidated income statements as if the property was acquired as of
the beginning of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Operating Data: |
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
43,031,138 |
|
|
$ |
43,712,005 |
|
Total operating expenses |
|
|
(23,997,882 |
) |
|
|
(21,123,839 |
) |
Other expense |
|
|
(14,142,012 |
) |
|
|
(18,224,883 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,891,244 |
|
|
|
4,363,283 |
|
Dividends attributable to preferred and senior common stock |
|
|
(4,113,800 |
) |
|
|
(4,093,750 |
) |
|
|
|
|
|
|
|
Net income available from continuing operations to common stockholders |
|
$ |
777,444 |
|
|
$ |
269,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
Basic net income from continuing operations |
|
$ |
0.09 |
|
|
$ |
0.03 |
|
Diluted net income from continuing operations |
|
$ |
0.09 |
|
|
$ |
0.03 |
|
Weighted average shares outstanding-basic |
|
|
8,576,303 |
|
|
|
8,563,264 |
|
Weighted average shares outstanding-diluted |
|
|
8,601,153 |
|
|
|
8,563,264 |
|
11. Quarterly Financial Information (unaudited)
The following table reflects the quarterly results of operations for the years ended December 31,
2010 and 2009.
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March |
|
|
Quarter ended June |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
31, 2010 |
|
|
30, 2010 |
|
|
September 30, 2010 |
|
|
December 31, 2010 |
|
Operating revenues |
|
$ |
10,684,976 |
|
|
$ |
10,681,387 |
|
|
$ |
10,334,413 |
|
|
$ |
10,227,294 |
|
Operating expenses |
|
|
5,360,386 |
|
|
|
5,350,201 |
|
|
|
7,282,219 |
|
|
|
5,421,766 |
|
Other expense |
|
|
(4,238,257 |
) |
|
|
(4,324,735 |
) |
|
|
(1,023,942 |
) |
|
|
(3,998,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,086,333 |
|
|
|
1,006,451 |
|
|
|
2,028,252 |
|
|
|
806,872 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,086,333 |
|
|
|
1,006,451 |
|
|
|
2,028,252 |
|
|
|
806,872 |
|
Dividends attributable to preferred and senior common stock |
|
|
(1,023,438 |
) |
|
|
(1,023,812 |
) |
|
|
(1,027,719 |
) |
|
|
(1,038,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
62,895 |
|
|
|
(17,361 |
) |
|
|
1,000,533 |
|
|
|
(231,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders basic |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
|
$ |
(0.04 |
) |
Net income available to common stockholders diluted |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
8,558,664 |
|
|
|
8,545,264 |
|
|
|
8,562,777 |
|
|
|
8,637,981 |
|
Weighted average shares outstanding diluted |
|
|
8,558,664 |
|
|
|
8,546,529 |
|
|
|
8,577,173 |
|
|
|
8,688,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March |
|
|
Quarter ended June |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
31, 2009 |
|
|
30, 2009 |
|
|
September 30, 2009 |
|
|
December 31, 2009 |
|
Operating revenues |
|
$ |
10,658,176 |
|
|
$ |
10,651,489 |
|
|
$ |
10,657,094 |
|
|
$ |
10,642,178 |
|
Operating expenses |
|
|
5,165,052 |
|
|
|
5,181,837 |
|
|
|
5,069,018 |
|
|
|
5,124,622 |
|
Other expense |
|
|
(4,421,393 |
) |
|
|
(4,373,632 |
) |
|
|
(4,473,194 |
) |
|
|
(4,400,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,071,731 |
|
|
|
1,096,020 |
|
|
|
1,114,882 |
|
|
|
1,117,315 |
|
Discontinued operations |
|
|
17,838 |
|
|
|
20,916 |
|
|
|
164,108 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,089,569 |
|
|
|
1,116,936 |
|
|
|
1,278,990 |
|
|
|
1,117,553 |
|
Distributions attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,437 |
) |
|
|
(1,023,437 |
) |
|
|
(1,023,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
66,132 |
|
|
|
93,499 |
|
|
|
255,553 |
|
|
|
94,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders basic &
diluted |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic & diluted |
|
|
8,563,264 |
|
|
|
8,563,264 |
|
|
|
8,563,264 |
|
|
|
8,563,264 |
|
12. Subsequent Events
On January 11, 2011 the Companys Board of Directors declared a cash distribution of $0.125 per
share of common stock, $0.1614583 per share of the Series A Preferred Stock, $0.15625 per share of
the Series B Preferred Stock, and $0.0875 per share of the Senior common stock for each of the
months of January, February and March of 2011. Monthly distributions will be payable on January 31, 2011, February 28,
2011 and March 31, 2011, respectively, to stockholders of record as of the close of business on
January 21, 2011, February 21, 2011 and March 21, 2011, respectively for shares of common stock and
preferred stock Series A and Series B. Monthly distributions to senior common stockholders will be
payable on the February 7, 2011, March 7, 2011, and April 6, 2011.
On January 31, 2011, the Company extended the lease with its tenant occupying its properties
located in Decatur, Georgia, Lawrenceville, Georgia, Snellville, Georgia, Covington, Georgia, and
Conyers, Georgia. The lease covering all of these properties was extended for an additional five
year period, thereby extending the lease until December 2031. The lease was originally set to
expire in December 2026. The lease provides for prescribed rent escalations over the life of the
lease, with annualized straight line rents of approximately $1.6 million. Furthermore, the lease
grants the tenant four options to extend the lease for a period of five years each.
On February 2, 2011, the Company sold 725,000 shares of its common stock at $18.35 per share
in an underwritten public offering of its common stock. The Company also granted the underwriters a
30-day option to purchase up to 108,750 shares of common stock on the same terms and conditions to
cover over-allotments, if any. On February 11, 2011 the underwriters executed their option to
purchase an additional
90
108,750 shares of common stock. The net proceeds after deducting the underwriting discount and
estimated offering expenses were approximately $14.3 million. The Company used the proceeds of the
offering to repay a portion of the outstanding balance under its New Line of Credit.
91
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
|
Subsequent to |
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
|
Accumulated |
|
|
Net Real |
|
|
Date |
|
Location of Property |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Acquisition |
|
|
Land |
|
|
Improvements |
|
|
Total(1) |
|
|
Depreciation(2) |
|
|
Estate |
|
|
Acquired |
|
Raleigh, North Carolina
Office Building |
|
$ |
4,940,000 |
|
|
$ |
960,000 |
|
|
$ |
4,480,772 |
|
|
$ |
|
|
|
$ |
960,000 |
|
|
$ |
4,480,772 |
|
|
$ |
5,440,772 |
|
|
$ |
1,224,039 |
|
|
$ |
4,216,733 |
|
|
|
12/23/2003 |
|
Canton, Ohio
Office & Warehouse Building |
|
|
2,861,267 |
|
|
|
186,739 |
|
|
|
3,082,007 |
|
|
|
|
|
|
|
186,739 |
|
|
|
3,082,007 |
|
|
|
3,268,746 |
|
|
|
608,863 |
|
|
|
2,659,883 |
|
|
|
1/30/2004 |
|
Akron, Ohio
Office & Laboratory Building |
|
|
7,332,602 |
|
|
|
1,974,000 |
|
|
|
6,769,565 |
|
|
|
284,926 |
|
|
|
1,974,000 |
|
|
|
7,054,491 |
|
|
|
9,028,491 |
|
|
|
1,189,088 |
|
|
|
7,839,403 |
|
|
|
4/29/2004 |
|
Charlotte, North Carolina
Office Building |
|
|
6,802,185 |
|
|
|
741,296 |
|
|
|
8,423,389 |
|
|
|
59,190 |
|
|
|
741,296 |
|
|
|
8,482,579 |
|
|
|
9,223,875 |
|
|
|
1,434,701 |
|
|
|
7,789,174 |
|
|
|
6/30/2004 |
|
Canton, North Carolina
Commercial & Manufacturing Building |
|
|
2,641,649 |
|
|
|
150,000 |
|
|
|
5,050,000 |
|
|
|
|
|
|
|
150,000 |
|
|
|
5,050,000 |
|
|
|
5,200,000 |
|
|
|
838,882 |
|
|
|
4,361,118 |
|
|
|
7/6/2004 |
|
Snyder Township, Pennsylvania
Commercial & Warehouse Building |
|
|
5,544,454 |
|
|
|
100,000 |
|
|
|
6,573,902 |
|
|
|
156,129 |
|
|
|
100,000 |
|
|
|
6,730,031 |
|
|
|
6,830,031 |
|
|
|
1,090,252 |
|
|
|
5,739,779 |
|
|
|
8/5/2004 |
|
Lexington, North Carolina
Commercial & Warehouse Building |
|
|
2,809,628 |
|
|
|
819,760 |
|
|
|
2,106,845 |
|
|
|
6,637 |
|
|
|
819,760 |
|
|
|
2,113,479 |
|
|
|
2,933,239 |
|
|
|
347,677 |
|
|
|
2,585,562 |
|
|
|
8/5/2004 |
|
Austin, Texas
Office Building |
|
|
6,500,000 |
|
|
|
1,000,000 |
|
|
|
6,295,794 |
|
|
|
46,095 |
|
|
|
1,000,000 |
|
|
|
6,341,889 |
|
|
|
7,341,889 |
|
|
|
1,047,193 |
|
|
|
6,294,696 |
|
|
|
9/16/2004 |
|
Mt. Pocono, Pennsylvania
Commercial & Manufacturing Building |
|
|
5,179,012 |
|
|
|
350,000 |
|
|
|
5,818,703 |
|
|
|
18,430 |
|
|
|
350,000 |
|
|
|
5,837,133 |
|
|
|
6,187,133 |
|
|
|
942,959 |
|
|
|
5,244,174 |
|
|
|
10/15/2004 |
|
San Antonio, Texas
Flexible Office Building |
|
|
7,080,146 |
|
|
|
843,000 |
|
|
|
7,513,750 |
|
|
|
22,673 |
|
|
|
843,000 |
|
|
|
7,536,423 |
|
|
|
8,379,423 |
|
|
|
1,503,338 |
|
|
|
6,876,085 |
|
|
|
2/10/2005 |
|
Columbus, Ohio
Industrial Building |
|
|
2,695,221 |
|
|
|
410,000 |
|
|
|
2,385,108 |
|
|
|
|
|
|
|
410,000 |
|
|
|
2,385,108 |
|
|
|
2,795,108 |
|
|
|
363,906 |
|
|
|
2,431,202 |
|
|
|
2/10/2005 |
|
Big Flats, New York
Industrial Building |
|
|
5,630,000 |
|
|
|
275,000 |
|
|
|
6,459,318 |
|
|
|
33,666 |
|
|
|
275,000 |
|
|
|
6,492,984 |
|
|
|
6,767,984 |
|
|
|
957,299 |
|
|
|
5,810,685 |
|
|
|
4/15/2005 |
|
Wichita, Kansas
Office Building |
|
|
8,316,687 |
|
|
|
1,525,000 |
|
|
|
9,702,731 |
|
|
|
67,611 |
|
|
|
1,525,000 |
|
|
|
9,770,342 |
|
|
|
11,295,342 |
|
|
|
1,492,116 |
|
|
|
9,803,226 |
|
|
|
5/18/2005 |
|
Arlington, Texas
Warehouse & Bakery Building |
|
|
4,064,745 |
|
|
|
635,964 |
|
|
|
3,694,876 |
|
|
|
45,003 |
|
|
|
635,964 |
|
|
|
3,739,879 |
|
|
|
4,375,843 |
|
|
|
553,942 |
|
|
|
3,821,901 |
|
|
|
5/26/2005 |
|
Dayton, Ohio
Office Building |
|
|
2,015,496 |
|
|
|
525,000 |
|
|
|
1,876,992 |
|
|
|
119,736 |
|
|
|
525,000 |
|
|
|
1,996,728 |
|
|
|
2,521,728 |
|
|
|
402,992 |
|
|
|
2,118,736 |
|
|
|
6/30/2005 |
|
Eatontown, New Jersey
Office Building |
|
|
4,580,000 |
|
|
|
1,350,630 |
|
|
|
3,520,062 |
|
|
|
306,681 |
|
|
|
1,350,630 |
|
|
|
3,826,743 |
|
|
|
5,177,373 |
|
|
|
572,203 |
|
|
|
4,605,170 |
|
|
|
7/7/2005 |
|
Frankling Township, New Jersey Office & Warehouse
Building |
|
|
6,790,000 |
|
|
|
1,631,534 |
|
|
|
6,199,849 |
|
|
|
|
|
|
|
1,631,534 |
|
|
|
6,199,849 |
|
|
|
7,831,383 |
|
|
|
872,739 |
|
|
|
6,958,644 |
|
|
|
7/11/2005 |
|
Duncan, South Carolina
Office & Warehouse Building |
|
|
11,188,012 |
|
|
|
783,212 |
|
|
|
10,790,451 |
|
|
|
2,033,148 |
|
|
|
783,212 |
|
|
|
12,823,599 |
|
|
|
13,606,811 |
|
|
|
1,704,745 |
|
|
|
11,902,065 |
|
|
|
7/14/2005 |
|
Duncan, South Carolina
Manufacturing Building |
|
|
2,781,050 |
|
|
|
194,686 |
|
|
|
2,682,227 |
|
|
|
|
|
|
|
194,686 |
|
|
|
2,682,227 |
|
|
|
2,876,913 |
|
|
|
423,756 |
|
|
|
2,453,158 |
|
|
|
7/14/2005 |
|
Hazelwood, Missouri
Office & Warehouse Building |
|
|
2,360,000 |
|
|
|
763,178 |
|
|
|
2,309,058 |
|
|
|
29,962 |
|
|
|
763,178 |
|
|
|
2,339,020 |
|
|
|
3,102,198 |
|
|
|
339,523 |
|
|
|
2,762,675 |
|
|
|
8/5/2005 |
|
92
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
|
Subsequent to |
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
|
Accumulated |
|
|
Net Real |
|
|
Date |
|
Location of Property |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Acquisition |
|
|
Land |
|
|
Improvements |
|
|
Total (1) |
|
|
Depreciation (2) |
|
|
Estate |
|
|
Acquired |
|
Angola, Indiana
Industrial Building |
|
$ |
584,212 |
|
|
$ |
65,780 |
|
|
$ |
1,074,758 |
|
|
$ |
|
|
|
$ |
65,780 |
|
|
$ |
1,074,758 |
|
|
$ |
1,140,538 |
|
|
$ |
130,045 |
|
|
$ |
1,010,493 |
|
|
|
9/2/2005 |
|
Angola, Indiana
Industrial Building |
|
|
1,168,415 |
|
|
|
131,559 |
|
|
|
1,129,874 |
|
|
|
|
|
|
|
131,559 |
|
|
|
1,129,874 |
|
|
|
1,261,433 |
|
|
|
260,088 |
|
|
|
1,001,345 |
|
|
|
9/2/2005 |
|
Rock Falls, Illinois
Industrial Building |
|
|
311,574 |
|
|
|
35,082 |
|
|
|
1,113,340 |
|
|
|
|
|
|
|
35,082 |
|
|
|
1,113,341 |
|
|
|
1,148,423 |
|
|
|
69,356 |
|
|
|
1,079,067 |
|
|
|
9/2/2005 |
|
Newburyport, Massachusetts
Industrial Building |
|
|
6,684,145 |
|
|
|
628,690 |
|
|
|
6,504,056 |
|
|
|
1,846,895 |
|
|
|
628,690 |
|
|
|
8,350,951 |
|
|
|
8,979,641 |
|
|
|
1,001,587 |
|
|
|
7,978,054 |
|
|
|
10/17/2005 |
|
Clintonville, Wisconsin
Industrial Manufacturing Building |
|
|
3,338,643 |
|
|
|
54,674 |
|
|
|
4,717,090 |
|
|
|
|
|
|
|
54,674 |
|
|
|
4,717,090 |
|
|
|
4,771,764 |
|
|
|
643,190 |
|
|
|
4,128,574 |
|
|
|
10/31/2005 |
|
Maple Heights, Ohio
Industrial Building |
|
|
10,488,260 |
|
|
|
1,608,976 |
|
|
|
10,065,475 |
|
|
|
1,123,464 |
|
|
|
1,608,976 |
|
|
|
11,188,940 |
|
|
|
12,797,916 |
|
|
|
1,610,048 |
|
|
|
11,187,868 |
|
|
|
12/21/2005 |
|
Richmond, Virginia
Industrial Building |
|
|
5,275,000 |
|
|
|
735,820 |
|
|
|
5,335,863 |
|
|
|
36,437 |
|
|
|
735,820 |
|
|
|
5,372,300 |
|
|
|
6,108,120 |
|
|
|
742,177 |
|
|
|
5,365,943 |
|
|
|
12/30/2005 |
|
Toledo, Oho
Industrial Building |
|
|
2,929,073 |
|
|
|
263,068 |
|
|
|
2,811,801 |
|
|
|
39,916 |
|
|
|
263,068 |
|
|
|
2,851,717 |
|
|
|
3,114,785 |
|
|
|
435,452 |
|
|
|
2,679,333 |
|
|
|
12/30/2005 |
|
South Hadley, Massachusetts
Industrial Building |
|
|
2,418,750 |
|
|
|
470,636 |
|
|
|
2,765,376 |
|
|
|
10,000 |
|
|
|
470,636 |
|
|
|
2,775,376 |
|
|
|
3,246,012 |
|
|
|
346,479 |
|
|
|
2,899,533 |
|
|
|
2/15/2006 |
|
Champaign, Illinois
Office Building |
|
|
1,699,941 |
|
|
|
686,979 |
|
|
|
2,035,784 |
|
|
|
10,546 |
|
|
|
686,979 |
|
|
|
2,046,330 |
|
|
|
2,733,309 |
|
|
|
286,905 |
|
|
|
2,446,405 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
3,333,217 |
|
|
|
1,347,017 |
|
|
|
3,991,733 |
|
|
|
|
|
|
|
1,347,017 |
|
|
|
3,991,733 |
|
|
|
5,338,750 |
|
|
|
562,558 |
|
|
|
4,776,192 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
2,083,261 |
|
|
|
841,886 |
|
|
|
2,494,833 |
|
|
|
|
|
|
|
841,886 |
|
|
|
2,494,833 |
|
|
|
3,336,719 |
|
|
|
351,599 |
|
|
|
2,985,120 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
1,905,100 |
|
|
|
769,888 |
|
|
|
2,281,475 |
|
|
|
|
|
|
|
769,888 |
|
|
|
2,281,475 |
|
|
|
3,051,363 |
|
|
|
321,530 |
|
|
|
2,729,833 |
|
|
|
2/21/2006 |
|
Roseville, Minnesota
Office Building |
|
|
18,740,559 |
|
|
|
2,587,757 |
|
|
|
25,290,127 |
|
|
|
|
|
|
|
2,587,757 |
|
|
|
25,290,126 |
|
|
|
27,877,883 |
|
|
|
3,842,042 |
|
|
|
24,035,841 |
|
|
|
2/21/2006 |
|
Burnsville, Minnesota
Office Building |
|
|
11,716,292 |
|
|
|
3,510,711 |
|
|
|
8,746,407 |
|
|
|
|
|
|
|
3,510,711 |
|
|
|
8,746,407 |
|
|
|
12,257,118 |
|
|
|
1,380,881 |
|
|
|
10,876,237 |
|
|
|
5/10/2006 |
|
Menomonee Falls, Wisconsin
Industrial Building |
|
|
6,940,000 |
|
|
|
624,700 |
|
|
|
6,910,616 |
|
|
|
|
|
|
|
624,700 |
|
|
|
6,910,616 |
|
|
|
7,535,316 |
|
|
|
810,716 |
|
|
|
6,724,600 |
|
|
|
6/30/2006 |
|
Baytown, Texas
Office Building |
|
|
2,000,000 |
|
|
|
221,314 |
|
|
|
2,443,469 |
|
|
|
|
|
|
|
221,314 |
|
|
|
2,443,469 |
|
|
|
2,664,783 |
|
|
|
323,500 |
|
|
|
2,341,283 |
|
|
|
7/11/2006 |
|
Sterling Heights, Michigan
Industrial Building |
|
|
|
|
|
|
2,734,887 |
|
|
|
8,606,190 |
|
|
|
12,676 |
|
|
|
2,734,887 |
|
|
|
8,618,866 |
|
|
|
11,353,753 |
|
|
|
944,550 |
|
|
|
10,409,203 |
|
|
|
9/22/2006 |
|
Birmingham, Alabama
Industrial Building |
|
|
|
|
|
|
611,597 |
|
|
|
2,325,761 |
|
|
|
|
|
|
|
611,597 |
|
|
|
2,325,761 |
|
|
|
2,937,358 |
|
|
|
259,784 |
|
|
|
2,677,574 |
|
|
|
9/29/2006 |
|
Montgomery, Alabama
Industrial Building |
|
|
|
|
|
|
221,965 |
|
|
|
844,081 |
|
|
|
|
|
|
|
221,965 |
|
|
|
844,081 |
|
|
|
1,066,046 |
|
|
|
94,283 |
|
|
|
971,764 |
|
|
|
9/29/2006 |
|
93
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
|
Subsequent to |
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
|
Accumulated |
|
|
Net Real |
|
|
Date |
|
Location of Property |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Acquisition |
|
|
Land |
|
|
Improvements |
|
|
Total (1) |
|
|
Depreciation (2) |
|
|
Estate |
|
|
Acquired |
|
Columbia, Missouri
Industrial Building |
|
$ |
|
|
|
$ |
145,988 |
|
|
$ |
555,157 |
|
|
$ |
|
|
|
$ |
145,988 |
|
|
$ |
555,158 |
|
|
$ |
701,146 |
|
|
$ |
62,010 |
|
|
$ |
639,135 |
|
|
|
9/29/2006 |
|
Mason, Ohio
Office Building |
|
|
5,400,000 |
|
|
|
797,274 |
|
|
|
6,258,344 |
|
|
|
47,471 |
|
|
|
797,274 |
|
|
|
6,305,815 |
|
|
|
7,103,089 |
|
|
|
810,732 |
|
|
|
6,292,357 |
|
|
|
1/5/2007 |
|
Raleigh, North Carolina
Industrial Building |
|
|
5,470,120 |
|
|
|
1,605,551 |
|
|
|
5,513,353 |
|
|
|
|
|
|
|
1,605,551 |
|
|
|
5,513,353 |
|
|
|
7,118,904 |
|
|
|
561,261 |
|
|
|
6,557,643 |
|
|
|
2/16/2007 |
|
Tulsa, Oklahoma
Manufacturing Building |
|
|
|
|
|
|
|
|
|
|
14,057,227 |
|
|
|
|
|
|
|
|
|
|
|
14,057,227 |
|
|
|
14,057,227 |
|
|
|
1,619,901 |
|
|
|
12,437,326 |
|
|
|
3/1/2007 |
|
Hialeah, Florida
Industrial Building |
|
|
|
|
|
|
3,562,452 |
|
|
|
6,671,600 |
|
|
|
35,000 |
|
|
|
3,562,452 |
|
|
|
6,706,600 |
|
|
|
10,269,055 |
|
|
|
658,492 |
|
|
|
9,610,563 |
|
|
|
3/9/2007 |
|
Tewksbury, Massachusetts
Industrial Building |
|
|
|
|
|
|
1,394,902 |
|
|
|
8,893,243 |
|
|
|
|
|
|
|
1,394,822 |
|
|
|
8,893,243 |
|
|
|
10,288,065 |
|
|
|
894,631 |
|
|
|
9,393,434 |
|
|
|
5/17/2007 |
|
Mason, Ohio
Retail Building |
|
|
4,825,041 |
|
|
|
1,201,338 |
|
|
|
4,960,987 |
|
|
|
|
|
|
|
1,201,338 |
|
|
|
4,960,987 |
|
|
|
6,162,325 |
|
|
|
450,106 |
|
|
|
5,712,219 |
|
|
|
7/1/2007 |
|
Cicero, New York
Industrial Building |
|
|
4,291,947 |
|
|
|
299,066 |
|
|
|
5,018,628 |
|
|
|
|
|
|
|
299,066 |
|
|
|
5,018,628 |
|
|
|
5,317,694 |
|
|
|
427,155 |
|
|
|
4,890,539 |
|
|
|
9/6/2007 |
|
Grand Rapids, Michigan
Office Building |
|
|
9,225,000 |
|
|
|
1,629,270 |
|
|
|
10,500,066 |
|
|
|
|
|
|
|
1,629,270 |
|
|
|
10,500,066 |
|
|
|
12,129,336 |
|
|
|
950,445 |
|
|
|
11,178,891 |
|
|
|
9/28/2007 |
|
Bollingbrook, Illinois
Industrial Building |
|
|
4,968,750 |
|
|
|
1,271,543 |
|
|
|
5,003,124 |
|
|
|
|
|
|
|
1,271,543 |
|
|
|
5,003,124 |
|
|
|
6,274,667 |
|
|
|
445,792 |
|
|
|
5,828,875 |
|
|
|
9/28/2007 |
|
Decatur, Georgia
Office Building |
|
|
|
|
|
|
784,188 |
|
|
|
3,245,281 |
|
|
|
|
|
|
|
784,188 |
|
|
|
3,245,281 |
|
|
|
4,029,469 |
|
|
|
266,885 |
|
|
|
3,762,585 |
|
|
|
12/13/2007 |
|
Decatur, Georgia
Office Building |
|
|
1,117,698 |
|
|
|
204,807 |
|
|
|
847,573 |
|
|
|
|
|
|
|
204,807 |
|
|
|
847,573 |
|
|
|
1,052,380 |
|
|
|
69,703 |
|
|
|
982,677 |
|
|
|
12/13/2007 |
|
Decatur, Georgia
Office Building |
|
|
1,403,002 |
|
|
|
257,086 |
|
|
|
1,063,925 |
|
|
|
|
|
|
|
257,086 |
|
|
|
1,063,925 |
|
|
|
1,321,011 |
|
|
|
87,495 |
|
|
|
1,233,516 |
|
|
|
12/13/2007 |
|
Lawrenceville, Georgia
Office Building |
|
|
3,704,723 |
|
|
|
678,854 |
|
|
|
2,809,365 |
|
|
|
|
|
|
|
678,854 |
|
|
|
2,809,365 |
|
|
|
3,488,219 |
|
|
|
231,036 |
|
|
|
3,257,183 |
|
|
|
12/13/2007 |
|
Snellville, Georgia
Office Building |
|
|
961,622 |
|
|
|
176,208 |
|
|
|
729,217 |
|
|
|
|
|
|
|
176,208 |
|
|
|
729,217 |
|
|
|
905,425 |
|
|
|
59,969 |
|
|
|
845,456 |
|
|
|
12/13/2007 |
|
Covington, Georgia
Office Building |
|
|
1,265,292 |
|
|
|
231,852 |
|
|
|
959,496 |
|
|
|
|
|
|
|
231,852 |
|
|
|
959,496 |
|
|
|
1,191,348 |
|
|
|
78,907 |
|
|
|
1,112,440 |
|
|
|
12/13/2007 |
|
Cumming, Georgia
Office Building |
|
|
4,028,089 |
|
|
|
738,107 |
|
|
|
3,054,580 |
|
|
|
|
|
|
|
738,107 |
|
|
|
3,054,580 |
|
|
|
3,792,687 |
|
|
|
251,202 |
|
|
|
3,541,484 |
|
|
|
12/13/2007 |
|
Conyers, Georgia
Office Building |
|
|
1,619,574 |
|
|
|
296,771 |
|
|
|
1,228,155 |
|
|
|
|
|
|
|
296,771 |
|
|
|
1,228,155 |
|
|
|
1,524,926 |
|
|
|
101,001 |
|
|
|
1,423,925 |
|
|
|
12/13/2007 |
|
Reading, Pennsylvania
Industrial Building |
|
|
5,257,500 |
|
|
|
490,646 |
|
|
|
6,202,376 |
|
|
|
|
|
|
|
490,646 |
|
|
|
6,202,376 |
|
|
|
6,693,022 |
|
|
|
466,134 |
|
|
|
6,226,888 |
|
|
|
1/29/2008 |
|
Fridley, Minnesota
Office Building |
|
|
|
|
|
|
1,354,233 |
|
|
|
8,073,526 |
|
|
|
|
|
|
|
1,354,233 |
|
|
|
8,073,526 |
|
|
|
9,427,759 |
|
|
|
892,652 |
|
|
|
8,535,107 |
|
|
|
2/26/2008 |
|
Concord Township, Ohio
Industrial Building |
|
|
|
|
|
|
1,796,467 |
|
|
|
11,154,123 |
|
|
|
|
|
|
|
1,786,212 |
|
|
|
11,154,123 |
|
|
|
12,940,335 |
|
|
|
846,077 |
|
|
|
12,094,258 |
|
|
|
3/31/2008 |
|
94
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
|
Subsequent to |
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
|
Accumulated |
|
|
Net Real |
|
|
Date |
|
Location of Property |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Acquisition |
|
|
Land |
|
|
Improvements |
|
|
Total (1) |
|
|
Depreciation (2) |
|
|
Estate |
|
|
Acquired |
|
Pineville, North Carolina
Industrial Building |
|
$ |
2,145,000 |
|
|
$ |
669,025 |
|
|
$ |
3,028,320 |
|
|
$ |
6,000 |
|
|
$ |
669,025 |
|
|
$ |
3,034,322 |
|
|
$ |
3,703,345 |
|
|
$ |
213,759 |
|
|
$ |
3,489,586 |
|
|
|
4/30/2008 |
|
Marietta, Ohio
Industrial Building |
|
|
4,500,000 |
|
|
|
829,014 |
|
|
|
6,607,265 |
|
|
|
|
|
|
|
829,014 |
|
|
|
6,607,265 |
|
|
|
7,436,279 |
|
|
|
400,169 |
|
|
|
7,036,110 |
|
|
|
8/29/2008 |
|
Chalfont, Pennsylvania
Industrial Building |
|
|
6,162,508 |
|
|
|
1,249,415 |
|
|
|
6,419,607 |
|
|
|
|
|
|
|
1,249,415 |
|
|
|
6,419,607 |
|
|
|
7,669,022 |
|
|
|
464,665 |
|
|
|
7,204,357 |
|
|
|
8/29/2008 |
|
Orange City, Iowa
Office and Warehouse Building |
|
|
10,795,003 |
|
|
|
132,100 |
|
|
|
9,382,794 |
|
|
|
|
|
|
|
132,100 |
|
|
|
9,382,794 |
|
|
|
9,514,894 |
|
|
|
22,296 |
|
|
|
9,492,598 |
|
|
|
12/7/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
260,869,463 |
|
|
$ |
55,168,142 |
|
|
$ |
339,460,840 |
|
|
$ |
6,398,293 |
|
|
$ |
55,157,807 |
|
|
$ |
345,859,133 |
|
|
$ |
401,016,940 |
|
|
$ |
43,659,456 |
|
|
$ |
357,357,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate cost for land and building improvements for
federal income tax purposes is the same as the total gross cost of land and
building improvements. |
|
(2) |
|
Depreciable life of all buildings is 39 years. Depreciable life
of all improvements is the shorter of the useful life of the assets or the life
of the respective leases on each building, which range from 5-20 years. |
95
The following table reconciles the change in the balance of real estate during the years ended
December 31, 2010, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
390,753,892 |
|
|
$ |
390,562,138 |
|
|
$ |
340,500,406 |
|
Acquisitions during period |
|
|
8,900,830 |
|
|
|
|
|
|
|
47,874,020 |
|
Improvements or other
additions |
|
|
1,362,218 |
|
|
|
1,139,711 |
|
|
|
2,187,712 |
|
Dispositions during period |
|
|
|
|
|
|
(947,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
401,016,940 |
|
|
$ |
390,753,892 |
|
|
$ |
390,562,138 |
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the change in the balance of accumulated depreciation during the
years ended December 31, 2010, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
34,111,952 |
|
|
$ |
24,757,576 |
|
|
$ |
15,738,634 |
|
Additions during period |
|
|
9,547,504 |
|
|
|
9,445,768 |
|
|
|
9,018,942 |
|
Dispositions during period |
|
|
|
|
|
|
(91,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
43,659,456 |
|
|
$ |
34,111,952 |
|
|
$ |
24,757,576 |
|
|
|
|
|
|
|
|
|
|
|
96
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2010
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Subject to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent |
|
Location and Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Amount of |
|
|
Carrying Amount of |
|
|
Principal or |
|
of Real Estate |
|
Type of Loan |
|
Interest Rate |
|
Final Maturity Date |
|
Periodic Payment Term |
|
Prior Lien |
|
|
Mortgage |
|
|
Mortgage(1) |
|
|
Interest |
|
McLean, Virginia; Office Property |
|
First Mortgage |
|
1 month LIBOR +6%; Floor of 7.5%, Ceiling of 10% |
|
5/30/2017 |
|
Monthly payment based upon a 24 year amortization term, which changes based on LIBOR,
with a floor of 7.5% and a ceiling of 10%. Payments are interest only until June 2011.
Balloon payment at maturity is $8,221,344. |
|
|
|
|
|
$ |
10,000,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,000,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage loan was repaid in full on July 22, 2010. |
The following table reconciles the change in the balance of mortgage loans on real estate
during the years ended December 31, 2010, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
Collections of principal |
|
|
(10,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
|
|
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
97
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the chief executive officer and chief
financial officer, concluded that our disclosure controls and procedures were effective as of
December 31, 2010 in providing a reasonable level of assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in applicable SEC rules and forms,
including providing a reasonable level of assurance that information required to be disclosed by us
in such reports is accumulated and communicated to our management, including our chief executive
officer and our chief financial officer, as appropriate to allow timely decisions regarding
required disclosure. However, in evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated can provide
only reasonable assurance of necessarily achieving the desired control objectives, and management
was required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
b) Managements Annual Report on Internal Control Over Financial Reporting
Refer to Managements Report on Internal Controls over Financial Reporting located in Item 8 of
this Form 10-K.
c) Attestation Report of the Registered Public Accounting Firm
Refer to the Report of Independent Registered Public Accounting Firm located in Item 8 of this Form
10-K.
d) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarter ended December 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
98
PART III
We will file a definitive Proxy Statement for our 2011 Annual Meeting of Stockholders (the 2011
Proxy Statement) with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after December 31, 2010. Accordingly, certain information required by Part III
has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2011 Proxy
Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from our 2011 Proxy
Statement under the captions Election of Directors, Section 16(a) Beneficial Ownership
Reporting Compliance and Code of Ethics.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from our 2011Proxy
Statement under the captions Executive Compensation and Director Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by Item 12 is hereby incorporated by reference from our 2011 Proxy
Statement under the caption Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from our 2011 Proxy
Statement under the captions Transactions with Related Persons and Information Regarding the
Board of Directors and Corporate Governance.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from our 2011 Proxy
Statement under the captions Independent Registered Public Accounting Firm Fees and Pre-Approval
Policy and Procedures.
99
PART IV
Item 15. Exhibits and Financial Statement Schedules
a. DOCUMENTS FILED AS PART OF THIS REPORT
1. The following financial statements are filed herewith:
Report of Management on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders Equity for the years ended December 31, 2010, 2009 and
2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
Notes to Financial Statements
2. Financial statement schedules
Schedule III Real Estate and Accumulated Depreciation is filed herewith.
Schedule IV Mortgage Loans on Real Estate is filed herewith.
All other schedules are omitted because they are not applicable, or because the required
information is included in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to
exhibits previously filed with the Securities and Exchange Commission:
100
Exhibit Index
|
|
|
|
|
Exhibit Number |
|
Exhibit Description |
|
3.1 |
|
|
Articles of Amendment and Restatement to Articles of
Incorporation, incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-11 (File No.
333-106024), filed June 11, 2003. |
|
|
|
|
|
|
3.1.1 |
|
|
Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.75% Series A Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.3
of Form 8-A12G (File No. 000-50363), filed January 19,
2006. |
|
|
|
|
|
|
3.1.2 |
|
|
Articles of Amendment to Articles Supplementary
Establishing and Fixing the Rights and Preferences of 7.75%
Series A Cumulative Redeemable Preferred Stock,
incorporated by reference to Exhibit 99.1 of Form 8-K,
filed on April 13, 2006. |
|
|
|
|
|
|
3.1.3 |
|
|
Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.5% Series B Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.4
of Form 8-A12B (File No. 000-50363), filed October 19,
2006. |
|
|
|
|
|
|
3.1.4 |
|
|
Articles of Amendment to Articles of Amendment and
Restatement to Articles of Incorporation, incorporated by
reference to Exhibit 3.1.1 to the Quarterly Report on Form
10-Q, filed July 30, 2009. |
|
|
|
|
|
|
3.1.5 |
|
|
Articles Supplementary, incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed March
19, 2010. |
|
|
|
|
|
|
3.1.6 |
|
|
Articles Supplementary, incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K, filed
September 9, 2010. |
|
|
|
|
|
|
3.1.7 |
|
|
Articles Supplementary, incorporated by reference to
Exhibit 3.2 of the Current Report on Form 8-K, filed
September 9, 2010. |
|
|
|
|
|
|
3.2 |
|
|
Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024),
filed June 11, 2003. |
|
|
|
|
|
|
3.2.1 |
|
|
First Amendment to Bylaws, incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed July
10, 2007. |
|
|
|
|
|
|
4.1 |
|
|
Form of Certificate for Common Stock of Gladstone
Commercial Corporation, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-106024), filed August 8, 2003. |
|
|
|
|
|
|
4.2 |
|
|
Form of Certificate for 7.75% Series A Cumulative
Redeemable Preferred Stock of Gladstone Commercial
Corporation, incorporated by reference to Exhibit 4.1 of
Form 8-A12G (File No. 000-50363), filed January 19, 2006. |
|
|
|
|
|
|
4.3 |
|
|
Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A12B
(File No. 001-33097), filed October 19, 2006. |
|
|
|
|
|
|
10.1 |
|
|
Real Property Purchase and Sale Agreement (Canada) between
3058348 Nova Scotia Company, 3058349 Nova Scotia Company
and Gladstone Commercial Limited Partnership, dated August
11, 2004, incorporated by reference to Exhibit 10.4 to the
Form 10-K (File No. 000-50363), filed March 8, 2005 |
101
|
|
|
|
|
Exhibit Number |
|
Exhibit Description |
|
10.2 |
|
|
Real Property Purchase and Sale Agreement (United States)
between PBC Pocono, L.L.C., PBC Norfolk, L.L.C. and
Gladstone Commercial Limited Partnership, dated August 11,
2004, incorporated by reference to Exhibit 10.5 to the Form
10-K (File No. 000-50363), filed March 8, 2005. |
|
|
|
|
|
|
10.3 |
|
|
Promissory Note between Key Bank National Association and
CMI04 Canton NC LLC, dated March 14, 2005, incorporated by
reference to Exhibit 10.1 of the Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 (File No.
000-50363), filed May 4, 2005. |
|
|
|
|
|
|
10.4 |
|
|
Loan Agreement between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of
August 25, 2005, incorporated by reference to Exhibit 10.4
of the Current Report on Form 8-K (File No. 000-50363),
filed August 29, 2005. |
|
|
|
|
|
|
10.5 |
|
|
Promissory Note between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of
August 25, 2005, incorporated by reference to Exhibit 10.5
of the Current Report on Form 8-K (File No. 000-50363),
filed August 29, 2005. |
|
|
|
|
|
|
10.6 |
|
|
Mortgage and Security Agreement between 260 Springside
Drive, Akron OH LLC and JP Morgan Chase Bank, N.A., dated
as of September 12, 2005, incorporated by reference to
Exhibit 10.6 of the Current Report on Form 8-K (File No.
000-50363), filed September 13, 2005. |
|
|
|
|
|
|
10.7 |
|
|
Fixed Rate Note between 260 Springside Drive, Akron OH LLC
and JP Morgan Chase Bank, N.A., dated as of September 12,
2005, incorporated by reference to Exhibit 10.7 of the
Current Report on Form 8-K (File No. 000-50363), filed
September 13, 2005. |
|
|
|
|
|
|
10.8 |
|
|
Loan Agreement between PZ05 Maple Heights OH LLC, WMI05
Columbus OH LLC, and OB Crenshaw GCC, LP, and Countrywide
Commercial Real Estate Finance, Inc., dated as of December
21, 2005, incorporated by reference to Exhibit 10.8 of the
Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005. |
|
|
|
|
|
|
10.9 |
|
|
Promissory Note between PZ05 Maple Heights OH LLC, WMI05
Columbus OH LLC, and OB Crenshaw GCC, LP, and Countrywide
Commercial Real Estate Finance, Inc., dated as of December
21, 2005, incorporated by reference to Exhibit 10.9 of the
Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005. |
|
|
|
|
|
|
10.10 |
|
|
First Amended and Restated Agreement of Limited Partnership
of Gladstone Commercial Limited Partnership, incorporated
by reference to Exhibit 10.1 of the Current Report on Form
8-K, filed February 1, 2006. |
|
|
|
|
|
|
10.11 |
|
|
Mortgage and Absolute Assignment of Rents and Leases and
Security Agreement (and Fixture Filing) between Stonewater
Dox Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference to
Exhibit 10.20 of the Current Report on Form 8-K (File No.
000-50363), filed February 24, 2006. |
|
|
|
|
|
|
10.12 |
|
|
Assumption Agreement between Stonewater Dox Funding LLC,
Stonewater Funding, LLC, ACI06 Champaign IL LLC, Gladstone
Commercial Corporation and LaSalle Bank National
Association, dated as of February 21, 2006, incorporated by
reference to Exhibit 10.21 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006. |
|
|
|
|
|
|
10.13 |
|
|
Promissory Note Secured by Mortgage between Stonewater Dox
Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference
to Exhibit 10.22 of the Current Report on Form 8-K (File
No. 000-50363), filed February 24, 2006. |
102
|
|
|
|
|
Exhibit Number |
|
Exhibit Description |
|
10.14 |
|
|
Purchase Agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of
November 23, 2005, as the same has been modified by that
certain Amendment to Purchase Agreement dated December 22,
2005, that certain Amendment to Purchase Agreement dated
December 30, 2005, that certain Amendment to Purchase
Agreement dated January 6, 2006, that certain Amendment to
Purchase Agreement dated January 13, 2006, that certain
Amendment to Purchase Agreement dated January 17, 2006 and
that certain Amendment to Purchase Agreement dated January
20, 2006., incorporated by reference to Exhibit 10.23 of
the Current Report on Form 8-K (File No. 000-50363), filed
February 24, 2006. |
|
|
|
|
|
|
10.15 |
|
|
Mortgage, Assignment of Rents and Security Agreement
between Stonewater Funding LLC and Greenwich Capital
Financial Products, Inc. dated as of May 12, 2004,
incorporated by reference to Exhibit 10.24 of the Current
Report on Form 8-K (File No. 000-50363), filed February 24,
2006. |
|
|
|
|
|
|
10.16 |
|
|
Loan Assumption Agreement between Stonewater UIS Funding
LLC, Stonewater Funding, LLC, and UC06 Roseville MN LLC,
Gladstone Commercial Corporation and LaSalle Bank National
Association, dated as of February 21, 2006, incorporated by
reference to Exhibit 10.25 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006. |
|
|
|
|
|
|
10.17 |
|
|
Promissory Note between Stonewater UIS Funding LLC and
Greenwich Capital Financial Products, Inc. dated as of May
12, 2004, incorporated by reference to Exhibit 10.26 of the
Current Report on Form 8-K (File No. 000-50363), filed
February 24, 2006. |
|
|
|
|
|
|
10.18 |
|
|
Purchase Agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of
November 23, 2005, as the same has been modified by that
certain Amendment to Purchase Agreement dated December 22,
2005, that certain Amendment to Purchase Agreement dated
December 30, 2005, that certain Amendment to Purchase
Agreement dated January 6, 2006, that certain Amendment to
Purchase Agreement dated January 13, 2006, that certain
Amendment to Purchase Agreement dated January 17, 2006 and
that certain Amendment to Purchase Agreement dated January
20, 2006, incorporated by reference to Exhibit 10.27 of the
Current Report on Form 8-K (File No. 000-50363), filed
February 24, 2006. |
|
|
|
|
|
|
10.19 |
|
|
Loan Agreement between IXIS Real Estate Capital Inc. and
2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI
LLC and MSI05-3 LLC, dated as of April 27, 2006,
incorporated by reference to Exhibit 10.29 of the Quarterly
Report on Form 10-Q (File No. 000-50363), filed May 2,
2006. |
|
|
|
|
|
|
10.20 |
|
|
Promissory Note between IXIS Real Estate Capital Inc. and
2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI
LLC and MSI05-3 LLC, dated as of April 27, 2006,
incorporated by reference to Exhibit 10.30 of the Quarterly
Report on Form 10-Q (File No. 000-50363), filed May 2,
2006. |
|
|
|
|
|
|
10.21 |
|
|
Custodial Service Agreement and Fee Schedule between Branch
Banking and Trust Company of Virginia, and Gladstone
Commercial Corporation, dated as of May 1, 2006,
incorporated by reference to Exhibit 10.33 of the Quarterly
Report on Form 10-Q (File No. 000-50363), filed August 8,
2006. |
|
|
|
|
|
|
10.22 |
|
|
Gladstone Commercial Limited Partnership Schedule 4.2(a)(2)
to First Amended and Restated Agreement of Limited
Partnership Designation of 7.50% Series B Cumulative
Redeemable Preferred Units, incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K, filed
October 25, 2006. |
103
|
|
|
|
|
Exhibit Number |
|
Exhibit Description |
|
10.23 |
|
|
Deed of Trust, Assignment of Leases and Rents and Security
Agreement between First Park Ten COCO San Antonio, L.P. and
CIBC Inc., dated as of November 22, 2006, incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 001-33097), filed November 28, 2006. |
|
|
|
|
|
|
10.24 |
|
|
Deed of Trust, Assignment of Leases and Rents and Security
Agreement between SLEE Grand Prairie, L.P. and CIBC Inc.,
dated as of November 22, 2006, incorporated by reference to
Exhibit 10.2 of the Current Report on Form 8-K (File No.
001-33097), filed November 28, 2006. |
|
|
|
|
|
|
10.25 |
|
|
Deed of Trust, Assignment of Leases and Rents and Security
Agreement between OB Midway NC Gladstone Commercial LLC,
and CIBC Inc., dated as of November 22, 2006, incorporated
by reference to Exhibit 10.3 of the Current Report on Form
8-K (File No. 001-33097), filed November 28, 2006. |
|
|
|
|
|
|
10.26 |
|
|
Promissory Note First Park Ten COCO San Antonio, L.P., SLEE
Grand Prairie, L.P. and OB Midway NC Gladstone Commercial
LLC and CIBC Inc., dated as of November 22, 2006,
incorporated by reference to Exhibit 10.4 of the Current
Report on Form 8-K (File No. 001-33097), filed November 28,
2006. |
|
|
|
|
|
|
10.27 |
|
|
Mortgage, Assignment of Leases and Rents and Security
Agreement between HMBF05 Newburyport MA LLC and CIBC Inc.,
dated as of December 22, 2006, incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K (File No.
001-33097), filed December 28, 2006. |
|
|
|
|
|
|
10.28 |
|
|
Open-end Mortgage, Assignment of Leases and Rents and
Security Agreement between SVMMC05 Toledo OH LLC and CIBC
Inc., dated as of December 22, 2006, incorporated by
reference to Exhibit 10.2 of the Current Report on Form 8-K
(File No. 001-33097), filed December 28, 2006. |
|
|
|
|
|
|
10.29 |
|
|
Mortgage, Assignment of Leases and Rents and Security
Agreement between TCI06 Burnsville MN LLC and CIBC Inc.,
dated as of December 22, 2006, incorporated by reference to
Exhibit 10.3 of the Current Report on Form 8-K (File No.
001-33097), filed December 28, 2006. |
|
|
|
|
|
|
10.30 |
|
|
Promissory Note between HMBF05 Newburyport MA LLC, SVMMC05
Toledo OH LLC and TCI06 Burnsville MN LLC and CIBC Inc.,
dated as of December 22, 2006, incorporated by reference to
Exhibit 10.4 of the Current Report on Form 8-K (File No.
001-33097), filed December 28, 2006. |
|
|
|
|
|
|
10.31 |
|
|
Amended and Restated Investment Advisory Agreement between
Gladstone Commercial Corporation and Gladstone Management
Corporation, dated January 1, 2007 incorporated by
reference to Exhibit 99.1 of the Current Report on Form 8-K
(File No. 001-33097), filed January 3, 2007 (renewed on
July 8, 2009). |
|
|
|
|
|
|
10.32 |
|
|
Administration Agreement between Gladstone Commercial
Corporation and Gladstone Administration, LLC, dated
January 1, 2007 incorporated by reference to Exhibit 99.2
of the Current Report on Form 8-K (File No. 001-33097),
filed January 3, 2007 (renewed on July 8, 2009). |
|
|
|
|
|
|
10.33 |
|
|
Open Market Sale Agreement by and among Gladstone
Commercial Corporation, Gladstone Commercial Limited
Partnership and Jefferies & Company, Inc., incorporated by
reference to Exhibit 1.1 of the Form 8-K (File No.
001-33097), filed November 4, 2009. |
104
|
|
|
|
|
Exhibit Number |
|
Exhibit Description |
|
10.34 |
|
|
Amendment to First Amended and Restated Agreement of
Limited Partnership of Gladstone Commercial Limited
Partnership, incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K, filed April 29, 2010. |
|
|
|
|
|
|
10.35 |
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Gladstone Commercial Limited Partnership Schedule 4.2(a)(3)
to First Amended and Restated Agreement of Limited
Partnership; Designation of Senior Common Units,
incorporated by reference to Exhibit 10.2 of the Current
Report on Form 8-K, filed April 29, 2010. |
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10.36 |
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Amended and Restated Dealer Manager Agreement, dated
December 22, 2009, by and between Gladstone Commercial
Corporation and Halcyon Capital Markets, LLC, incorporated
by reference to Exhibit 10.39 of the Annual Report on Form
10-K (File No. 001-33097), filed on February 24, 2010. |
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10.37 |
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Amended and Restated Dealer Manager Agreement, effective as
of December 22, 2009, by and between Gladstone Commercial
Corporation and Halcyon Capital Markets, LLC, incorporated
by reference to Exhibit 10.40 of the Annual Report on Form
10-K (File No. 001-33097), filed on February 24, 2010. |
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10.38 |
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Credit Agreement, dated as of December 28, 2010, by and
among Gladstone Commercial Limited Partnership, Gladstone
Commercial Corporation, each of the financial institutions
initially a signatory thereto together with their
successors and assignees under Section 12.6 thereof and
Capital One, N.A., incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K, filed December 30,
2010. |
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11 |
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Computation of Per Share Earnings from Operations (included
in the notes to the audited financial statements contained
in this Report. |
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12 |
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Statements re: computation of ratios (included in Selected
Financial Data contained in this Form 10-K). |
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14 |
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Gladstone Commercial Corporation Code of Business Conduct
and Ethics, dated October 11, 2005, incorporated by
reference to Exhibit 14.1 to Current Report on Form 8-K
(File No. 000-50363), filed October 12, 2005. |
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31.1 |
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Certification of Chief Executive Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith). |
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31.2 |
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Certification of Chief Financial Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith). |
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32.1 |
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Certification of Chief Executive Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith). |
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32.2 |
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Certification of Chief Financial Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith). |
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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Gladstone Commercial Corporation
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Date: March 8, 2011 |
By: |
/s/ Danielle Jones
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Danielle Jones
Chief Financial Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacity and on the dates
indicated.
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Date: March 8, 2011
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By:
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/s/ David Gladstone |
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David Gladstone
Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer) |
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Date: March 8, 2011
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By:
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/s/ Terry Lee Brubaker |
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Terry Lee Brubaker
Vice Chairman, Chief Operating Officer and Director |
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Date: March 8, 2011
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By:
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/s/ George Stelljes III |
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George Stelljes III
President, Chief Investment Officer and Director |
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Date: March 8, 2011
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By:
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/s/ Danielle Jones |
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Danielle Jones
Chief Financial Officer
(principal financial and accounting officer) |
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Date: March 8, 2011
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By:
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/s/ David A.R. Dullum |
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David A.R. Dullum
Director |
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Date: March 8, 2011
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By:
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/s/ Anthony W. Parker |
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Anthony W. Parker
Director |
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Date: March 8, 2011
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By:
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/s/ Michela A. English |
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Michela A. English
Director |
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106
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Date: March 8, 2011
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By:
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/s/ Paul Adelgren |
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Paul Adelgren
Director |
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Date: March 8, 2011
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By:
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/s/ John Outland |
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John Outland
Director |
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Date: March 8, 2011
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By:
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/s/ Gerard Mead |
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Gerard Mead
Director |
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Date: March 8, 2011
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By:
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/s/ John Reilly |
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John Reilly
Director |
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107