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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 |
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 0-50363
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)
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Securities registered pursuant to Section 12(b) of the Act: |
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Common Stock, par value $0.001 per share
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NASDAQ Global Market |
7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share
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NASDAQ Global Market |
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.001 per share
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NASDAQ Global Market |
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(Title of Each Class)
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(Name of exchange on which registered) |
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 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
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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,
2008, based on the closing price on that date of $17.33 on the Nasdaq Global Select Market, was
$138,123,098. For the purposes of calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates.
The number of shares of the registrants Common Stock, $0.001 par value, outstanding as of February
20, 2009 was 8,563,264.
Documents Incorporated by Reference: Portions of the registrants Proxy Statement relating to the
Registrants 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
GLADSTONE COMMERCIAL CORPORATION
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2008
TABLE OF CONTENTS
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PAGE |
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PART I |
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3 |
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18 |
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30 |
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31 |
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33 |
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33 |
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34 |
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35 |
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37 |
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53 |
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55 |
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88 |
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88 |
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88 |
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89 |
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89 |
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89 |
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89 |
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89 |
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90 |
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2
Forward-Looking Statements
All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933( the Securities Act),
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). These statements may relate to, among other things, future events or our future performance
or financial condition. In some cases, you can identify forward-looking statements by terminology
such as may, might, believe, will, provided, anticipate, future, could, growth,
plan, intend, expect, should, would, if, seek, possible, potential, likely or
the negative of such terms or comparable terminology. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others: (1) further adverse changes in the economy and the capital
markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee
Brubaker, or George Stelljes III; (4) changes in our business strategy; (5) availability, terms and
deployment of capital, including the ability to maintain and borrow under our existing line of
credit, arrange for long-term mortgages on our properties, secure one or more additional long-term
credit facilities, and to raise equity capital; (6) changes in our industry, interest rates,
exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those
factors described in the Risk Factors section of this Form 10-K. We caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of the date made. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, after the date of this Form 10-K.
Item 1. Business
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 and hold one
mortgage loan.
We conduct substantially all of our activities, including the ownership of all of our properties,
through Gladstone Commercial Limited Partnership, a Delaware limited partnership that 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 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 Lending, LLC, which we refer to as
Gladstone Lending. Gladstone Lending is a Delaware limited liability company that was formed to
hold all of our real estate mortgage loans.
3
Significant Recent Developments
Investment Activities: During the year ended December 31, 2008, we acquired six properties totaling
approximately 756,000 square feet, for a total gross investment of approximately $53.6 million, and
made capital improvements to our properties located in Newburyport, Massachusetts; Arlington, Texas
and Duncan, South Carolina for approximately $2.2 million, resulting in a total investment of
approximately $55.8 million. Of the total investment, $49.3 million was funded under our line of
credit and the remaining $6.5 million was funded under a long-term note payable with GE Commercial
Mortgage Financial Corporation, or GE, assumed in connection with an acquisition.
Financing Activities: During the year ended December 31, 2008, we had net borrowings under our line
of credit of approximately $7.1 million with approximately $11.5 million outstanding at December
31, 2008. The proceeds from the line of credit were used to fund the six acquisitions during the
year and to fund capital improvements to our properties. In September 2008, we borrowed
approximately $48.0 million pursuant to a long-term note payable with GE, collateralized by
security interests in 15 of our properties. The proceeds from the long-term note payable were used
to pay down the line of credit.
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 external adviser,
Gladstone Management Corporation, which we refer to as 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.
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 frozen as the CMBS, or collateralized mortgage backed securities, market has
disappeared. With the recent closure of the CMBS market, many banks are not lending on commercial
real estate as they are no longer able to sell these loans to the CMBS market and many banks are
not willing or able to keep these loans on their balance sheets. We are now seeing banks only
willing to issue medium-term mortgages, between 2 to 5 years, at substantially less favorable
terms. As a result, we intend to focus on medium-term mortgages 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 as 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 makes inadvisable investment or management decisions, our operations could be materially
adversely impacted.
4
We anticipate that we will make substantially all of our investments through our Operating
Partnership and Gladstone Lending. Our Operating Partnership and Gladstone 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 will be
redeemable for cash or, at our election, shares of our common stock on a one-for-one basis at any
time. 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, each
classified as a qualified REIT subsidiary, or QRS.
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, this is not 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. We have not in the past and do
not anticipate that in the future we will invest in residential 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. We have not in the past and do not anticipate
in the future we will invest in residential mortgages. 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 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. From time to time, we may sell
mortgage loans that we hold to third parties.
5
Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
We consider underwriting 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, 2008 and
December 31, 2007:
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December 31, 2008 |
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December 31, 2007 |
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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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Automobile |
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$ |
1,166,654 |
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2.9 |
% |
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$ |
1,166,654 |
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3.7 |
% |
Beverage, Food & Tobacco |
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2,079,113 |
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5.2 |
% |
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1,284,210 |
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4.1 |
% |
Buildings and Real Estate |
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2,013,515 |
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5.1 |
% |
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1,226,196 |
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3.9 |
% |
Chemicals, Plastics & Rubber |
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2,452,628 |
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6.2 |
% |
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1,853,217 |
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5.9 |
% |
Containers, Packaging & Glass |
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2,288,909 |
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5.8 |
% |
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2,232,221 |
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7.1 |
% |
Diversified/Conglomerate Manufacturing |
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3,165,747 |
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8.0 |
% |
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2,478,816 |
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7.9 |
% |
Diversified/Conglomerate Services |
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308,105 |
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0.8 |
% |
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308,105 |
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1.0 |
% |
Electronics |
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6,165,789 |
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15.5 |
% |
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5,699,152 |
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18.1 |
% |
Healthcare, Education & Childcare |
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5,719,016 |
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14.4 |
% |
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2,463,808 |
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7.8 |
% |
Home & Office Furnishings |
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529,743 |
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1.3 |
% |
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169,223 |
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0.5 |
% |
Insurance |
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722,866 |
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1.8 |
% |
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722,866 |
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2.3 |
% |
Machinery |
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2,241,752 |
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5.7 |
% |
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1,442,223 |
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4.6 |
% |
Oil & Gas |
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1,152,443 |
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2.9 |
% |
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1,152,443 |
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3.7 |
% |
Personal & Non-Durable Consumer Products |
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1,355,061 |
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3.4 |
% |
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1,166,453 |
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3.7 |
% |
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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1.8 |
% |
Printing & Publishing |
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2,293,103 |
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5.8 |
% |
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2,007,554 |
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6.4 |
% |
Telecommunications |
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5,446,338 |
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13.8 |
% |
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5,521,150 |
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17.5 |
% |
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$ |
39,675,788 |
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100.0 |
% |
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$ |
31,469,297 |
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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, since 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. |
7
Underwriting of the Real Estate and Due Diligence Process
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 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 hard to
define since 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
being 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 equity enhancements. We have not in the past, nor do we intend in the future to
make or invest in sub-prime mortgage loans.
8
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
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.
9
Temporary Investments
Our working capital and other reserves are invested in permitted temporary investments. Our Adviser
evaluates the relative risks and rates of return, our cash needs and other appropriate
considerations when making short-term investments on our behalf. The rates of return of permitted
temporary investments may be less than or greater than what would be obtainable from real estate
investments.
If at any time the character of our investments would cause us to be deemed to be an investment
company for purposes of the Investment Company Act of 1940, which we refer to as the 1940 Act, we
will take the necessary action to ensure that we are not deemed to be an investment company. Our
Adviser will continually review our investment activity and the composition of our portfolio to
ensure that we do not come within the application of the 1940 Act. If we were to be deemed an
investment company under the 1940 Act, it would result in penalties and substantial additional
operating costs.
Qualified REIT Subsidiaries
While we intend to conduct substantially all of our activities through our Operating Partnership
and Gladstone Lending, we may also form one or more wholly-owned qualified REIT subsidiaries, or
QRSs, to purchase properties. These QRSs would be formed for the sole purpose of acquiring a
specific property or properties located in one or more states and would have organizational
documents that are substantially similar in all relevant ways to our organizational documents and
comply with all applicable state securities laws and regulations.
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 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. We expect that in any joint venture the cost of structuring joint
investments would be shared ratably by us and the other participating investors.
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 will result in a more diversified portfolio and maximize potential returns to our
stockholders. We may refinance properties during the term of a loan when we believe it is
advantageous.
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Recourse Financing
Borrowings under our $95.0 million short-term line of credit, which is secured by those properties
pledged to the borrowing base under the line of credit, and our $20.0 million short-term loan are
both recourse financing, which means that our lenders have a claim against our assets. We
currently 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. Our $20.0 million short-term loan
matures in June 2009, and we intend to repay this loan from borrowings under our line of credit.
Our line of credit matures in December 2009, however, we intend to exercise our option to extend
the term for an additional year, through December 2010.
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 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 report, 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. |
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 interest 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.
11
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 1940 Act; |
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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. |
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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 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.
Future Revisions in Policies and Strategies
Our independent directors periodically review our investment policies to evaluate whether they are
in the best interest 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 bylaws or articles of incorporation, 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, Gladstone Management Corporation. 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 an advisory agreement 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 Adviser also has
a wholly-owned subsidiary, Gladstone Administration, LLC, or the Administrator, which employs our
chief financial officer, chief compliance officer, treasurer and their respective staffs.
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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, New Jersey, Pennsylvania, 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, respectively, but it is not intended to include all of the services
which may be provided to us by third parties.
Investment Advisory Agreements
We have been externally managed pursuant to a contractual investment advisory arrangement with our
Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll,
benefits, and general expenses directly. Our initial investment advisory agreement with our
Adviser, which we refer to as the Initial Advisory Agreement, was in place from August 12, 2003
through December 31, 2006. On January 1, 2007, we entered into an amended and restated investment
advisory agreement with our Adviser, which we refer to as the Amended Advisory Agreement, and an
administration agreement with our Administrator, which we refer to as the Administration Agreement.
Under the terms of the Amended 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, 2008, 2007 and 2006, none of these expenses
were incurred by our Adviser or by us directly.
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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. We do not
presently expect that our Adviser will incur any of these fees on our behalf.
Management Services and Fees under the Amended Advisory Agreement
The Amended 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.
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 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). |
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.
Administration Agreement
Under the Administration Agreement, we pay separately for our allocable portion of our
Administrators overhead expenses in performing its obligations including, but not limited to, rent
for employees of our Administrator, and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer, treasurer 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.
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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. |
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 Amended 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 Amended Advisory
Agreement, our Adviser is required to devote sufficient resources to the administration of our
affairs to discharge its obligations under the agreement. The Amended 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 Amended
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 Amended Advisory Agreement to a successor
entity.
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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 Amended 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 20-25 full
time employees of our Adviser or our Administrator will spend substantial time on our matters
during calendar year 2009. 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, 2008, our Adviser and our Administrator collectively had 65 full-time employees.
A breakdown of these employees is summarized by functional area in the table below:
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Executive Management |
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44
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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 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.
Available Information
Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments, if any, to those reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act are available free of charge through our website at www.GladstoneCommercial.com and on
the Security and Exchange Commissions website at www.sec.gov. A request for any of these reports
may also be submitted to us by writing: Corporate Secretary, Gladstone Commercial Corporation, 1521
Westbranch Drive, Suite 200, McLean, VA 22102, or by calling our toll-free investor relations line
at 1-866-366-5745.
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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 common stock price.
The United States is in a recession, and there is substantial uncertainty as to how long it will
last and we do not know when market conditions will stabilize, if adverse conditions will intensify
or the full extent to which the disruptions will affect us. The stress to the global credit
markets has resulted in an extreme tightening of liquidity and while the United States government
is in the process of initiating and implementing plans designed to ease the credit markets, the
credit markets currently remain very constricted. Continued weak economic and credit conditions
could adversely impact the financial condition of one or more of our tenants or borrower and,
therefore, could make a tenant or borrower bankruptcy, and payment default on the related lease or
loan, more likely. As of December 31, 2008, all of our tenants and borrower were paying as agreed,
however, there is no guarantee this will continue. Impaired financial positions and operating
results could affect our ability to access capital under our line of credit, as the maximum amount
we may draw under our line of credit is based on a percentage of the value of properties pledged as
collateral to the banks, which must meet agreed upon eligibility standards. The recession
generally, and the disruptions in the capital markets in particular, have decreased liquidity and
increased our cost of equity capital which has impacted our ability to raise capital and in turn
reduced our volume of new investments. 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 and the price of our common stock.
Risks related to our financing
Our line of credit and term loan each contain 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.
The agreements governing our line of credit and term loan require 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 to asset, 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, 2008, we were in compliance with these covenants. However, our
continued compliance with these covenants depends on many factors, and could be impacted by current
economic conditions, and thus there are no assurances that we will continue to comply with these
covenants. In addition, our lender has the option to obtain updated appraisals for the properties
pledged to the line of credit as borrowing base collateral if the lender believes there has been a
material adverse change to the value of any of the pledged properties. If the aggregate value of
the updated appraisals is lower than the current aggregate value of appraisals, it would lower the
amount of our borrowing base and reduce the amount we could borrow under the line of credit with
that borrowing base. If the line is fully drawn, and the value of the borrowing base is reduced
because of a lower aggregate updated appraisal value, we would be required to repay a portion of
the outstanding line. 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 term loan and thereby have a material adverse impact on our liquidity,
financial condition, results of operations and ability to pay distributions.
18
Our ability to renew our line of credit on terms favorable to us, or at all, and availability to
repay our term loan could adversely impact our liquidity and ability to fund new investments.
Our $95.0 million revolving line of credit matures in December 2009, however, we intend to exercise
our option to extend the term for an additional year through December 2010. At the time of
extension, our lender has the option to obtain updated appraisals for the properties pledged to the
line of credit as borrowing base collateral. If the aggregate value of the updated appraisals is
lower than the current aggregate value of appraisals, it would lower the amount of our borrowing
base and reduce the amount we could borrow under the line of credit with that borrowing base. If
the line is fully drawn at the time of renewal, and the value of the borrowing base is reduced
because of a lower aggregate updated appraisal value, we would be required to repay a portion of
the outstanding line. In addition, our ability to obtain replacement financing in December 2010
could be constrained by current economic conditions affecting the credit markets generally. In the
event that we are not able to renew, extend or refinance the credit facility on favorable terms, or
at all, this could have a material adverse effect on our liquidity and ability to fund new
investments. Our $20.0 million unsecured term loan matures in June 2009, and while we currently
have availability under our line of credit to repay the loan at maturity, there can be no guarantee
that we will have the availability at that time.
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, risks
associated with balloon payments, and risk of loss of our equity upon foreclosure.
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 common stock.
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 frozen in the current economic environment, and we
are now seeing banks only willing to issue medium-term mortgages, between 2 to 5 years, at
substantially less favorable terms. These medium-term mortgages will necessarily become our new
strategy until the market for long-term mortgages returns. To date we have obtained approximately
$255 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.
19
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. We currently have one variable rate
mortgage loan, certain of our leases contain escalations based on market interest rates, and the
interest rates on our existing line of credit and short-term loan are variable. Although we seek to
mitigate this risk by structuring such provisions to contain a minimum interest rate or escalation
rate, as 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 incident 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.
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.
20
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 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.
21
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 freely sublease the property, 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.
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 |
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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.
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.
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, 2008, we owned 65 properties and had 66 tenants in these properties, and our 5
largest tenants accounted for approximately 24.7% 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, 2008, 15.5% of our total rental income was earned
from tenants in the electronic industry, 14.4% of our total rental income was earned from tenants
in the healthcare, education and childcare industry and 13.8% 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 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.
23
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.
Potential liability for environmental matters could adversely affect our financial condition.
Our purchase of industrial and commercial properties subjects us to the risk of liabilities under
federal, state and local environmental laws. Some of these laws could subject us to:
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responsibility and liability for the cost of removal or remediation of
hazardous substances released on our properties, generally without
regard to our knowledge of or responsibility for the presence of the
contaminants; |
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liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances; and |
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potential liability for common law claims by third parties for damages
resulting from environmental contaminants. |
We generally include provisions in our leases making tenants responsible for all environmental
liabilities and for compliance with environmental regulations, and requiring tenants to reimburse
us for damages or costs for which we have been found liable. However, these provisions will not
eliminate our statutory liability or preclude third party claims against us. Even if we were to
have a legal claim against a tenant to enable us to recover any amounts we are required to pay,
there are no assurances that we would be able to collect any money from the tenant. Our costs of
investigation, remediation or removal of hazardous substances may be substantial. In addition, the
presence of hazardous substances on one of our properties, or the failure to properly remediate a
contaminated property, could adversely affect our ability to sell or lease the property or to
borrow using the property as collateral.
We obtain environmental site assessments, or ESAs, on all of our properties at the time of
acquisition. The ESAs are intended to identify potential environmental contamination. The ESAs
include a historical review of the property, a review of certain public records, a preliminary
investigation of the site and surrounding properties, screening for the presence of hazardous
substances and underground storage tanks, and the preparation and issuance of a written report.
The ESAs that we have obtained have not revealed any environmental liability or compliance concerns
that we believe would have a material adverse effect on our business, assets, results of operations
or liquidity, nor are we aware of any such liability. Nevertheless, it is possible that these ESAs
do not reveal all environmental liabilities or that there are material environmental liabilities or
compliance concerns that we are not aware of. Moreover, we cannot assure you that (i) future laws,
ordinances or regulations will not impose material environmental liability, or (ii) the current
environmental condition of a property will not be affected by the condition of properties in the
vicinity of the property (such as the presence of leaking underground storage tanks) or by third
parties unrelated to us.
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.
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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 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 |
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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.
On January 1, 2007, the Amended Advisory Agreement became effective. In addition to providing for
a base management fee based on our stockholders equity, this 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, 2008 and 2007, an unconditional and irrevocable voluntary waiver was issued by our
Adviser for approximately $2.2 million and $2.3 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 our stock price.
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We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
On January 1, 2007, the Amended Advisory Agreement became effective and entitled 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 of being a REIT
We may not qualify as a REIT for federal income tax purposes, which would subject us to federal
income tax on our taxable income at regular corporate rates, thereby reducing the amount of funds
available for paying distributions to our stockholders.
We have historically operated and intend to continue to operate in a manner that will allow us to
qualify as a REIT for federal income tax purposes. Our qualification as a REIT depends on our
ability to meet various requirements set forth in the Internal Revenue Code concerning, among other
things, the ownership of our outstanding common stock, the nature of our assets, the sources of our
income and the amount of our distributions to our stockholders. The REIT qualification requirements
are extremely complex, and interpretations of the federal income tax laws governing qualification
as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so
as to qualify as a REIT. At any time new laws, interpretations or court decisions may change the
federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT.
It is also possible that future economic, market, legal, tax or other considerations may cause our
board of directors to revoke our REIT election, which it may do without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax consequences that will substantially
reduce the funds available for distribution to you because:
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we would not be allowed a deduction for distributions to stockholders
in computing our taxable income, we would be subject to federal income
tax at regular corporate rates and we might need to borrow money or
sell assets in order to pay any such tax; |
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we could be subject to the federal alternative minimum tax and
possibly increased state and local taxes; and |
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unless we are entitled to relief under statutory provisions, we would
be prevented from re-qualifying to be taxed as a REIT for the four
taxable years following the year during which we ceased to qualify. |
In addition, if we fail to qualify as a REIT, all distributions to stockholders would be subject to
tax to the extent of our current and accumulated earnings and profits. If we were taxed as a
regular corporation, corporate distributees might be eligible for the dividends received deduction,
but we would not be required to make distributions to stockholders.
26
We have not sought a ruling from the Internal Revenue Service that we qualify as a REIT, nor do we
intend to do so in the future.
An IRS determination that we do not qualify as a REIT would deprive our stockholders of the tax
benefits of our REIT status only if the IRS determination is upheld in court or otherwise becomes
final. To the extent that we challenge an IRS determination that we do not qualify as a REIT, we
may incur legal expenses that would reduce our funds available for distribution to our
stockholders. As a result of all these factors, our failure to qualify as a REIT could impair our
ability to expand our business and raise capital, and would adversely affect the value of our
common stock.
Failure to make required distributions or to satisfy certain income requirements would subject us
to tax.
In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our
taxable income, other than any net capital gains. To the extent that we satisfy the distribution
requirement but distribute less than 100% of our taxable income, we will be subject to federal
corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible
excise tax on the amount, if any, by which our distributions in any year are less than the sum of:
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85% of our ordinary income for that year; |
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95% of our capital gain net income for that year; and |
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100% of our undistributed taxable income from prior years. |
In addition, each year at least 95% of our gross income must be derived from passive sources in
real estate and securities, and at least 75% of our gross income must be derived from real estate
sources. If we fail to satisfy either of these gross income tests, but nonetheless continue to
qualify as a REIT because we meet certain other requirements, we will incur a tax of up to 100% on
the greater of the excess of 95% of our gross income over the amount of our qualifying income, or
the excess of 75% of our gross income over the amount of our qualifying income.
We intend to pay out our income to our stockholders in a manner intended to satisfy the
distribution requirement applicable to REITs and the foregoing gross income tests and, thus, avoid
corporate income taxes and the 4% excise tax. Differences in timing between the recognition of
income and the related cash receipts or the effect of required debt amortization payments could
require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the
distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular
year. In the future, we may borrow funds to pay distributions to our stockholders and the limited
partners of our Operating Partnership. Any funds that we borrow would subject us to interest rate
and other market risks.
Because we must distribute a substantial portion of our net income to qualify as a REIT, we largely
depend on third-party sources of capital to fund our future capital needs.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable
income each year, excluding capital gains. Because of this distribution requirement, it is not
likely that we will be able to fund a significant portion of our future capital needs, including
property acquisitions, from retained earnings. Therefore, we mostly rely on public and private debt
and equity capital to fund our business. This capital may not be available on favorable terms or
at all. Our access to additional capital is also dependent on the markets perception of our
growth potential and our current and potential future earnings. Moreover, additional debt
financings may substantially increase our leverage. As discussed in Risk related to the economy
above, the current recession has severely decreased liquidity and increased our cost of debt and
equity capital, thus limiting our ability to raise additional capital and to fund new property
acquisitions.
27
Other risks
Recent accounting pronouncements may impact our results of operations.
In December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141 (revised
2007),Business Combinations, or SFAS 141(R), which replaced SFAS No. 141, Business
Combinations, or SFAS 141. SFAS 141(R) significantly changes 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. SFAS 141(R) requires that all expenses related to an
acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition as
had been the previous accounting under SFAS 141. SFAS 141(R) is 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. We expect the expensing of acquisition costs will lower our earnings during
2009 and in future years in which we acquire 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 are 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.
28
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. With the current market volatility, our common stock has
significantly fluctuated. On February 19, 2009, the closing market price of our common stock was
$6.56, which represents a 56% discount to our average stock price of $14.82 during 2008. We cannot
assure investors that the market price of our common 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; |
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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 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.
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.
29
If our Operating Partnership fails to maintain its status as a partnership or other form of
pass-through entity 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 own 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 partnership
for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing
distributions to our Operating Partnership. Such a recharacterization of an underlying property
owner could also threaten our ability to maintain REIT status.
Our potential participation in joint ventures creates additional risk.
We may participate in joint ventures or purchase properties jointly with other unaffiliated
entities. There are additional risks involved in these types of transactions. These risks include
the potential of our joint venture partner becoming bankrupt or our economic or business interests
diverging. These diverging interests could, among other things, expose us to liabilities of the
joint venture in excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of the divided
property.
Item 1B. Unresolved Staff Comments
None.
30
Item 2. Properties
As of December 31, 2008, we owned 65 properties of which the details are outlined in the table
below:
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Total Annualized Rental |
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Total Annualized |
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Total Rental Income for |
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Income for the Year |
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Rental Income per |
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Year Built/ |
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Rentable |
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the Year Ended |
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Ended |
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Occupied Square |
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Year of Lease |
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, 2008 |
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December 31, 2008 (1) |
|
Foot (2) |
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Expiration |
208 South Rogers Lane
(Raleigh NC) |
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1997 |
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12/23/2003 |
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58,926 |
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100 |
% |
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$ |
624,118 |
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$ |
624,118 |
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$ |
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 |
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100 |
% |
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$ |
347,843 |
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$ |
347,843 |
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$ |
6.44 |
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2014 |
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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 |
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100 |
% |
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$ |
1,077,943 |
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|
$ |
1,077,943 |
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$ |
12.85 |
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2009/2015 |
(3) |
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5815 Westpark Drive
(Charlotte, NC) |
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1984/1995 |
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6/30/2004 |
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64,500 |
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100 |
% |
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$ |
984,331 |
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$ |
984,331 |
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$ |
15.26 |
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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 |
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$ |
600,145 |
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$ |
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 |
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100 |
% |
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$ |
905,304 |
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$ |
905,304 |
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$ |
3.12 |
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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 |
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100 |
% |
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$ |
413,447 |
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$ |
413,447 |
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$ |
2.68 |
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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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$ |
751,333 |
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$ |
14.47 |
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2015 |
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3701 E. Virginia Beach Blvd
(Norfolk, VA) |
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1967 |
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10/15/2004 |
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25,797 |
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100 |
% |
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$ |
103,501 |
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$ |
103,501 |
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$ |
4.01 |
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2021 |
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13 Industrial Park Drive
(Mt. Pocono, PA) |
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1995-1999 |
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10/15/2004 |
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223,275 |
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100 |
% |
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$ |
628,904 |
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$ |
628,904 |
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$ |
2.82 |
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2021 |
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6550 First Park Ten Boulevard
(San Antonio, TX) |
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1999 |
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2/10/2005 |
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60,245 |
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100 |
% |
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$ |
769,793 |
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$ |
769,793 |
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$ |
12.78 |
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2014 |
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4630 Journal Street
(Columbus, OH) |
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1995 |
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2/10/2005 |
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39,000 |
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100 |
% |
|
$ |
308,105 |
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$ |
308,105 |
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$ |
7.90 |
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2015 |
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199 Sing Sing Road
(Big Flats, NY) |
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2001 |
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4/15/2005 |
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|
120,000 |
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100 |
% |
|
$ |
644,252 |
|
|
$ |
644,252 |
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$ |
5.37 |
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2013 |
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2525 North Woodlawn Avenue
(Wichita, KS) |
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2000 |
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5/18/2005 |
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69,287 |
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|
100 |
% |
|
$ |
1,109,217 |
|
|
$ |
1,109,217 |
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$ |
16.01 |
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2012 |
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725 & 737 Great Southwest Pkwy
(Arlington, TX) |
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1966 |
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5/26/2005 |
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64,000 |
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100 |
% |
|
$ |
578,163 |
|
|
$ |
578,163 |
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$ |
9.03 |
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2013 |
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4032 Linden Avenue
(Dayton, OH) |
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1956 |
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|
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6/30/2005 |
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|
|
59,894 |
|
|
|
100 |
% |
|
$ |
268,042 |
|
|
$ |
268,042 |
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$ |
4.48 |
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2018 |
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81 Corbett Way
(Eatontown, NJ) |
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1991 |
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7/7/2005 |
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|
|
30,268 |
|
|
|
100 |
% |
|
$ |
536,324 |
|
|
$ |
536,324 |
|
|
$ |
17.72 |
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2011 |
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17 & 20 Veronica Avenue
(Franklin Township, NJ) |
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1978 |
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7/11/2005 |
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183,000 |
|
|
|
100 |
% |
|
$ |
970,158 |
|
|
$ |
970,158 |
|
|
$ |
5.30 |
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2020 |
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150 & 170 Ridgeview Center Drive
(Duncan, SC) |
|
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1984/2001/2007 |
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7/14/2005 |
|
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|
222,670 |
|
|
|
100 |
% |
|
$ |
1,539,286 |
|
|
$ |
1,539,286 |
|
|
$ |
6.91 |
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2020 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 & 170 Ridgeview Center Drive
(Duncan, SC) |
|
|
1984/2001/2007 |
|
|
|
7/14/2005 |
|
|
|
55,350 |
|
|
|
100 |
% |
|
$ |
382,627 |
|
|
$ |
382,627 |
|
|
$ |
6.91 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5656 Campus Parkway
(Hazelwood, MO) |
|
|
1977 |
|
|
|
8/5/2005 |
|
|
|
51,155 |
|
|
|
100 |
% |
|
$ |
289,928 |
|
|
$ |
289,928 |
|
|
$ |
5.67 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914 Wohlert Street
(Angola, IN) |
|
|
1982 |
|
|
|
9/2/2005 |
|
|
|
52,080 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
125,202 |
|
|
$ |
2.40 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 Growth Parkway
(Angola, IN) |
|
|
1998 |
|
|
|
9/2/2005 |
|
|
|
50,000 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
125,202 |
|
|
$ |
2.50 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
802 East 11th Street
(Rock Falls, IL) |
|
|
1988 |
|
|
|
9/2/2005 |
|
|
|
52,000 |
|
|
|
100 |
% |
|
$ |
125,202 |
|
|
$ |
125,202 |
|
|
$ |
2.41 |
|
|
|
2020 |
|
31
Item 2. Properties (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annualized Rental |
|
Total Annualized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental Income for |
|
Income for the Year |
|
Rental Income per |
|
|
|
|
Year Built/ |
|
|
|
|
|
Rentable |
|
|
|
|
|
the Year Ended |
|
Ended |
|
Occupied Square |
|
Year of Lease |
Property |
|
Improvements |
|
Date of Purchase |
|
Square Feet |
|
Occupancy |
|
December 31, 2008 |
|
December 31, 2008 (1) |
|
Foot (2) |
|
Expiration |
2 Opportunity Way
(Newburyport, MA) |
|
|
1994 |
|
|
|
10/17/2005 |
|
|
|
86,308 |
|
|
|
100 |
% |
|
$ |
840,153 |
|
|
$ |
840,153 |
|
|
$ |
9.73 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255 Spring Street
(Clintonville, WI) |
|
|
1992 |
|
|
|
10/31/2005 |
|
|
|
291,142 |
|
|
|
100 |
% |
|
$ |
575,006 |
|
|
$ |
575,006 |
|
|
$ |
1.98 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5700 Lee Road
(Maple Heights, OH) |
|
|
1974 |
|
|
|
12/21/2005 |
|
|
|
347,218 |
|
|
|
100 |
% |
|
$ |
1,152,443 |
|
|
$ |
1,152,443 |
|
|
$ |
3.32 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7545 Midlothian Turnpike
(Richmond, VA) |
|
|
1972 |
|
|
|
12/30/2005 |
|
|
|
42,213 |
|
|
|
100 |
% |
|
$ |
722,866 |
|
|
$ |
722,866 |
|
|
$ |
17.12 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3930 Sunforest Court
(Toledo, OH) |
|
|
1979 |
|
|
|
12/30/2005 |
|
|
|
23,368 |
|
|
|
100 |
% |
|
$ |
327,152 |
|
|
$ |
327,152 |
|
|
$ |
14.00 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 Canal Street
(South Hadley, MA) |
|
|
1978 |
|
|
|
2/15/2006 |
|
|
|
150,000 |
|
|
|
100 |
% |
|
$ |
359,673 |
|
|
$ |
359,673 |
|
|
$ |
2.40 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2101 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
20,400 |
|
|
|
100 |
% |
|
$ |
295,220 |
|
|
$ |
295,220 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2109 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
40,000 |
|
|
|
100 |
% |
|
$ |
578,863 |
|
|
$ |
578,863 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2215 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
25,000 |
|
|
|
100 |
% |
|
$ |
361,790 |
|
|
$ |
361,790 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2301 Fox Drive
(Champaign, IL) |
|
|
1996 |
|
|
|
2/21/2006 |
|
|
|
22,862 |
|
|
|
100 |
% |
|
$ |
330,849 |
|
|
$ |
330,849 |
|
|
$ |
14.47 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2470 Highcrest Road
(Roseville, MN) |
|
|
1964 |
|
|
|
2/21/2006 |
|
|
|
359,540 |
|
|
|
100 |
% |
|
$ |
3,030,458 |
|
|
$ |
3,030,458 |
|
|
$ |
8.43 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12000 Portland Avenue South
(Burnsville, MN) |
|
|
1984 |
|
|
|
5/10/2006 |
|
|
|
114,100 |
|
|
|
100 |
% |
|
$ |
1,234,632 |
|
|
$ |
1,234,632 |
|
|
$ |
10.82 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14701 Anthony Avenue
(Menomonee Falls, WI) |
|
|
1986/2000 |
|
|
|
6/30/2006 |
|
|
|
125,692 |
|
|
|
100 |
% |
|
$ |
775,274 |
|
|
$ |
775,274 |
|
|
$ |
6.17 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1025 Birdsong Drive
(Baytown, TX) |
|
|
1997 |
|
|
|
7/11/2006 |
|
|
|
12,000 |
|
|
|
100 |
% |
|
$ |
254,121 |
|
|
$ |
254,121 |
|
|
$ |
21.18 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42400 Merrill Road
(Sterling Heights, MI) |
|
|
1979/1989 |
|
|
|
9/22/2006 |
|
|
|
532,869 |
|
|
|
100 |
% |
|
$ |
1,166,654 |
|
|
$ |
1,166,654 |
|
|
$ |
2.19 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2150, 2200 Pinson Valley Parkway
(Birmingham, AL) |
|
|
1961/1980 |
|
|
|
9/29/2006 |
|
|
|
63,514 |
|
|
|
100 |
% |
|
$ |
271,163 |
|
|
$ |
271,163 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2325 West Fairview Avenue
(Montgomery, AL) |
|
|
1962/1989 |
|
|
|
9/29/2006 |
|
|
|
29,472 |
|
|
|
100 |
% |
|
$ |
125,826 |
|
|
$ |
125,826 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5221 N Highway 763
(Columbia, MO) |
|
|
1978 |
|
|
|
9/29/2006 |
|
|
|
16,275 |
|
|
|
100 |
% |
|
$ |
69,483 |
|
|
$ |
69,483 |
|
|
$ |
4.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4690 Parkway Drive
(Mason, OH) |
|
|
2002 |
|
|
|
1/5/2007 |
|
|
|
60,000 |
|
|
|
100 |
% |
|
$ |
681,270 |
|
|
$ |
681,270 |
|
|
$ |
11.35 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 South Rogers Lane
(Raleigh, NC) |
|
|
1994 |
|
|
|
2/16/2007 |
|
|
|
115,500 |
|
|
|
100 |
% |
|
$ |
717,203 |
|
|
$ |
717,203 |
|
|
$ |
6.21 |
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1110 West Tenkiller
(Tulsa, OK) |
|
|
2004 |
|
|
|
3/1/2007 |
|
|
|
238,310 |
|
|
|
100 |
% |
|
$ |
1,565,794 |
|
|
$ |
1,565,794 |
|
|
$ |
6.57 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3725 East 10th Court
(Hialeah, FL) |
|
|
1956/1992 |
|
|
|
3/9/2007 |
|
|
|
132,337 |
|
|
|
100 |
% |
|
$ |
995,388 |
|
|
$ |
995,388 |
|
|
$ |
7.52 |
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554 Clark Road
(Tewksbury, MA) |
|
|
1985/1989 |
|
|
|
5/17/2007 |
|
|
|
102,200 |
|
|
|
100 |
% |
|
$ |
922,927 |
|
|
$ |
922,927 |
|
|
$ |
9.03 |
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5324 Natorp Boulevard
(Mason, OH) |
|
|
2007 |
|
|
|
7/1/2007 |
|
|
|
21,264 |
|
|
|
100 |
% |
|
$ |
583,131 |
|
|
$ |
583,131 |
|
|
$ |
27.42 |
|
|
|
2027 |
|
32
Item 2. Properties (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annualized Rental |
|
Total Annualized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rental Income for |
|
Income for the Year |
|
Rental Income per |
|
|
|
|
Year Built/ |
|
|
|
|
|
Rentable |
|
|
|
|
|
the Year Ended |
|
Ended |
|
Occupied Square |
|
Year of Lease |
Property |
|
Improvements |
|
Date of Purchase |
|
Square Feet |
|
Occupancy |
|
December 31, 2008 |
|
December 31, 2008 (1) |
|
Foot (2) |
|
Expiration |
7282 Willam Barry Boulevard
(Cicero, NY) |
|
|
2005 |
|
|
|
9/6/2007 |
|
|
|
71,880 |
|
|
|
100 |
% |
|
$ |
529,743 |
|
|
$ |
529,743 |
|
|
$ |
7.37 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1515 Arboretum Drive SE
(Grand Rapids, MI) |
|
|
2001 |
|
|
|
9/28/2007 |
|
|
|
63,235 |
|
|
|
100 |
% |
|
$ |
1,029,184 |
|
|
$ |
1,029,184 |
|
|
$ |
16.28 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Territorial Court
(Bollingbrook, IL) |
|
|
2002 |
|
|
|
9/28/2007 |
|
|
|
55,869 |
|
|
|
100 |
% |
|
$ |
619,296 |
|
|
$ |
619,296 |
|
|
$ |
11.08 |
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2349 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
16,740 |
|
|
|
100 |
% |
|
$ |
404,159 |
|
|
$ |
404,159 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2341 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
4,372 |
|
|
|
100 |
% |
|
$ |
105,555 |
|
|
$ |
105,555 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2339 Lawrenceville Highway
(Decatur, GA) |
|
|
1989 |
|
|
|
12/13/2007 |
|
|
|
5,488 |
|
|
|
100 |
% |
|
$ |
132,498 |
|
|
$ |
132,498 |
|
|
$ |
24.14 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 Phillip Boulevard
(Lawrenceville, GA) |
|
|
2005 |
|
|
|
12/13/2007 |
|
|
|
12,412 |
|
|
|
100 |
% |
|
$ |
349,871 |
|
|
$ |
349,871 |
|
|
$ |
28.19 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2096 McGee Road
(Snellville, GA) |
|
|
1986 |
|
|
|
12/13/2007 |
|
|
|
3,800 |
|
|
|
100 |
% |
|
$ |
90,815 |
|
|
$ |
90,815 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7174 Wheat Street
(Covington, GA) |
|
|
2000 |
|
|
|
12/13/2007 |
|
|
|
5,000 |
|
|
|
100 |
% |
|
$ |
119,493 |
|
|
$ |
119,493 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1055 Haw Creek Parkway
(Cumming, GA) |
|
|
2004 |
|
|
|
12/13/2007 |
|
|
|
13,919 |
|
|
|
100 |
% |
|
$ |
380,410 |
|
|
$ |
380,410 |
|
|
$ |
27.33 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1293 Wellbrook Circle
(Conyers, GA) |
|
|
1994 |
|
|
|
12/13/2007 |
|
|
|
6,400 |
|
|
|
100 |
% |
|
$ |
152,951 |
|
|
$ |
152,951 |
|
|
$ |
23.90 |
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425 Gateway Drive
(Reading, PA) |
|
|
2007 |
|
|
|
1/29/2008 |
|
|
|
42,900 |
|
|
|
100 |
% |
|
$ |
660,797 |
|
|
$ |
716,664 |
|
|
$ |
16.71 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6499 University Avenue NE
(Fridley, MN) |
|
|
1985/2006 |
|
|
|
2/26/2008 |
|
|
|
74,160 |
|
|
|
100 |
% |
|
$ |
799,528 |
|
|
$ |
946,380 |
|
|
$ |
12.76 |
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7528 Auburn Road
(Concord Township, OH) |
|
|
1957/2008 |
|
|
|
3/31/2008 |
|
|
|
273,300 |
|
|
|
100 |
% |
|
$ |
1,297,734 |
|
|
$ |
1,724,136 |
|
|
$ |
6.31 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10021 Rodney Street
(Pineville, NC) |
|
|
1985 |
|
|
|
4/30/2008 |
|
|
|
74,950 |
|
|
|
100 |
% |
|
$ |
293,265 |
|
|
$ |
438,072 |
|
|
$ |
5.84 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28305 State Route 7
(Marietta, OH) |
|
|
1992/2007 |
|
|
|
8/29/2008 |
|
|
|
223,458 |
|
|
|
100 |
% |
|
$ |
306,146 |
|
|
$ |
896,748 |
|
|
$ |
4.01 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400 Highpoint Drive
(Chalfont, PA) |
|
|
1987 |
|
|
|
8/29/2008 |
|
|
|
67,200 |
|
|
|
100 |
% |
|
$ |
258,632 |
|
|
$ |
757,572 |
|
|
$ |
11.27 |
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
6,329,956 |
|
|
|
|
|
|
$ |
39,675,788 |
|
|
$ |
41,539,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts represented in total annualized rental revenue
for the year ended December 31, 2008 have been calculated by
taking the 2008 base rent and annualizing the partial-year results
for properties acquired during 2008. Because annualized base rent is not derived from historical results that were accounted
for in accordance with GAAP, historical results differ from the
annualized amounts. Management believes this measure is useful to the
readers of this table so they are able to calculate the total
annualized rental revenue per square foot. |
|
(2) |
|
The amounts represented in this column were calculated by
taking the total annualized revenue and dividing by the total rentable square feet. |
|
(3) |
|
Two tenants occupy this building, each with separate leases ending in different years. |
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. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year ended December 31, 2008.
33
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, by quarter, the high and low closing prices per share of our common stock
on the Nasdaq Global Market and the distributions per share for the years ended December 31, 2008
and 2007. Distributions 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 Paid |
Quarter Ended |
|
High |
|
Low |
|
Per Share |
03/31/07 |
|
$ |
20.63 |
|
|
$ |
19.06 |
|
|
$ |
0.360 |
|
06/30/07 |
|
|
20.40 |
|
|
|
19.01 |
|
|
|
0.360 |
|
09/30/07 |
|
|
20.10 |
|
|
|
17.40 |
|
|
|
0.360 |
|
12/31/07 |
|
|
19.45 |
|
|
|
15.75 |
|
|
|
0.360 |
|
03/31/08 |
|
|
18.00 |
|
|
|
15.01 |
|
|
|
0.375 |
|
06/30/08 |
|
|
18.29 |
|
|
|
15.75 |
|
|
|
0.375 |
|
09/30/08 |
|
|
17.00 |
|
|
|
14.40 |
|
|
|
0.375 |
|
12/31/08 |
|
|
15.79 |
|
|
|
7.30 |
|
|
|
0.375 |
|
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, distributions may 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 the shares of common stock
and will not be taxable to the extent that the distribution equals or is less than the
stockholders basis in the stock. To the extent a distribution exceeds both current and
accumulated earnings and profits and the stockholders basis in the stock, that distribution will
be treated as a gain from the sale or exchange of that stockholders shares. Every year, we notify
stockholders of the taxability of distributions paid during the preceding year.
As of February 6, 2009, there were approximately 6,065 beneficial owners of our common stock.
There were no unregistered sales of securities during the fiscal year ended December 31, 2008.
34
Item 6. Selected Financial Data
The following selected financial data for the fiscal years ended December 31, 2008, 2007, 2006,
2005 and 2004 is derived from our audited consolidated financial statements. Certain amounts from
prior years financial statements have been reclassified to discontinued operations. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
40,910,998 |
|
|
$ |
32,793,539 |
|
|
$ |
25,945,546 |
|
|
$ |
12,881,506 |
|
|
$ |
4,191,329 |
|
Total operating expenses |
|
|
(19,391,922 |
) |
|
|
(15,821,630 |
) |
|
|
(14,067,096 |
) |
|
|
(7,185,040 |
) |
|
|
(3,276,735 |
) |
Other expense |
|
|
(16,570,753 |
) |
|
|
(10,940,394 |
) |
|
|
(8,521,419 |
) |
|
|
(2,185,509 |
) |
|
|
614,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,948,323 |
|
|
|
6,031,515 |
|
|
|
3,357,031 |
|
|
|
3,510,957 |
|
|
|
1,529,253 |
|
Discontinued operations |
|
|
(35,376 |
) |
|
|
108,714 |
|
|
|
1,015,797 |
|
|
|
90,988 |
|
|
|
94,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,912,947 |
|
|
$ |
6,140,229 |
|
|
$ |
4,372,828 |
|
|
$ |
3,601,945 |
|
|
$ |
1,623,928 |
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
$ |
3,601,945 |
|
|
$ |
1,623,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of distributions attributable to preferred stock) |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.15 |
|
|
$ |
0.46 |
|
|
$ |
0.20 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.13 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
$ |
0.47 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of distributions attributable to preferred stock) |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.14 |
|
|
$ |
0.46 |
|
|
$ |
0.20 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.13 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.27 |
|
|
$ |
0.47 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
|
|
7,670,219 |
|
|
|
7,649,855 |
|
Weighted average shares outstanding-diluted |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
|
|
7,723,220 |
|
|
|
7,708,534 |
|
Cash distributions declared per common share |
|
$ |
1.50 |
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
0.96 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
$ |
3,601,945 |
|
|
$ |
1,623,928 |
|
Real estate depreciation and amortization, including discontinued operations |
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,349,474 |
|
|
|
3,651,119 |
|
|
|
973,345 |
|
Less: Gain on sale of real estate, net of taxes paid |
|
|
|
|
|
|
(78,667 |
) |
|
|
(1,106,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to common stockholders (1) |
|
|
13,523,838 |
|
|
|
12,496,270 |
|
|
|
9,428,822 |
|
|
|
7,253,064 |
|
|
|
2,597,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges and preferred distributions (2) |
|
|
1.0 |
x |
|
|
1.1 |
x |
|
|
1.1 |
x |
|
|
2.4 |
x |
|
|
60.8 |
x |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, before accumulated depreciation |
|
$ |
390,562,138 |
|
|
$ |
340,500,406 |
|
|
$ |
243,713,542 |
|
|
$ |
165,043,639 |
|
|
$ |
61,251,455 |
|
Total assets |
|
$ |
429,098,785 |
|
|
$ |
378,902,689 |
|
|
$ |
315,766,022 |
|
|
$ |
207,046,954 |
|
|
$ |
105,585,094 |
|
Mortgage notes payable, term loan and borrowings under the line of credit |
|
$ |
286,611,173 |
|
|
$ |
226,520,471 |
|
|
$ |
154,494,438 |
|
|
$ |
105,118,961 |
|
|
$ |
|
|
Total stockholders equity |
|
$ |
130,495,260 |
|
|
$ |
142,368,068 |
|
|
$ |
152,224,176 |
|
|
$ |
98,948,536 |
|
|
$ |
102,692,693 |
|
Total common shares outstanding |
|
|
8,563,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
7,672,000 |
|
|
|
7,667,000 |
|
|
|
|
(1) |
|
Funds from Operations (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. 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 distributions. We
believe that net income available to common stockholders is the most directly comparable GAAP
measure to FFO available to common stockholders. |
35
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 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, 2008,
2007, 2006, 2005 and 2004 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, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
4,912,947 |
|
|
$ |
6,140,229 |
|
|
$ |
4,372,828 |
|
|
$ |
3,601,945 |
|
|
$ |
1,623,928 |
|
Less: Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
819,197 |
|
|
|
2,046,479 |
|
|
|
2,185,938 |
|
|
|
3,601,945 |
|
|
|
1,623,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Real estate depreciation and amortization,
including discontinued operations |
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,349,474 |
|
|
|
3,651,119 |
|
|
|
973,345 |
|
Less: Gain on sale of real estate, net of taxes paid |
|
|
|
|
|
|
(78,667 |
) |
|
|
(1,106,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders |
|
$ |
13,523,838 |
|
|
$ |
12,496,270 |
|
|
$ |
9,428,822 |
|
|
$ |
7,253,064 |
|
|
$ |
2,597,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
|
|
7,670,219 |
|
|
|
7,649,855 |
|
Weighted average shares outstanding diluted |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
|
|
7,723,220 |
|
|
|
7,708,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per weighted average common share |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
$ |
0.47 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per weighted average common share |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.27 |
|
|
$ |
0.47 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic FFO per weighted average common share |
|
$ |
1.58 |
|
|
$ |
1.46 |
|
|
$ |
1.20 |
|
|
$ |
0.95 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO per weighted average common share |
|
$ |
1.58 |
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
$ |
0.94 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per common share |
|
$ |
1.50 |
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
0.96 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFO paid per common share |
|
|
95 |
% |
|
|
99 |
% |
|
|
120 |
% |
|
|
102 |
% |
|
|
141 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Amended Advisory Agreement, by three. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended |
|
|
For the year ended |
|
|
For the year ended |
|
|
For the year ended |
|
|
For the year ended |
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
Net income from continuing operations |
|
$ |
4,948,323 |
|
|
$ |
6,031,515 |
|
|
$ |
3,357,031 |
|
|
$ |
3,510,957 |
|
|
$ |
1,529,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: fixed charges |
|
|
20,283,961 |
|
|
|
15,670,067 |
|
|
|
11,490,476 |
|
|
|
2,494,245 |
|
|
|
25,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: preferred distributions |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
21,138,534 |
|
|
$ |
17,607,832 |
|
|
$ |
12,660,617 |
|
|
$ |
6,005,202 |
|
|
$ |
1,554,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
15,574,731 |
|
|
|
10,847,346 |
|
|
|
8,041,412 |
|
|
|
2,187,586 |
|
|
|
|
|
Amortization of deferred financing fees |
|
|
604,433 |
|
|
|
717,195 |
|
|
|
1,207,198 |
|
|
|
260,098 |
|
|
|
|
|
Estimated interest component of rent |
|
|
11,047 |
|
|
|
11,776 |
|
|
|
54,976 |
|
|
|
46,561 |
|
|
|
25,565 |
|
Preferred distributions |
|
|
4,093,750 |
|
|
|
4,093,750 |
|
|
|
2,186,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges and preferred distributions |
|
|
20,283,961 |
|
|
|
15,670,067 |
|
|
|
11,490,476 |
|
|
|
2,494,245 |
|
|
|
25,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges
and preferred distributions |
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
2.4 |
|
|
|
60.8 |
|
36
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 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
the 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 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.
Business Environment
The United States entered into a recession in December 2007, and, as a result, conditions within
the global credit markets and the U.S. real estate credit markets in particular continue to
experience historic levels of dislocation and stress. The economic downturn and the disruptions in
the capital markets have increased the cost of, and decreased our ability to obtain, new debt and
equity capital. The longer these conditions persist, the greater the probability that these factors
could have an adverse effect on our operations and financial results. The current economic
conditions also make it difficult to price and finance new investment opportunities on attractive
terms. We do not know when market conditions will stabilize, if adverse conditions will intensify
or the full extent to which the disruptions will affect us. Continued weak economic conditions
could adversely impact the financial condition of one or more of our tenants and therefore, could
make a tenant bankruptcy and payment default on the related lease or loan more likely. Currently,
all of our properties are fully leased and all of our tenants and our borrower are current and
paying in accordance with their leases and loan, respectively. In addition, no balloon payments
are due under our mortgage notes payable until 2010, and the $48.0 million mortgage note that
matures in 2010 has three annual extension options through 2013.
Our ability to make new investments is highly dependent upon external financing. Our principal
external financing sources generally include the issuance of equity securities, the issuance of
long-term mortgages secured by properties and borrowings under our line of credit. Recent market
conditions have affected the trading price of our common stock. On February 19, 2009, the closing
market price of our common stock was $6.56, which represents a 56% discount to our average stock
price of $14.82 during 2008. As a result, equity financing is not currently a viable alternative
for us. In addition, the market for long-term mortgages has frozen as the collateralized
mortgage-backed securities, or CMBS, market has disappeared. With the recent closure of the CMBS
market, many banks are not lending on commercial real estate as they are no longer able to sell
these loans to the CMBS market and many banks are not willing or able to keep these loans on their
balance sheets. We are now seeing banks only willing to issue medium-term mortgages, between 2 to
5 years, at substantially less favorable terms. As a result, we intend to focus on medium-term
mortgages until the market for long-term mortgages returns. Our ability to increase the
availability under our line of credit is dependent upon us 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 10 of our properties do not have
long-term mortgages, and 9 of those are
pledged as collateral under our line of credit. Our line of credit matures in December 2009,
however we intend to exercise our option to extend the term for an additional year, through
December 2010.
37
We expect that under current market conditions, debt and equity capital will be costly and
difficult for us to access for some time. As long as this is the case, our near-term strategy has
become somewhat dependent upon retaining capital and building the value of our existing portfolio
of properties by reviewing and renegotiating existing leases and making capital improvements to our
properties. Capital improvements will be limited to the extent we have available capital. We will
continue to review potential acquisitions and we intend to continue our strategy of making
conservative investments in properties that have existing financing, and funding the remainder
using the existing availability under our line of credit, that we believe will weather the current
recession and that are likely to produce attractive long-term returns for our stockholders.
Recent Events
Investment Activities: During the year ended December 31, 2008, we acquired six properties totaling
approximately 756,000 square feet for approximately $53.6 million, and made capital improvements to
our properties located in Newburyport, Massachusetts; Arlington, Texas and Duncan, South Carolina
for approximately $2.2 million, resulting in a total investment of approximately $55.8 million. Of
the total investment, $49.3 million was funded under our line of credit and the remaining $6.5
million was funded under a long-term note payable with GE Commercial Mortgage Financial
Corporation, or GE, assumed in connection with an acquisition.
Financing Activities: During the year ended December 31, 2008, we had net borrowings under our line
of credit of approximately $7.1 million with $11.5 million outstanding at December 31, 2008. The
proceeds from the line of credit were used to fund the six acquisitions during the year and to fund
capital improvements to our properties located in Newburyport, Massachusetts; Arlington, Texas and
Duncan, South Carolina. In September 2008, we borrowed approximately $48.0 million pursuant to a
long-term note payable with GE, collateralized by security interests in 15 of our properties. The
proceeds from the long-term note payable were used to pay down the line of credit.
Property Classifications
At December 31, 2008, we owned 65 properties totaling approximately 6.3 million square feet, and
had one mortgage loan outstanding. The total gross investment in these acquisitions, including the
$10.0 million mortgage loan investment, was approximately $443.3 million at December 31, 2008.
Prior to December 31, 2008, we reported the aggregate number of properties we own based on the
appraisals obtained in connection with the acquisition of our properties, which occasionally
grouped two or more buildings together. At December 31, 2008 we are reporting, and in future
periods we will report, our aggregate number of properties based on the number of individual
buildings. Below is a summary of the properties we owned as of the respective periods, using the
new methodology:
|
|
|
|
|
|
As of: |
|
|
|
Total properties owned |
March 31, 2007 |
|
|
|
46 |
|
June 30, 2007 |
|
|
|
47 |
|
September 30, 2007 |
|
|
|
51 |
|
December 31, 2007 |
|
|
|
59 |
|
March 31, 2008 |
|
|
|
62 |
|
June 30, 2008 |
|
|
|
63 |
|
September 30, 2008 |
|
|
|
65 |
|
December 31, 2008 |
|
|
|
65 |
|
38
Our Adviser and Administrator
Gladstone Management Corporation, or our Adviser, is led by a management team which has extensive
experience in our lines of business. Our Adviser is controlled by 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 and 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. Our Adviser
also has a wholly-owned subsidiary, Gladstone Administration, LLC, or the Administrator, which
employs our chief financial officer, chief compliance officer, treasurer and their respective
staffs.
Our Adviser and Administrator also provide investment advisory and administrative services 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 and administrative services to other funds, both public and private, of which it is the
sponsor.
Investment Advisory and Administration Agreements
We have been externally managed pursuant to a contractual investment advisory arrangement with our
Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll,
benefits, and general expenses directly. Our initial investment advisory agreement with our
Adviser, which we refer to as the Initial Advisory Agreement, was in place from August 12, 2003
through December 31, 2006. On January 1, 2007, we entered into an amended and restated investment
advisory agreement with our Adviser, which we refer to as the Amended Advisory Agreement, and an
administration agreement, which we refer to as the Administration Agreement, with our
Administrator.
Under the terms of the Initial Advisory Agreement and the Amended Advisory Agreement, we were and
remain 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, 2008, 2007 and 2006 none
of these 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 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 Amended Advisory Agreement
The Amended 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. 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 will
reward our Adviser if our quarterly FFO, before giving effect to any incentive fee (pre-incentive
fee FFO), exceeds 1.75%, or 7% annualized, (the hurdle rate) of total stockholders equity, less
the recorded value of any preferred stock. Our Adviser will receive 100% of the amount of the
pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of our pre-incentive
fee FFO. Our Adviser will also receive an incentive fee of 20% of the amount of our
pre-incentive fee FFO that exceeds 2.1875%. The incentive fee may be reduced because of our line
of credit covenant 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 a portion of the incentive fee for the years ended December 31,
2008 and 2007, which allowed us to maintain the current level of distributions to our stockholders.
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 waiver, in whole or in part.
39
Administration Agreement
Under the Administration Agreement, we pay separately for our allocable portion of our
Administrators overhead expenses in performing its obligations including, but not limited to, rent
for employees of our Administrator, and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer, treasurer 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 data 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 on 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
report. 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 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 each case on their fair values.
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
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 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.
40
The allocation of the purchase price directly affects the following in our consolidated financial
statements:
|
|
|
The amount of acquisition costs 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 changes in the purchase price allocation
among our assets could have a material impact on our FFO, which is used by investors of
REITs to evaluate our operating performance; and |
|
|
|
|
The period of time that tangible and intangible assets are depreciated over 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, we depreciate our
buildings over 39 years, and land is not depreciated. 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 investment in such property is recoverable. In preparing the projection of undiscounted future
cash flows, we estimate the hold periods of the properties and cap rates using information 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. 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 we would recognize.
Using the methodology discussed above and in light of the current economic conditions discussed
above in Business Environment, we performed an impairment analysis of our entire portfolio at
December 31, 2008. We have concluded that none of our properties are currently 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 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 did not make a loss allowance for our
existing mortgage loan receivable as of December 31, 2008, as we believe the carrying value of the
loan is fully collectible.
41
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently
issued accounting pronouncements.
Results of Operations
Our weighted-average yield on the portfolio was approximately 9.63%, 9.55% and 9.48% as of December
31, 2008, 2007, and 2006, respectively. Our weighted-average yields on the six properties acquired
during the year ended December 31, 2008 were as follows:
|
|
|
|
|
|
|
Date Acquired |
|
Property Location |
|
Weighted-Average Yield |
1/29/08 |
|
Reading, Pennsylvania |
|
|
9.95 |
% |
2/26/08 |
|
Fridley, Minnesota |
|
|
8.93 |
% |
3/31/08 |
|
Concord Township, Ohio |
|
|
11.27 |
% |
4/30/08 |
|
Pineville, North Carolina |
|
|
11.06 |
% |
8/29/08 |
|
Marietta, Ohio |
|
|
11.07 |
% |
8/29/08 |
|
Chalfont, Pennsylvania |
|
|
9.01 |
% |
The weighted-average yield on our 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 take into account the interest
expense incurred on the financings placed on our properties.
42
A comparison of our operating results for the years ended December 31, 2008 and 2007 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
39,675,788 |
|
|
$ |
31,469,297 |
|
|
$ |
8,206,491 |
|
|
|
26 |
% |
Interest income from mortgage notes receivable |
|
|
898,573 |
|
|
|
1,013,889 |
|
|
|
(115,316 |
) |
|
|
-11 |
% |
Tenant recovery revenue |
|
|
336,637 |
|
|
|
310,353 |
|
|
|
26,284 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
40,910,998 |
|
|
|
32,793,539 |
|
|
|
8,117,459 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
2,176,183 |
|
|
|
21 |
% |
Property operating expenses |
|
|
877,073 |
|
|
|
800,822 |
|
|
|
76,251 |
|
|
|
10 |
% |
Due diligence expense |
|
|
1,176,379 |
|
|
|
20,968 |
|
|
|
1,155,411 |
|
|
|
5510 |
% |
Base management fee |
|
|
1,637,851 |
|
|
|
1,858,120 |
|
|
|
(220,269 |
) |
|
|
-12 |
% |
Incentive fee |
|
|
2,831,722 |
|
|
|
2,564,365 |
|
|
|
267,357 |
|
|
|
10 |
% |
Administration fee |
|
|
954,635 |
|
|
|
837,898 |
|
|
|
116,737 |
|
|
|
14 |
% |
Professional fees |
|
|
521,410 |
|
|
|
625,349 |
|
|
|
(103,939 |
) |
|
|
-17 |
% |
Insurance |
|
|
173,414 |
|
|
|
214,141 |
|
|
|
(40,727 |
) |
|
|
-19 |
% |
Directors fees |
|
|
216,851 |
|
|
|
229,000 |
|
|
|
(12,149 |
) |
|
|
-5 |
% |
Stockholder related expense |
|
|
298,384 |
|
|
|
244,629 |
|
|
|
53,755 |
|
|
|
22 |
% |
Asset retirement obligation expense |
|
|
133,244 |
|
|
|
116,478 |
|
|
|
16,766 |
|
|
|
14 |
% |
General and administrative |
|
|
63,263 |
|
|
|
102,999 |
|
|
|
(39,736 |
) |
|
|
-39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit from Adviser |
|
|
21,588,867 |
|
|
|
18,143,227 |
|
|
|
3,445,640 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee |
|
|
(2,196,945 |
) |
|
|
(2,321,597 |
) |
|
|
124,652 |
|
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,391,922 |
|
|
|
15,821,630 |
|
|
|
3,570,292 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
21,844 |
|
|
|
354,249 |
|
|
|
(332,405 |
) |
|
|
-94 |
% |
Interest income employee loans |
|
|
202,097 |
|
|
|
222,051 |
|
|
|
(19,954 |
) |
|
|
-9 |
% |
Other income |
|
|
63,993 |
|
|
|
47,847 |
|
|
|
16,146 |
|
|
|
34 |
% |
Interest expense |
|
|
(16,858,687 |
) |
|
|
(11,564,541 |
) |
|
|
(5,294,146 |
) |
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(16,570,753 |
) |
|
|
(10,940,394 |
) |
|
|
(5,630,359 |
) |
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,948,323 |
|
|
|
6,031,515 |
|
|
|
(1,083,192 |
) |
|
|
-18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(35,376 |
) |
|
|
(3,312 |
) |
|
|
(32,064 |
) |
|
|
968 |
% |
Net realized income from foreign currency transactions |
|
|
|
|
|
|
33,359 |
|
|
|
(33,359 |
) |
|
|
-100 |
% |
Taxes refunded on sale of real estate |
|
|
|
|
|
|
78,667 |
|
|
|
(78,667 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
(35,376 |
) |
|
|
108,714 |
|
|
|
(144,090 |
) |
|
|
-133 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,912,947 |
|
|
|
6,140,229 |
|
|
|
(1,227,282 |
) |
|
|
-20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
(1,227,282 |
) |
|
|
-60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Operating Revenues
Rental income increased for the year ended December 31, 2008, as compared to the year ended
December 31, 2007, primarily as a result of the six properties acquired during 2008, coupled with
properties acquired during 2007 that were held for the full year in 2008.
Interest income from mortgage notes receivable decreased for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, primarily because interest income on our mortgage
loan is based on the London Interbank Offered Rate, or LIBOR, which has significantly decreased
over the past year.
Tenant recovery revenue increased for the year ended December 31, 2008 as compared to the year
ended December 31, 2007, primarily as a result of the reimbursement of the ground lease payments on
our Tulsa, Oklahoma property acquired in March 2007, which was held for the entire year in 2008,
coupled with properties acquired during 2008 in which tenants reimbursed us for insurance expense.
Operating Expenses
Depreciation and amortization expenses increased during the year ended December 31, 2008, as
compared to the year ended December 31, 2007, as a result of the six properties acquired during
2008, and properties acquired during 2007 that were held for the full year in 2008.
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, 2008, as compared to the year ended December
31, 2007, due to an increase in the amount of franchise taxes paid as a result of the properties
acquired during 2008. In addition, property operating expenses included ground lease payments on
our Tulsa, Oklahoma property acquired in March 2007, which was held for the entire year in 2008.
Due diligence expense consists of fees incurred for acquisitions that did not close. The fees
primarily consist of legal fees and fees incurred for third-party reports prepared during our due
diligence work. Over $1.0 million of the fees incurred were related to a large potential
acquisition that did not close during 2008, and is not expected to be pursued further in 2009. We
anticipate with the adoption of SFAS 141(R), discussed in detail in Note 1 of the accompanying
consolidated financial statements, that the amount of expense we incur during 2009 and future years
will also increase, as we will no longer be able to capitalize due diligence costs into the price
of the acquisition.
The base management fee decreased for the year ended December 31, 2008, as compared to the year
ended December 31, 2007, as a result of a decrease in total common stockholders equity, the main
component of the calculation. The calculation of the base management fee is described in detail
above under Investment Advisory and Administration Agreements.
The incentive fee increased for the year ended December 31, 2008, as compared to the year ended
December 31, 2007, due to the decrease in total common stockholders equity, coupled with the
increase in FFO. The calculation of the incentive fee is described in detail above under
Investment Advisory and Administration Agreements.
The administration fee increased for the year ended December 31, 2008, as compared to the year
ended December 31, 2007, primarily as a result of the increased number of employees of our
Administrator, coupled with an increase in overhead expenses allocated by our Administrator. The
calculation of the administrative fee is described in detail above under Investment Advisory and
Administration Agreements.
Professional fees, consisting primarily of legal and accounting fees, decreased during the year
ended December 31, 2008, as compared to the year ended December 31, 2007, primarily as a result of
a reduction
in legal fees combined with fees incurred during the year ended December 31, 2007 for state tax
research and costs related to the implementation of FIN 48, which were not incurred during the year
ended December 31, 2008.
44
Insurance expense consists of the premiums paid for directors and officers insurance, which is
renewed annually each September. Insurance expense decreased for the year ended December 31, 2008,
as compared to the year ended December 31, 2007, because of a decrease in the premiums for the
period from September 2007 through September 2008. Premiums for directors and officers insurance
increased approximately 11% for the period from September 2008 through September 2009 and thus we
expect this amount to increase in 2009.
Directors fees decreased during the year ended December 31, 2008, as compared to the year ended
December 31, 2007, primarily as a result of fewer committee meetings occurring in the year ended
December 31, 2008 coupled with one of the independent directors becoming an interested director in
January 2008, and thus the director no longer receiving fees for attending board meetings.
Stockholder related expense increased for the year ended December 31, 2008, as compared to the year
ended December 31, 2007, primarily as a result of the increase in our costs associated with
printing and filing the annual report, coupled with costs associated with the solicitation of the
stockholder vote for the 2008 annual meeting.
Asset retirement obligation expense increased for the year ended December 31, 2008, as compared to
the year ended December 31, 2007, primarily as a result of a property acquired during 2008, which
was required to recognize an asset retirement liability, coupled with a property acquired where a
liability was recorded during 2007 that was held for the full year in 2008.
General and administrative expenses decreased for the year ended December 31, 2008, as compared to
the year ended December 31, 2007, primarily as a result of a decrease in the amount of dues and
subscriptions, office expense and bank service charges incurred in 2008.
Other Income and Expense
Interest income from temporary investments decreased during the year ended December 31, 2008, as
compared to the year ended December 31, 2007. The decrease was primarily a result of the decrease
in our average cash balances during the year ended December 31, 2008.
Interest income on employee loans decreased during the year ended December 31, 2008, as compared to
the year ended December 31, 2007. This decrease was a result of employees who paid off their loans
during 2008, coupled with other partial principal repayments over the periods.
Other income increased during the year ended December 31, 2008, as compared to the year ended
December 31, 2007, primarily because of a real estate tax reimbursement we received from our
property located in Sterling Heights, Michigan in 2008.
Interest expense increased for the year ended December 31, 2008, as compared to the year ended
December 31, 2007. This was primarily a result of the long-term financings we closed on 16 of our
properties during 2008, coupled with an increased amount outstanding on our line of credit during
2008.
Discontinued Operations
The loss from discontinued operations for the year ended December 31, 2008 is the expense related
to our two Canadian properties, which were sold in July 2006. The expense relates to legal fees
associated with the dissolution of the entities which sold the properties. The 2006 tax returns
were filed in March 2007, and we were due a refund of approximately $79,000, which is reflected on
the accompanying consolidated statements of operations under Taxes refunded on sale of real estate
for the year ended December 31, 2007.
45
Net Income Available to Common Stockholders
Net income available to common stockholders decreased for the year ended December 31, 2008, as
compared to the year ended December 31, 2007. 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 increase in the size of our portfolio of investments in the past year and the
corresponding increase in our revenues and the other events described above.
A comparison of our operating results for the years ended December 31, 2007 and 2006 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
31,469,297 |
|
|
$ |
23,964,035 |
|
|
$ |
7,505,262 |
|
|
|
31 |
% |
Interest income from mortgage notes receivable |
|
|
1,013,889 |
|
|
|
1,845,231 |
|
|
|
(831,342 |
) |
|
|
-45 |
% |
Tenant recovery revenue |
|
|
310,353 |
|
|
|
136,280 |
|
|
|
174,073 |
|
|
|
128 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
32,793,539 |
|
|
|
25,945,546 |
|
|
|
6,847,993 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10,528,458 |
|
|
|
8,297,174 |
|
|
|
2,231,284 |
|
|
|
27 |
% |
Property operating expenses |
|
|
800,822 |
|
|
|
636,427 |
|
|
|
164,395 |
|
|
|
26 |
% |
Due diligence expense |
|
|
20,968 |
|
|
|
9,365 |
|
|
|
11,603 |
|
|
|
124 |
% |
Base management fee |
|
|
1,858,120 |
|
|
|
2,902,053 |
|
|
|
(1,043,933 |
) |
|
|
-36 |
% |
Incentive fee |
|
|
2,564,365 |
|
|
|
|
|
|
|
2,564,365 |
|
|
|
100 |
% |
Administration fee |
|
|
837,898 |
|
|
|
|
|
|
|
837,898 |
|
|
|
100 |
% |
Professional fees |
|
|
625,349 |
|
|
|
953,066 |
|
|
|
(327,717 |
) |
|
|
-34 |
% |
Insurance |
|
|
214,141 |
|
|
|
211,562 |
|
|
|
2,579 |
|
|
|
1 |
% |
Directors fees |
|
|
229,000 |
|
|
|
140,000 |
|
|
|
89,000 |
|
|
|
64 |
% |
Stockholder related expense |
|
|
244,629 |
|
|
|
311,049 |
|
|
|
(66,420 |
) |
|
|
-21 |
% |
Asset retirement obligation expense |
|
|
116,478 |
|
|
|
129,142 |
|
|
|
(12,664 |
) |
|
|
-10 |
% |
General and administrative |
|
|
102,999 |
|
|
|
82,847 |
|
|
|
20,152 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit from Adviser |
|
|
18,143,227 |
|
|
|
14,067,096 |
|
|
|
4,076,131 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee |
|
|
(2,321,597 |
) |
|
|
|
|
|
|
(2,321,597 |
) |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
15,821,630 |
|
|
|
14,067,096 |
|
|
|
1,754,534 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
354,249 |
|
|
|
76,772 |
|
|
|
277,477 |
|
|
|
361 |
% |
Interest income employee loans |
|
|
222,051 |
|
|
|
125,788 |
|
|
|
96,263 |
|
|
|
77 |
% |
Other income |
|
|
47,847 |
|
|
|
380,915 |
|
|
|
(333,068 |
) |
|
|
-87 |
% |
Interest expense |
|
|
(11,564,541 |
) |
|
|
(9,104,894 |
) |
|
|
(2,459,647 |
) |
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(10,940,394 |
) |
|
|
(8,521,419 |
) |
|
|
(2,418,975 |
) |
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
6,031,515 |
|
|
|
3,357,031 |
|
|
|
2,674,484 |
|
|
|
80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(3,312 |
) |
|
|
112,145 |
|
|
|
(115,457 |
) |
|
|
-103 |
% |
Net realized income from foreign currency transactions |
|
|
33,359 |
|
|
|
(202,938 |
) |
|
|
236,297 |
|
|
|
-116 |
% |
Gain on sale of real estate |
|
|
|
|
|
|
1,422,026 |
|
|
|
(1,422,026 |
) |
|
|
100 |
% |
Taxes refunded on sale of real estate |
|
|
78,667 |
|
|
|
(315,436 |
) |
|
|
394,103 |
|
|
|
-125 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
108,714 |
|
|
|
1,015,797 |
|
|
|
(907,083 |
) |
|
|
-89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6,140,229 |
|
|
|
4,372,828 |
|
|
|
1,767,401 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
(1,906,860 |
) |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
$ |
(139,459 |
) |
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Operating Revenues
Rental income increased for the year ended December 31, 2007, as compared to the year ended
December 31, 2006, primarily due to the acquisition of 14 properties and one leasehold interest
during 2007, and properties acquired during 2006 that were held for the full year in 2007.
Interest income from mortgage loans decreased for the year ended December 31, 2007, as compared to
the year ended December 31, 2006, due to the defaulted mortgage loan on the Sterling Heights,
Michigan property in August 2006. We acquired the building in satisfaction of the mortgage loan in
September 2006.
Tenant recovery revenue increased for the year ended December 31, 2007, as compared to the year
ended December 31, 2006, as a result of an increase in the number of tenants which reimbursed us
for insurance expense and the reimbursement of the ground lease payments on our Tulsa, Oklahoma
property acquired in March 2007, which was partially offset by an over-accrual of franchise taxes
in 2005, which resulted in a credit to tenant recovery revenue in 2006.
Operating Expenses
Depreciation and amortization expenses increased during the year ended December 31, 2007, as
compared to the year ended December 31, 2006, as a result of the 14 properties and one leasehold
interest acquired during 2007, coupled with properties acquired during 2006 that were held for the
full period in 2007.
Property operating expenses consist of franchise taxes, management fees, insurance, ground lease
payments on our Tulsa, Oklahoma property acquired in March 2007 and overhead expenses paid on
behalf of certain of our properties. Property operating expenses increased during the year ended
December 31, 2007, as compared to the year ended December 31, 2006, primarily as a result of the 14
properties and one leasehold interest acquired during 2007, and the corresponding increase in
franchise taxes, management fees and insurance.
Due diligence expense consists of fees incurred for acquisitions that did not close. The fees
primarily consist of legal fees and fees incurred for third party reports prepared during our due
diligence work.
The base management fee for the year ended December 31, 2007 was computed under the terms of the
Amended Advisory Agreement and the base management fee for the years ended December 31, 2006 was
computed under the terms of the Initial Advisory Agreement. Both agreements are described above
under Investment Advisory and Administration Agreements.
On January 1, 2007, the Amended Advisory Agreement, which includes an incentive fee component,
became effective. The calculation of the incentive fee is described in detail above under
Investment Advisory and Administration Agreements. There was no incentive fee recorded during
the year ended December 31, 2006, as the Amended Advisory Agreement was not in effect.
On January 1, 2007, the Administration Agreement became effective and we began paying our
Administrator amounts equal to our allocable portion of our Administrators overhead expenses in
performing its obligations under the Administration Agreement. The calculation of the
administrative fee is described above under Investment Advisory and Administration Agreements.
There was no administration fee recorded during the year ended December 31, 2006, as the
Administration Agreement was not in effect.
Professional fees, consisting primarily of legal and accounting fees, decreased during the year
ended December 31, 2007, as compared to the year ended December 31, 2006, primarily as a result of
fees paid in connection with the formation of the Massachusetts Business Trusts in 2006, fees paid
in connection with the audit of the modification to the stock option plan in 2006, legal fees
incurred in 2006 related to the defaulted mortgage loan on the Sterling Heights, Michigan property,
and lower audit fees paid in 2007 than
2006, partially offset by an increase in accounting fees paid in 2007 related to the implementation
of FIN 48 and increased tax return preparation fees associated with the increased number of states
in which we were required to file tax returns.
47
Insurance expense consists of the premiums paid for directors and officers insurance, which is
renewed annually each September. Insurance expense remained flat for the year ended December 31,
2007, as compared to the year ended December 31, 2006 because of increased premiums for the period
from September 2006 through September 2007 as compared to the previous year, partially offset by a
decrease in premiums for the period from September 2007 through September 2008 as compared to the
previous year.
Directors fees increased for the year ended December 31, 2007, as compared to the year ended
December 31, 2006, due to an increase in the annual fees each board member collects, coupled with
an increased number of committee meetings. The board member annual fees increased in 2007 as a
result of the termination of our stock option plan.
Stockholder related expense decreased for the year ended December 31, 2007, as compared to the year
ended December 31, 2006, primarily as a result of costs associated with the solicitation of the
stockholder vote for the annual meeting in 2006, partially offset by the increase in our annual
fees due to NASDAQ, and increased costs associated with printing the annual report.
Asset retirement obligation expense decreased for the year ended December 31, 2007, as compared to
the year ended December 31, 2006, primarily as a result of the expense recorded during 2006, which
included expense related to prior periods. The expense related to prior periods was immaterial to
the 2006 earnings.
General and administrative expenses increased for the year ended December 31, 2007, as compared to
the year ended December 31, 2006, primarily as a result of an increase in the number of conferences
attended during 2007 and the expense associated with traveling to these conferences, coupled with
an increase in our annual fees due to The National Association of Real Estate Investment Trusts, or
NAREIT.
There was no stock option compensation expense recorded for the year ended December 31, 2007 as we
terminated our stock option plan on December 31, 2006. Stock option compensation expense for the
year ended December 31, 2006 was the result of the adoption of the SFAS 123 (R) (revised 2004)
Share-based Payment.
Other Income and Expense
Interest income from temporary investments increased during the year ended December 31, 2007, as
compared to the year ended December 31, 2006. The increase was primarily a result of the increase
in our average cash balances during the year ended December 31, 2007, as a result of long-term
financings on 10 properties that closed subsequent to December 31, 2006.
Interest income on employee loans increased during the year ended December 31, 2007, as compared to
the year ended December 31, 2006. This increase was a result of 11 employee loans that were
originated during 2006 in which interest was earned for the full year in 2007.
Other income decreased for the year ended December 31, 2007 as compared to the year ended December
31, 2006, primarily because of income received from defaulted interest, expenses, and late
penalties from the settlement on the defaulted mortgage loan on the Sterling Heights, Michigan
property in 2006.
Interest expense increased for the year ended December 31, 2007, as compared to the year ended
December 31, 2006. This was primarily a result of the long-term financings we closed on 10
properties in 2007, partially offset by a decreased amount outstanding on our line of credit.
48
Discontinued Operations
Income from discontinued operations relates to our two Canadian properties, which were sold in July
2006. Income for the year ended December 31, 2006 was a result of operations from the Canadian
properties held during that time, whereas the expense for the year ended December 31, 2007 was a
result of expenses related to the entities that we incurred subsequent to the sale. We also paid
and fully accrued approximately $315,000 in taxes related to the gain on the sale in 2006. The
2006 tax returns were subsequently filed in March of 2007, and the amount owed was approximately
$236,000. We received a refund of approximately $79,000 in 2007, which is reflected under taxes
paid on sale of real estate.
Net Income Available to Common Stockholders
Net income available to common stockholders decreased for the year ended December 31, 2007, as
compared to the year ended December 31, 2006. This decrease was primarily a result of the gain on
sale of the two Canadian properties recognized in July of 2006, coupled with increased interest
expense from the increased number of properties which have long-term financing and the preferred
distributions paid. This is partially offset by the increase in our portfolio of investments in
the past year and the corresponding increase in our revenues and the other events described above,
and the elimination of stock option expense during 2007.
Liquidity and Capital Resources
Future Capital Needs
At December 31, 2008, we had approximately $4.5 million in cash and cash equivalents. We have
access to our existing line of credit with an available borrowing capacity of $35.5 million, have
obtained mortgages on 55 of our properties and have a $20.0 million short-term loan. We had
investments in 65 real properties for a net value, including intangible assets, of approximately
$397.3 million and one mortgage loan receivable for $10.0 million.
As discussed in Business Environment above, continued weak economic conditions have adversely
affected our ability to obtain additional mortgages, as well as our ability to borrow funds and
issue equity securities, our principal sources of external financing. Until economic conditions
improve, we intend to fund our existing contractual obligations with our cash flows from operations
and borrowing against our existing line of credit. When economic conditions improve, we intend to
complete additional acquisitions of real estate and to originate additional mortgage notes. When
economic conditions improve, we intend to fund our contractual obligations and acquire additional
properties by borrowing all or a portion of the purchase price and collateralizing the mortgages
with some or all of our real property, by borrowing against our existing line of credit or by
issuing additional equity securities under an effective shelf registration statement. The
registration statement permits us to issue, through one or more transactions, up to an aggregate of
$300.0 million in securities consisting of common or preferred stock, all of which was available as
of December 31, 2008. We may also use these funds for general corporate needs. If we are unable
to make any required debt payments on any borrowings, our lenders could foreclose on the properties
collateralizing their loans, which could cause us to lose part or all of our investments in such
properties. We do not have any balloon principal payments due under any of our long-term mortgages
until 2010, and the $48.0 million mortgage that matures in 2010 has three annual extension options
through 2013.
In addition, we need sufficient capital to fund our distributions, pay the debt service costs on
our existing long-term mortgages, repay our $20.0 million short-term loan and fund our current
operating costs. We may require credits to our management fees, issued from our Adviser, in order
to meet these obligations, although our Adviser is under no obligation to provide such credits, in
whole or in part. We routinely review our liquidity requirements, and we believe that our current
cash flows from operations, coupled with our current availability on our line of credit, are
sufficient to continue operations, repay our short-term loan and pay distributions to our
stockholders, however we are unable to determine the terms of future
borrowings or equity issuances or whether we will be able to borrow funds or issue equity on terms
favorable to us, or at all.
49
Operating Activities
Net cash provided by operating activities during the year ended December 31, 2008 was approximately
$17.6 million, compared to net cash provided by operating activities of approximately $16.1 million
for the year ended December 31, 2007. The increase in cash provided by operating activities is
primarily a result of the six properties we acquired during 2008, coupled with the properties
acquired during 2007 that were held for the full year in 2008. A majority of cash from operating
activities is generated from the rental payments we receive from our tenants and the interest
payments we receive from our borrower. 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 and short-term loan, distributions to our
stockholders, management fees to our Adviser, and other entity level expenses.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2008 was approximately
$50.8 million, which primarily consisted of the purchase of six properties, as described in Recent
Events above, as compared to net cash used in investing activities during the year ended December
31, 2007 of approximately $106.1 million, which primarily consisted of the purchase of 14
properties and one leasehold interest. During the year ended December 31, 2008, we purchased five
of the six properties using borrowings under our line of credit and assumed the mortgage on the
sixth property located in Chalfont, Pennsylvania. During the year ended December 31, 2007, we
purchased all of the properties using borrowings under our line of credit, and then subsequently
placed long-term mortgages on most of these properties and used the proceeds to pay down the line
of credit.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2008 was approximately
$36.3 million, which primarily consisted of the proceeds from the long-term financing of 16 of our
properties and borrowings under our line of credit, partially offset by repayments on our line of
credit, principal repayments on mortgage notes payable, payments for deferred financing costs and
distributions paid to our stockholders. Net cash provided by financing activities for the year
ended December 31, 2007 was approximately $55.3 million, which primarily consisted of the proceeds
received from the long-term financing of 10 of our properties and the proceeds from the short-term
loan, partially offset by repayments on our line of credit, payments for deferred financing costs,
principal repayments on mortgage notes payable and distributions paid to our stockholders.
Mortgage Notes Payable
On August 29, 2008, we assumed approximately $6.4 million of indebtedness pursuant to a long-term
note payable from GE Commercial Mortgage Financial Corporation, or GE, in connection with our
acquisition on the same date of a property located in Chalfont, Pennsylvania. The note accrues
interest at a rate of 6.80% per year, and we may not repay this note prior to maturity or we may be
subject to a substantial prepayment penalty. The note matures on June 1, 2016.
On September 15, 2008, through wholly-owned subsidiaries, we borrowed approximately $48.0 million
pursuant to a long-term note payable from GE, which is collateralized by security interests in 15
properties. The note accrues interest at a rate of 6.85% per year and we may not repay this note
prior to maturity, or we would be subject to a substantial prepayment penalty. The note has a
maturity date of October 1, 2010, with three annual extension options through October 1, 2013. We
used the proceeds from the note to pay down the outstanding balance on the line of credit.
As of December 31, 2008, we had 16 fixed-rate mortgage notes payable in the aggregate principal
amount of approximately $255.1 million, collateralized by a total of 55 properties with terms
ranging from 2 years
to 25 years. The weighted-average interest rate on the mortgage notes payable as of December 31,
2008 was approximately 6.0%.
50
Line of Credit
On December 29, 2006, we entered into a $75.0 million senior revolving credit agreement with a
syndicate of banks led by KeyBank National Association, which matures on December 29, 2009. As
long as we are in compliance with our covenants under the line of credit, we have the option to
extend the line of credit for an additional year, and we currently intend to exercise this option.
We must notify KeyBank of our intention to exercise the renewal option 45 days prior to the
maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of
notification. We subsequently increased the availability under our line of credit to $95.0 million
in November 2007. The interest rate charged on the advances under the facility is based on LIBOR,
the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically.
The unused portion of the line of credit is subject to a fee of 0.15% per year. Our ability to
access this funding source is subject to us continuing to meet customary lending requirements such
as compliance with financial and operating covenants and meeting certain lending limits. One such
covenant requires us to limit distributions to our stockholders to 95% of our funds from
operations, or FFO, beginning with the quarter ended December 31, 2007. In addition, the maximum
amount 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. 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 removed 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. As of December 31, 2008, there
was $11.5 million outstanding under the line of credit at an interest rate of approximately 2.4%,
and approximately $5.1 million outstanding under letters of credit at a weighted average interest
rate of approximately 2.0%. At December 31, 2008, the remaining borrowing capacity available under
the line of credit was approximately $35.5 million. We were in compliance with all covenants under
the line of credit as of December 31, 2008.
Short-Term Loan
On December 21, 2007, we entered into a $20.0 million unsecured term loan with KeyBank National
Association, which matured on December 20, 2008. We exercised our option to extend the term for an
additional six months, which resulted in a new maturity date of June 20, 2009. The interest rate
charged on the loan is based on LIBOR, the prime rate or the federal funds rate, depending on
market conditions, and adjusts periodically. Our ability to maintain this funding source is
subject to us continuing to meet customary lending requirements such as compliance with financial
and operating covenants and meeting certain lending limits. One such covenant requires us to limit
distributions to our stockholders to 95% of our FFO. As of December 31, 2008, the interest rate on
the short-term loan was approximately 4.2%, and we were in compliance with all covenants under the
short-term loan. We currently have adequate availability under our line of credit to repay the
loan in June 2009.
51
Contractual Obligations
The following table reflects our significant contractual obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 Years |
|
Debt Obligations (1) |
|
$ |
286,611,173 |
|
|
$ |
33,953,975 |
|
|
$ |
53,333,089 |
|
|
$ |
6,431,796 |
|
|
$ |
192,892,313 |
|
Interest on Debt Obligations (2) |
|
|
94,181,075 |
|
|
|
16,530,519 |
|
|
|
26,763,348 |
|
|
|
23,261,607 |
|
|
|
27,625,601 |
|
Capital Lease Obligations (3) |
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
Operating Lease Obligations (4) |
|
|
1,680,000 |
|
|
|
134,400 |
|
|
|
268,800 |
|
|
|
268,800 |
|
|
|
1,008,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
382,772,248 |
|
|
$ |
50,618,894 |
|
|
$ |
80,365,237 |
|
|
$ |
29,962,203 |
|
|
$ |
221,825,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt obligations represent borrowings under our line of credit, term loan and mortgage notes
payable that were outstanding as of December 31, 2008.
The line of credit matures in December 2009, and we expect to exercise our
option to extend for an additional year. The term loan matures in June 2009. The
$48.0 million mortgage note issued in September 2008 matures in October 2010,
and we expect to exercise our options to extend through October 2013. |
|
(2) |
|
Interest on debt obligations includes estimated interest on our borrowings under our line of
credit or term loan. The balance and interest rate on our line of credit and term loan are
variable, thus the amount of interest calculated for purposes of this
table was based upon rates and balances as of December 31, 2008. |
|
(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 defined in Item 303(a)(4)(ii) of SEC
Regulation S-K as of December 31, 2008.
52
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 will be exposed to is interest rate risk. We
currently own one variable rate loan receivable, certain of our leases contain escalations based on
market interest rates, and the interest rate on our existing line of credit and short-term loan are
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 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.
To illustrate the potential impact of changes in interest rates on our net income for the years
ended December 31, 2008 and 2007, we have performed the following analysis, which assumes that our
balance sheet remains constant and 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% increase and 1% decrease in the one month LIBOR
for the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
1% increase in the one month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental & interest income |
|
$ |
106,031 |
|
|
$ |
36,500 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
320,250 |
|
|
|
247,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease |
|
$ |
(214,219 |
) |
|
$ |
(210,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders (as reported) |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
|
|
|
|
|
|
|
|
Net decrease as percentage of
Net income available to common stockholders (as reported) |
|
|
-26.1 |
% |
|
|
-10.3 |
% |
|
|
|
|
|
|
|
|
|
1% decrease in the one month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental & interest income |
|
$ |
(96,882 |
) |
|
$ |
(38,948 |
) |
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(320,250 |
) |
|
$ |
(248,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase |
|
$ |
223,368 |
|
|
$ |
209,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders (as reported) |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
|
|
|
|
|
|
|
|
Net increase as percentage of
Net income available to common stockholders (as reported) |
|
|
27.3 |
% |
|
|
10.2 |
% |
As of December 31, 2008, the fair value of our fixed rate debt
outstanding was approximately $227.9
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, 2008, 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 $10.4 million and $11.1 million, respectively.
53
In the future, we may be exposed to additional effects of interest rate changes primarily as a
result of our line of credit, term loan or long-term mortgage debt used 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, all of which may affect our ability to refinance debt if necessary.
54
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
55
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, 2008.
The effectiveness of our internal control over financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
February 25, 2009
56
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, 2008 and December 31, 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2008 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, 2008 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 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.
57
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.
PricewaterhouseCoopers LLP
McLean, VA
February 25, 2009
58
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate, at cost |
|
$ |
390,562,138 |
|
|
$ |
340,500,406 |
|
Less: accumulated depreciation |
|
|
24,757,576 |
|
|
|
15,738,634 |
|
|
|
|
|
|
|
|
Total real estate, net |
|
|
365,804,562 |
|
|
|
324,761,772 |
|
|
|
|
|
|
|
|
|
|
Lease intangibles, net |
|
|
31,533,843 |
|
|
|
28,989,556 |
|
Mortgage notes receivable |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
Cash and cash equivalents |
|
|
4,503,578 |
|
|
|
1,356,408 |
|
Restricted cash |
|
|
2,677,561 |
|
|
|
1,914,067 |
|
Funds held in escrow |
|
|
2,150,919 |
|
|
|
1,401,695 |
|
Deferred rent receivable |
|
|
7,228,811 |
|
|
|
5,094,799 |
|
Deferred financing costs, net |
|
|
4,383,446 |
|
|
|
4,405,129 |
|
Due from adviser (Refer to Note 2) |
|
|
108,898 |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
707,167 |
|
|
|
979,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
429,098,785 |
|
|
$ |
378,902,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
255,111,173 |
|
|
$ |
202,120,471 |
|
Short-term loan and borrowings under line of credit |
|
|
31,500,000 |
|
|
|
24,400,000 |
|
Deferred rent liability |
|
|
3,147,472 |
|
|
|
3,933,035 |
|
Asset retirement obligation liability |
|
|
2,190,192 |
|
|
|
1,811,752 |
|
Accounts payable and accrued expenses |
|
|
2,673,787 |
|
|
|
778,949 |
|
Due to adviser (Refer to Note 2) |
|
|
|
|
|
|
784,301 |
|
Obligation under capital lease |
|
|
235,378 |
|
|
|
|
|
Rent received in advance, security deposits and funds held in escrow |
|
|
3,745,523 |
|
|
|
2,706,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
298,603,525 |
|
|
|
236,534,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
2,150 |
|
|
|
2,150 |
|
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264
and 8,565,264 shares issued and outstanding, respectively |
|
|
8,563 |
|
|
|
8,565 |
|
Additional paid in capital |
|
|
170,622,581 |
|
|
|
170,640,979 |
|
Notes receivable employees |
|
|
(2,595,886 |
) |
|
|
(2,769,923 |
) |
Distributions in excess of accumulated earnings |
|
|
(37,542,148 |
) |
|
|
(25,513,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
130,495,260 |
|
|
|
142,368,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
429,098,785 |
|
|
$ |
378,902,689 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
39,675,788 |
|
|
$ |
31,469,297 |
|
|
$ |
23,964,035 |
|
Interest income from mortgage notes receivable |
|
|
898,573 |
|
|
|
1,013,889 |
|
|
|
1,845,231 |
|
Tenant recovery revenue |
|
|
336,637 |
|
|
|
310,353 |
|
|
|
136,280 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
40,910,998 |
|
|
|
32,793,539 |
|
|
|
25,945,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,297,174 |
|
Property operating expense |
|
|
877,073 |
|
|
|
800,822 |
|
|
|
636,427 |
|
Due diligence expense |
|
|
1,176,379 |
|
|
|
20,968 |
|
|
|
9,365 |
|
Base management fee (Refer to Note 2) |
|
|
1,637,851 |
|
|
|
1,858,120 |
|
|
|
2,902,053 |
|
Incentive fee (Refer to Note 2) |
|
|
2,831,722 |
|
|
|
2,564,365 |
|
|
|
|
|
Administration fee (Refer to Note 2) |
|
|
954,635 |
|
|
|
837,898 |
|
|
|
|
|
Professional fees |
|
|
521,410 |
|
|
|
625,349 |
|
|
|
953,066 |
|
Insurance |
|
|
173,414 |
|
|
|
214,141 |
|
|
|
211,562 |
|
Directors fees |
|
|
216,851 |
|
|
|
229,000 |
|
|
|
140,000 |
|
Stockholder related expenses |
|
|
298,384 |
|
|
|
244,629 |
|
|
|
311,049 |
|
Asset retirement obligation expense |
|
|
133,244 |
|
|
|
116,478 |
|
|
|
129,142 |
|
General and administrative |
|
|
63,263 |
|
|
|
102,999 |
|
|
|
82,847 |
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
394,411 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit from Adviser |
|
|
21,588,867 |
|
|
|
18,143,227 |
|
|
|
14,067,096 |
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee (Refer to Note 2) |
|
|
(2,196,945 |
) |
|
|
(2,321,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,391,922 |
|
|
|
15,821,630 |
|
|
|
14,067,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
21,844 |
|
|
|
354,249 |
|
|
|
76,772 |
|
Interest income employee loans |
|
|
202,097 |
|
|
|
222,051 |
|
|
|
125,788 |
|
Other income |
|
|
63,993 |
|
|
|
47,847 |
|
|
|
380,915 |
|
Interest expense |
|
|
(16,858,687 |
) |
|
|
(11,564,541 |
) |
|
|
(9,104,894 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(16,570,753 |
) |
|
|
(10,940,394 |
) |
|
|
(8,521,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,948,323 |
|
|
|
6,031,515 |
|
|
|
3,357,031 |
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(35,376 |
) |
|
|
(3,312 |
) |
|
|
112,145 |
|
Net realized income (loss) from foreign currency transactions |
|
|
|
|
|
|
33,359 |
|
|
|
(202,938 |
) |
Gain on sale of real estate |
|
|
|
|
|
|
|
|
|
|
1,422,026 |
|
Taxes refunded (paid) on sale of real estate |
|
|
|
|
|
|
78,667 |
|
|
|
(315,436 |
) |
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
(35,376 |
) |
|
|
108,714 |
|
|
|
1,015,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,912,947 |
|
|
|
6,140,229 |
|
|
|
4,372,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
(2,186,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share basic |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of distributions
attributable to preferred stock) |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.15 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (net of distributions
attributable to preferred stock) |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.14 |
|
Discontinued operations |
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
60
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Distributions in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
Receivable |
|
|
Excess of |
|
|
Total |
|
|
|
Common |
|
|
Preferred |
|
|
Excess of |
|
|
From Sale of |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Par Value |
|
|
Common Stock |
|
|
Earnings |
|
|
Equity |
|
Issuance of Common Stock
Under Stock Option Plan |
|
|
893 |
|
|
|
|
|
|
|
13,650,453 |
|
|
|
(2,769,954 |
) |
|
|
|
|
|
|
10,881,392 |
|
|
Issuance of Preferred Stock |
|
|
|
|
|
|
2,150 |
|
|
|
53,747,850 |
|
|
|
|
|
|
|
|
|
|
|
53,750,000 |
|
|
Public Offering Costs |
|
|
|
|
|
|
|
|
|
|
(2,654,279 |
) |
|
|
|
|
|
|
|
|
|
|
(2,654,279 |
) |
|
Stock Option Compensation
Expense |
|
|
|
|
|
|
|
|
|
|
394,411 |
|
|
|
|
|
|
|
|
|
|
|
394,411 |
|
|
Repayment of Principal on
Notes Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914 |
|
|
|
|
|
|
|
914 |
|
|
Distributions Declared to
Common and Preferred
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,469,626 |
) |
|
|
(13,469,626 |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,372,828 |
|
|
|
4,372,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
8,565 |
|
|
$ |
2,150 |
|
|
$ |
170,640,979 |
|
|
$ |
(3,201,322 |
) |
|
$ |
(15,226,196 |
) |
|
$ |
152,224,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Principal on
Notes Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431,399 |
|
|
|
|
|
|
|
431,399 |
|
|
Distributions Declared to
Common and Preferred
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,427,736 |
) |
|
|
(16,427,736 |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,140,229 |
|
|
|
6,140,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
8,565 |
|
|
$ |
2,150 |
|
|
$ |
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 |
|
$ |
8,563 |
|
|
$ |
2,150 |
|
|
$ |
170,622,581 |
|
|
$ |
(2,595,886 |
) |
|
$ |
(37,542,148 |
) |
|
$ |
130,495,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
61
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,912,947 |
|
|
$ |
6,140,229 |
|
|
$ |
4,372,828 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including discontinued operations |
|
|
12,704,641 |
|
|
|
10,528,458 |
|
|
|
8,349,474 |
|
Amortization of deferred financing costs, including discontinued operations |
|
|
1,283,956 |
|
|
|
717,195 |
|
|
|
1,207,198 |
|
Amortization of deferred rent asset and liability |
|
|
(532,066 |
) |
|
|
(532,068 |
) |
|
|
(442,765 |
) |
Accretion of obligation under capital lease |
|
|
10,311 |
|
|
|
|
|
|
|
|
|
Asset retirement obligation expense, including discontinued operations |
|
|
133,244 |
|
|
|
116,478 |
|
|
|
139,074 |
|
Stock compensation |
|
|
|
|
|
|
|
|
|
|
394,411 |
|
Increase in mortgage notes payable due to change in value of foreign currency |
|
|
|
|
|
|
|
|
|
|
202,066 |
|
Value of building acquired in excess of mortgage note satisfied, applied to interest income |
|
|
|
|
|
|
|
|
|
|
(335,701 |
) |
Gain on sale of real estate |
|
|
|
|
|
|
|
|
|
|
(1,422,026 |
) |
Decrease (increase) in prepaid expenses and other assets |
|
|
172,096 |
|
|
|
64,990 |
|
|
|
(62,880 |
) |
Increase in deferred rent receivable |
|
|
(2,387,509 |
) |
|
|
(1,741,016 |
) |
|
|
(1,270,159 |
) |
Increase in accounts payable, accrued expenses, and amount due adviser, net |
|
|
1,001,639 |
|
|
|
625,398 |
|
|
|
196,294 |
|
Increase in rent received in advance |
|
|
275,916 |
|
|
|
176,145 |
|
|
|
268,037 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
17,575,175 |
|
|
|
16,095,809 |
|
|
|
11,595,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments |
|
|
(49,359,852 |
) |
|
|
(105,599,587 |
) |
|
|
(48,339,307 |
) |
Proceeds from sales of real estate |
|
|
|
|
|
|
|
|
|
|
2,102,567 |
|
Principal repayments on mortgage notes receivable |
|
|
|
|
|
|
|
|
|
|
44,742 |
|
Receipts from lenders for reserves held in escrow |
|
|
874,227 |
|
|
|
1,603,309 |
|
|
|
1,127,753 |
|
Payments to lenders for reserves held in escrow |
|
|
(1,623,452 |
) |
|
|
(1,369,186 |
) |
|
|
(1,722,280 |
) |
(Increase) decrease in restricted cash |
|
|
(763,494 |
) |
|
|
(688,905 |
) |
|
|
749,274 |
|
Deposits on future acquisitions |
|
|
(1,650,000 |
) |
|
|
(2,110,000 |
) |
|
|
(900,000 |
) |
Deposits applied against real estate investments |
|
|
1,750,000 |
|
|
|
2,110,000 |
|
|
|
1,200,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(50,772,571 |
) |
|
|
(106,054,369 |
) |
|
|
(45,737,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from share issuance |
|
|
|
|
|
|
|
|
|
|
65,089,026 |
|
Redemption of shares for payment of taxes |
|
|
|
|
|
|
|
|
|
|
(457,634 |
) |
Offering costs |
|
|
|
|
|
|
|
|
|
|
(2,654,279 |
) |
Borrowings under mortgage notes payable |
|
|
48,015,000 |
|
|
|
48,521,690 |
|
|
|
68,055,000 |
|
Principal repayments on mortgage notes payable |
|
|
(1,485,901 |
) |
|
|
(895,657 |
) |
|
|
(604,318 |
) |
Principal repayments on employee notes receivable |
|
|
155,637 |
|
|
|
431,399 |
|
|
|
914 |
|
Borrowings from short-term loan and line of credit |
|
|
76,900,000 |
|
|
|
65,500,000 |
|
|
|
71,400,400 |
|
Repayments on line of credit |
|
|
(69,800,000 |
) |
|
|
(41,100,000 |
) |
|
|
(114,960,400 |
) |
Receipts from tenants for reserves |
|
|
2,391,360 |
|
|
|
2,023,019 |
|
|
|
2,099,506 |
|
Payments to tenants from reserves |
|
|
(2,159,671 |
) |
|
|
(1,710,685 |
) |
|
|
(3,276,731 |
) |
Increase in security deposits |
|
|
531,806 |
|
|
|
376,572 |
|
|
|
427,951 |
|
Payments for deferred financing costs |
|
|
(1,262,273 |
) |
|
|
(1,409,320 |
) |
|
|
(3,242,881 |
) |
Distributions paid for common and preferred |
|
|
(16,941,392 |
) |
|
|
(16,427,736 |
) |
|
|
(13,469,627 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
36,344,566 |
|
|
|
55,309,282 |
|
|
|
68,406,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,147,170 |
|
|
|
(34,649,278 |
) |
|
|
34,265,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
1,356,408 |
|
|
|
36,005,686 |
|
|
|
1,740,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
4,503,578 |
|
|
$ |
1,356,408 |
|
|
$ |
36,005,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for interest |
|
$ |
14,337,944 |
|
|
$ |
10,693,440 |
|
|
$ |
8,045,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to real estate included in accounts payable, accrued expenses, and amount due adviser |
|
$ |
|
|
|
$ |
81,400 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in asset retirement obligation |
|
$ |
245,196 |
|
|
$ |
180,458 |
|
|
$ |
1,631,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt assumed in connection with acquisitions |
|
$ |
6,461,603 |
|
|
$ |
4,506,689 |
|
|
$ |
30,129,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation under capital lease |
|
$ |
225,068 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of mortgage notes payable by buyer |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,846,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of building in satisfaction of mortgage note receivable |
|
$ |
|
|
|
$ |
|
|
|
$ |
11,316,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,769,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of common stock in satisfaction of employee note receivable |
|
$ |
18,400 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
62
GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Gladstone Commercial Corporation (the Company) is a Maryland corporation that operates in a
manner so as to qualify as a real estate investment trust (REIT) for federal income tax purposes
and was incorporated on February 14, 2003 under the General Corporation Law of Maryland, primarily
for the purpose 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 disclosed below, the financial
position and results of operations of the Operating Partnership are consolidated with those of
the Company.
Gladstone Commercial Partners, LLC, a Delaware limited liability company (Commercial Partners)
and a subsidiary of the Company, was organized to engage in any lawful act or activity for which a
limited liability company may be organized in Delaware. Commercial Partners has the power to make
and perform all contracts and to engage in all activities to carry out the purposes of the Company,
and all other powers available to it as a limited liability company. As the Company currently owns
all of the membership interests of Commercial Partners, the financial position and results of
operations of Commercial Partners are consolidated with those of the Company.
Gladstone Lending, LLC, a Delaware limited liability company (Gladstone 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 Lending, the financial position and results of operations of Gladstone 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, subsidiaries of the Company, each are business
trusts 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.
63
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 incurred. The Company computes depreciation
using the straight-line method over the estimated useful life of 39 years for buildings and
improvements, five to seven 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 Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, which requires the
purchase price of real estate to be 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 each case on their fair
values.
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
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 $9.0 million, $7.1 million and $5.4 million for the years
ended December 31, 2008, 2007 and 2006, 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
$0.3 million for each of the years ended December 31, 2008, 2007 and 2006, respectively. The
capitalized below-market lease values, included in the accompanying 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
$0.8 million, $0.8 million and $0.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
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 expectations of lease renewals (including those existing
under the terms of the lease agreement), among other factors.
64
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 charged to expense. Total amortization expense related to these intangible
assets, including discontinued operations, was approximately $3.7 million, $3.4 million and $3.0
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Impairment
Investments in Real Estate
The Company accounts for the impairment of real estate in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which requires that the Company 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 the current economic conditions discussed in Managements Discussion and Analysis -Business Environment, the Company performed an impairment analysis of its entire portfolio at
December 31, 2008. In performing the analysis, the Company considered such factors as the tenants
payment history, the financial condition of the tenants, the likelihood of lease renewal, business
conditions in the industry in which the tenants operate and whether the carrying 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 that it reflect in its financial statements an
allowance for estimated credit losses with respect to mortgage loans 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.
Cash and Cash Equivalents
The Company considers 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 to be cash equivalents;
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, 2008 were held in the
custody of one financial institution, and the Companys balance at times may exceed federally
insurable limits.
65
Restricted Cash
Restricted cash consists of security deposits and funds held in escrow for certain tenants. The
funds held in escrow are for capital improvements, taxes, insurance and other replacement reserves
for certain of our 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 when evidence of insurance and tax payments has been submitted to the Company.
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 consist of replacement reserves for capital
improvements, repairs and maintenance, insurance and taxes. 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.
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
financing secured. The Company made payments of approximately $1.3 million, $1.4 million and $3.2
million for deferred financing costs during the years ended December 31, 2008, 2007 and 2006,
respectively. Total amortization expense related to deferred financing costs was approximately
$1.3 million, $0.7 million and $1.2 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid
assets and deposits on real estate.
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 SFAS No. 13 Accounting for 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 $10,310 for the year ended December 31, 2008.
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. Certain of the Companys leases
currently contain rental increases at specified intervals. We recognize such revenues on a
straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred
rent receivable in the accompanying 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 collectible. 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 area in
which the property is located. In the event that the collectibility of deferred rent with respect
to any given tenant is in doubt, the Company records an allowance for uncollectible accounts or
records a direct write-off of the specific rent receivable, which would have an adverse effect on the net income for
the year in which the reserve is increased or the direct write-off is recorded and would
decrease total assets and stockholders equity. No such reserves have been recorded as of
December 31, 2008.
66
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.
Certain of the Companys mortgage loans and leases have embedded derivatives in the form of
interest rate floors and ceilings. These embedded derivatives do not require separate accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
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 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 SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, 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
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, 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 10, 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.
Foreign Currency Transactions
The Company purchased two properties in Canada in October 2004. These properties were classified
as held for sale as of June 30, 2006, and were sold in July 2006. All gains and losses from
foreign currency transactions are reflected in discontinued operations in the Companys
consolidated financial statements. The Company had a bank account in Canada, which was closed in
December 2007. The cash account was
re-valued at each balance sheet date to reflect the then current exchange rate. The gains or
losses from the valuation of the cash were recorded on the income statement as a realized gain or
loss. A realized gain, net
of taxes paid, of approximately $1.1 million related to the sale of the Canadian properties was
recognized for the year ended December 31, 2006. A refund of taxes paid was subsequently received
during 2007, which effectively increased the cumulative net gain recorded in 2006 and 2007 on the
sale to approximately $1.2 million.
67
Asset Retirement Obligations
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 requires an entity to
recognize a liability for a conditional asset retirement obligation when incurred if the liability
can be reasonably estimated. FIN 47 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. FIN 47 also 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. The Company accrued a liability during the
years ended December 31, 2008 and 2007 of approximately $0.2 million and $0.06 million,
respectively, related to properties acquired during those periods, which reflected the present
value of the future obligation. The Company recorded expense of approximately $0.1 million for
each of the years ended December 31, 2008, 2007 and 2006, including discontinued operations,
related to the cumulative accretion of the obligation.
Real Estate Held for Sale and Discontinued Operations
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 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
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
The Company has only partially adopted the provisions of SFAS 157 because of the issuance of FSP
SFAS 157-2 (the FSP), which allows companies to delay the effective date of SFAS 157 for
non-financial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The partial adoption had no impact on the
Companys results of operations.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS 157
in a market that is not active. More specifically, FSP No. 157-3 states that significant judgment
should be applied to determine if observable data in a dislocated market represents forced
liquidations or distressed sales and are not representative of fair value in an orderly
transaction. FSP No. 157-3 also provides further guidance that the use of a reporting entitys own
assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable
when relevant observable inputs are not available. In addition, FSP No. 157-3 provides guidance on
the level of reliance of broker quotes or pricing services when measuring fair value in a non
active market stating that less reliance should be placed on a quote that does not reflect actual
market transactions and a quote that is not a binding offer. The guidance in FSP No. 157-3 is
effective upon issuance for all financial statements that have not been issued and any changes in
valuation techniques as a result of applying FSP No. 157-3 are accounted for as a change in
accounting estimate. The Company
adopted this pronouncement during the quarter ended December 31, 2008, and the adoption had no
material impact on its consolidated financial statements as of December 31, 2008.
68
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 allows entities to measure at fair value many
financial instruments and certain other assets and liabilities that are not otherwise required
to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company adopted SFAS 159 effective for the fiscal year beginning January 1, 2008,
and the adoption had no impact on the Companys results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, ( SFAS No.
141(R)), which replaces SFAS No. 141, Business Combinations (SFAS 141). SFAS 141 (R)
significantly changes the accounting for acquisitions involving business combinations, as it
requires that the assets and liabilities of all business combinations be recorded at fair value,
with limited exceptions. SFAS 141(R) 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 under SFAS 141. SFAS 141(R) is 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. If SFAS 141(R) had been in effect as of January 1,
2008, the Company would have expensed approximately $0.7 million of transaction costs related to
the six acquisitions completed during the year ended December 31, 2008, or approximately 1.4% of
the total purchase price of the acquired properties, which would have resulted in an increase in
operating expenses of approximately 3.8% and a corresponding decrease in net income of
approximately 14.9%. The impact on the Companys 2009 results of operations could differ
significantly.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 requires all entities to report noncontrolling
(minority) interests in subsidiaries in the same way as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company
does not believe the adoption of this pronouncement will have a material impact on its results of
operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161), which is intended to help investors better understand how derivative
instruments and hedging activities affect an entitys financial position, financial performance and
cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround
disclosing the objectives and strategies for using derivative instruments by their underlying risk
as well as a tabular format of the fair values of the derivative instruments and their gains and
losses. SFAS 161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company adopted this pronouncement during the quarter ended
December 31, 2008, and the adoption had no material impact on its consolidated financial statements
as of December 31, 2008.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP No. 142-3), which amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). FSP No. 142-3 is intended to
improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and
the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP
No. 142-3 is effective for financial statements issued for fiscal years beginning after December
15, 2008, as well as interim periods within those fiscal years, and must be applied prospectively
to intangible assets acquired after the effective date. The Company does not believe the adoption
of this pronouncement will have a material impact on its results of operations.
69
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.
Reclassifications
Certain amounts from prior years financial statements have been reclassified to conform to the
current presentation. Certain items within the cash flow statement were re-classed between the
financing and investing sections during 2008. These items related to payments received from
tenants for reserves and payments made to lenders for reserves. These reclassifications had no
effect on previously reported net income or stockholders equity.
2. Management Advisory Fee
The Company has been externally managed pursuant to a contractual investment advisory arrangement
with its Adviser, under which its Adviser has directly employed all of the Companys personnel and
paid its payroll, benefits, and general expenses directly. The Companys initial investment
advisory agreement with its Adviser was in place from August 12, 2003 through December 31, 2006
(the Initial Advisory Agreement). On January 1, 2007, the Company entered into an amended and
restated investment advisory agreement with its Adviser (the Amended Advisory Agreement) and an
administration agreement (the Administration Agreement) with a wholly-owned subsidiary of the
Adviser, Gladstone Administration, LLC (the Administrator). The management services and fees
under the Initial Advisory Agreement and the Amended Advisory and Administration Agreements are
described below.
Initial Advisory Agreement
Under the Initial Advisory Agreement, the Company was required to reimburse its Adviser for its
pro rata share of its Advisers payroll and benefits expenses on an employee-by-employee basis,
based on the percentage of each employees time devoted to the Companys matters. During the year
ended December 31, 2006, these expenses were approximately $2.3 million.
The Company was also required to reimburse its Adviser for its pro rata portion of all other
expenses of its Adviser not reimbursed under the Initial Advisory Agreement (overhead expenses),
equal to the total overhead expenses of its Adviser, multiplied by the ratio of hours worked by its
Advisers employees on the Companys projects to the total hours worked by its Advisers employees.
However, the Company was only required to reimburse its Adviser for its portion of its overhead
expenses if the amount of payroll and benefits the Company reimbursed to its Adviser was less than
2.0% of the Companys average invested assets for the year. Additionally, the Company was only
required to reimburse its Adviser for overhead expenses up to the point that reimbursed overhead
expenses and payroll and benefits expenses, on a combined basis, equaled 2.0% of the Companys
average invested assets for the year. The Adviser billed the Company on a monthly basis for these
amounts. The Adviser was required to reimburse the Company annually for the amount by which
overhead expenses billed to and paid by the Company exceeded this combined 2.0% limit during a
given year. The overhead expenses never exceeded the combined 2.0% limit and, consequently, the
Company never received any reimbursement. During the year ended December 31, 2006, the Company
reimbursed its Adviser approximately $0.6 million of overhead expenses.
Amended Advisory Agreement
The Amended 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, and an
incentive fee based on FFO. For the years ended December 31, 2008 and 2007, the Company recorded a
base management fee of approximately $1.6 million and $1.9 million, respectively. 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 stockholders equity, less the recorded value of any preferred stock. 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 pre-incentive fee FFO. The Adviser also receives an incentive fee of
20% of the amount of the Companys pre-incentive fee FFO that exceeds 2.1875%.
70
For the years ended December 31, 2008 and 2007, the Company recorded an incentive fee of
approximately $2.8 million and $2.6 million, respectively, offset by a credit related to an
unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $2.2 million
and $2.3 million, respectively, for a net incentive fee for the years ended December 31, 2008 and
2007 of approximately $0.6 million and $0.3 million, respectively. The board of directors of the
Company accepted the Advisers offer to unconditionally, irrevocably and voluntarily waive a
portion of the incentive fee for the years ended December 31, 2008 and 2007, in order to comply
with the covenant under its line of credit which limits its distributions to 95% of FFO, and in
turn to maintain the current level of distributions to the Companys stockholders.
Administration Agreement
Under the Administration Agreement, the Company pays separately for its allocable portion of the
Administrators overhead expenses in performing its obligations including, but not limited to,
rent for employees of the Administrator, and its allocable portion of the salaries and benefits
expenses of its chief financial officer, chief compliance officer, treasurer 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, 2008 and 2007, the Company recorded an
administration fee of approximately $1.0 million and $0.8 million, respectively.
3. Stock Options
The Company adopted SFAS 123(R), Share-Based Payment, on January 1, 2006 using the modified
prospective approach. Under the modified prospective approach, stock-based compensation expense
was recorded for the unvested portion of previously issued awards that remained outstanding at
January 1, 2006 using the same estimate of the grant date fair value and the same attribution
method used to determine the pro forma disclosure under SFAS 123. SFAS 123(R) also requires that
all share-based payments to employees after January 1, 2006, including employee stock options, be
recognized in the financial statements as stock-based compensation expense based on the fair value
on the date of grant. The Company recorded total stock option compensation expense of approximately $0.4 million for the year
ended December 31, 2006, and since it terminated its stock option plan on December 31, 2006 there
was no stock option compensation expense recorded for either the years ended December 31, 2008 or
2007.
71
A summary of the status of the Companys 2003 Equity Incentive Plan from December 31, 2005
through December 31, 2006 (termination) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Exercise Price |
Options outstanding at December 31, 2005, of which 744,250
shares were exercisable |
|
|
916,000 |
|
|
$ |
15.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(916,000 |
) |
|
$ |
15.40 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of all outstanding notes issued to employees of the Adviser
for the exercise of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Strike Price of |
|
|
Amount of |
|
|
Balance of |
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Options |
|
|
Promissory Note |
|
|
Employee Loans |
|
|
|
|
|
|
Interest Rate |
|
Date Issued |
|
Exercised |
|
|
Exercised |
|
|
Issued to Employees |
|
|
at 12/31/08 |
|
|
Term of Note |
|
|
on Note |
|
Sep-04 |
|
|
25,000 |
|
|
$ |
15.00 |
|
|
$ |
375,000 |
|
|
$ |
365,927 |
|
|
9 years |
|
|
5.00 |
% |
Apr-06 |
|
|
12,422 |
|
|
|
16.10 |
|
|
|
199,994 |
|
|
|
199,994 |
|
|
9 years |
|
|
7.77 |
% |
May-06 |
|
|
50,000 |
|
|
|
16.85 |
|
|
|
842,500 |
|
|
|
842,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
15,000 |
|
|
|
16.10 |
|
|
|
241,500 |
|
|
|
241,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,500 |
|
|
|
16.01 |
|
|
|
40,000 |
|
|
|
38,365 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
15.00 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
10 years |
|
|
7.87 |
% |
Oct-06 |
|
|
12,000 |
|
|
|
16.10 |
|
|
|
193,200 |
|
|
|
193,200 |
|
|
9 years |
|
|
8.17 |
% |
Nov-06 |
|
|
25,000 |
|
|
|
15.00 |
|
|
|
375,000 |
|
|
|
245,000 |
|
|
9 years |
|
|
8.15 |
% |
Dec-06 |
|
|
25,000 |
|
|
|
15.00 |
|
|
|
375,000 |
|
|
|
375,000 |
|
|
10 years |
|
|
8.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,922 |
|
|
|
|
|
|
$ |
2,736,594 |
|
|
$ |
2,595,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with Emerging Issues Task Force No. 85-1, Classifying Notes Received for Capital
Stock, 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 loans to employees and are included in the equity
section of the accompanying consolidated balance sheets.
4. Earnings per Common Share
The following tables set forth the computation of basic and diluted earnings per share for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income available to common stockholders |
|
$ |
819,197 |
|
|
$ |
2,046,479 |
|
|
$ |
2,185,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic & diluted weighted average shares |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,827,781 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
158,909 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted weighted average shares |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
|
|
7,986,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
72
5. 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, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
55,226,042 |
(1) |
|
$ |
48,867,482 |
|
Building |
|
|
325,515,390 |
|
|
|
283,829,987 |
|
Tenant improvements |
|
|
9,820,706 |
|
|
|
7,802,937 |
|
Accumulated depreciation |
|
|
(24,757,576 |
) |
|
|
(15,738,634 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
$ |
365,804,562 |
|
|
$ |
324,761,772 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes land held under a capital lease carried at approximately $1.1 million. |
During the year ended December 31, 2008, the Company acquired six properties, which are
summarized below:
On January 29, 2008, the Company acquired a 42,900 square foot industrial building in Reading,
Pennsylvania for approximately $7.2 million, including transaction costs. At closing, the Company
extended a 20 year triple net lease with the sole tenant, and the tenant has four options to
extend the lease for additional periods of five years each. The lease provides for prescribed
rent escalations over the life of the lease, with annualized straight line rents of approximately
$0.72 million.
On February 26, 2008, the Company acquired a 74,160 square foot office building in Fridley,
Minnesota for approximately $10.6 million, including transaction costs. At closing, the Company was
assigned the previously existing triple net lease with the sole tenant, which had a remaining term
of approximately five years. The tenant has two options to extend the lease for additional periods
of five years each. The lease provides for prescribed rent escalations over the life of the lease,
with annualized straight line rents of
approximately $0.95 million. The Company was also assigned a ground lease on the parking lot at the
time of closing, which has a remaining term of approximately six years. At the end of the term, the
Company is required to purchase the land. The rent due under the ground lease had been prepaid by
the previous owner through the end of the term.
On March 31, 2008, the Company acquired a 273,300 square foot industrial building in Concord
Township, Ohio for approximately $15.3 million, including transaction costs. At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has three options
to extend the lease for additional periods of five years each. The lease provides for prescribed
rent escalations over the life of the lease, with annualized straight line rents of approximately
$1.72 million.
On April 30, 2008, the Company acquired a 74,950 square foot industrial building in Pineville,
North Carolina for approximately $3.9 million, including transaction costs. At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has three
options to extend the lease for additional periods of five years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight line rents of
approximately $0.43 million.
On August 29, 2008, the Company acquired a 223,458 square foot industrial building in Marietta,
Ohio for approximately $8.1 million, including transaction costs. At closing, the Company extended
a 20 year triple net lease with the sole tenant, and the tenant has two options to extend the lease
for additional periods of ten years each. The lease provides for prescribed rent escalations over
the life of the lease, with annualized straight line rents of approximately $0.90 million.
73
On August 29, 2008, the Company acquired a 67,200 square foot office building in Chalfont,
Pennsylvania for approximately $8.4 million, including transaction costs, which was funded by a
combination of cash on hand, and the assumption of approximately $6.5 million of financing on the
property. At closing, the Company was assigned the previously existing triple net lease with the
sole tenant, which had a remaining term of approximately 7 years. The tenant has two options to
extend the lease for additional periods of five years each. The lease provides for prescribed rent
escalations over the life of the lease, with annualized straight line rents of approximately $0.76
million.
Future operating lease payments from tenants under non-cancelable leases, excluding tenant
reimbursement of expenses, in effect at December 31, 2008, were as follows:
|
|
|
|
|
|
|
Tenant |
|
|
Lease Payments |
2009 |
|
$ |
39,037,028 |
|
2010 |
|
|
38,980,217 |
|
2011 |
|
|
38,516,159 |
|
2012 |
|
|
38,222,196 |
|
2013 |
|
|
32,860,916 |
|
Thereafter |
|
$ |
184,512,854 |
|
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, 2008 was approximately $5.7 million, and the total annual ground lease
payments on the Tulsa, Oklahoma property was approximately $134,000.
In accordance with SFAS 141 the Company allocated the purchase price of the properties acquired
during the year ended December 31, 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant |
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
|
|
|
|
Total Purchase |
|
|
|
Land |
|
|
Building |
|
|
Improvements |
|
|
In-place Leases |
|
|
Leasing Costs |
|
|
Relationships |
|
|
Obligations |
|
|
Price |
|
Reading, Pennsylvania |
|
$ |
490,646 |
|
|
$ |
6,188,168 |
|
|
$ |
14,208 |
|
|
$ |
362,479 |
|
|
$ |
1,786 |
|
|
$ |
141,232 |
|
|
$ |
|
|
|
$ |
7,198,519 |
|
Fridley, Minnesota |
|
|
1,354,233 |
|
|
|
7,454,098 |
|
|
|
619,428 |
|
|
|
452,414 |
|
|
|
171,005 |
|
|
|
807,950 |
|
|
|
(225,068 |
) |
|
|
10,634,060 |
|
Concord Township, Ohio |
|
|
1,796,467 |
|
|
|
10,254,003 |
|
|
|
900,120 |
|
|
|
1,702,792 |
|
|
|
5,102 |
|
|
|
917,661 |
|
|
|
(245,196 |
) |
|
|
15,330,949 |
|
Pineville, North Carolina |
|
|
669,025 |
|
|
|
2,930,295 |
|
|
|
98,025 |
|
|
|
151,426 |
|
|
|
2,218 |
|
|
|
93,080 |
|
|
|
|
|
|
|
3,944,069 |
|
Marietta, Ohio |
|
|
829,014 |
|
|
|
6,537,796 |
|
|
|
69,469 |
|
|
|
479,124 |
|
|
|
3,268 |
|
|
|
179,014 |
|
|
|
|
|
|
|
8,097,685 |
|
Chalfont, Pennsylvania |
|
|
1,249,415 |
|
|
|
6,103,088 |
|
|
|
316,519 |
|
|
|
172,278 |
|
|
|
189,326 |
|
|
|
397,841 |
|
|
|
|
|
|
|
8,428,467 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,388,800 |
|
|
$ |
39,467,448 |
|
|
$ |
2,017,769 |
|
|
$ |
3,320,513 |
|
|
$ |
372,705 |
|
|
$ |
2,536,778 |
|
|
$ |
(470,264 |
) |
|
$ |
53,633,749 |
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The weighted average amortization period for the intangible assets acquired during the
year ended December 31, 2008, were as follows:
|
|
|
|
|
Intangible assets |
|
Years |
In-place leases |
|
|
16.8 |
|
Leasing costs |
|
|
18.2 |
|
Customer relationships |
|
|
22.7 |
|
All intangible assets |
|
|
16.7 |
|
There were no allocations to above or below market lease intangibles for the six acquisitions
during the year ended December 31, 2008.
74
The following table summarizes the net value of other intangible assets and the accumulated
amortization for each intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Lease Intangibles |
|
|
Amortization |
|
|
Lease Intangibles |
|
|
Amortization |
|
In-place leases |
|
$ |
15,981,245 |
|
|
$ |
(5,079,343 |
) |
|
$ |
12,660,732 |
|
|
$ |
(3,414,868 |
) |
Leasing costs |
|
|
9,662,731 |
|
|
|
(2,987,360 |
) |
|
|
9,290,026 |
|
|
|
(2,114,233 |
) |
Customer relationships |
|
|
17,136,501 |
|
|
|
(3,179,931 |
) |
|
|
14,599,726 |
|
|
|
(2,031,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,780,477 |
|
|
$ |
(11,246,634 |
) |
|
$ |
36,550,484 |
|
|
$ |
(7,560,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated aggregate amortization expense for each of the five succeeding fiscal years is as
follows:
|
|
|
|
|
|
Estimated Aggregate |
|
|
Amortization Expense |
2009 |
|
$ |
3,768,633 |
2010 |
|
|
3,691,359 |
2011 |
|
|
3,500,565 |
2012 |
|
|
3,114,280 |
2013 |
|
|
1,903,712 |
Thereafter |
|
$ |
9,656,867 |
6. Discontinued Operations
On July 21, 2006, the Company sold its two Canadian properties for approximately $6.9 million, for
a gain on the sale of approximately $1.4 million. The Company incurred approximately $0.3 million
in taxes related to the gain on the sale in 2006. The 2006 tax returns were subsequently filed in
March of 2007, and the Company received a refund in 2007 in the amount of approximately $0.08
million, which is reflected in the accompanying statement of operations in discontinued operations
under taxes refunded on sale of real estate. The operating expenses recorded during the years ended
December 31, 2008 and 2007 are legal fees related to the Canadian entities which have been
dissolved.
The Company classified its two Canadian properties as discontinued operations, in accordance with
the provisions of SFAS 144. The table below summarizes the components of income (loss) from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating (expense) income |
|
$ |
(35,376 |
) |
|
$ |
(3,312 |
) |
|
$ |
112,145 |
|
|
Net realized income (loss) from foreign currency
transactions |
|
|
|
|
|
|
33,359 |
|
|
|
(202,938 |
) |
|
Taxes refunded (paid) on sale of real estate |
|
|
|
|
|
|
78,667 |
|
|
|
(315,436 |
) |
|
Gain on sale of real estate |
|
|
|
|
|
|
|
|
|
|
1,422,026 |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
$ |
(35,376 |
) |
|
$ |
108,714 |
|
|
$ |
1,015,797 |
|
|
|
|
|
|
|
|
|
|
|
7. Mortgage Note Receivable
On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million,
collateralized by an office building in McLean, Virginia, where the Companys Adviser and
Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the
greater of 7.5% per year or the one month London Interbank Offered Rate (LIBOR) rate plus 6.0%
per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of
the term, with payments of principal commencing after the initial period. The balance of the
principal and all interest remaining is due at the end of the 12 year term. At December 31, 2008,
the interest rate was 7.9%.
75
The fair market value of the mortgage note receivable as of December 31, 2008 was approximately
$9.7 million, as compared to the carrying value stated above of approximately $10.0 million. The
fair market value is calculated based on a discounted cash flow analysis, using an interest rate
based on managements estimate of the interest rate on a mortgage note receivable with comparable
terms.
8. Mortgage Notes Payable, Line of Credit and Short-Term Loan
The Companys mortgage notes payable, line of credit and short-term loan as of December 31, 2008
and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated Interest |
|
|
|
|
|
|
Date of Issuance/ |
|
|
Principal Maturity |
|
|
Rate at |
|
|
Principal Balance Outstanding |
|
|
|
Assumption |
|
|
Date |
|
|
December 31, 2008 (1) |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
Fixed-Rate Mortgage Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/16/05 |
|
|
|
04/01/30 |
|
|
|
6.33 |
% |
|
$ |
2,948,753 |
|
|
$ |
3,003,582 |
|
|
|
|
08/25/05 |
|
|
|
09/01/15 |
|
|
|
5.33 |
% |
|
|
21,399,644 |
|
|
|
21,664,476 |
|
|
|
|
09/12/05 |
|
|
|
09/01/15 |
|
|
|
5.21 |
% |
|
|
12,560,673 |
|
|
|
12,588,000 |
|
|
|
|
12/21/05 |
|
|
|
12/08/15 |
|
|
|
5.71 |
% |
|
|
19,241,117 |
|
|
|
19,456,000 |
|
|
|
|
02/21/06 |
|
|
|
12/01/13 |
|
|
|
5.91 |
% |
|
|
9,344,908 |
|
|
|
9,480,063 |
|
|
|
|
02/21/06 |
|
|
|
06/30/14 |
|
|
|
5.20 |
% |
|
|
19,472,740 |
|
|
|
19,782,270 |
|
|
|
|
03/29/06 |
|
|
|
04/01/16 |
|
|
|
5.92 |
% |
|
|
17,000,000 |
|
|
|
17,000,000 |
|
|
|
|
04/27/06 |
|
|
|
05/05/16 |
|
|
|
6.58 |
% |
|
|
14,281,616 |
|
|
|
14,514,214 |
|
|
|
|
11/22/06 |
|
|
|
12/01/16 |
|
|
|
5.76 |
% |
|
|
14,309,000 |
|
|
|
14,309,000 |
|
|
|
|
12/22/06 |
|
|
|
01/01/17 |
|
|
|
5.79 |
% |
|
|
21,846,000 |
|
|
|
21,846,000 |
|
|
|
|
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 |
|
|
|
|
09/06/07 |
|
|
|
12/11/15 |
|
|
|
5.81 |
% |
|
|
4,426,393 |
|
|
|
4,487,205 |
|
|
|
|
10/15/07 |
|
|
|
11/08/17 |
|
|
|
6.63 |
% |
|
|
15,828,612 |
|
|
|
15,974,661 |
|
|
|
|
08/29/08 |
|
|
|
06/01/16 |
|
|
|
6.80 |
% |
|
|
6,421,717 |
|
|
|
|
|
|
|
|
09/15/08 |
|
|
|
10/01/10 |
(2) |
|
|
6.85 |
% |
|
|
48,015,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed-Rate Mortgage Notes
Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,111,173 |
|
|
|
202,120,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Line of Credit: |
|
|
12/29/06 |
|
|
|
12/29/09 |
(3) |
|
LIBOR + 1.9% |
|
|
11,500,000 |
|
|
|
4,400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Short-Term Loan: |
|
|
12/21/07 |
|
|
|
06/20/09 |
|
|
LIBOR + 2.75% |
|
|
20,000,000 |
|
|
|
20,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Notes Payable, Line of Credit and
Short-Term Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
286,611,173 |
|
|
$ |
226,520,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average interest rate on all debt outstanding at December 31, 2008 was
approximately 5.70%. |
|
(2) |
|
This note has three annual extension options, which extends the term of the note
until October 1, 2013. |
|
(3) |
|
The line of credit may be extended for a one-year period at the Companys option,
subject to certain conditions. |
Mortgage Notes Payable
As of December 31, 2008 the Company had 16 fixed-rate mortgage notes payable, collateralized by a
total of 55 properties. The obligor under each of these notes is a wholly-owned separate borrowing
entity, which owns 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 also indemnifies 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, 2008 was
approximately 6.0%.
The fair market value of all fixed-rate mortgage notes payable outstanding as of December 31, 2008
was approximately $227.9 million, as compared to the carrying value stated above of approximately
$255.1 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.
76
On August 29, 2008, the Company assumed approximately $6.5 million of indebtedness pursuant to a
long-term note payable from GE Commercial Mortgage Financial Corporation (GE), in connection with
the Companys acquisition, on the same date, of a property located in Chalfont, Pennsylvania. The
note accrues interest at a rate of 6.80% per year, and the Company may not repay this note prior to
maturity, or the Company would be subject to a substantial prepayment penalty. The note matures on
June 1, 2016.
On September 15, 2008, through wholly-owned subsidiaries, the Company borrowed approximately $48.0
million pursuant to a long-term note payable from GE, which is collateralized by security interests
in 15 properties. The note accrues interest at a rate of 6.85% per year and the Company may not
repay this note prior to maturity, or the Company would be subject to a substantial prepayment
penalty. The note has a maturity date of October 1, 2010, with three annual extension options
through October 1, 2013. The Company used the proceeds from the note to pay down the outstanding
balance on the line of credit.
Scheduled principal payments of mortgage notes payable are as follows:
|
|
|
|
|
|
|
Scheduled principal |
|
|
|
payments |
|
2009 |
|
|
2,453,975 |
|
2010 |
|
|
50,533,486 |
|
2011 |
|
|
2,799,601 |
|
2012 |
|
|
3,087,824 |
|
2013 |
|
|
11,828,375 |
|
Thereafter |
|
|
184,407,912 |
|
|
|
|
|
|
|
$ |
255,111,173 |
|
|
|
|
|
Line of Credit
On December 29, 2006, the Company entered into a $75 million senior revolving credit agreement with
a syndicate of banks led by KeyBank National Association (KeyBank), which matures on December 29,
2009. As long as the Company is in compliance with its covenants under the line of credit, the
Company has the option to extend the line of credit for an additional year, and intends to exercise
this option. The Company must notify KeyBank of its intention to exercise the renewal option 45
days prior to the maturity date and pay an extension fee of 0.20% of the total commitment
outstanding at the date of notification. The Company subsequently increased the availability under
the line of credit to $95 million in November 2007. The interest rate charged on the advances
under the facility is based on the LIBOR, the prime rate or the federal funds rate, depending on
market conditions, and adjusts periodically. The unused portion of the line of credit is subject
to a fee of 0.15% per year. The Companys ability to access this funding source is subject to the
Company continuing to meet customary lending requirements such as compliance with financial and
operating covenants and meeting certain lending limits. One such covenant requires the Company to
limit its distributions to stockholders to 95% of its FFO, beginning with the quarter ended
December 31, 2007. 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. KeyBank has the option to obtain updated appraisals for the properties pledged to the line of credit as borrowing base
collateral if they believe there has been a material adverse change to the value of any of the pledged properties.
If the aggregate value of the updated appraisals is lower than the current aggregate value of appraisals, it would lower
the amount of the Companys borrowing base and reduce the amount the Company could borrow under its line of credit
with that borrowing base. The Company does not believe that if updated appraisals were obtained on its pledged
properties that any change in the value of the properties would be significant enough to trigger a scenario whereby
the Company would have to repay amounts outstanding under the line of credit or affect its ability to use the
availability under the line of credit to repay its short-term loan in June 2009.
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 removed property. Conversely,
as the Company purchases new properties meeting the eligibility standards, the Company may pledge
these new properties to obtain additional advances under this agreement. The availability under
the line of credit may also be reduced by letters of credit used in the ordinary course of
business. The Company anticipates that certain of its letters of
credit will be returned during 2009, thus further increasing its
availability. The Company may use the advances under the line of credit for both general corporate
purposes and the acquisition of new investments. As of December 31, 2008, there was approximately
$11.5 million outstanding under the line of credit at an interest rate of approximately 2.4%, and
approximately $5.1 million outstanding under letters of credit at a weighted
average interest rate of approximately 2.0%. At December 31, 2008, the remaining borrowing capacity
available under the line of credit was approximately $35.5 million. The Company was in compliance
with all covenants under the line of credit as of December 31, 2008.
77
Short-Term Loan
On December 21, 2007, the Company entered into a $20 million unsecured term loan with KeyBank,
which matured on December 21, 2008. The Company exercised its option to extend the term for an
additional six months which resulted in a new maturity date of June 20, 2009. The interest rate
charged on the loan is based on the LIBOR, the prime rate or the federal funds rate, depending on
market conditions, and adjusts periodically. The Companys ability to maintain this funding source
is subject to it continuing to meet customary lending requirements such as compliance with
financial and operating covenants and meeting certain lending limits. One such covenant requires
the Company to limit distributions to its stockholders to 95% of its FFO. As of December 31, 2008,
the interest rate on the short-term loan was approximately 4.2%, and the Company was in compliance
with all covenants under the short-term loan. The Company currently has adequate availability under its line of credit to repay the loan in June 2009.
9. Stockholders Equity
Distributions paid per common share for the years ended December 31, 2008, 2007 and 2006 were
$1.50, $1.44 and $1.44 per share, respectively. Distributions paid per share of Series A Preferred
Stock for the years ended December 31, 2008, 2007 and 2006 were approximately $1.94, $1.94 and
$1.79 per share, respectively. Distributions paid per share of Series B Preferred Stock for the
years ended December 31, 2008, 2007 and 2006 were approximately $1.88, $1.88 and $0.34 per share,
respectively. The tax status of distributions is reflected in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
Ordinary Income |
|
Return of Capital |
|
Capital Gains |
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2006 |
|
|
2.06500 |
% |
|
|
95.60560 |
% |
|
|
2.32940 |
% |
For the year ended
December 31, 2007 |
|
|
25.86040 |
% |
|
|
74.13960 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2008 |
|
|
9.26770 |
% |
|
|
90.73230 |
% |
|
|
0.00000 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2006 |
|
|
46.99260 |
% |
|
|
0.00000 |
% |
|
|
53.00740 |
% |
For the year ended
December 31, 2007 |
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2008 |
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2006 |
|
|
46.99260 |
% |
|
|
0.00000 |
% |
|
|
53.00740 |
% |
For the year ended
December 31, 2007 |
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
For the year ended
December 31, 2008 |
|
|
100.00000 |
% |
|
|
0.00000 |
% |
|
|
0.00000 |
% |
78
10. Segment Information
As of December 31, 2008, the Companys operations were 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 extends mortgage loans and collects principal and
interest payments 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.
The following table summarizes the Companys consolidated operating results and total assets by
segment as of and for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2008 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
40,012,425 |
|
|
$ |
898,573 |
|
|
$ |
|
|
|
$ |
40,910,998 |
|
Operating expenses |
|
|
(14,891,337 |
) |
|
|
|
|
|
|
(4,500,585 |
) |
|
|
(19,391,922 |
) |
Other expense |
|
|
(13,673,497 |
) |
|
|
|
|
|
|
(2,897,256 |
) |
|
|
(16,570,753 |
) |
Discontinued
operations |
|
|
(35,376 |
) |
|
|
|
|
|
|
|
|
|
|
(35,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,412,215 |
|
|
$ |
898,573 |
|
|
$ |
(7,397,841 |
) |
|
$ |
4,912,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
413,760,683 |
|
|
$ |
10,000,000 |
|
|
$ |
5,338,102 |
|
|
$ |
429,098,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2007 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
31,779,650 |
|
|
$ |
1,013,889 |
|
|
$ |
|
|
|
$ |
32,793,539 |
|
Operating expenses |
|
|
(11,466,726 |
) |
|
|
|
|
|
|
(4,354,904 |
) |
|
|
(15,821,630 |
) |
Other expense |
|
|
(10,832,171 |
) |
|
|
|
|
|
|
(108,223 |
) |
|
|
(10,940,394 |
) |
Discontinued
operations |
|
|
108,714 |
|
|
|
|
|
|
|
|
|
|
|
108,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,589,467 |
|
|
$ |
1,013,889 |
|
|
$ |
(4,463,127 |
) |
|
$ |
6,140,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
366,231,132 |
|
|
$ |
10,086,111 |
|
|
$ |
2,585,446 |
|
|
$ |
378,902,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2006 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
24,100,315 |
|
|
$ |
1,845,231 |
|
|
$ |
|
|
|
$ |
25,945,546 |
|
Operating expenses |
|
|
(9,072,108 |
) |
|
|
|
|
|
|
(4,994,988 |
) |
|
|
(14,067,096 |
) |
Other income |
|
|
(6,398,534 |
) |
|
|
|
|
|
|
(2,122,885 |
) |
|
|
(8,521,419 |
) |
Discontinued
operations |
|
|
1,015,797 |
|
|
|
|
|
|
|
|
|
|
|
1,015,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,645,470 |
|
|
$ |
1,845,231 |
|
|
$ |
(7,117,873 |
) |
|
$ |
4,372,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
268,666,706 |
|
|
$ |
10,000,000 |
|
|
$ |
37,099,316 |
|
|
$ |
315,766,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
11. Pro Forma Financial Information (unaudited)
The Company acquired six properties during the year ended December 31, 2008. The following table
reflects pro-forma condensed consolidated income statements as if the six properties were acquired
as of the beginning of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
Operating Data: |
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
42,774,460 |
|
|
$ |
38,273,105 |
|
Total operating expenses |
|
|
(20,166,594 |
) |
|
|
(18,519,132 |
) |
Other expense |
|
|
(17,336,795 |
) |
|
|
(11,766,179 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
5,271,071 |
|
|
|
7,987,794 |
|
|
|
|
|
|
|
|
Distributions attributable to preferred stock |
|
|
(4,093,750 |
) |
|
|
(4,093,750 |
) |
|
|
|
|
|
|
|
Net income from continuing operations available to common stockholders |
|
$ |
1,177,321 |
|
|
$ |
3,894,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
Basic & diluted net income from continuing operations |
|
$ |
0.14 |
|
|
$ |
0.45 |
|
Weighted average shares outstanding-basic & diluted |
|
|
8,565,149 |
|
|
|
8,565,264 |
|
These pro-forma condensed consolidated income statements are not necessarily indicative of what
actual results would have been had the Company acquired the specified properties as of the
beginning of the periods presented.
12. Quarterly Financial Information (unaudited)
The following table reflects the quarterly results of operations for the years ended December
31, 2008 and 2007, certain amounts from prior quarters financial statements have been reclassified
to conform to the current quarters presentation. These reclassifications had no effect on
previously reported net income or stockholders equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
March 31, 2008 |
|
|
June 30, 2008 |
|
|
September 30, 2008 |
|
|
December 31, 2008 |
|
Operating revenues |
|
$ |
9,513,481 |
|
|
$ |
10,225,458 |
|
|
$ |
10,457,143 |
|
|
$ |
10,714,916 |
|
Operating expenses |
|
|
4,378,486 |
|
|
|
5,106,392 |
|
|
|
5,021,564 |
|
|
|
4,885,480 |
|
Other expense |
|
|
(3,685,065 |
) |
|
|
(3,899,215 |
) |
|
|
(4,292,698 |
) |
|
|
(4,693,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,449,930 |
|
|
|
1,219,851 |
|
|
|
1,142,881 |
|
|
|
1,135,661 |
|
Discontinued operations |
|
|
(33,228 |
) |
|
|
(406 |
) |
|
|
(1,322 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,416,702 |
|
|
|
1,219,445 |
|
|
|
1,141,559 |
|
|
|
1,135,241 |
|
Distributions attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,437 |
) |
|
|
(1,023,437 |
) |
|
|
(1,023,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
393,265 |
|
|
|
196,008 |
|
|
|
118,122 |
|
|
|
111,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders basic
& diluted |
|
$ |
0.046 |
|
|
$ |
0.023 |
|
|
$ |
0.014 |
|
|
$ |
0.013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic & diluted |
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,564,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
March 31, 2007 |
|
|
June 30, 2007 |
|
|
September 30, 2007 |
|
|
December 31, 2007 |
|
Operating revenues |
|
$ |
7,383,771 |
|
|
$ |
8,079,568 |
|
|
$ |
8,360,508 |
|
|
$ |
8,969,692 |
|
Operating expenses |
|
|
3,711,491 |
|
|
|
3,948,741 |
|
|
|
3,984,969 |
|
|
|
4,176,429 |
|
Other income (expense) |
|
|
(2,216,609 |
) |
|
|
(2,573,068 |
) |
|
|
(2,824,541 |
) |
|
|
(3,326,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,455,671 |
|
|
|
1,557,759 |
|
|
|
1,550,998 |
|
|
|
1,467,087 |
|
Discontinued operations |
|
|
74,673 |
|
|
|
(1,447 |
) |
|
|
39,462 |
|
|
|
(3,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,530,344 |
|
|
|
1,556,312 |
|
|
|
1,590,460 |
|
|
|
1,463,113 |
|
Distributions attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,437 |
) |
|
|
(1,023,438 |
) |
|
|
(1,023,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
506,907 |
|
|
|
532,875 |
|
|
|
567,022 |
|
|
|
439,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders basic
& diluted |
|
$ |
0.059 |
|
|
$ |
0.060 |
|
|
$ |
0.070 |
|
|
$ |
0.051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic & diluted |
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
80
13. Subsequent Events
On January 13, 2009, the Companys Board of Directors declared a cash distribution of $0.125 per
common share, $0.1614583 per share of the Series A Preferred Stock, and $0.15625 per share of the
Series B Preferred Stock for each of the months of January, February and March of 2009. Monthly
distributions will be payable on January 30, 2009, February 27, 2009 and March 31, 2009, to those
stockholders of record as of the close of business for the dates of January 22, 2009, February 19,
2009 and March 23, 2009, respectively.
81
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
Costs Capitalized |
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
Subsequent to |
|
|
|
|
|
Buildings & |
|
|
|
|
|
Accumulated |
|
|
|
|
Location of Property |
|
Encumbrances |
|
Land |
|
Improvements |
|
Acquisition |
|
Land |
|
Improvements |
|
Total(1) |
|
Depreciation(2) |
|
Net Real Estate |
|
Date Acquired |
Raleigh, North Carolina
Office Building |
|
$ |
4,940,000 |
|
|
$ |
960,000 |
|
|
$ |
4,480,772 |
|
|
$ |
|
|
|
$ |
960,000 |
|
|
$ |
4,480,772 |
|
|
$ |
5,440,772 |
|
|
$ |
949,636 |
|
|
$ |
4,491,136 |
|
|
|
12/23/2003 |
|
Canton, Ohio Office
& Warehouse Building |
|
|
2,948,753 |
|
|
|
186,739 |
|
|
|
3,082,007 |
|
|
|
|
|
|
|
186,739 |
|
|
|
3,082,007 |
|
|
|
3,268,746 |
|
|
|
432,810 |
|
|
|
2,835,936 |
|
|
|
1/30/2004 |
|
Akron, Ohio
Office & Laboratory Building |
|
|
7,543,588 |
|
|
|
1,974,000 |
|
|
|
6,769,565 |
|
|
|
19,782 |
|
|
|
1,974,000 |
|
|
|
6,789,347 |
|
|
|
8,763,347 |
|
|
|
833,413 |
|
|
|
7,929,934 |
|
|
|
4/29/2004 |
|
Charlotte, North Carolina
Office Building |
|
|
7,007,973 |
|
|
|
741,296 |
|
|
|
8,423,389 |
|
|
|
59,190 |
|
|
|
741,296 |
|
|
|
8,482,579 |
|
|
|
9,223,875 |
|
|
|
993,253 |
|
|
|
8,230,622 |
|
|
|
6/30/2004 |
|
Canton, North Carolina
Commercial & Manufacturing Building |
|
|
2,943,596 |
|
|
|
150,000 |
|
|
|
5,050,000 |
|
|
|
|
|
|
|
150,000 |
|
|
|
5,050,000 |
|
|
|
5,200,000 |
|
|
|
579,908 |
|
|
|
4,620,092 |
|
|
|
7/6/2004 |
|
Snyder Township,
Pennsylvania
Commercial & Warehouse Building |
|
|
5,696,383 |
|
|
|
100,000 |
|
|
|
6,573,902 |
|
|
|
6,907 |
|
|
|
100,000 |
|
|
|
6,580,809 |
|
|
|
6,680,809 |
|
|
|
747,597 |
|
|
|
5,933,212 |
|
|
|
8/5/2004 |
|
Lexington, North Carolina
Commercial & Warehouse Building |
|
|
2,881,000 |
|
|
|
819,760 |
|
|
|
2,106,845 |
|
|
|
6,637 |
|
|
|
819,760 |
|
|
|
2,113,482 |
|
|
|
2,933,242 |
|
|
|
239,297 |
|
|
|
2,693,945 |
|
|
|
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 |
|
|
|
707,763 |
|
|
|
6,634,126 |
|
|
|
9/16/2004 |
|
Norfolk, Virginia
Commercial & Manufacturing Building |
|
|
|
|
|
|
190,000 |
|
|
|
739,521 |
|
|
|
18,190 |
|
|
|
190,000 |
|
|
|
757,711 |
|
|
|
947,711 |
|
|
|
81,684 |
|
|
|
866,027 |
|
|
|
10/15/2004 |
|
Mt. Pocono, Pennsylvania
Commercial & Manufacturing Building |
|
|
5,297,639 |
|
|
|
350,000 |
|
|
|
5,818,703 |
|
|
|
18,430 |
|
|
|
350,000 |
|
|
|
5,837,133 |
|
|
|
6,187,133 |
|
|
|
639,175 |
|
|
|
5,547,958 |
|
|
|
10/15/2004 |
|
San Antonio, Texas Flexible
Office Building |
|
|
7,260,000 |
|
|
|
843,000 |
|
|
|
7,513,750 |
|
|
|
22,673 |
|
|
|
843,000 |
|
|
|
7,536,423 |
|
|
|
8,379,423 |
|
|
|
995,102 |
|
|
|
7,384,321 |
|
|
|
2/10/2005 |
|
Columbus, Ohio
Industrial Building |
|
|
2,769,075 |
|
|
|
410,000 |
|
|
|
2,385,108 |
|
|
|
|
|
|
|
410,000 |
|
|
|
2,385,108 |
|
|
|
2,795,108 |
|
|
|
240,896 |
|
|
|
2,554,212 |
|
|
|
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 |
|
|
|
624,325 |
|
|
|
6,143,659 |
|
|
|
4/15/2005 |
|
Wichita, Kansas
Office Building |
|
|
8,657,420 |
|
|
|
1,525,000 |
|
|
|
9,702,731 |
|
|
|
51,453 |
|
|
|
1,525,000 |
|
|
|
9,754,184 |
|
|
|
11,279,184 |
|
|
|
965,017 |
|
|
|
10,314,167 |
|
|
|
5/18/2005 |
|
Arlington, Texas
Warehouse & Bakery Building |
|
|
4,168,000 |
|
|
|
635,964 |
|
|
|
3,694,876 |
|
|
|
37,604 |
|
|
|
635,964 |
|
|
|
3,732,480 |
|
|
|
4,368,444 |
|
|
|
348,469 |
|
|
|
4,019,975 |
|
|
|
5/26/2005 |
|
Dayton, Ohio
Office Building |
|
|
2,073,489 |
|
|
|
525,000 |
|
|
|
1,876,992 |
|
|
|
119,736 |
|
|
|
525,000 |
|
|
|
1,996,728 |
|
|
|
2,521,728 |
|
|
|
255,496 |
|
|
|
2,266,232 |
|
|
|
6/30/2005 |
|
Eatontown, New Jersey
Office Building |
|
|
4,580,000 |
|
|
|
1,350,630 |
|
|
|
3,520,062 |
|
|
|
6,681 |
|
|
|
1,350,630 |
|
|
|
3,526,743 |
|
|
|
4,877,373 |
|
|
|
378,958 |
|
|
|
4,498,415 |
|
|
|
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 |
|
|
|
551,875 |
|
|
|
7,279,508 |
|
|
|
7/11/2005 |
|
Duncan, South Carolina
Office & Warehouse Building |
|
|
11,526,486 |
|
|
|
783,212 |
|
|
|
10,790,451 |
|
|
|
2,033,148 |
|
|
|
783,212 |
|
|
|
12,823,599 |
|
|
|
13,606,811 |
|
|
|
1,067,835 |
|
|
|
12,134,204 |
|
|
|
7/14/2005 |
|
Duncan, South Carolina
Manufacturing Building |
|
|
2,865,186 |
|
|
|
194,686 |
|
|
|
2,682,227 |
|
|
|
|
|
|
|
194,686 |
|
|
|
2,682,227 |
|
|
|
2,876,913 |
|
|
|
265,436 |
|
|
|
3,016,249 |
|
|
|
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 |
|
|
|
214,137 |
|
|
|
2,888,061 |
|
|
|
8/5/2005 |
|
82
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
Costs Capitalized |
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
Subsequent to |
|
|
|
|
|
Buildings & |
|
|
|
|
|
Accumulated |
|
|
|
|
Location of Property |
|
Encumbrances |
|
Land |
|
Improvements |
|
Acquisition |
|
Land |
|
Improvements |
|
Total(1) |
|
Depreciation(2) |
|
Net Real Estate |
|
Date Acquired |
Angola, Indiana
Industrial Building |
|
$ |
688,919 |
|
|
$ |
65,780 |
|
|
$ |
1,074,758 |
|
|
$ |
|
|
|
$ |
65,780 |
|
|
$ |
1,074,758 |
|
|
$ |
1,140,538 |
|
|
$ |
91,744 |
|
|
$ |
1,046,550 |
|
|
|
9/2/2005 |
|
Angola, Indiana
Industrial Building |
|
|
770,933 |
|
|
|
131,559 |
|
|
|
1,129,874 |
|
|
|
|
|
|
|
131,559 |
|
|
|
1,129,874 |
|
|
|
1,261,433 |
|
|
|
102,666 |
|
|
|
1,171,139 |
|
|
|
9/2/2005 |
|
Rock Falls, Illinois
Industrial Building |
|
|
688,919 |
|
|
|
35,082 |
|
|
|
1,113,340 |
|
|
|
|
|
|
|
35,082 |
|
|
|
1,113,340 |
|
|
|
1,148,422 |
|
|
|
91,744 |
|
|
|
1,046,550 |
|
|
|
9/2/2005 |
|
Newburyport, Massachusetts
Industrial Building |
|
|
6,846,000 |
|
|
|
628,690 |
|
|
|
6,504,056 |
|
|
|
1,839,895 |
|
|
|
628,690 |
|
|
|
8,343,951 |
|
|
|
8,972,641 |
|
|
|
566,219 |
|
|
|
8,406,422 |
|
|
|
10/17/2005 |
|
Clintonville, Wisconsin
Industrial Manufacturing Building |
|
|
3,475,426 |
|
|
|
54,674 |
|
|
|
4,717,090 |
|
|
|
|
|
|
|
54,674 |
|
|
|
4,717,090 |
|
|
|
4,771,764 |
|
|
|
394,213 |
|
|
|
4,377,551 |
|
|
|
10/31/2005 |
|
Maple Heights, Ohio
Industrial Building |
|
|
10,775,658 |
|
|
|
1,608,976 |
|
|
|
10,065,475 |
|
|
|
58,905 |
|
|
|
1,608,976 |
|
|
|
10,124,380 |
|
|
|
11,733,356 |
|
|
|
907,040 |
|
|
|
10,826,316 |
|
|
|
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 |
|
|
|
448,636 |
|
|
|
5,659,484 |
|
|
|
12/30/2005 |
|
Toledo, Oho
Industrial Building |
|
|
3,000,000 |
|
|
|
263,068 |
|
|
|
2,811,801 |
|
|
|
39,916 |
|
|
|
263,068 |
|
|
|
2,851,717 |
|
|
|
3,114,785 |
|
|
|
263,707 |
|
|
|
2,851,078 |
|
|
|
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 |
|
|
|
203,983 |
|
|
|
3,042,029 |
|
|
|
2/15/2006 |
|
Champaign, Illinois
Office Building |
|
|
1,760,878 |
|
|
|
686,979 |
|
|
|
2,035,784 |
|
|
|
10,546 |
|
|
|
686,979 |
|
|
|
2,046,330 |
|
|
|
2,733,309 |
|
|
|
168,760 |
|
|
|
2,555,990 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
3,452,701 |
|
|
|
1,347,017 |
|
|
|
3,991,733 |
|
|
|
|
|
|
|
1,347,017 |
|
|
|
3,991,733 |
|
|
|
5,338,750 |
|
|
|
330,901 |
|
|
|
5,011,745 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
2,157,938 |
|
|
|
841,886 |
|
|
|
2,494,833 |
|
|
|
|
|
|
|
841,886 |
|
|
|
2,494,833 |
|
|
|
3,336,719 |
|
|
|
206,814 |
|
|
|
3,132,341 |
|
|
|
2/21/2006 |
|
Champaign, Illinois
Office Building |
|
|
1,973,391 |
|
|
|
769,888 |
|
|
|
2,281,475 |
|
|
|
|
|
|
|
769,888 |
|
|
|
2,281,475 |
|
|
|
3,051,363 |
|
|
|
189,127 |
|
|
|
2,864,463 |
|
|
|
2/21/2006 |
|
Roseville, Minnesota
Office Building |
|
|
19,472,740 |
|
|
|
2,587,757 |
|
|
|
25,290,127 |
|
|
|
|
|
|
|
2,587,757 |
|
|
|
25,290,127 |
|
|
|
27,877,884 |
|
|
|
2,260,331 |
|
|
|
25,617,553 |
|
|
|
2/21/2006 |
|
Burnsville, Minnesota
Office Building |
|
|
12,000,000 |
|
|
|
3,510,711 |
|
|
|
8,746,407 |
|
|
|
|
|
|
|
3,510,711 |
|
|
|
8,746,407 |
|
|
|
12,257,118 |
|
|
|
786,119 |
|
|
|
11,470,999 |
|
|
|
5/10/2006 |
|
Menomonee Falls, Wisconsin
Industrial Building |
|
|
6,940,000 |
|
|
|
624,700 |
|
|
|
6,910,616 |
|
|
|
|
|
|
|
624,700 |
|
|
|
6,910,616 |
|
|
|
7,535,316 |
|
|
|
450,378 |
|
|
|
7,084,938 |
|
|
|
6/30/2006 |
|
Baytown, Texas
Office Building |
|
|
2,000,000 |
|
|
|
221,314 |
|
|
|
2,443,469 |
|
|
|
|
|
|
|
221,314 |
|
|
|
2,443,469 |
|
|
|
2,664,783 |
|
|
|
178,660 |
|
|
|
2,486,123 |
|
|
|
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 |
|
|
|
502,557 |
|
|
|
10,851,196 |
|
|
|
9/22/2006 |
|
Birmingham, Alabama
Industrial Building |
|
|
|
|
|
|
611,597 |
|
|
|
2,325,761 |
|
|
|
|
|
|
|
611,597 |
|
|
|
2,325,761 |
|
|
|
2,937,359 |
|
|
|
137,747 |
|
|
|
2,799,612 |
|
|
|
9/29/2006 |
|
Montgomery, Alabama
Industrial Building |
|
|
|
|
|
|
221,965 |
|
|
|
844,081 |
|
|
|
|
|
|
|
221,965 |
|
|
|
844,081 |
|
|
|
1,066,046 |
|
|
|
49,992 |
|
|
|
1,016,054 |
|
|
|
9/29/2006 |
|
Columbia, Missouri
Industrial Building |
|
|
|
|
|
|
145,988 |
|
|
|
555,157 |
|
|
|
|
|
|
|
145,988 |
|
|
|
555,157 |
|
|
|
701,145 |
|
|
|
32,880 |
|
|
|
668,265 |
|
|
|
9/29/2006 |
|
83
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
Costs Capitalized |
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
Subsequent to |
|
|
|
|
|
Buildings & |
|
|
|
|
|
Accumulated |
|
|
|
|
Location of Property |
|
Encumbrances |
|
Land |
|
Improvements |
|
Acquisition |
|
Land |
|
Improvements |
|
Total(1) |
|
Depreciation(2) |
|
Net Real Estate |
|
Date Acquired |
Mason, Ohio
Office Building |
|
$ |
5,400,000 |
|
|
$ |
797,274 |
|
|
$ |
6,258,344 |
|
|
$ |
|
|
|
$ |
797,274 |
|
|
$ |
6,258,344 |
|
|
$ |
7,055,618 |
|
|
$ |
400,461 |
|
|
$ |
6,655,157 |
|
|
|
1/5/2007 |
|
Raleigh, North Carolina
Industrial Building |
|
|
5,595,414 |
|
|
|
1,605,551 |
|
|
|
5,513,353 |
|
|
|
|
|
|
|
1,605,551 |
|
|
|
5,513,353 |
|
|
|
7,118,904 |
|
|
|
270,656 |
|
|
|
6,848,248 |
|
|
|
2/16/2007 |
|
Tulsa, Oklahoma
Manufacturing Building |
|
|
|
|
|
|
|
|
|
|
14,057,227 |
|
|
|
|
|
|
|
|
|
|
|
14,057,227 |
|
|
|
14,057,227 |
|
|
|
773,749 |
|
|
|
13,283,478 |
|
|
|
3/1/2007 |
|
Hialeah, Florida
Industrial Building |
|
|
|
|
|
|
3,562,452 |
|
|
|
6,671,600 |
|
|
|
|
|
|
|
3,562,452 |
|
|
|
6,671,600 |
|
|
|
10,234,052 |
|
|
|
311,989 |
|
|
|
9,922,063 |
|
|
|
3/9/2007 |
|
Tewksbury, Massachusetts
Industrial Building |
|
|
|
|
|
|
1,394,902 |
|
|
|
8,893,243 |
|
|
|
|
|
|
|
1,394,902 |
|
|
|
8,893,243 |
|
|
|
10,288,145 |
|
|
|
400,699 |
|
|
|
9,887,446 |
|
|
|
5/17/2007 |
|
Mason, Ohio
Retail Building |
|
|
4,935,559 |
|
|
|
1,201,338 |
|
|
|
4,960,987 |
|
|
|
|
|
|
|
1,201,338 |
|
|
|
4,960,987 |
|
|
|
6,162,325 |
|
|
|
190,415 |
|
|
|
5,971,910 |
|
|
|
7/1/2007 |
|
Cicero, New York
Industrial Building |
|
|
4,426,393 |
|
|
|
299,066 |
|
|
|
5,018,628 |
|
|
|
|
|
|
|
299,066 |
|
|
|
5,018,628 |
|
|
|
5,317,694 |
|
|
|
169,789 |
|
|
|
5,147,905 |
|
|
|
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 |
|
|
|
372,209 |
|
|
|
11,757,127 |
|
|
|
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 |
|
|
|
172,155 |
|
|
|
6,102,512 |
|
|
|
9/28/2007 |
|
Decatur, Georgia
Office Building |
|
|
3,283,096 |
|
|
|
784,188 |
|
|
|
3,245,281 |
|
|
|
|
|
|
|
784,188 |
|
|
|
3,245,281 |
|
|
|
4,029,469 |
|
|
|
91,938 |
|
|
|
3,937,531 |
|
|
|
12/13/2007 |
|
Decatur, Georgia
Office Building |
|
|
857,449 |
|
|
|
204,807 |
|
|
|
847,573 |
|
|
|
|
|
|
|
204,807 |
|
|
|
847,573 |
|
|
|
1,052,380 |
|
|
|
24,011 |
|
|
|
1,028,368 |
|
|
|
12/13/2007 |
|
Decatur, Georgia
Office Building |
|
|
1,076,322 |
|
|
|
257,086 |
|
|
|
1,063,925 |
|
|
|
|
|
|
|
257,086 |
|
|
|
1,063,925 |
|
|
|
1,321,011 |
|
|
|
30,141 |
|
|
|
1,290,870 |
|
|
|
12/13/2007 |
|
Lawrenceville, Georgia
Office Building |
|
|
2,842,102 |
|
|
|
678,854 |
|
|
|
2,809,365 |
|
|
|
|
|
|
|
678,854 |
|
|
|
2,809,365 |
|
|
|
3,488,219 |
|
|
|
79,588 |
|
|
|
3,408,631 |
|
|
|
12/13/2007 |
|
Snellville, Georgia
Office Building |
|
|
737,714 |
|
|
|
176,208 |
|
|
|
729,217 |
|
|
|
|
|
|
|
176,208 |
|
|
|
729,217 |
|
|
|
905,425 |
|
|
|
20,659 |
|
|
|
884,766 |
|
|
|
12/13/2007 |
|
Covington, Georgia
Office Building |
|
|
970,677 |
|
|
|
231,852 |
|
|
|
959,496 |
|
|
|
|
|
|
|
231,852 |
|
|
|
959,496 |
|
|
|
1,191,348 |
|
|
|
27,182 |
|
|
|
1,164,166 |
|
|
|
12/13/2007 |
|
Cumming, Georgia
Office Building |
|
|
3,090,174 |
|
|
|
738,107 |
|
|
|
3,054,580 |
|
|
|
|
|
|
|
738,107 |
|
|
|
3,054,580 |
|
|
|
3,792,687 |
|
|
|
86,535 |
|
|
|
3,706,152 |
|
|
|
12/13/2007 |
|
Conyers, Georgia
Office Building |
|
|
1,242,466 |
|
|
|
296,771 |
|
|
|
1,228,155 |
|
|
|
|
|
|
|
296,771 |
|
|
|
1,228,155 |
|
|
|
1,524,926 |
|
|
|
34,793 |
|
|
|
1,490,133 |
|
|
|
12/13/2007 |
|
84
GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
Costs Capitalized |
|
|
Total Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings & |
|
|
Subsequent to |
|
|
|
|
|
|
Buildings & |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Location of Property |
|
Encumbrances |
|
Land |
|
|
Improvements |
|
|
Acquisition |
|
|
Land |
|
|
Improvements |
|
|
Total(1) |
|
|
Depreciation(2) |
|
|
Net Real Estate |
|
|
Date Acquired |
|
Reading, Pennsylvania
Industrial Building |
|
$ |
5,257,500 |
|
|
$ |
490,646 |
|
|
$ |
6,202,376 |
|
|
$ |
|
|
|
$ |
490,646 |
|
|
$ |
6,202,376 |
|
|
$ |
6,693,022 |
|
|
$ |
147,383 |
|
|
$ |
6,545,639 |
|
|
|
1/29/2008 |
|
Fridley, Minnesota
Office Building |
|
|
|
|
|
|
1,354,233 |
|
|
|
8,073,526 |
|
|
|
|
|
|
|
1,354,233 |
|
|
|
8,073,526 |
|
|
|
9,427,759 |
|
|
|
267,499 |
|
|
|
9,160,260 |
|
|
|
2/26/2008 |
|
Concord Township, Ohio
Industrial Building |
|
|
|
|
|
|
1,796,467 |
|
|
|
11,154,123 |
|
|
|
|
|
|
|
1,796,467 |
|
|
|
11,154,123 |
|
|
|
12,950,590 |
|
|
|
230,595 |
|
|
|
12,719,995 |
|
|
|
3/31/2008 |
|
Pineville, North Carolina
Industrial Building |
|
|
2,145,000 |
|
|
|
669,025 |
|
|
|
3,028,320 |
|
|
|
|
|
|
|
669,025 |
|
|
|
3,028,320 |
|
|
|
3,697,345 |
|
|
|
53,578 |
|
|
|
3,643,767 |
|
|
|
4/30/2008 |
|
Marietta, Ohio
Industrial Building |
|
|
4,500,000 |
|
|
|
829,014 |
|
|
|
6,607,265 |
|
|
|
|
|
|
|
829,014 |
|
|
|
6,607,265 |
|
|
|
7,436,279 |
|
|
|
57,956 |
|
|
|
7,378,323 |
|
|
|
8/29/2008 |
|
Chalfont, Pennsylvania
Industrial Building |
|
|
6,421,717 |
|
|
|
1,249,415 |
|
|
|
6,419,607 |
|
|
|
|
|
|
|
1,249,415 |
|
|
|
6,419,607 |
|
|
|
7,669,022 |
|
|
|
67,296 |
|
|
|
7,601,726 |
|
|
|
8/29/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
255,111,173 |
|
|
$ |
55,226,042 |
|
|
$ |
330,817,567 |
|
|
$ |
4,518,529 |
|
|
$ |
55,226,042 |
|
|
$ |
335,336,096 |
|
|
$ |
390,562,138 |
|
|
$ |
24,757,576 |
|
|
$ |
365,804,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
85
The following table reconciles the change in the balance of real estate during the years ended
December 31, 2008, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
340,500,406 |
|
|
$ |
243,713,542 |
|
|
$ |
165,043,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions during period |
|
|
47,874,020 |
|
|
|
95,396,039 |
|
|
|
83,466,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements or other additions |
|
|
2,187,712 |
|
|
|
1,390,825 |
|
|
|
183,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions during period |
|
|
|
|
|
|
|
|
|
|
(4,979,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
390,562,138 |
|
|
$ |
340,500,406 |
|
|
$ |
243,713,542 |
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the change in the balance of accumulated depreciation during the
years ended December 31, 2008, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
15,738,634 |
|
|
$ |
8,595,419 |
|
|
$ |
3,408,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions during period |
|
|
9,018,942 |
|
|
|
7,143,215 |
|
|
|
5,351,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions during period |
|
|
|
|
|
|
|
|
|
|
(164,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
24,757,576 |
|
|
$ |
15,738,634 |
|
|
$ |
8,595,419 |
|
|
|
|
|
|
|
|
|
|
|
86
GLADSTONE
COMMERCIAL CORPORATION
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final |
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Principal Amount of Loans |
|
Location and Type of Real |
|
|
|
|
|
Maturity |
|
|
|
|
|
|
|
Face Amount |
|
|
Amount of |
|
|
Subject to Delinquent |
|
Estate |
|
Type of Loan |
|
Interest Rate |
|
Date |
|
Periodic Payment Term |
|
Prior Lien |
|
|
of Mortgage |
|
|
Mortgage(1) |
|
|
Principal or 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 $8,324,514. |
|
|
|
|
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate cost for federal income tax purposes is the same
as the carrying amount of the mortgage. |
The following table reconciles the change in the balance of mortgage loans on real estate during
the years ended December 31, 2008, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
$ |
21,025,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections of principal |
|
|
|
|
|
|
|
|
|
|
(44,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfaction of mortgage loan receivable |
|
|
|
|
|
|
|
|
|
|
(10,981,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
87
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, 2008, 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, 2008 in providing a reasonable level of assurance that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 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, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
On November 3, 2008, we exercised the option under our existing loan agreement with KeyBank
National Association to extend the term of our $20 million unsecured loan by six months, resulting
in a new maturity date of June 20, 2009. The loan was originally set to expire on December 20,
2008.
88
PART III
We will file a definitive Proxy Statement for our 2009 Annual Meeting of Stockholders (the 2009
Proxy Statement) with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of our fiscal year. Accordingly, certain information required by
Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the
2009 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 2009 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 2009 Proxy
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 2009 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 2009 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 2009 Proxy
Statement under the captions Independent Registered Public Accounting Firm Fees and Pre-Approval
Policy and Procedures.
89
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, 2008 and December 31, 2007
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and
2006
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
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:
90
Exhibit Index
|
|
|
|
|
Exhibit |
|
|
|
Description of Document |
3.1
|
|
|
|
Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form
S-11 (File No. 333-106024), filed September 11, 2003. |
|
|
|
|
|
3.2
|
|
|
|
Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003. |
|
|
|
|
|
3.2.1
|
|
|
|
First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363),
filed July 10, 2007. |
|
|
|
|
|
4.1
|
|
|
|
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-A (File
No. 000-50363), filed January 19, 2006. |
|
|
|
|
|
4.2
|
|
|
|
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-A (File
No. 000-50363), filed October 19, 2006. |
|
|
|
|
|
4.3
|
|
|
|
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-A (File No. 000-50363),
filed January 19, 2006. |
|
|
|
|
|
4.4
|
|
|
|
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-A (File No. 000-50363),
filed October 19, 2006. |
|
|
|
|
|
4.5
|
|
|
|
Amendment to the Stock Transfer Agency Agreement dated as of
August 18, 2003 by and between Gladstone Commercial Corporation,
and The Bank of New York. |
|
|
|
|
|
10.1
|
|
|
|
Agreement of Limited Partnership of Gladstone Commercial Limited
Partnership, dated July 17, 2003, incorporated by reference to
Exhibit 10.3 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-11 (File No. 333-106024), filed July 22,
2003. |
|
|
|
|
|
10.2
|
|
|
|
Real Property Purchase and Sale Agreement 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. |
|
|
|
|
|
10.3
|
|
|
|
Real Property Purchase and Sale Agreement 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. |
|
|
|
|
|
10.4
|
|
|
|
Trademark License Agreement, dated December 20, 2004, between
Gladstone Commercial Corporation and Gladstone Management
Corporation, incorporated by reference to Exhibit 10.6 to the
Form 10-K (File No. 000-50363), filed March 8, 2005. |
|
|
|
|
|
10.5
|
|
|
|
First Amendment to Agreement of Limited Partnership of Gladstone
Commercial Limited Partnership, dated September 1, 2004,
incorporated by reference to Exhibit 10.8 to the Form 10-K (File
No. 000-50363), filed March 8, 2005. |
91
|
|
|
|
|
Exhibit |
|
|
|
Description of Document |
10.6
|
|
|
|
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. |
|
|
|
|
|
10.7
|
|
|
|
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. |
|
|
|
|
|
10.8
|
|
|
|
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. |
|
|
|
|
|
10.9
|
|
|
|
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. |
|
|
|
|
|
10.10
|
|
|
|
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. |
|
|
|
|
|
10.11
|
|
|
|
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. |
|
|
|
|
|
10.12
|
|
|
|
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. |
|
|
|
|
|
10.13
|
|
|
|
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 (File
No. 000-50363), filed February 1, 2006. |
|
|
|
|
|
10.14
|
|
|
|
Loan agreement 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. |
|
|
|
|
|
10.15
|
|
|
|
Assumption agreement between Stonewater Dox 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. |
|
|
|
|
|
10.16
|
|
|
|
Promissory note 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. |
|
|
|
|
|
10.17
|
|
|
|
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. |
92
|
|
|
|
|
Exhibit |
|
|
|
Description of Document |
10.18
|
|
|
|
Loan agreement between Stonewater Dox 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. |
|
|
|
|
|
10.19
|
|
|
|
Loan assumption agreement between Stonewater UIS 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. |
|
|
|
|
|
10.20
|
|
|
|
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. |
|
|
|
|
|
10.21
|
|
|
|
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. |
|
|
|
|
|
10.22
|
|
|
|
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. |
|
|
|
|
|
10.23
|
|
|
|
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. |
|
|
|
|
|
10.24*
|
|
|
|
Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporation, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed July 12, 2006. |
|
|
|
|
|
10.25
|
|
|
|
Custodial Agreement between Branch Banking and Trust Company of
Virginia, as Custodian, and Gladstone Commercial Company, 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 May
2, 2006. |
|
|
|
|
|
10. 26
|
|
|
|
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.
000-50363), filed November 28, 2006. |
|
|
|
|
|
10.27
|
|
|
|
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. 000-50363),
filed November 28, 2006. |
|
|
|
|
|
10.28
|
|
|
|
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.
000-50363), filed November 28, 2006. |
93
|
|
|
|
|
Exhibit |
|
|
|
Description of Document |
10.29
|
|
|
|
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., N.A., dated as of November 22, 2006, incorporated by
reference to Exhibit 10.4 of the Current Report on Form 8-K (File
No. 000-50363), filed November 28, 2006. |
|
|
|
|
|
10.30
|
|
|
|
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. 000-50363), filed
December 28, 2006. |
|
|
|
|
|
10.31
|
|
|
|
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. 000-50363), filed
December 28, 2006. |
|
|
|
|
|
10.32
|
|
|
|
Mortgage, Assignment of Leases and Rents and Security Agreement
between TCI06 Burnsville MC 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. 000-50363), filed
December 28, 2006. |
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10.33
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Promissory Note between HMBF05 Newburyport MA LLC, SVMMC05 Toledo
OH LLC and TCI06 Burnsville MC 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. 000-50363), filed
December 28, 2006. |
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10.34
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Credit Agreement dated as of December 29, 2006 among Gladstone
Commercial Limited Partnership as Borrower and Gladstone
Commercial Corporation as Guarantor, the Initial Guarantors
Listed Therein, the Banks Listed Therein and KeyBank National
Association, as Administrative Agent, incorporated by reference
to Exhibit 10.1 of the Current Report on Form 8-K (File No.
000-50363), filed January 3, 2007. |
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10.35
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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.
000-50363), filed January 3, 2007 (renewed on July 9, 2008). |
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10.36
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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. 000-50363), filed January 3, 2007 (renewed
on July 9, 2008). |
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10.37
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Accordian Agreement between Gladstone Commercial Limited
Partnership and KeyBank National Association, dated November 13,
2007 incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K (File No. 000-50363), filed November 16, 2007. |
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10.38
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Note Agreement between Gladstone Commercial Limited Partnership
and KeyBank National Association, dated December 21, 2007
incorporated by reference to Exhibit 10.1 of the Current Report
on Form 8-K (File No. 000-50363), filed December 27, 2007. |
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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 report). |
94
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Exhibit |
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Description of Document |
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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21
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Subsidiaries of Gladstone Commercial Corporation. |
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23
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Consent of Independent Registered Public Accounting Firm. |
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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. |
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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. |
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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. |
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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. |
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* |
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Denotes management contract, compensation plan, contract or other arrangement. |
95
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: February 25, 2009 |
By: |
/s/ Danielle Jones
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Danielle Jones |
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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: February 25, 2009 |
By: |
/s/ David Gladstone
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David Gladstone |
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Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer) |
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Date: February 25, 2009 |
By: |
/s/ Terry Lee Brubaker
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Terry Lee Brubaker |
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Vice Chairman, Chief Operating Officer and Director |
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Date: February 25, 2009 |
By: |
/s/ George Stelljes III
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George Stelljes III |
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President, Chief Investment Officer and Director |
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Date: February 25, 2009 |
By: |
/s/ Danielle Jones
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Danielle Jones |
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Chief Financial Officer
(principal financial and accounting officer) |
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Date: February 25, 2009 |
By: |
/s/ David A.R. Dullum
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David A.R. Dullum |
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Director |
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Date: February 25, 2009 |
By: |
/s/ Anthony W. Parker
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Anthony W. Parker |
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Director |
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Date: February 25, 2009 |
By: |
/s/ Michela A. English
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Michela A. English |
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Director |
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96
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Date: February 25, 2009 |
By: |
/s/ Paul Adelgren
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Paul Adelgren |
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Director |
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Date: February 25, 2009 |
By: |
/s/ Maurice Coulon
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Maurice Coulon |
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Director |
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Date: February 25, 2009 |
By: |
/s/ John Outland
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John Outland |
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Director |
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Date: February 25, 2009 |
By: |
/s/ Gerard Mead
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Gerard Mead |
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Director |
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97