Gladstone Commercial Corporation
GLADSTONE COMMERCIAL CORP (Form: 10-Q, Received: 07/25/2016 15:58:56)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
OR  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER: 001-33097  
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
02-0681276
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1521 WESTBRANCH DRIVE, SUITE 100
MCLEAN, VIRGINIA
 
22102
(Address of principal executive offices)
 
(Zip Code)
(703) 287-5800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report)  
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   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
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):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of July 25, 2016 was 22,583,722 .

1

Table of Contents

GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
June 30, 2016
TABLE OF CONTENTS
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Gladstone Commercial Corporation
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)  
 
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Real estate, at cost
 
$
790,232

 
$
780,377

Less: accumulated depreciation
 
122,827

 
112,243

Total real estate, net
 
667,405

 
668,134

Lease intangibles, net
 
101,683

 
104,914

Real estate and related assets held for sale, net
 
3,820

 
1,077

Mortgage note receivable
 

 
5,900

Cash and cash equivalents
 
3,993

 
5,152

Restricted cash
 
3,902

 
4,205

Funds held in escrow
 
5,922

 
7,534

Deferred rent receivable, net
 
28,909

 
27,443

Other assets
 
2,651

 
2,825

TOTAL ASSETS
 
$
818,285

 
$
827,184

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Mortgage notes payable, net
 
$
441,604

 
$
455,863

Borrowings under line of credit, net
 
60,229

 
44,591

Borrowings under term loan facility, net
 
24,887

 
24,878

Series C mandatorily redeemable preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 1,700,000 shares authorized; and 540,000 and 1,540,000 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
13,424

 
38,100

Deferred rent liability, net
 
8,964

 
9,657

Asset retirement obligation
 
3,645

 
3,674

Accounts payable and accrued expenses
 
3,681

 
6,388

Liabilities related to assets held for sale
 
357

 
868

Due to Adviser and Administrator (1)
 
1,884

 
1,858

Other liabilities
 
7,523

 
7,436

TOTAL LIABILITIES
 
$
566,198

 
$
593,313

Commitments and contingencies (2)
 

 

MEZZANINE EQUITY
 
 
 
 
Series D redeemable preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 6,000,000 shares authorized; and 1,063,705 shares issued and outstanding at June 30, 2016 (3)
 
$
25,532

 
$

TOTAL MEZZANINE EQUITY
 
$
25,532

 
$

STOCKHOLDERS’ EQUITY
 
 
 
 
Series A and B redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 5,350,000 and 2,300,000 shares authorized and 2,264,000 and 2,150,000 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
$
2

 
$
2

Senior common stock, par value $0.001 per share; 4,450,000 and 7,500,000 shares authorized and 959,552 and 972,214 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
1

 
1

Common stock, par value $0.001 per share, 32,500,000 and 38,500,000 shares authorized and 22,983,604 and 22,485,607 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
23

 
22

Additional paid in capital
 
429,608

 
418,897

Distributions in excess of accumulated earnings
 
(203,079
)
 
(185,051
)
TOTAL STOCKHOLDERS' EQUITY
 
226,555

 
233,871

TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
$
818,285

 
$
827,184


(1)
Refer to Note 2 "Related-Party Transactions"
(2)
Refer to Note 9 “Commitments and Contingencies
(3)
Refer to Note 10 “Stockholders' Equity and Mezzanine Equity

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Gladstone Commercial Corporation
Condensed Consolidated Statements of Operations
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)  
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenues
 
 
 
 
 
 
 
 
Rental revenue
 
$
20,890

 
$
20,012

 
$
41,547

 
$
39,300

Tenant recovery revenue
 
357

 
394

 
842

 
718

Interest income from mortgage note receivable
 

 
282

 
385

 
549

Total operating revenues
 
21,247

 
20,688

 
42,774

 
40,567

Operating expenses
 
 
 
 
 
 
 
 
Depreciation and amortization
 
9,205

 
8,947

 
18,338

 
17,154

Property operating expenses
 
1,434

 
1,178

 
3,045

 
2,139

Acquisition related expenses
 
117

 
255

 
126

 
451

Base management fee (1)
 
856

 
866

 
1,717

 
1,717

Incentive fee (1)
 
655

 
1,760

 
1,273

 
3,433

Administration fee (1)
 
370

 
366

 
775

 
728

General and administrative
 
609

 
539

 
1,184

 
1,229

Impairment charge
 
187

 

 
230

 

Total operating expenses before credit to incentive fee
 
13,433

 
13,911

 
26,688

 
26,851

Credit to incentive fee (1)
 

 
(1,316
)
 

 
(2,500
)
Total operating expenses
 
13,433

 
12,595

 
26,688

 
24,351

Other (expense) income
 
 
 
 
 
 
 
 
Interest expense
 
(6,579
)
 
(6,999
)
 
(13,310
)
 
(13,770
)
Distributions attributable to Series C mandatorily redeemable preferred stock
 
(686
)
 
(686
)
 
(1,372
)
 
(1,372
)
Other income
 
334

 
23

 
334

 
51

Total other expense
 
(6,931
)
 
(7,662
)
 
(14,348
)
 
(15,091
)
Net income
 
883

 
431

 
1,738

 
1,125

Distributions attributable to Series A, B and D preferred stock
 
(1,263
)
 
(1,023
)
 
(2,290
)
 
(2,047
)
Distributions attributable to senior common stock
 
(251
)
 
(261
)
 
(504
)
 
(485
)
Net loss attributable to common stockholders
 
$
(631
)
 
$
(853
)
 
$
(1,056
)
 
$
(1,407
)
Loss per weighted average share of common stock - basic & diluted
 
 
 
 
 
 
 
 
Loss attributable to common shareholders
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.05
)
 
$
(0.07
)
Weighted average shares of common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Diluted
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Earnings per weighted average share of senior common stock
 
$
0.26

 
$
0.26

 
$
0.52

 
$
0.52

Weighted average shares of senior common stock outstanding - basic
 
959,552

 
995,852

 
961,794

 
928,323

 
(1)
Refer to Note 2 “Related-Party Transactions”
The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Gladstone Commercial Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
 
 
For the six months ended June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
1,738

 
$
1,125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
18,338

 
17,154

Impairment charge
 
230

 

Amortization of deferred financing costs
 
1,090

 
878

Amortization of deferred rent asset and liability, net
 
(215
)
 
(270
)
Amortization of discount and premium on assumed debt
 
(116
)
 
(154
)
Asset retirement obligation expense
 
73

 
76

Decrease (increase) in other assets
 
196

 
(538
)
Increase in deferred rent receivable
 
(1,959
)
 
(1,843
)
(Decrease) increase in accounts payable, accrued expenses, and amount due Adviser and Administrator
 
(655
)
 
1,021

Decrease in other liabilities
 
(402
)
 
(683
)
Leasing commissions paid
 
(486
)
 
(291
)
Net cash provided by operating activities
 
17,832

 
16,475

Cash flows from investing activities:
 
 
 
 
Acquisition of real estate and related intangible assets
 
(17,000
)
 
(58,248
)
Improvements of existing real estate
 
(2,654
)
 
(3,072
)
Proceeds from sale of real estate
 
200

 

Issuance of mortgage note receivable
 

 
(300
)
Collection of mortgage note receivable
 
5,900

 

Receipts from lenders for funds held in escrow
 
2,719

 
642

Payments to lenders for funds held in escrow
 
(1,107
)
 
(1,924
)
Receipts from tenants for reserves
 
1,840

 
2,037

Payments to tenants from reserves
 
(1,505
)
 
(1,308
)
Decrease (increase) in restricted cash
 
303

 
(800
)
Deposits on future acquisitions
 
(500
)
 
(1,600
)
Deposits applied against acquisition of real estate investments
 
500

 
1,400

Net cash used in investing activities
 
(11,304
)
 
(63,173
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of equity
 
37,669

 
30,363

Offering costs paid
 
(1,247
)
 
(742
)
Retirement of senior common stock
 
(178
)
 

Redemption of Series C mandatorily redeemable preferred stock
 
(25,000
)
 

Borrowings under mortgage notes payable
 
37,905

 
51,819

Payments for deferred financing costs
 
(690
)
 
(883
)
Principal repayments on mortgage notes payable
 
(51,977
)
 
(23,625
)
Principal repayments on employee notes receivable
 

 
375

Borrowings from line of credit
 
71,000

 
56,400

Repayments on line of credit
 
(55,500
)
 
(54,500
)
Increase in security deposits
 
97

 
108

Distributions paid for common, senior common and preferred stock
 
(19,766
)
 
(17,919
)
Net cash (used in) provided by financing activities
 
(7,687
)
 
41,396

Net decrease in cash and cash equivalents
 
$
(1,159
)
 
$
(5,302
)
Cash and cash equivalents, beginning of period
 
$
5,152

 
$
8,599

Cash and cash equivalents, end of period
 
$
3,993

 
$
3,297

NON-CASH INVESTING AND FINANCING INFORMATION
 
 
 
 
Increase in asset retirement obligation assumed in acquisition
 
$

 
$
56

Senior common dividend issued in the dividend reinvestment program
 
$

 
$
52

Capital improvements included in accounts payable and accrued expenses
 
$
2,461

 
$
2,922

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Gladstone Commercial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization, Basis of Presentation and Significant Accounting Policies
Gladstone Commercial Corporation is a real estate investment trust, or REIT, that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and commercial mortgage loans; however, we do not have any mortgage loans currently outstanding. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation, or the Adviser, and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company, or the Administrator, each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership, or the Operating Partnership.
All further references herein to “we,” “our,” “us” and the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.
Interim Financial Information
Our interim financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 , as filed with the U.S. Securities and Exchange Commission on February 17, 2016. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
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 periods. Actual results could materially differ from those estimates.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 . There were no material changes to our critical accounting policies during the six months ended June 30, 2016 ; however we issued mezzanine equity during the six months ended June 30, 2016 , which is further described in Note 10.


6


Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is expected to minimally impact our consolidated financial statements as we currently have  four operating ground lease arrangements for which we are the lessee. We also expect our legal expense to increase as the new standard requires us to expense indirect leasing costs that were previously capitalized to leasing commissions. ASC 2016-02 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. 
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU-2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred financing cost. ASU 2015-03 was effective for annual periods beginning after December 15, 2015. We have adopted the provisions of ASU 2015-03 for the six months ended June 30, 2016 . We had unamortized deferred financing fees of $5.7 million and $6.1 million as of June 30, 2016 and December 31, 2015 , respectively. These costs have been reclassified from deferred financing costs, net, to mortgage notes payable, net, borrowings under line of credit, net, borrowings under term loan facility, net, and Series C mandatorily redeemable preferred stock, net. All periods presented have been retrospectively adjusted.
The following table summarizes the retrospective adjustment and the overall impact on the previously reported consolidated financial statements (dollars in thousands):  
 
 
December 31, 2015
 
 
As Previously Reported
 
Retrospective Application
Deferred financing costs, net
 
$
6,138

 
$

Mortgage notes payable, net
 
460,770

 
455,863

Borrowings under line of credit, net
 
45,300

 
44,591

Borrowings under term loan facility, net
 
25,000

 
24,878

Series C mandatorily redeemable preferred stock, net
 
38,500

 
38,100


2. Related-Party Transactions
Gladstone Management and Gladstone Administration
We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Mr. Michael LiCalsi, our general counsel and secretary, serves as our Administrator’s president. We have an advisory agreement with our Adviser, and an administration agreement with our Administrator, or the Administration Agreement. The services and fees under the advisory agreement and Administration Agreement are described below. At June 30, 2016 and December 31, 2015 , $ 1.9 million and $1.9 million , respectively, was collectively due to our Adviser and Administrator.

7


Base Management Fee
On July 24, 2015, we entered into a second amended and restated advisory agreement, or the Second Amended Advisory Agreement, with the Adviser. Our entrance into the agreement was approved unanimously by our Board of Directors, including separate and unanimous approval by the independent directors on our Board of Directors. Our Board of Directors generally reviews and considers approving or renewing the agreement with our Adviser each July.
Pursuant to the terms of the Second Amended Advisory Agreement, effective July 1, 2015, the calculation of the annual base management fee equals 1.5% of our adjusted total stockholders’ equity, which is our total stockholders’ equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges) and adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee). The fee is calculated and accrued quarterly as 0.375%  per quarter of such adjusted total stockholders’ equity figure. On July 12, 2016, we entered into a third amended and restated advisory agreement, to amend the definition of our adjusted total stockholders' equity to include total mezzanine equity. The amendment is effective as of July 1, 2016.
Prior to entering into the Second Amended Advisory Agreement on July 24, 2015, our then-existing advisory agreement with the Adviser, or the Former Advisory Agreement, provided for an annual base management fee equal to 2.0% of our common stockholders’ equity, which was our total stockholders’ equity, less the recorded value of any preferred stock and adjusted to exclude the effect of any unrealized gains, losses, or other items that did not affect realized net income (including impairment charges).
For the three and six months ended June 30, 2016 , we recorded a base management fee of $0.9 million and $ 1.7 million , respectively, and for the three and six months ended June 30, 2015 , we recorded a base management fee of $ 0.9 million and $ 1.7 million , respectively.
Incentive Fee
Under the Second Amended Advisory Agreement, effective July 1, 2015, the calculation of the incentive fee was revised to reward the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the new hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the new hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO is defined as GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.
The incentive fee under the Former Advisory Agreement rewarded the Adviser in circumstances where our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeded 1.75% , or 7.0% annualized, or the hurdle rate, of common stockholders’ equity. Funds from operations, or FFO, included any realized capital gains and capital losses, less any distributions paid on preferred stock and Senior Common Stock, but FFO did not include any unrealized capital gains or losses (including impairment charges). The Adviser received 100.0% of the amount of the pre-incentive fee FFO that exceeded the hurdle rate, but was less than 2.1875% of our common stockholders’ equity. The Adviser also received an incentive fee of 20.0% of the amount of our pre-incentive fee FFO that exceeded 2.1875% of common stockholders’ equity.

For the three and six months ended June 30, 2016 , we recorded an incentive fee of $0.7 million and $1.3 million , respectively, offset by credits related to unconditional, voluntary and irrevocable waivers issued by the Adviser of $0.0 million and $0.0 million , respectively, resulting in a net incentive fee for the three and six months ended June 30, 2016 , of $ 0.7 million and $1.3 million , respectively. For the three and six months ended June 30, 2015 , we recorded an incentive fee of $ 1.8 million and $ 3.4 million , respectively, offset by credits related to unconditional, voluntary and irrevocable waivers issued by the Adviser of $ 1.3 million and $ 2.5 million , respectively, resulting in a net incentive fee for the three and six months ended June 30, 2015 , of $ 0.5 million and $ 0.9 million , respectively. Our Board of Directors accepted the Adviser’s offer to waive, on a quarterly basis, a portion of the incentive fee for the three and six months covering January 1, 2015 through June 30, 2015 in order to support the current level of distributions to our stockholders. The Adviser did not waive any portion of the incentive fee for the three and six months ended June 30, 2016 . Waivers cannot be recouped by the Adviser in the future.

8


On July 12, 2016, we amended and restated our existing advisory agreement with our Adviser by entering into a third amended adn restated advisory agreement, to redefine the definition of adjusted stockholders' equity, to include total mezzanine equity, in the calculation of both the base management and incentive fee. All other provisions remained unchanged. The revision was effective as of July 1, 2016.
Capital Gain Fee
Under the Second Amended Advisory Agreement, effective July 1, 2015, we will pay to the Adviser a capital gains-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (which is calculated as the original acquisition price plus any subsequent non-reimbursed capital improvements). At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and six months ended June 30, 2016 or 2015 .
Termination Fee
The Second Amended Advisory Agreement includes a termination fee whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the agreement after the Company has defaulted and applicable cure periods have expired. The agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions of the agreement, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.
Administration Agreement
Pursuant to the Administration Agreement, we pay for our allocable portion of the Administrator’s expenses in performing services to us, including, but not limited to, rent and the salaries and benefits of its personnel, including our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president), and their respective staffs. Our allocable portion of the Administrator’s expenses is derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. For the three and six months ended June 30, 2016 , we recorded an administration fee of $0.4 million and $ 0.8 million , respectively, and for the three and six months ended June 30, 2015 , we recorded an administration fee of $ 0.4 million and $ 0.7 million , respectively. Our Board of Directors generally reviews and considers approving or renewing the agreement with our Administrator each July.
Gladstone Securities
Gladstone Securities, LLC, or Gladstone Securities, is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

Dealer Manager Agreement
In connection with the offering of our Senior Common Stock (see footnote 10, “Stockholders’ Equity,” for further details) we entered into a Dealer Manager Agreement, dated March 25, 2011, or the Dealer Manager Agreement, with Gladstone Securities pursuant to which Gladstone Securities agreed to act as our exclusive dealer manager in connection with the offering. The Dealer Manager Agreement terminated according to its terms on March 28, 2015 , requiring us to write-off $0.1 million of deferred offering costs to general and administrative expense. Pursuant to the terms of the Dealer Manager Agreement, Gladstone Securities was entitled to receive a sales commission in the amount of 7.0% of the gross proceeds of the shares of Senior Common Stock sold, plus a dealer manager fee in the amount of 3.0% of the gross proceeds of the shares of Senior Common Stock sold. In addition, we agreed to indemnify Gladstone Securities against various liabilities, including certain liabilities arising under the federal securities laws. We made approximately $0.3 million of payments during the six months ended June 30, 2015 , to Gladstone Securities pursuant to this agreement.

9


Mortgage Financing Arrangement Agreement
We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities may from time to time solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1 million and $0.1 million during the three and six months ended June 30, 2016 , respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.35% and 0.39% of total mortgages secured. We paid financing fees to Gladstone Securities of $0.1 million and $0.2 millions during the three and six months ended June 30, 2015 , respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.3% of total mortgages secured in each period. Our Board of Directors renewed the agreement for an additional year, through August 31, 2017, at its July 2016 meeting.
3. Loss per Share of Common Stock
The following tables set forth the computation of basic and diluted loss per share of common stock for the three and six months ended June 30, 2016 and 2015 , respectively. We computed basic loss per share for the three and six months ended June 30, 2016 and 2015 , respectively, using the weighted average number of shares outstanding during the periods. Diluted loss per share for the three and six months ended June 30, 2016 and 2015 , reflects additional shares of common stock related to our convertible senior common stock (if the effect would be dilutive), that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net income available to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Calculation of basic loss per share of common stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(631
)
 
$
(853
)
 
$
(1,056
)
 
$
(1,407
)
Denominator for basic weighted average shares of common stock
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Basic loss per share of common stock
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.05
)
 
$
(0.07
)
Calculation of diluted loss per share of common stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(631
)
 
$
(853
)
 
$
(1,056
)
 
$
(1,407
)
Net loss attributable to common stockholders plus assumed conversions (1)
 
$
(631
)
 
$
(853
)
 
$
(1,056
)
 
$
(1,407
)
Denominator for basic weighted average shares of common stock
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Effect of convertible senior common stock (1)
 

 

 

 

Denominator for diluted weighted average shares of common stock (1)
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Diluted loss per share of common stock
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.05
)
 
$
(0.07
)
 
(1)
We excluded 800,116 shares of convertible senior common stock from the calculation of diluted earnings per share for the three and six months ended June 30, 2016 , respectively, because it was anti-dilutive. We also excluded 830,600 shares and 775,002 shares of convertible senior common stock from the calculation of diluted earnings per share for the three and six months ended June 30, 2015 , respectively, because it was anti-dilutive.

10


4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of our investments in real estate as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
June 30, 2016
(1)
December 31, 2015
(2)
Real estate:
 
 
 
 
 
Land
 
$
99,780

 
$
97,117

 
Building
 
641,266

 
635,728

 
Tenant improvements
 
49,186

 
47,532

 
Accumulated depreciation
 
(122,827
)
 
(112,243
)
 
Real estate, net
 
$
667,405

 
$
668,134

 
 
(1)
Does not include real estate held for sale as of June 30, 2016 .
(2)
Does not include real estate held for sale as of December 31, 2015 .
Real estate depreciation expense on building and tenant improvements was $ 5.9 million and $ 11.8 million for the three and six months ended June 30, 2016 , respectively, and $ 5.5 million and $ 10.7 million for the three and six months ended June 30, 2015 , respectively.

2016 Real Estate Activity

During the six months ended June 30, 2016 , we acquired one property, which is summarized below (dollars in thousands):

Location
 
Acquisition Date
 
Square Footage (unaudited)
 
Lease Term
 
Renewal Options
 
Total Purchase Price
 
Acquisition Expenses
 
Annualized GAAP Rent
 
Debt Issued
Salt Lake City, UT
 
5/26/2016
 
107,062

 
6 Years
 
2 (3 Years and 2 Years)
 
$
17,000

 
$
109

 
$
1,393

 
$
9,900


In accordance with Accounting Standards Codification, or ASC, 805, "Business Combinations," we determined the fair value of the acquired assets related to the one property acquired during the six months ended June 30, 2016 as follows (dollars in thousands):

Location
 
Land
 
Building
 
Tenant Improvements
 
In-place Leases
 
Leasing Costs
 
Customer Relationships
 
Below Market Leases
 
Total Purchase Price
Salt Lake City, UT
 
$
3,008

 
$
8,973

 
$
1,685

 
$
1,352

 
$
337

 
$
1,675

 
$
(30
)
 
$
17,000


Below is a summary of the total revenue and earnings recognized on the one property acquired during the six months ended June 30, 2016 (dollars in thousands):

 
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
 
 
2016
 
2016
Location
 
Acquisition Date
 
Rental Revenue
 
Earnings (1)
 
Rental Revenue
 
Earnings (1)
Salt Lake City, UT
 
5/26/2016
 
$
139

 
$
35

 
$
139

 
$
35

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



11


Pro Forma
The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the six months ended June 30, 2016 and the twelve months ended December 31, 2015 , respectively, were acquired as of January 1, 2015 . The pro-forma earnings for the six months ended June 30, 2016 and 2015 were adjusted to assume that the acquisition-related costs were incurred as of the previous period (dollars in thousands, except per share amounts):
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
(unaudited)
 
(unaudited)
 
 
2016
 
2015
 
2016
 
2015
Operating Data:
 
 
 
 
 
 
 
 
Total operating revenue
 
$
21,465

 
$
21,955

 
$
43,349

 
$
43,420

Total operating expenses
 
(13,485
)
 
(13,382
)
 
(27,005
)
 
(26,037
)
Other expenses
 
(7,004
)
 
(8,024
)
 
(14,540
)
 
(15,993
)
Net income
 
976

 
549

 
1,804

 
1,390

Dividends attributable to preferred and senior common stock
 
(1,514
)
 
(1,284
)
 
(2,794
)
 
(2,532
)
Net loss attributable to common stockholders
 
$
(538
)
 
$
(735
)
 
$
(990
)
 
$
(1,142
)
Share and Per Share Data:
 
 
 
 
 
 
 
 
Basic and diluted loss per share of common stock - pro forma
 
$
(0.02
)
 
$
(0.04
)
 
$
(0.04
)
 
$
(0.06
)
Basic and diluted loss per share of common stock - actual
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.05
)
 
$
(0.07
)
Weighted average shares outstanding-basic and diluted
 
22,684,391

 
20,833,787

 
22,614,838

 
20,524,101

Significant Real Estate Activity on Existing Assets
During the six months ended June 30, 2016 , we executed leases on three properties, which are summarized below (dollars in thousands):
 
Location
 
Lease Commencement Date
 
Square Footage
(unaudited)
 
Lease Term
 
Renewal Options
 
Annualized GAAP Rent
 
Tenant Improvement
 
Leasing Commissions
Maple Heights, OH
 
6/1/2016
 
40,606

(1)
5.2 Years
 
2 (3 year)
 
$
109

 
$

 
$
34

Bolingbrook, IL
 
7/1/2016
 
13,816

(2)
7.2 Years
 
1 (5 year)
 
70

 
69

 
28

Burnsville, MN
 
12/1/2016
 
12,663

(3)
5.3 Years
 
1 (5 year)
 
143

 

 
104

 
(1)
Tenant's lease is for 11.7% of the building. The building is now 92.8% leased.
(2)
Tenant’s lease is for 24.9% of the building. The building is now 62.7% leased.
(3)
Tenant's lease is for 11.0% of the building. The building is now 80.4% leased.
On May 31, 2016, we reached a legal settlement with the previous tenant at our currently vacant Newburyport, Massachusetts property to compensate us for deferred capital obligations and repairs they were required to perform during their tenancy. We recognized $0.3 million , recorded in other income on the condensed consolidated statement of operations, related to reimbursed deferred capital obligations, and received $0.9 million as a reimbursement of repairs incurred during the three and six months ended June 30, 2016 in connection with the legal settlement received.

12



2015 Real Estate Activity
Investment Activity
During the six months ended June 30, 2015 , we acquired four properties, which are summarized below (dollars in thousands):
 
Location
 
Acquisition Date
 
Square Footage (unaudited)
 
Lease Term
 
Renewal Options
 
Total Purchase Price
 
Acquisition Expenses
 
Annualized GAAP Rent
 
 Debt Issued
Richardson, TX
(1)
3/6/2015
 
155,984

 
9.5 Years
 
2 (5 years each)
 
$
24,700

 
$
112

 
$
2,708

 
$
14,573

Birmingham, AL
 
3/20/2015
 
30,850

 
8.5 Years
 
1 (5 years)
 
3,648

 
76

 
333

 
 N/A

Columbus, OH
 
5/28/2015
 
78,033

 
15.0 Years
 
2 (5 years each)
 
7,700

 
72

 
637

 
4,466

Salt Lake City, UT
(1)
5/29/2015
 
86,409

 
6.5 Years
 
1 (5 years)
 
22,200

 
144

 
2,411

 
13,000

Total
 
 
 
351,276

 
 
 
 
 
$
58,248

 
$
404

 
$
6,089

 
$
32,039

 
(1)
The tenant occupying this property is subject to a gross lease.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the four properties acquired during the six months ended June 30, 2015 , as follows (dollars in thousands):
 
Location
 
Land
 
Building
 
Tenant Improvements
 
In-place Leases
 
Leasing Costs
 
Customer Relationships
 
Above Market Leases
 
Below Market Leases
 
Total Purchase Price
Richardson, TX
 
$
2,728

 
$
12,591

 
$
2,781

 
$
2,060

 
$
1,804

 
$
1,929

 
$
807

 
$

 
$
24,700

Birmingham, AL
 
650

 
1,683

 
351

 
458

 
146

 
360

 

 

 
3,648

Columbus, OH
 
1,338

 
3,511

 
1,547

 
1,144

 
672

 
567

 

 
(1,079
)
 
7,700

Salt Lake City, UT
 
3,248

 
11,861

 
1,268

 
2,396

 
981

 
1,678

 
821

 
(53
)
 
22,200

 
 
$
7,964

 
$
29,646

 
$
5,947

 
$
6,058

 
$
3,603

 
$
4,534

 
$
1,628

 
$
(1,132
)
 
$
58,248

Below is a summary of the total revenue and earnings recognized on the four properties acquired during the three and six months ended June 30, 2015 (dollars in thousands):
 
 
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
 
 
2015
 
2015
Location
 
Acquisition
Date
 
Rental Revenue
 
Earnings (1)
 
Rental Revenue
 
Earnings (1)
Richardson, TX
 
3/6/2015
 
$
657

 
$
90

 
$
839

 
$
328

Birmingham, AL
 
3/20/2015
 
83

 
(22
)
 
94

 
106

Columbus, OH
 
5/28/2015
 
67

 
149

 
67

 
149

Salt Lake City, UT
 
5/29/2015
 
207

 
278

 
207

 
278

 
 
 
 
$
1,014

 
$
495

 
$
1,207

 
$
861

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

13


Leasing Activity
During the six months ended June 30, 2015 , we amended six of our leases, which are summarized below (dollars in thousands):
 
Location
 
New Lease
Effective Date
 
Square Footage
(unaudited)
 
New Lease
Term
 
Renewal
Options
 
Annualized
GAAP Rent
 
Tenant
Improvement
 
Leasing
Commissions
Indianapolis, IN
 
1/1/2015
 
3,546

 
8.3 Years
 
N/A
 
$
64

 
$
64

 
$
28

Indianapolis, IN
 
2/1/2015
 
8,275

 
3.0 Years
 
N/A
 
124

 

 

Raleigh, NC
 
2/1/2015
 
58,926

 
5.5 Years
 
2 (5 year)
 
711

 

 
144

Raleigh, NC
 
2/1/2015
 
21,300

(1)
5.5 Years
 
2 (5 year)
 
239

 
100

 
32

Columbus, OH
 
12/1/2016
 
9,484

(2)
7.1 Years
 
N/A
 
1,246

 
142

 
29

Raleigh, NC
 
8/1/2015
 
86,886

(3)
12.4 Years
 
2 (5 year)
 
534

 
800

 
398

 
 
 
 
188,417

 
 
 
 
 
$
2,918

 
$
1,106

 
$
631

 
(1)
Tenant’s lease is for 18.3% of the building. The building is now 93.2% leased.
(2)
The anchor tenant currently occupying 92.0% of the building will expand into the remaining space, currently occupied by another tenant through November 30, 2016.
(3)
Tenant's lease is for 74.8% of the building. The building is now 93.2% leased.

Intangible Assets
The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of June 30, 2016 and December 31, 2015 respectively (in thousands):
 
 
 
June 30, 2016
(1)
 
December 31, 2015
(2)
 
 
Lease Intangibles
 
Accumulated Amortization
 
 
Lease Intangibles
 
Accumulated Amortization
 
In-place leases
 
$
67,217

 
$
(25,428
)
 
 
$
66,244

 
$
(22,679
)
 
Leasing costs
 
44,791

 
(16,748
)
 
 
44,360

 
(14,774
)
 
Customer relationships
 
48,099

 
(16,248
)
 
 
46,485

 
(14,722
)
 
 
 
$
160,107

 
$
(58,424
)
 
 
$
157,089

 
$
(52,175
)
 
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Above market leases
 
$
10,232

 
$
(7,053
)
 
 
$
10,176

 
$
(6,818
)
 
Below market leases and deferred revenue
 
(17,302
)
 
8,338

 
 
(17,951
)
 
8,294

 
 
 
$
(7,070
)
 
$
1,285

 
 
$
(7,775
)
 
$
1,476

 
 
(1)
Does not include real estate held for sale as of June 30, 2016 .
(2)
Does not include real estate held for sale as of December 31, 2015 .
Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $ 3.3 million and $ 6.6 million for the three and six months ended June 30, 2016 , respectively, and $ 3.5 million and $ 6.4 million for the three and six months ended June 30, 2015 , respectively, and is included in depreciation and amortization expense in the condensed consolidated statement of operations.
Total amortization related to above-market lease values was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2016 , respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2015 , respectively, and is included in rental income in the condensed consolidated statement of operations. Total amortization related to below-market lease values was $ 0.2 million and $ 0.5 million for the three and six months ended June 30, 2016 , respectively, and $ 0.2 million and $ 0.5 million for the three and six months ended June 30, 2015 , respectively, and is included in rental income in the condensed consolidated statement of operations.

14


The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the six months ended June 30, 2016 and 2015 , respectively, were as follows:
Intangible Assets & Liabilities
 
2016
 
2015
In-place leases
 
6.1
 
10.9
Leasing costs
 
6.1
 
10.9
Customer relationships
 
9.1
 
15.6
Above market leases
 
0
 
18.9
Below market leases
 
6.1
 
12.4
All intangible assets & liabilities
 
6.9
 
12.5

5. Real Estate Dispositions, Held for Sale, and Impairment Charges
Real Estate Dispositions
On May 16, 2016, we completed the sale of our Dayton, Ohio property for $0.2 million . There was no gain or loss recognized on this sale. We considered this office asset to be non-core to our long term strategy, and we re-deployed the proceeds to pay down outstanding debt.
The table below summarizes the components of operating income from the real estate and related assets disposed of for the Dayton, Ohio property during the three and six months ended June 30, 2016 , and 2015 , respectively (dollars in thousands):
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenue
 
$
1


$
106

 
$
45

 
$
215

Operating expense
 
50

 
50

 
103

 
105

Other expense
 

 
(25
)
 
(43
)
(1)  
(49
)
(Loss) income from real estate and related assets sold
 
$
(49
)
 
$
31

 
$
(101
)
 
$
61

(1)
Includes $0.04 million impairment charge on our Dayton, Ohio property.

Real Estate Held for Sale
As of June 30, 2016 , we classified one property located in Rock Falls, Illinois, two properties located in Angola, Indiana and one property located in Montgomery, Alabama, as held for sale under the provisions of ASC 360-10, “Property, Plant, and Equipment,” which requires that the assets and liabilities of any such properties, be presented separately in our condensed consolidated balance sheet in the current period presented. We consider these industrial assets to be non-core to our long term strategy. We have executed sales agreements for each of these properties and anticipate completing these sales during third quarter 2016.

The table below summarizes the components of income from real estate and related assets held for sale (dollars in thousands):
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenue
 
$
119

 
$
212

 
$
242

 
$
424

Operating expense
 
29

 
65

 
57

 
131

Other expense
 
(200
)
(1)  
(33
)
 
(232
)
(1)  
(65
)
(Loss) income from real estate and related assets held for sale
 
$
(110
)
 
$
114

 
$
(47
)
 
$
228

 
(1)
Includes $0.2 million impairment charge on our four properties held for sale.


15


The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheet (dollars in thousands):
 
 
June 30, 2016
ASSETS HELD FOR SALE
 
Real estate, at cost
$
4,593

Less: accumulated depreciation
1,187

Total real estate held for sale, net
3,406

Lease intangibles, net
153

Deferred rent receivable, net
259

Other assets
2

TOTAL ASSETS HELD FOR SALE
$
3,820

LIABILITIES HELD FOR SALE
 
Deferred rent liability, net
$
274

Asset retirement obligation
83

Other liabilities

TOTAL LIABILITIES HELD FOR SALE
$
357

Impairment Charge
We performed an evaluation and analysis on our portfolio and determined that our Dayton, Ohio property was impaired during the three months ended March 31, 2016 by an additional $0.04 million . We sold this property for $0.2 million in May 2016, and did not recognize any gain or loss on the sale. This property was previously impaired by $0.6 million during fiscal year 2015.
We also recorded impairment charges of $ 0.2 million on our four properties classified as held for sale as of June 30, 2016 .
The fair values for the above properties were calculated using Level 3 inputs which include an executed purchase and sale agreement and estimated selling costs.
No other impairment was recognized on our portfolio during both the three and six months ended June 30, 2016 and June 30, 2015 , respectively.
6. Mortgage Note Receivable
On July 25, 2014, we closed a $5.6 million second mortgage development loan for the construction of an 81,371 square foot, build-to-suit transitional care facility located on a major hospital campus in Phoenix, Arizona. Subsequently, on April 14, 2015, we closed an additional $0.3 million interim financing loan for the development of the Phoenix, Arizona property. Construction was completed in July 2015 and we earned 9.0% interest, paid currently in cash, on the loan during construction and through maturity. Prior to completion of the facility, we were granted a right of first offer to purchase the property at fair value. We elected not to purchase the property, and received an exit fee upon maturity of the loan in an amount sufficient for us to earn an internal rate of return of 22% on the second mortgage development loan, inclusive of interest earned. We recognized $ 0.4 million in both cash interest income and exit fee revenue during the six months ended June 30, 2016 . We recognized $ 0.3 million and $ 0.5 million , respectively, in both cash interest income and exit fee revenue during the three and six months ended June 30, 2015 , respectively. The principal balance of the loans and all associated interest and exit fee revenue was received in January 2016. We currently have no mortgage notes receivable outstanding.

16


7. Mortgage Notes Payable, Line of Credit and Term Loan Facility
Our mortgage notes payable and line of credit as of June 30, 2016 and December 31, 2015 are summarized below (dollars in thousands):
 
 
 
Encumbered properties at
 
 
 
Carrying Value at
 
Stated Interest Rates at
 
Scheduled Maturity Dates at
 
 
June 30, 2016
 
 
 
June 30, 2016
 
December 31, 2015
 
June 30, 2016
(4)
June 30, 2016
Mortgage and Other Secured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate mortgage loans
 
56

 
 
 
$
385,760

 
$
427,334

 
(1)
 
(2)
Variable rate mortgage loans
 
16

 
 
 
60,546

 
33,044

 
(3)
 
(2)
Premiums and discounts (net)
 
-

 
 
 
277

 
392

 
N/A
 
N/A
Deferred financing costs, mortgage loans (net)
 
-

 
 
 
(4,979
)
 
(4,907
)
 
N/A
 
N/A
Total Mortgage Notes Payable
 
72

 
 
 
$
441,604

 
$
455,863

 
(5)
 
 
Variable rate Line of Credit
 
24

 
(6)
 
60,800

 
45,300

 
LIBOR + 2.50%
 
8/7/2018
Deferred financing costs, line of credit (net)
 
-

 
 
 
(571
)
 
(709
)
 
N/A
 
N/A
Total Line of Credit
 
24

 
 
 
$
60,229

 
$
44,591

 
 
 
 
Variable rate Term Loan Facility
 
-

 
 
 
25,000

 
25,000

 
LIBOR + 2.45%
 
10/5/2020
Deferred financing costs, term loan facility (net)
 
-

 
 
 
(113
)
 
(122
)
 
N/A
 
N/A
Total Term Loan Facility
 
N/A

 
 
 
$
24,887

 
$
24,878

 
 
 
 
Total Mortgage Notes Payable, Line of Credit and Term Loan Facility
 
96

 
 
 
$
526,720

 
$
525,332

 
 
 
 
 
(1)
Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.63% .
(2)
We have 42 mortgage notes payable with maturity dates ranging from 12/1/2016 through 7/1/2045 .
(3)
Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.15% to one month LIBOR + 2.75% . At June 30, 2016 , one month LIBOR was approximately 0.47% .
(4)
The weighted average interest rate on all debt outstanding at June 30, 2016 , was approximately 4.47% .
(5)
The weighted average interest rate on the mortgage notes outstanding at June 30, 2016 , was approximately 4.77% .
(6)
The amount we may draw under our line of credit and term loan facility is based on a percentage of the fair value of a combined pool of 24 unencumbered properties as of June 30, 2016 .
N/A - Not Applicable
Mortgage Notes Payable
As of June 30, 2016 , we had 42 mortgage notes payable, collateralized by a total of 72 properties with a net book value of $626.7 million . Gladstone Commercial Corporation has limited recourse liabilities that could result from any one or more of the following circumstances: 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, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. Gladstone Commercial Corporation has full recourse for $3.4 million of the mortgages notes payable outstanding, or 0.8% . We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. 

17


During the six months ended June 30, 2016 , we repaid 5 mortgages, collateralized by 11 properties and issued 3 long-term mortgages, collateralized by 8 properties, which are summarized below (dollars in thousands):
 
Date of Issuance/Repayment
 
Issuing Bank
 
Debt Issued
 
Interest Rate
 
 
 
Maturity Date
 
Principal Balance Repaid
 
Previous Interest Rate
3/1/2016
 
First Niagara Bank
 
$
18,475

 
LIBOR + 2.35%
 
(1)
 
3/1/2023
 
$
21,197

 
6.14%
4/22/2016
 
Great Southern Bank
 
9,530

 
LIBOR + 2.75%
 
(2)
 
4/22/2019
 
3,667

 
6.25%
4/28/2016
 
N/A
 
N/A
 
N/A
 
(3)
 
N/A
 
22,510

 
6.34%
5/26/2016
 
Prudential
 
9,900

 
4.684%
 
(4)
 
6/1/2026
 
N/A
 
N/A
 
(1)
We refinanced maturing debt on our Chalfont, Pennsylvania, Big Flats, New York and Franklin and Eatontown, New Jersey properties, which was originally set to mature during second quarter 2016. We entered into an interest rate cap agreement with First Niagara Bank, which caps LIBOR at 3% through March 1, 2019 .
(2)
We refinanced maturing debt on our Coppell, Texas property, which was originally set to mature during second quarter 2016. We pooled the new mortgage debt with unencumbered properties located in Allen and Colleyville, Texas. We entered into an interest rate cap agreement with Great Southern Bank, which caps LIBOR at 2.5% through April 22, 2019.
(3)
We repaid our $10.7 million mortgage on our Springfield, Missouri property that was originally set to mature on July 1, 2016, and we repaid our $11.8 million mortgage on our Wichita, Kansas, Clintonville, Wisconsin, Angola, Indiana and Rock Falls, Illinois properties that was originally set to mature on May 5, 2016. We repaid both mortgages using existing cash on hand and borrowings from our line of credit.
(4)
We borrowed $9.9 million to acquire the property acquired in Salt Lake City, UT on May 26, 2016.
We made payments of $0.3 million and $0.7 million for deferred financing costs during the three and six months ended June 30, 2016 , respectively, and payments of $0.4 million and $0.9 million during the three and six months ended June 30, 2015 , respectively.

Scheduled principal payments of mortgage notes payable for the remainder of 2016, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):
 
Year
 
Scheduled Principal Payments
 
Six Months Ending December 31, 2016
 
$25,303
 
2017
 
70,115
 
2018
 
42,027
 
2019
 
45,463
 
2020
 
11,910
 
2021
 
24,121
 
Thereafter
 
227,367
 
Total
 
$446,306
(1)

(1) This figure does not include $0.3 million of premiums and (discounts) net and $5.7 million of deferred financing costs net, which are reflected in mortgage notes payable on the consolidated balance sheet.

18


Interest Rate Cap
We have entered into interest rate cap agreements that cap the interest rate on certain of our notes payable when one-month LIBOR is in excess of 3.0% . We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At June 30, 2016 and December 31, 2015 , our interest rate cap agreements were valued using Level 2 inputs.
The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as interest expense on our accompanying condensed consolidated statements of operations. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):
 
 
 
 
 
 
 
 
 
As of June 30, 2016
 
As of December 31, 2015
Interest Rate Cap
 
LIBOR Cap
 
Maturity Date
 
Cost
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair
Value
Nov-13
 
3.00%
 
Dec-16
 
$
31

 
$
8,200

 
$

 
$
8,200

 
$

Jul-15
 
3.00%
 
Jul-18
 
68

 
20,874

 

 
21,204

 
14

Dec-15
 
3.00%
 
Dec-20
 
52

 
3,596

 
6

 
3,640

 
26

Mar-16
 
3.00%
 
Mar-19
 
33

 
18,367

 
3

 

 

Apr-16
 
2.50%
 
Apr-19
 
27

 
9,508

 
2

 

 

 
 
 
 
 
 
$
211

 
$
60,545

 
$
11

 
$
33,044

 
$
40

The fair value of all mortgage notes payable outstanding as of June 30, 2016 was $454.1 million , as compared to the carrying value stated above, inclusive of premiums, discounts and deferred financing costs, of $441.6 million . The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

Line of Credit and Term Loan Facility
In August 2013, we procured a senior unsecured revolving credit facility, or the Line of Credit, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent). On October 5, 2015, we expanded our Line of Credit to $85.0 million , extended the maturity date one-year through August 2018, with a one year extension option through August 2019 and entered into a Term Loan Facility (discussed below). The interest rate on the Line of Credit was also reduced by 25 basis points at each of the leverage tiers and the total maximum commitment under the two facilities, including the Line of Credit and Term Loan Facility, was increased from $100.0 million to $150.0 million . We also added three new lenders to the bank syndicate, which is now comprised of KeyBank, Comerica Bank, Fifth Third Bank, US Bank and Huntington Bank. We were subject to payment of $0.5 million for the modification of the agreement.
In connection with the Line of Credit expansion in October 2015 mentioned above, we added a $25.0 million , five year term loan facility, or the Term Loan Facility, which was fully drawn at closing and matures in October 2020. The Term Loan Facility is subject to the same leverage tiers as the Line of Credit; however the interest rate at each leverage tier is five basis points lower. We have the option to repay the Term Loan Facility in full, or in part, at any time without penalty or premium prior to the maturity date.
As of June 30, 2016 , there was $85.8 million outstanding under our Line of Credit and Term Loan Facility at a weighted average interest rate of approximately 2.95% and $2.5 million outstanding under letters of credit at a weighted average interest rate of 2.5% . As of June 30, 2016 , the maximum additional amount we could draw under the Line of Credit was $8.6 million . We were in compliance with all covenants under the Line of Credit and Term Loan Facility as of June 30, 2016 .
The amount outstanding under the Line of Credit and Term Loan Facility approximates fair value as of June 30, 2016 , as the debt is variable rate.

19


8. Mandatorily Redeemable Preferred Stock
In February 2012, we completed a public offering of 1,540,000 shares of 7.125% Series C Cumulative Term Preferred Stock, par value $0.001 per share, or the Term Preferred Stock, at a public offering price of $25.00 per share. Gross proceeds of the offering totaled $38.5 million and net proceeds, after deducting offering expenses borne by us, were $36.7 million . The Term Preferred Stock is traded under the ticker symbol GOODN on the NASDAQ Global Select Market, or the NASDAQ. The Term Preferred Stock is not convertible into our common stock or any other security of ours. As of January 31, 2016, we may redeem the shares at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends to and including the date of redemption. The shares of the Term Preferred Stock have a mandatory redemption date of January 31, 2017 . We incurred $1.8 million in total offering costs related to these transactions, which have been recorded net of the Series C mandatorily redeemable preferred stock on the condensed consolidated balance sheet and will be amortized over the redemption period, ending August 19, 2016, see Note 11 for further information regarding the redemption of the Term Preferred Stock.
The Term Preferred Stock is recorded as a liability in accordance with ASC 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the condensed consolidated statements of operations.
During June 2016, we partially redeemed $25.0 million of our Term Preferred Stock and accordingly wrote-off $0.1 million of unamortized offering costs, which were recorded to interest expense in our condensed consolidated statements of operations.
Subsequent to the second quarter, we sent notices of redemption for the remaining 540,000 shares outstanding of our Term Preferred Stock. We intend to redeem these shares on August 19, 2016 at a redemption price of $25.00 per share, plus an amount equal to all accumulated and unpaid dividends.
The fair value of our Term Preferred Stock as of June 30, 2016 , was $13.6 million , as compared to the carrying value of $13.4 million , which includes $0.1 million of unamortized deferred financing costs. The fair value is calculated based on the closing share price as of June 30, 2016 of $25.20 . The fair value was calculated using Level 1 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

9. Commitments and Contingencies
Ground Leases
We are obligated as lessee under four ground leases. Future minimum rental payments due under the terms of these leases as of June 30, 2016 , are as follows (dollars in thousands):
 
 
 
 
 
For the year ended December 31,
 
 
Location
 
Lease End Date
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Tulsa, OK
 
Apr-21
 
$
85

 
$
169

 
$
169

 
$
169

 
$
169

 
$
85

Springfield, MA
 
Feb-30
 
43

 
89

 
90

 
90

 
90

 
884

Dartmouth, MA
 
May-36
 
87

 
174

 
174

 
174

 
174

 
3,126

Salt Lake City, UT
 
Nov-40
 
15

 
30

 
31

 
32

 
33

 
853