Gladstone Commercial Corporation
GLADSTONE COMMERCIAL CORP (Form: 10-Q, Received: 10/31/2016 16:18:46)
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 SEPTEMBER 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 October 31, 2016 was 23,748,303 .

1

Table of Contents

GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
September 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)  
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Real estate, at cost
 
$
797,115

 
$
780,377

Less: accumulated depreciation
 
125,250

 
112,243

Total real estate, net
 
671,865

 
668,134

Lease intangibles, net
 
102,765

 
104,914

Real estate and related assets held for sale, net
 
11,748

 
1,077

Mortgage note receivable
 

 
5,900

Cash and cash equivalents
 
8,747

 
5,152

Restricted cash
 
4,002

 
4,205

Funds held in escrow
 
7,172

 
7,534

Deferred rent receivable, net
 
29,288

 
27,443

Other assets
 
3,056

 
2,825

TOTAL ASSETS
 
$
838,643

 
$
827,184

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Mortgage notes payable, net
 
$
444,522

 
$
455,863

Borrowings under Line of Credit, net
 
46,772

 
44,591

Borrowings under Term Loan Facility, net
 
24,892

 
24,878

Series C mandatorily redeemable term preferred stock, net, par value $0.001 per share; $25 per share liquidation preference; 160,000 and 1,700,000 shares authorized; and 0 and 1,540,000 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 

 
38,100

Deferred rent liability, net
 
11,275

 
9,657

Asset retirement obligation
 
3,268

 
3,674

Accounts payable and accrued expenses
 
4,031

 
6,388

Liabilities related to assets held for sale, net
 
688

 
868

Due to Adviser and Administrator (1)
 
1,991

 
1,858

Other liabilities
 
8,076

 
7,436

TOTAL LIABILITIES
 
$
545,515

 
$
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 and 0 shares authorized; and 2,775,589 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively (3)
 
$
67,213

 
$

TOTAL MEZZANINE EQUITY
 
$
67,213

 
$

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 September 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 September 30, 2016 and December 31, 2015, respectively
 
1

 
1

Common stock, par value $0.001 per share, 34,040,000 and 38,500,000 shares authorized and 23,601,153 and 22,485,607 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
24

 
22

Additional paid in capital
 
440,136

 
418,897

Distributions in excess of accumulated earnings
 
(214,248
)
 
(185,051
)
TOTAL STOCKHOLDERS' EQUITY
 
225,915

 
233,871

TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
$
838,643

 
$
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

Table of Contents

Gladstone Commercial Corporation
Condensed Consolidated Statements of Operations
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)  
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenues
 
 
 
 
 
 
 
 
Rental revenue
 
$
21,205

 
$
20,653

 
$
62,752

 
$
59,953

Tenant recovery revenue
 
384

 
437

 
1,226

 
1,195

Interest income from mortgage note receivable
 

 
285

 
385

 
835

Total operating revenues
 
21,589

 
21,375

 
64,363

 
61,983

Operating expenses
 
 
 
 
 
 
 
 
Depreciation and amortization
 
9,459

 
9,006

 
27,796

 
26,160

Property operating expenses
 
1,410

 
1,612

 
4,455

 
3,752

Acquisition related expenses
 
149

 
138

 
275

 
589

Base management fee (1)
 
1,072

 
872

 
2,789

 
2,589

Incentive fee (1)
 
564

 
621

 
1,837

 
4,054

Administration fee (1)
 
311

 
326

 
1,086

 
1,054

General and administrative
 
421

 
446

 
1,607

 
1,675

Impairment charge
 
1,786

 
622

 
2,016

 
622

Total operating expenses before credit to incentive fee
 
15,172

 
13,643

 
41,861

 
40,495

Credit to incentive fee (1)
 

 

 

 
(2,500
)
Total operating expenses
 
15,172

 
13,643

 
41,861

 
37,995

Other (expense) income
 
 
 
 
 
 
 
 
Interest expense
 
(6,338
)
 
(7,142
)
 
(19,648
)
 
(20,912
)
Distributions attributable to Series C mandatorily redeemable preferred stock
 
(131
)
 
(686
)
 
(1,502
)
 
(2,057
)
Loss on sale of real estate
 
(24
)
 

 
(24
)
 

Other income
 
3

 

 
337

 
11

Total other expense, net
 
(6,490
)
 
(7,828
)
 
(20,837
)
 
(22,958
)
Net (loss) income
 
(73
)
 
(96
)
 
1,665

 
1,030

Distributions attributable to Series A, B and D preferred stock
 
(2,002
)
 
(1,023
)
 
(4,292
)
 
(3,070
)
Distributions attributable to senior common stock
 
(254
)
 
(263
)
 
(758
)
 
(748
)
Net loss attributable to common stockholders
 
$
(2,329
)
 
$
(1,382
)
 
$
(3,385
)
 
$
(2,788
)
Loss per weighted average share of common stock - basic & diluted
 
 
 
 
 
 
 
 
Loss attributable to common shareholders
 
$
(0.10
)
 
$
(0.06
)
 
$
(0.15
)
 
$
(0.13
)
Weighted average shares of common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Diluted
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Earnings per weighted average share of senior common stock
 
$
0.26

 
$
0.26

 
$
0.79

 
$
0.79

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

 
993,069

 
961,041

 
948,347

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


4

Table of Contents

Gladstone Commercial Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
 
 
For the nine months ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
1,665

 
$
1,030

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
27,796

 
26,160

Impairment charge
 
2,016

 
622

Loss on sale of real estate
 
24

 

Amortization of deferred financing costs
 
1,537

 
1,358

Amortization of deferred rent asset and liability, net
 
(363
)
 
(394
)
Amortization of discount and premium on assumed debt
 
(145
)
 
(231
)
Asset retirement obligation expense
 
114

 
114

Decrease (increase) in other assets
 
288

 
(946
)
Increase in deferred rent receivable
 
(2,780
)
 
(3,034
)
Increase in accounts payable, accrued expenses, and amount due Adviser and Administrator
 
240

 
1,045

Increase (decrease) in other liabilities
 
51

 
(315
)
Leasing commissions paid
 
(628
)
 
(532
)
Net cash provided by operating activities
 
29,815

 
24,877

Cash flows from investing activities:
 
 
 
 
Acquisition of real estate and related intangible assets
 
(40,900
)
 
(71,248
)
Improvements of existing real estate
 
(3,793
)
 
(4,969
)
Proceeds from sale of real estate
 
3,022

 

Issuance of mortgage note receivable
 

 
(300
)
Collection of mortgage note receivable
 
5,900

 

Receipts from lenders for funds held in escrow
 
2,747

 
2,952

Payments to lenders for funds held in escrow
 
(2,385
)
 
(2,792
)
Receipts from tenants for reserves
 
2,678

 
3,068

Payments to tenants from reserves
 
(2,219
)
 
(1,992
)
Decrease (increase) in restricted cash
 
203

 
(1,214
)
Deposits on future acquisitions
 
(1,750
)
 
(1,700
)
Deposits applied against acquisition of real estate investments
 
1,250

 
1,700

Net cash used in investing activities
 
(35,247
)
 
(76,495
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of equity
 
90,999

 
39,495

Offering costs paid
 
(2,367
)
 
(892
)
Retirement of senior common stock
 
(178
)
 

Redemption of Series C mandatorily redeemable preferred stock
 
(38,500
)
 

Borrowings under mortgage notes payable
 
56,005

 
61,059

Payments for deferred financing costs
 
(1,024
)
 
(1,157
)
Principal repayments on mortgage notes payable
 
(67,119
)
 
(37,216
)
Principal repayments on employee notes receivable
 

 
375

Borrowings from line of credit
 
132,500

 
73,200

Repayments on line of credit
 
(130,500
)
 
(61,000
)
Increase in security deposits
 
73

 
138

Distributions paid for common, senior common and preferred stock
 
(30,862
)
 
(27,253
)
Net cash provided by financing activities
 
9,027

 
46,749

Net increase (decrease) in cash and cash equivalents
 
$
3,595

 
$
(4,869
)
Cash and cash equivalents, beginning of period
 
$
5,152

 
$
8,599

Cash and cash equivalents, end of period
 
$
8,747

 
$
3,730

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

 
$
56

Senior common dividend issued in the dividend reinvestment program
 
$

 
$
53

Fixed asset additions paid for by tenant
 
$
2,570

 
$

Capital improvements included in accounts payable and accrued expenses
 
$
2,023

 
$
4,954

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 nine months ended September 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 nine months ended September 30, 2016 ; however we issued mezzanine equity during the nine months ended September 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. 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  We are currently assessing the impact of ASU 2016-15 and do not anticipate a material impact on our financial position, results of operations or cash flows.  ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. 

In October 2016, the FASB issued Accounting Standards Update 2016-17, “Interests Held through Related Parties That Are under Common Control” (“ASU 2016-17”), which amends the consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. We are currently assessing the impact of ASU 2016-17 and do not anticipate a material impact on our financial position, results of operations or cash flows.  ASU 2016-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years, 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 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 nine months ended September 30, 2016 . We had unamortized deferred financing fees of $5.6 million and $6.1 million as of September 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



7


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 September 30, 2016 and December 31, 2015 , $ 2.0 million and $1.9 million , respectively, was collectively due to our Adviser and Administrator.
Base Management Fee
On July 24, 2015, we entered into a second amended and restated advisory agreement, with the Adviser effective July 1, 2015. We subsequently entered into a third amended and restated advisory agreement with the Adviser on July 12, 2016 effective July 1, 2016, or the Advisory Agreement. Our entrance into each of the amended agreements was approved unanimously by our Board of Directors. Our Board of Directors reviews and considers approving or renewing the agreement with our Adviser each July.
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. Effective July 1, 2016, the definition of adjusted total stockholders' equity in the calculation of the base management fee and the incentive fee (described below) includes total mezzanine equity. All other provisions remained unchanged.
Prior to July 1, 2015, our then-existing advisory agreement with the Adviser, 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 nine months ended September 30, 2016 , we recorded a base management fee of $1.1 million and $ 2.8 million , respectively, and for the three and nine months ended September 30, 2015 , we recorded a base management fee of $ 0.9 million and $ 2.6 million , respectively.
Incentive Fee
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), or the hurdle amount. Effective July 1, 2016, the definition of adjusted total stockholders' equity includes total mezzanine equity. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle amount. 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 (as defined in the Advisory Agreement) is 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.
Prior to July 1, 2015, our then-existing advisory agerement 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.


8


For the three and nine months ended September 30, 2016 , we recorded an incentive fee of $0.6 million and $1.8 million , respectively. For the three and nine months ended September 30, 2015 , we recorded an incentive fee of $ 0.6 million and $ 4.1 million , respectively, offset by credits related to unconditional, voluntary and irrevocable waivers issued by the Adviser of $ 0.0 million and $ 2.5 million , respectively, resulting in a net incentive fee for the three and nine months ended September 30, 2015 , of $ 0.6 million and $ 1.6 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 nine months covering January 1, 2015 through September 31, 2015 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 nine months ended September 30, 2016 . Waivers cannot be recouped by the Adviser in the future.

Capital Gain Fee
Under the Advisory Agreement, 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 nine months ended September 30, 2016 or 2015 .
Termination Fee
The 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 nine months ended September 30, 2016 , we recorded an administration fee of $0.3 million and $ 1.1 million , respectively, and for the three and nine months ended September 30, 2015 , we recorded an administration fee of $ 0.3 million and $ 1.1 million , respectively. Our Board of Directors 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.


9


Dealer Manager Agreement
In connection with the offering of our Senior Common Stock (see Note 10, “Stockholders’ and Mezzanine 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 nine months ended September 30, 2015 , to Gladstone Securities pursuant to this agreement.
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 $0.05 million and $0.2 million during the three and nine months ended September 30, 2016 , respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.28% and 0.36% of total mortgages secured. We paid financing fees to Gladstone Securities of $0.02 million and $0.2 million during the three and nine months ended September 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.

10


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 nine months ended September 30, 2016 and 2015 , respectively. We computed basic loss per share for the three and nine months ended September 30, 2016 and 2015 , respectively, using the weighted average number of shares outstanding during the periods. Diluted loss per share for the three and nine months ended September 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 September 30,
 
For the nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Calculation of basic loss per share of common stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(2,329
)
 
$
(1,382
)
 
$
(3,385
)
 
$
(2,788
)
Denominator for basic weighted average shares of common stock
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Basic loss per share of common stock
 
$
(0.10
)
 
$
(0.06
)
 
$
(0.15
)
 
$
(0.13
)
Calculation of diluted loss per share of common stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(2,329
)
 
$
(1,382
)
 
$
(3,385
)
 
$
(2,788
)
Net loss attributable to common stockholders plus assumed conversions (1)
 
$
(2,329
)
 
$
(1,382
)
 
$
(3,385
)
 
$
(2,788
)
Denominator for basic weighted average shares of common stock
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Effect of convertible senior common stock (1)
 

 

 

 

Denominator for diluted weighted average shares of common stock (1)
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Diluted loss per share of common stock
 
$
(0.10
)
 
$
(0.06
)
 
$
(0.15
)
 
$
(0.13
)
 
(1)
We excluded 800,116 shares of convertible senior common stock from the calculation of diluted earnings per share for the three and nine months ended September 30, 2016 , respectively, because it was anti-dilutive. We also excluded 828,444 shares and 791,582 shares of convertible senior common stock from the calculation of diluted earnings per share for the three and nine months ended September 30, 2015 , respectively, because it was anti-dilutive.
4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of our investments in real estate as of September 30, 2016 and December 31, 2015 , excluding real estate held for sale as of September 30, 2016 and December 31, 2015 , respectively (dollars in thousands):
 
 
 
September 30, 2016

December 31, 2015

Real estate:
 
 
 
 
 
Land
 
$
102,101

 
$
97,117

 
Building
 
644,662

 
635,728

 
Tenant improvements
 
50,352

 
47,532

 
Accumulated depreciation
 
(125,250
)
 
(112,243
)
 
Real estate, net
 
$
671,865

 
$
668,134

 

Real estate depreciation expense on building and tenant improvements was $ 6.1 million and $ 17.9 million for the three and nine months ended September 30, 2016 , respectively, and $ 5.7 million and $ 16.4 million for the three and nine months ended September 30, 2015 , respectively.


11


2016 Real Estate Activity

During the nine months ended September 30, 2016 , we acquired two 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
Salt Lake City, UT
 
5/26/2016
 
107,062

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

 
$
105

 
$
1,393

 
$
9,900

Fort Lauderdale, FL
 
9/12/2016
 
119,224

 
9 Years
 
2 (5 Years)
 
23,900

 
74

 
1,974

 
14,100

Total
 

 
226,286

 

 

 
$
40,900

 
$
179

 
$
3,367

 
$
24,000


In accordance with Accounting Standards Codification, or ASC, 805, "Business Combinations," we determined the fair value of the acquired assets related to the two properties acquired during the nine months ended September 30, 2016 as follows (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

Fort Lauderdale, FL
 
4,117

 
13,961

 
1,555

 
2,003

 
1,100

 
1,415

 
(251
)
 
23,900

 
 
$
7,125

 
$
22,934

 
$
3,240

 
$
3,355

 
$
1,437

 
$
3,090

 
$
(281
)
 
$
40,900


Below is a summary of the total revenue and earnings recognized on the two properties acquired during the nine months ended September 30, 2016 (dollars in thousands):

 
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
 
 
 
2016
 
2016
 
Location
 
Acquisition Date
 
Rental Revenue
 
Earnings
 
Rental Revenue
 
Earnings
 
Salt Lake City, UT
 
5/26/2016
 
$
358

 
$
(22
)
 
$
497

 
$
(143
)
(1)
Fort Lauderdale, FL
 
9/12/2016
 
106

 
(60
)
(2)
106

 
(60
)
(2)
 
 
 
 
$
464

 
$
(82
)
 
$
603

 
$
(203
)
 
(1)
Includes $ 0.1 million of non-recurring acquisition costs.
(2)
Includes $ 0.07 million of non-recurring acquisition costs.


12


Pro Forma
The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the nine months ended September 30, 2016 , were acquired as of January 1, 2015, and the properties acquired during 2015 , were acquired as of January 1, 2014. The pro-forma earnings for the nine months ended September 30, 2016 and 2015 were adjusted to assume that the acquisition-related costs were incurred as of the assumed acquisition date (dollars in thousands, except per share amounts):
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
(unaudited)
 
(unaudited)
 
 
2016
 
2015
 
2016
 
2015
Operating Data:
 
 
 
 
 
 
 
 
Total operating revenue
 
$
22,012

 
$
22,463

 
$
66,406

 
$
67,222

Total operating expenses
 
(15,205
)
 
(13,785
)
 
(42,968
)
 
(41,204
)
Other expenses
 
(6,612
)
 
(8,159
)
 
(21,453
)
 
(24,499
)
Net income
 
195

 
519

 
1,985

 
1,519

Dividends attributable to preferred and senior common stock
 
(2,256
)
 
(1,286
)
 
(5,050
)
 
(3,818
)
Net loss attributable to common stockholders
 
$
(2,061
)
 
$
(767
)
 
$
(3,065
)
 
$
(2,299
)
Share and Per Share Data:
 
 
 
 
 
 
 
 
Basic and diluted loss per share of common stock - pro forma
 
$
(0.09
)
 
$
(0.04
)
 
$
(0.13
)
 
$
(0.11
)
Basic and diluted loss per share of common stock - actual
 
$
(0.10
)
 
$
(0.06
)
 
$
(0.15
)
 
$
(0.13
)
Weighted average shares outstanding-basic and diluted
 
23,509,054

 
21,403,808

 
22,915,086

 
20,820,559

Significant Real Estate Activity on Existing Assets
During the nine months ended September 30, 2016 , we executed seven leases, 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

Richmond, VA
 
N/A
 
42,213

(3)
3 Years
 
N/A
 
228

 

 

Maple Heights, OH
 
N/A
 
180,000

(4)
1 Year
 
N/A
 
530

 
60

 

Burnsville, MN
 
12/1/2016
 
12,663

(5)
5.3 Years
 
1 (5 year)
 
143

 

 
104

South Hadley, MA
 
N/A
 
150,000

(6)
1 Year
 
1 (1 year)
 
288

 

 
7

Bolingbrook, IL
 
1/2/2017
 
20,719

(7)
7.3 Years
 
1 (5 year)
 
107

 
204

 
48

 
(1)
Tenant's lease is for 11.7% of the building. The building is now 63.5% leased.
(2)
Tenant’s lease is for 24.9% of the building. The building is now 100.0% leased.
(3)
Tenant extended their current lease for an additional 3 years, expiring December 2019.
(4)
Tenant extended their current lease for an additional year, expiring December 2019. The tenant also exercised their contraction right and downsized their square footage. The building is now 63.5% leased.
(5)
Tenant's lease is for 11.0% of the building. The building is now 80.4% leased.
(6)
Tenant extended their current lease for an additional year, expiring February 2018.
(7)
Tenant’s lease is for 37.3% of the building. The building is now 100.0% 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 nine months ended September 30, 2016 in connection with the legal settlement received, which was recorded net against operating expenses on the condensed consolidated statement of operations.

13


2015 Real Estate Activity
Investment Activity
During the nine months ended September 30, 2015 , we acquired five 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

 
149

 
2,411

 
13,000

Atlanta, GA
(2)
7/15/2015
 
78,151

 
Multiple
(2)
2 (5 years)
 
13,000

 
109

 
1,291

 
7,540

Total
 
 
 
429,427

 
 
 
 
 
$
71,248

 
$
518

 
$
7,380

 
$
39,579

 
(1)
The tenant occupying this property is subject to a gross lease.
(2)
This building is 100% leased to one tenant through two leases. The lease for 30% of the space expires in July 2030 and the lease for the remaining space expires in July 2022.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the five properties acquired during the nine months ended September 30, 2015 , as follows (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

Atlanta, GA
 
2,271

 
7,862

 
916

 
750

 
548

 
723

 
44

 
(114
)
 
13,000

 
 
$
10,235

 
$
37,508

 
$
6,863

 
$
6,808

 
$
4,151

 
$
5,257

 
$
1,672

 
$
(1,246
)
 
$
71,248

Below is a summary of the total revenue and earnings recognized on the five properties acquired during the three and nine months ended September 30, 2015 (dollars in thousands):
 
 
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
 
 
 
2015
 
2015
 
Location
 
Acquisition Date
 
Rental Revenue
 
Earnings (1)
 
Rental Revenue
 
Earnings (1)
 
Richardson, TX
 
3/6/2015
 
$
656

 
$
(57
)
 
$
1,496

 
$
(22
)
(1)
Birmingham, AL
 
3/20/2015
 
83

 
(28
)
 
177

 
6

(2)
Columbus, OH
 
5/28/2015
 
177

 
(28
)
 
244

 
32

(3)
Salt Lake City, UT
 
5/29/2015
 
572

 
14

 
780

 
122

(4)
Atlanta, GA
 
7/15/2015
 
274

 
28

(5)
274

 
28

(5)
 
 
 
 
$
1,762

 
$
(71
)
 
$
2,971

 
$
166

 
 
(1)
Includes $ 0.1 million of non-recurring acquisition costs.
(2)
Includes $ 0.08 million of non-recurring acquisition costs.
(3)
Includes $ 0.07 million of non-recurring acquisition costs.
(4)
Includes $ 0.1 million of non-recurring acquisition costs.
(5)
Includes $ 0.1 million of non-recurring acquisition costs.


14


Leasing Activity
During the nine months ended September 30, 2015 , we amended nine 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


5.5 Years
 
2 (5 year)
 
239

 
100

 
32

Columbus, OH
 
12/1/2016
 
9,484

(1)
7.1 Years
 
N/A
 
1,246

 
142

 
29

Raleigh, NC
 
8/1/2015
 
86,886

(2)
12.4 Years
 
2 (5 year)
 
534

 
800

 
398

Indianapolis, IN
 
8/1/2015
 
6,903


3 Years
 
N/A
 
111

 
64

 
16

Baytown, TX
 
9/18/2015
 
6,791

(3)
7 Years
 
2 (5 year)
 
132

 
360

 
71

Indianapolis, IN
 
10/1/2015
 
1,427

(4)
3 Years
 
N/A
 
22

 

 
4

 
 
 
 
203,538

 
 
 
 
 
3,183

 
1,530

 
722

 
(1)
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.
(2)
Tenant's lease is for 74.8% of the building. The building is now 93.2% leased.
(3)
Tenant's lease is for 56.6% of the building. The building is now 56.6% leased.
(4)
Tenant's lease is for 1.6% of the building. The building is now 95.9% 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 September 30, 2016 and December 31, 2015 , excluding real estate held for sale as of September 30, 2016 and December 31, 2015 , respectively (in thousands):
 
 
 
September 30, 2016

December 31, 2015

 
 
Lease Intangibles
 
Accumulated Amortization
 
Lease Intangibles
 
Accumulated Amortization
 
In-place leases
 
$
68,681

 
$
(26,469
)
 
$
66,244

 
$
(22,679
)
 
Leasing costs
 
45,555

 
(17,320
)
 
44,360

 
(14,774
)
 
Customer relationships
 
48,774

 
(16,456
)
 
46,485

 
(14,722
)
 
 
 
$
163,010

 
$
(60,245
)
 
$
157,089

 
$
(52,175
)
 
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Above market leases
 
$
10,292

 
$
(7,175
)
 
$
10,176

 
$
(6,818
)
 
Below market leases and deferred revenue
 
(19,813
)
 
8,538

 
(17,951
)
 
8,294

 
 
 
$
(9,521
)
 
$
1,363

 
$
(7,775
)
 
$
1,476

 
 
Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $ 3.4 million and $ 9.9 million for the three and nine months ended September 30, 2016 , respectively, and $ 3.3 million and $ 9.7 million for the three and nine months ended September 30, 2015 , respectively, and is included in depreciation and amortization expense in the condensed consolidated statement of operations.

15


Total amortization related to above-market lease values was $ 0.1 million and $ 0.4 million for the three and nine months ended September 30, 2016 , respectively, and $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2015 , respectively, and is included in rental revenue in the condensed consolidated statement of operations. Total amortization related to below-market lease values was $ 0.3 million and $ 0.7 million for the three and nine months ended September 30, 2016 , respectively, and $ 0.2 million and $ 0.7 million for the three and nine months ended September 30, 2015 , respectively, and is included in rental revenue in the condensed consolidated statement of operations.
The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2016 and 2015 , respectively, were as follows:
Intangible Assets & Liabilities
 
2016
 
2015
In-place leases
 
7.9

 
11.5
Leasing costs
 
7.9

 
11.5
Customer relationships
 
12.2

 
16.1
Above market leases
 

 
17.2
Below market leases
 
7.9

 
13.5
All intangible assets & liabilities
 
9.0

 
12.9

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.
On August 24, 2016, we completed the sale of our property located in Rock Falls, Illinois, and our two properties located in Angola, Indiana for an aggregate of $3.0 million and recognized a loss of $0.02 million . We considered these industrial assets to be non-core to our long term strategy, and we re-deployed the proceeds to pay down outstanding debt.
Per ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," our 2016 dispositions were not classified as discontinued operations because they do not represent a strategic shift in operations, nor will they have a major effect on our operations and financial results.
The table below summarizes the components of operating income from the real estate and related assets disposed of during the three and nine months ended September 30, 2016 , and 2015 , respectively (dollars in thousands):
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
Operating revenue
 
$
50

 
$
132

 
$
271

 
$
538

 
Operating expense
 
4

 
702

(1)
193

(2)
872

(1)
Other expense
 
(10
)
 
(41
)
 
(69
)

(155
)
 
Income (loss) from real estate and related assets sold
 
$
36

 
$
(611
)
 
$
9

 
$
(489
)
 
(1) Includes a $0.6 million impairment charge on our Dayton, Ohio property.
(2) Includes a $0.04 million impairment charge on our Dayton, Ohio property and a $0.02 million impairment charge on our Angola, IN and Rock Falls, IL properties.


16


Real Estate Held for Sale
As of September 30, 2016 , we classified five properties (located in Montgomery, Alabama, Hazelwood, Missouri, Syracuse, New York, Toledo, Ohio and South Hadley, Massachusetts) as held for sale under the provisions of ASC 360-10, “Property, Plant, and Equipment.” ASC 360-10 requires that the assets and liabilities of any such properties, be presented separately in our condensed consolidated balance sheet in the current period presented, and that we cease recording depreciation and amortization expense. We consider all five of these assets to be non-core to our long term strategy. We have executed sales agreements for the Montgomery, Alabama, Hazelwood, Missouri, and Toledo, Ohio properties, and are actively looking for buyers for the Syracuse, New York and South Hadley, Massachusetts properties. We anticipate the Hazelwood, Missouri property sale will close during second quarter 2017, and we currently anticipate the remaining four properties to sell during the fourth quarter 2016.
Per ASU 2014-08, our assets classified as held for sale were not classified as discontinued operations because they do not represent a strategic shift in our operations, nor will they have a major effect on our operations and financial results.

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 September 30,
 
For the nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenue
 
$
362

 
$
357

 
$
1,090

 
$
1,074

Operating expense
 
1,918

(1)
151

 
2,426

(2)
484

Other expense
 
(108
)

(138
)
 
(338
)

(412
)
(Loss) income from real estate and related assets held for sale
 
$
(1,664
)
 
$
68

 
$
(1,674
)
 
$
178

 
(1)
Includes $1.8 million impairment charge on our five properties held for sale.
(2)
Includes $2.0 million impairment charge on our five properties held for sale.

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):
 
 
September 30, 2016
 
December 31, 2015
ASSETS HELD FOR SALE
 
 
 
Real estate, at cost
$
15,051

 
$
1,899

Less: accumulated depreciation
3,904

 
846

Total real estate held for sale, net
11,147

 
1,053

Lease intangibles, net
299

 

Deferred rent receivable, net
297

 

Other assets
5

 
24

TOTAL ASSETS HELD FOR SALE
$
11,748

 
$
1,077

LIABILITIES HELD FOR SALE
 
 
 
Deferred rent liability, net
$
239

 
$

Asset retirement obligation
449

 
75

Accounts payable and accrued expenses

 
1

Other liabilities

 
792

TOTAL LIABILITIES HELD FOR SALE
$
688

 
$
868


17


Impairment Charges
We performed an evaluation and analysis on our held for sale properties and recorded impairment charges of $1.8 million and $2.0 million for the three and nine months ended September 30, 2016 , and $0.6 million for both the three and nine months ended September 30, 2015 , respectively. We recognized impairment charges of $0.04 million on our Dayton, Ohio property and $0.02 million on our Angola, Indiana and Rock Falls, Illinois properties, which were sold during the nine months ended September 30, 2016. We also recognized $0.2 million , $0.7 million and $1.1 million of impairment charges on our Montgomery, Alabama, Hazelwood, Missouri and South Hadley, Massachusetts properties, respectively, which are all classified as held for sale in the accompanying condensed consolidated balance sheet, during the nine months ended September 30, 2016. We recognized impairment on these assets as the hold period for these assets was shortened when they met the definition of held for sale.
We recognized $0.6 million of impairment charges on our Dayton, Ohio property during the nine months ended September 30, 2015. This property was sold in May 2016.
The fair values for the above properties were calculated using Level 3 inputs which were calculated using an estimated sales price, less estimated costs to sell. The estimated sales price was determined using an executed purchase and sale agreement, auction house price ranges and real estate broker guidance.
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 22.0% 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 nine months ended September 30, 2016 . We recognized $ 0.3 million and $ 0.8 million , respectively, in both cash interest income and exit fee revenue during the three and nine months ended September 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.

18


7. Mortgage Notes Payable, Line of Credit and Term Loan Facility
Our mortgage notes payable and line of credit as of September 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
 
 
September 30, 2016
 
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
(4)
September 30, 2016
Mortgage and Other Secured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate mortgage loans
 
54

 
 
 
$
385,102

 
$
427,334

 
(1)
 
(2)
Variable rate mortgage loans
 
17

 
 
 
64,161

 
33,044

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

 
 
 
247

 
392

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

 
 
 
(4,988
)
 
(4,907
)
 
N/A
 
N/A
Total Mortgage Notes Payable, net
 
71

 
 
 
$
444,522

 
$
455,863

 
(5)
 
 
Variable rate Line of Credit
 
25

 
(6)
 
47,300

 
45,300

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

 
 
 
(528
)
 
(709
)
 
N/A
 
N/A
Total Line of Credit, net
 
25

 
 
 
$
46,772

 
$
44,591

 
 
 
 
Variable rate Term Loan Facility
 
-

 
 
 
25,000

 
25,000

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

 
 
 
(108
)
 
(122
)
 
N/A
 
N/A
Total Term Loan Facility, net
 
N/A

 
 
 
$
24,892

 
$
24,878

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

 
 
 
$
516,186

 
$
525,332

 
 
 
 
 
(1)
Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.63% .
(2)
We have 43 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 September 30, 2016 , one month LIBOR was approximately 0.53% .
(4)
The weighted average interest rate on all debt outstanding at September 30, 2016 was approximately 4.47% .
(5)
The weighted average interest rate on the mortgage notes outstanding at September 30, 2016 was approximately 4.71% .
(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 25 unencumbered properties as of September 30, 2016 .
N/A - Not Applicable

19


Mortgage Notes Payable
As of September 30, 2016 , we had 43 mortgage notes payable, collateralized by a total of 71 properties with a net book value of $638.5 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 $7.4 million of the mortgages notes payable outstanding, or 1.7% of the outstanding balance. 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. 
During the nine months ended September 30, 2016 , we repaid 6 mortgages, collateralized by 12 properties, and issued 5 long-term mortgages, collateralized by 10 properties, which are summarized below (dollars in thousands):
 
Date of Issuance/Repayment
 
Issuing Bank
 
New Debt Issued
 
Interest Rate
 
 
 
Maturity Date
 
Principal Balance Repaid
 
Previous Interest Rate
3/1/2016
 
Key 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