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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, 2019
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) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
GOOD
 
Nasdaq Global Select Market
7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODP
 
Nasdaq Global Select Market
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODO
 
Nasdaq Global Select Market
7.00% Series D Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODM
 
Nasdaq Global Select Market
6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share
 
GOODN
 
Nasdaq Global Select Market

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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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 30, 2019 was 31,229,157.

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GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
September 30, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Real estate, at cost
 
$
1,008,438

 
$
946,649

Less: accumulated depreciation
 
202,480

 
178,257

Total real estate, net
 
805,958

 
768,392

Lease intangibles, net
 
110,197

 
111,448

Real estate and related assets held for sale, net
 

 
4,151

Cash and cash equivalents
 
6,175

 
6,591

Restricted cash
 
2,778

 
2,491

Funds held in escrow
 
6,011

 
6,010

Right-of-use assets from operating leases
 
5,846

 

Deferred rent receivable, net
 
37,344

 
34,771

Other assets
 
3,703

 
4,921

TOTAL ASSETS
 
$
978,012

 
$
938,775

LIABILITIES, MEZZANINE EQUITY AND EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Mortgage notes payable, net (1)
 
$
434,689

 
$
441,346

Borrowings under Revolver, net
 
34,915

 
50,084

Borrowings under Term Loan, net
 
121,219

 
74,629

Deferred rent liability, net
 
19,754

 
17,305

Operating lease liabilities
 
5,886

 

Asset retirement obligation
 
3,120

 
2,875

Accounts payable and accrued expenses
 
2,658

 
2,704

Due to Adviser and Administrator (1)
 
2,730

 
2,523

Other liabilities
 
9,190

 
7,292

TOTAL LIABILITIES
 
$
634,161

 
$
598,758

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 3,509,555 shares issued and outstanding at September 30, 2019 and December 31, 2018 (3)
 
$
85,598

 
$
85,598

TOTAL MEZZANINE EQUITY
 
$
85,598

 
$
85,598

EQUITY
 
 
 
 
Series A and B redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 5,350,000 shares authorized and 2,264,000 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively (3)
 
$
2

 
$
2

Senior common stock, par value $0.001 per share; 950,000 shares authorized; and 848,906 and 866,259 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively (3)
 
1

 
1

Common stock, par value $0.001 per share, 83,700,000 and 87,700,000 shares authorized and 31,220,465 and 29,254,899 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively (3)
 
31

 
29

Additional paid in capital
 
599,956

 
559,977

Accumulated other comprehensive income
 
(2,483
)
 
(148
)
Distributions in excess of accumulated earnings
 
(343,736
)
 
(310,117
)
TOTAL STOCKHOLDERS' EQUITY
 
253,771

 
249,744

OP Units held by Non-controlling OP Unitholders (3)
 
$
4,482

 
$
4,675

TOTAL EQUITY
 
$
258,253

 
$
254,419

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY
 
$
978,012

 
$
938,775

(1)
Refer to Note 2 “Related-Party Transactions”
(2)
Refer to Note 7 “Commitments and Contingencies”
(3)
Refer to Note 8 “Equity and Mezzanine Equity”

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

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Gladstone Commercial Corporation
Condensed Consolidated Statements of Operations and Comprehensive Income
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited) 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Operating revenues
 
 
 
 
 
 
 
 
Lease revenue
 
$
28,667

 
$
26,591

 
$
85,001

 
$
79,538

Total operating revenues
 
28,667

 
26,591

 
85,001

 
79,538

Operating expenses
 
 
 
 
 
 
 
 
Depreciation and amortization
 
12,979

 
11,807

 
38,611

 
35,166

Property operating expenses
 
3,202

 
2,638

 
9,330

 
8,247

Base management fee (1)
 
1,292

 
1,242

 
3,852

 
3,798

Incentive fee (1)
 
965

 
785

 
2,720

 
2,215

Administration fee (1)
 
411

 
440

 
1,222

 
1,187

General and administrative
 
596

 
510

 
2,035

 
1,754

Total operating expenses
 
19,445

 
17,422

 
57,770

 
52,367

Other (expense) income
 
 
 
 
 
 
 
 
Interest expense
 
(7,170
)
 
(6,531
)
 
(21,406
)
 
(19,275
)
Gain on sale of real estate, net
 

 

 
2,952

 
1,844

Other income
 
139

 
39

 
291

 
67

Total other expense, net
 
(7,031
)
 
(6,492
)
 
(18,163
)
 
(17,364
)
Net income
 
2,191

 
2,677

 
9,068

 
9,807

Net loss (income) attributable to OP Units held by Non-controlling OP Unitholders
 
16

 

 
(13
)
 

Net income attributable to the Company
 
$
2,207

 
$
2,677

 
$
9,055

 
$
9,807

Distributions attributable to Series A, B and D preferred stock
 
(2,612
)
 
(2,612
)
 
(7,837
)
 
(7,803
)
Distributions attributable to senior common stock
 
(226
)
 
(235
)
 
(675
)
 
(700
)
Net (loss) income (attributable) available to common stockholders
 
$
(631
)
 
$
(170
)
 
$
543

 
$
1,304

(Loss) earnings per weighted average share of common stock - basic & diluted
 
 
 
 
 
 
 
 
(Loss) earnings (attributable) available to common shareholders
 
$
(0.02
)
 
$
(0.01
)
 
$
0.02

 
$
0.05

Weighted average shares of common stock outstanding
 
 
 
 
 
 
 
 
Basic and Diluted
 
31,032,802

 
28,734,380

 
30,338,690

 
28,532,224

Earnings per weighted average share of senior common stock
 
$
0.26

 
$
0.27

 
$
0.78

 
$
0.79

Weighted average shares of senior common stock outstanding - basic
 
854,435

 
886,346

 
859,956

 
890,966

Comprehensive income
 
 
 
 
 
 
 
 
Change in unrealized (loss) gain related to interest rate hedging instruments, net
 
$
(624
)
 
$
245

 
$
(2,335
)
 
$
1,028

Other Comprehensive (loss) income
 
(624
)
 
245

 
(2,335
)
 
1,028

Net income
 
$
2,191

 
$
2,677

 
$
9,068

 
$
9,807

Comprehensive income
 
$
1,567

 
$
2,922

 
$
6,733

 
$
10,835

Comprehensive loss (income) attributable to OP Units held by Non-controlling OP Unitholders
 
16

 

 
(13
)
 

Total comprehensive income attributable to the Company
 
$
1,583

 
$
2,922

 
$
6,720

 
$
10,835

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

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Gladstone Commercial Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)

 
 
For the nine months ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
9,068

 
$
9,807

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
38,611

 
35,166

Gain on sale of real estate, net
 
(2,952
)
 
(1,844
)
Amortization of deferred financing costs
 
1,268

 
1,103

Amortization of deferred rent asset and liability, net
 
(1,071
)
 
(797
)
Amortization of discount and premium on assumed debt, net
 
47

 
(36
)
Asset retirement obligation expense
 
81

 
90

Operating changes in assets and liabilities
 
 
 
 
(Increase) decrease in other assets
 
(88
)
 
170

Increase in deferred rent receivable
 
(1,448
)
 
(1,908
)
(Decrease) increase in accounts payable, accrued expenses, and amount due to Adviser and Administrator
 
(13
)
 
513

Decrease in right-of-use asset from operating leases
 
152

 

Decrease in operating lease liabilities
 
(112
)
 

Increase (decrease) in other liabilities
 
398

 
(1,071
)
Leasing commissions paid
 
(875
)
 
(402
)
Net cash provided by operating activities
 
$
43,066

 
$
40,791

Cash flows from investing activities:
 
 
 
 
Acquisition of real estate and related intangible assets
 
$
(67,272
)
 
$
(22,800
)
Improvements of existing real estate
 
(3,261
)
 
(2,494
)
Proceeds from sale of real estate
 
6,318

 
10,773

Receipts from lenders for funds held in escrow
 
1,424

 
1,286

Payments to lenders for funds held in escrow
 
(1,425
)
 
(1,817
)
Receipts from tenants for reserves
 
2,166

 
2,119

Payments to tenants from reserves
 
(1,589
)
 
(1,884
)
Deposits on future acquisitions
 
(1,490
)
 
(590
)
Deposits applied against acquisition of real estate investments
 
1,490

 
590

Net cash used in investing activities
 
$
(63,639
)
 
$
(14,817
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of equity
 
$
41,231

 
$
12,504

Offering costs paid
 
(620
)
 
(200
)
Retirement of senior common stock
 

 
(34
)
Borrowings under mortgage notes payable
 
41,140

 
14,125

Payments for deferred financing costs
 
(2,075
)
 
(345
)
Principal repayments on mortgage notes payable
 
(48,116
)
 
(24,888
)
Borrowings from revolving credit facility
 
94,500

 
57,400

Repayments on revolving credit facility
 
(109,300
)
 
(47,900
)
Borrowings on term loan
 
47,300

 

Decrease in security deposits
 
(106
)
 
(26
)

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Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders
 
(43,510
)
 
(40,615
)
Net cash provided by (used in) financing activities
 
$
20,444

 
$
(29,979
)
Net decrease in cash, cash equivalents, and restricted cash
 
$
(129
)
 
$
(4,005
)
Cash, cash equivalents, and restricted cash at beginning of period
 
$
9,082

 
$
9,080

Cash, cash equivalents, and restricted cash at end of period
 
$
8,953

 
$
5,075

NON-CASH INVESTING AND FINANCING INFORMATION
 
 
 
 
Tenant funded fixed asset improvements
 
$
2,665

 
$
314

Reserves released by title company to tenant
 
$

 
$
3,966

Unrealized (loss) gain related to interest rate hedging instruments, net
 
$
(2,335
)
 
$
1,028

Right-of-use asset from operating leases
 
$
5,998

 
$

Operating lease liabilities
 
$
(5,998
)
 
$

Capital improvements and leasing commissions included in accounts payable and accrued expenses
 
$
371

 
$
506

Increase in asset retirement obligation assumed in acquisition
 
$
164

 
$


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (dollars in thousands):

 
 
For the nine months ended September 30,
 
 
2019
 
2018
Cash and cash equivalents
 
$
6,175

 
$
2,470

Restricted cash
 
2,778

 
2,605

Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows
 
$
8,953

 
$
5,075


Restricted cash consists of security deposits and receipts from tenants for reserves. These funds will be released to the tenants upon completion of agreed upon tasks, as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings and upon receipt by us of evidence of insurance and tax payments.

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

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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 (“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 office 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 (the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company (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 other general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”).

All 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 generally accepted accounting principles (“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 statement 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, 2018, as filed with the U.S. Securities and Exchange Commission on February 13, 2019. The results of operations for the three and nine months ended September 30, 2019 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 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, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2019.


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Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this guidance for our annual and interim periods beginning January 1, 2018 and used the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application. Our adoption of this guidance did not have a material impact on our consolidated financial statements. Further, as discussed below, we adopted the new guidance regarding the principles for the recognition measurement, presentation and disclosure of leases on January 1, 2019. The new revenue standard applies to executory costs and other components of revenue due under leases that are deemed to be non-lease components (examples include common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. Revenue from these non-lease components, which were previously recognized on a straight-line basis under previous lease guidance, are recognized under the new revenue guidance as the related services are delivered. As a result, while our total revenue recognized over the lease term does not differ under the new guidance, the revenue recognition pattern could be different. The new leasing guidance allows for an accounting election to account for each separate lease component and its associated non-lease components as a single lease component. As a lessor, we have made an accounting election to account for each separate lease component and its associated non-lease components as a single lease component. As a result of this election, our revenue recognition pattern for our leasing arrangements is consistent with how we recognized lease revenue prior to our adoption of the new leasing standard.

In February 2016, the FASB issued Accounting Standards Update (“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 of the leased asset 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. We adopted ASU 2016-02, as amended, as of January 1, 2019, which resulted in the recording of additional right-of-use assets from operating leases and operating lease liabilities of approximately $6.0 million for the four operating ground lease arrangements with terms greater than one year for which we are the lessee. We adopted the modified retrospective method, where we recorded the cumulative effect of applying the guidance as of January 1, 2019. We also adopted the full suite of practical expedients provided under this guidance, whereby we are not reassessing whether a contract is or contains a lease, the lease classification and the initial direct costs incurred upon onset of our leases. We have also adopted the hindsight practical expedient whereby we can use hindsight to determine the lease term as of the date of implementation, and we adopted the land easements practical expedient where we do not have to assess whether existing or expired land easements contain a lease. We analyzed our operating ground leases on the date of implementation and identified any option periods we believed were appropriate to include in the lease term, and discounted the future lease payments using a discount rate equivalent to a treasury rate with a similar lease term plus a spread ranging from 2.50% to 2.60%. This spread was determined by reviewing market premiums over treasuries for fully securitized assets. Three of our ground leases have fixed rental charges, and one has variable charges that are driven by the consumer price index. Three of our ground leases have options to extend, and one ground lease has multiple early termination options. We will include option periods or exclude termination options in future lease payments for ground leases located in our target markets.


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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 other 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 Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip, is an executive managing director of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary. We have entered into an advisory agreement with our Adviser, as amended from time to time (the “Advisory Agreement”), and an administration agreement with our Administrator (the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of September 30, 2019 and December 31, 2018, $2.7 million and $2.5 million, respectively, were collectively due to our Adviser and Administrator. Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser each July. During its July 2019 meeting, our Board of Directors reviewed and renewed the Advisory Agreement for an additional year, through August 31, 2020.

Base Management Fee

On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement with the Adviser, effective as of October 1, 2018 to clarify that the agreement’s definition of Total Equity includes outstanding OP Units held by the Operating Partnership’s non-controlling limited partners (“Non-controlling OP Unitholders”).

Under the Advisory Agreement, the calculation of the annual base management fee equals 1.5% of our Total Equity, which is our total stockholders’ equity plus total mezzanine 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), 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), and adjusted to include OP Units held by Non-controlling OP Unitholders. The fee is calculated and accrued quarterly as 0.375% per quarter of such Total Equity figure. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources.

For the three and nine months ended September 30, 2019, we recorded a base management fee of $1.3 million and $3.9 million, respectively. For the three and nine months ended September 30, 2018, we recorded a base management fee of $1.2 million and $3.8 million, respectively.

Incentive Fee

Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards 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 hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the 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 (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.

For the three and nine months ended September 30, 2019, we recorded an incentive fee of $1.0 million and $2.7 million, respectively. For the three and nine months ended September 30, 2018, we recorded an incentive fee of $0.8 million and $2.2 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and nine months ended September 30, 2019 or 2018, respectively.


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Capital Gain Fee

Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory 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 (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. 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, 2019 or 2018.

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 Advisory Agreement after we have defaulted and applicable cure periods have expired. The Advisory 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 thereof, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.

Administration Agreement

Under the terms of the Administration Agreement, we pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally 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. We believe this approach helps approximate fees paid by us to actual services performed by the Administrator for us. For the three and nine months ended September 30, 2019, we recorded an administration fee of $0.4 million and $1.2 million, respectively. For the three and nine months ended September 30, 2018, we recorded an administration fee of $0.4 million and $1.2 million, respectively.

Gladstone Securities

Gladstone Securities, LLC (“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 David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

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 (the “Financing Arrangement Agreement”). In connection with this engagement, Gladstone Securities will, from time to time, continue to 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 $3,000 and $0.10 million during the three and nine months ended September 30, 2019, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.08% and 0.19%, respectively, of the mortgage principal secured and/or extended. We paid financing fees to Gladstone Securities of $18,363 and $42,663 during the three and nine months ended September 30, 2018, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.15% and 0.12%, respectively, of the mortgage principal secured and/or extended. Our Board of Directors renewed the Financing Arrangement Agreement for an additional year, through August 31, 2020, at its July 2019 meeting.

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3. (Loss) Earnings Per Share of Common Stock

The following tables set forth the computation of basic and diluted (loss) earnings per share of common stock for the three and nine months ended September 30, 2019 and 2018. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted (loss) earnings per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of (loss) income would also be added back to net (loss) income. Net (loss) income figures are presented net of such non-controlling interests in the (loss) earnings per share calculation.

We computed basic (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018 reflects additional shares of common stock related to our convertible senior common stock (the “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 (loss) income (attributable) 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,
 
 
2019
 
2018
 
2019
 
2018
Calculation of basic (loss) earnings per share of common stock:
 
 
 
 
 
 
 
 
Net (loss) income (attributable) available to common stockholders
 
$
(631
)
 
$
(170
)
 
$
543

 
$
1,304

Denominator for basic weighted average shares of common stock (1)
 
31,032,802

 
28,734,380

 
30,338,690

 
28,532,224

Basic (loss) earnings per share of common stock
 
$
(0.02
)
 
$
(0.01
)
 
$
0.02

 
$
0.05

Calculation of diluted (loss) earnings per share of common stock:
 
 
 
 
 
 
 
 
Net (loss) income (attributable) available to common stockholders
 
$
(631
)
 
$
(170
)
 
$
543

 
$
1,304

Add: income impact of assumed conversion of senior common stock (2)
 

 

 

 

Net (loss) income (attributable) available to common stockholders plus assumed conversions (2)
 
$
(631
)
 
$
(170
)
 
$
543

 
$
1,304

Denominator for basic weighted average shares of common stock (1)
 
31,032,802

 
28,734,380

 
30,338,690

 
28,532,224

Effect of convertible Senior Common Stock (2)
 

 

 

 

Denominator for diluted weighted average shares of common stock (2)
 
31,032,802

 
28,734,380

 
30,338,690

 
28,532,224

Diluted (loss) earnings per share of common stock
 
$
(0.02
)
 
$
(0.01
)
 
$
0.02

 
$
0.05

 
(1)
The weighted average number of OP Units held by Non-controlling OP Unitholders was 742,937 for the three and nine months ended September 30, 2019. The Company was the sole holder of OP Units for all periods prior to October 30, 2018.
(2)
We excluded convertible shares of Senior Common Stock of 709,906 and 737,752 from the calculation of diluted (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018, respectively, because they were anti-dilutive.


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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, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):
 
 
 
September 30, 2019

December 31, 2018
Real estate:
 
 
 
 
Land
 
$
130,962

 
$
125,905

Building and improvements
 
810,774

 
755,584

Tenant improvements
 
66,702

 
65,160

Accumulated depreciation
 
(202,480
)
 
(178,257
)
Real estate, net
 
$
805,958

 
$
768,392


Real estate depreciation expense on building and tenant improvements was $8.3 million and $24.4 million for the three and nine months ended September 30, 2019, respectively, and $7.5 million and $22.3 million for the three and nine months ended September 30, 2018, respectively.
 
Acquisitions

We acquired nine properties during the nine months ended September 30, 2019, and two properties during the nine months ended September 30, 2018. The acquisitions are summarized below (dollars in thousands):

Nine Months Ended
 
Aggregate Square Footage
 
Weighted Average Lease Term
 
Aggregate Purchase Price
 
Acquisition Expenses
 
Aggregate Annualized GAAP Rent
 
Aggregate Debt Issued or Assumed
September 30, 2019
(1)
1,463,763

 
14.8 Years
 
$
67,272

 
$
621

(3)
$
5,437

 
$
8,900

September 30, 2018
(2)
285,254

 
11.7 Years
 
22,800

 
225

(3)
1,851

 
4,745


(1)
On February 8, 2019, we acquired a 26,050 square foot property in a suburb of Philadelphia, Pennsylvania, for $2.7 million. The annualized GAAP rent on the 15.1 year lease is $0.2 million. On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $3.6 million. The annualized GAAP rent on the 10.0 year lease is $0.3 million. On April 5, 2019, we acquired a 207,000 square foot property in Ocala, Florida, for $11.9 million. The annualized GAAP rent on the 20.1 year lease is $0.8 million. On April 5, 2019, we acquired a 176,000 square foot property in Ocala, Florida, for $7.3 million. The annualized GAAP rent on the 20.1 year lease is $0.7 million. On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio, for $3.2 million. The annualized GAAP rent on the 7.0 year lease is $0.2 million. On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $17.9 million. The annualized GAAP rent on the 8.5 year lease is $1.6 million. We issued $8.9 million of mortgage debt with a fixed interest rate of 4.35% in connection with this acquisition. On July 30, 2019, we acquired a 78,452 square foot property in Denton, Texas, for $6.6 million. The annualized GAAP rent on the 11.9 year lease is $0.5 million. On September 26, 2019, we acquired a 211,000 square foot two property portfolio in Temple, Texas, for $14.1 million. The annualized GAAP rent on the 20.0 year lease is $1.2 million.
(2)
On March 9, 2018, we acquired a 127,444 square foot property in Vance, Alabama for $14.3 million. The annualized GAAP rent on the 9.8 year lease is $1.1 million. On September 20, 2018, we acquired a 157,810 square foot property in Columbus, Ohio for $8.5 million. We issued $4.7 million of mortgage debt in connection with this acquisition. The annualized GAAP rent on the 15.0 year lease is $0.8 million.
(3)
We accounted for these transactions under ASU 2017-01, “Clarifying the Definition of a Business.” As a result, we treated our acquisitions during the nine months ended September 30, 2019 and 2018 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.6 million and $0.2 million, respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.


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We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2019 and 2018 as follows (dollars in thousands):

 
 
Nine months ended September 30, 2019
 
Nine months ended September 30, 2018
Acquired assets and liabilities
 
Purchase price
 
Purchase price
Land
 
$
5,046

 
$
1,140

Building
 
48,898

 
17,849

Tenant Improvements
 
1,541

 
776

In-place Leases
 
4,868

 
1,249

Leasing Costs
 
4,481

 
1,245

Customer Relationships
 
2,200

 
792

Above Market Leases
 
1,865

 
49

Below Market Leases
 
(1,627
)
 
(300
)
Total Purchase Price
 
$
67,272

 
$
22,800


Significant Real Estate Activity on Existing Assets

During the nine months ended September 30, 2019 and 2018, we executed five leases and two leases, respectively, which are summarized below (dollars in thousands):

Nine Months Ended
 
Aggregate Square Footage
 
Weighted Average Remaining Lease Term
 
Aggregate Annualized GAAP Rent
 
Aggregate Tenant Improvement
 
Aggregate Leasing Commissions
September 30, 2019
 
230,264

 
8.8 years
 
$
3,366

 
$
785

 
$
910

September 30, 2018
(1)
184,441

 
1.6 years
 
391

 

 
14


(1)
One of the new leases we entered into was on our South Hadley, Massachusetts property, which was classified as held for sale on the condensed consolidated balance sheets as of September 30, 2018.

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the three months ending December 31, 2019 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

Year
Tenant Lease Payments
Three Months Ending 2019
$
27,585

2020
102,850

2021
96,826

2022
89,192

2023
81,303

2024
72,155

Thereafter
275,658

 
$
745,569


We account for all of our real estate leasing arrangements as operating leases. A majority of our leases are subject to fixed rental increases, but a small subset of our lease portfolio has variable lease payments that are driven by the consumer price index. Many of our tenants have renewal options in their respective leases, but we seldom include option periods in the determination of lease term, as we generally will not enter into leasing arrangements with bargain renewal options. A small number of tenants have termination options.

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Future minimum lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and real estate held for sale as of December 31, 2018, for each of the five succeeding fiscal years and thereafter, is as follows (dollars in thousands):
 
Year
Tenant Lease Payments
2019
$
103,322

2020
97,302

2021
89,057

2022
82,336

2023
74,337

Thereafter
279,424

 
$
725,778

 
In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay operating expenses on the respective properties in the event the tenants fail to pay them.

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, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):

 
 
September 30, 2019

December 31, 2018
 
 
Lease Intangibles
 
Accumulated Amortization
 
Lease Intangibles
 
Accumulated Amortization
In-place leases
 
$
88,762

 
$
(46,418
)
 
$
83,894

 
$
(40,445
)
Leasing costs
 
64,986

 
(32,252
)
 
59,671

 
(28,092
)
Customer relationships
 
62,656

 
(27,537
)
 
60,455

 
(24,035
)
 
 
$
216,404

 
$
(106,207
)
 
$
204,020

 
$
(92,572
)
 
 
 
 
 
 
 
 
 
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
Above market leases
 
$
16,417

 
$
(9,723
)
 
$
14,551

 
$
(8,981
)
Below market leases and deferred revenue
 
(34,098
)
 
14,344

 
(29,807
)
 
12,502

 
 
$
(17,681
)
 
$
4,621

 
$
(15,256
)
 
$
3,521


Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.7 million and $14.2 million for the three and nine months ended September 30, 2019, respectively, and $4.3 million and $12.9 million for the three and nine months ended September 30, 2018, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and comprehensive income.

Total amortization related to above-market lease values was $0.3 million and $0.8 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income. Total amortization related to below-market lease values was $0.7 million and $1.8 million for the three and nine months ended September 30, 2019, respectively, and $0.5 million and $1.5 million for the three and nine months ended September 30, 2018, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income.

The weighted average amortization periods in years for the intangible assets acquired during the nine months ended September 30, 2019 and 2018 were as follows:
 

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Intangible Assets & Liabilities
 
2019
 
2018
In-place leases
 
15.9
 
13.0
Leasing costs
 
15.9
 
13.0
Customer relationships
 
20.6
 
21.2
Above market leases
 
9.3
 
9.8
Below market leases
 
9.6
 
15.0
All intangible assets & liabilities
 
17.3
 
15.0

5. Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions

During the nine months ended September 30, 2019, we continued to execute our capital recycling program, whereby we sell properties outside of our core markets and redeploy proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. On January 31, 2019, we sold one non-core property, located in Maitland, Florida, which is detailed in the table below (dollars in thousands):

Square Footage Sold
 
Sales Price
 
Sales Costs
 
Gain on Sale of Real Estate, net
50,000

 
$
6,850

 
$
532

 
$
2,952


Our disposition during the nine months ended September 30, 2019 was not classified as a discontinued operation because it did not represent a strategic shift in operations, nor will it have a major effect on our operations and financial results. Accordingly, the operating results of this property is included within continuing operations for all periods reported.

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, 2019, and 2018 (dollars in thousands):

 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Operating revenue
 
$


$
254

 
$
245


$
749

Operating expense
 
1

 
269

 
786


810

Other income, net
 


(84
)
 
2,614

(1)
(251
)
(Expense) income from real estate and related assets sold
 
$
(1
)
 
$
(99
)
 
$
2,073

 
$
(312
)

(1)
Includes a $3.0 million gain on sale of real estate, net on one property.

Real Estate Held for Sale

At September 30, 2019, we did not have any properties classified as held for sale. At December 31, 2018, we had one property classified as held for sale, located in Maitland, Florida. This property was sold during the nine months ended September 30, 2019.

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The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheets (dollars in thousands):
 
 
December 31, 2018
Assets Held for Sale
 
Real estate, at cost
$
3,173

Less: accumulated depreciation
218

Total real estate held for sale, net
2,955

Lease intangibles, net
1,105

Deferred rent receivable, net
91

Total Assets Held for Sale
$
4,151


Impairment Charges

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the nine months ended September 30, 2019 and did not identify any held and used assets which were impaired. We also did not recognize an impairment charge during the nine months ended September 30, 2018.

The property we classified as held for sale was reviewed through our held for sale carrying value analysis, during the three and nine months ended September 30, 2018, and we concluded that the fair market value less selling costs was greater than the carrying value of the property. We sold this property during the nine months ended September 30, 2019.

We continue to evaluate our properties on a quarterly basis for changes that could create the need to record impairment. Future impairment losses may result, and could be significant, should market conditions deteriorate in the markets in which we hold our assets or should we be unable to secure leases at terms that are favorable to us, which could impact the estimated cash flow of our properties over the period in which we plan to hold our properties. Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis.


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6. Mortgage Notes Payable and Credit Facility

Our mortgage notes payable and Credit Facility as of September 30, 2019 and December 31, 2018 are summarized below (dollars in thousands):

 
 
Encumbered properties at
 
 
 
Carrying Value at
 
Stated Interest Rates at
 
Scheduled Maturity Dates at
 
 
September 30, 2019
 
 
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019

September 30, 2019
Mortgage and other secured loans:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate mortgage loans
 
51

 
 
 
$
393,220

 
$
385,051

 
(1)
 
(2)
Variable rate mortgage loans
 
12

 
 
 
45,514

 
60,659

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

 
 
 
(254
)
 
(301
)
 
N/A
 
N/A
Deferred financing costs, mortgage loans, net
 
-

 
 
 
(3,791
)
 
(4,063
)
 
N/A
 
N/A
Total mortgage notes payable, net
 
63

 
 
 
$
434,689

 
$
441,346

 
(4)
 
 
Variable rate revolving credit facility
 
43

 
(6)
 
$
35,800

 
$
50,600

 
LIBOR + 1.65%
 
7/2/2023
Deferred financing costs, revolving credit facility
 
-

 
 
 
(885
)
 
(516
)
 
N/A
 
N/A
Total revolver, net
 
43

 
 
 
$
34,915

 
$
50,084

 
 
 
 
Variable rate term loan facility
 
-

 
(6)
 
$
122,300

 
$
75,000

 
LIBOR + 1.60%
 
7/2/2024
Deferred financing costs, term loan facility
 
-

 
 
 
(1,081
)
 
(371
)
 
N/A
 
N/A
Total term loan, net
 
N/A

 
 
 
$
121,219

 
$
74,629

 
 
 
 
Total mortgage notes payable and credit facility
 
106

 
 
 
$
590,823

 
$
566,059

 
(5)
 
 
 
(1)
Interest rates on our fixed rate mortgage notes payable vary from 3.42% to 6.63%.
(2)
We have 47 mortgage notes payable with maturity dates ranging from 12/6/2019 through 7/1/2045.
(3)
Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.00% to one month LIBOR + 2.75%. At September 30, 2019, one month LIBOR was approximately 2.02%.
(4)
The weighted average interest rate on the mortgage notes outstanding at September 30, 2019 was approximately 4.58%.
(5)
The weighted average interest rate on all debt outstanding at September 30, 2019 was approximately 4.33%.
(6)
The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 43 unencumbered properties as of September 30, 2019.
N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2019, we had 47 mortgage notes payable, collateralized by a total of 63 properties with a net book value of $632.3 million. We have 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. We have full recourse for $16.2 million of the mortgages notes payable, net, or 3.7% 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, 2019, we partially repaid one mortgage collateralized by three properties, releasing one of the collateralized properties that we sold on January 31, 2019, and we fully repaid three mortgages fully collateralized by seven properties, all of which are summarized below (dollars in thousands):
 
Aggregate Variable Rate Debt Repaid
 
Weighted Average Interest Rate on Variable Rate Debt Repaid
 
Aggregate Fixed Rate Debt Repaid
 
Weighted Average Interest Rate on Fixed Rate Debt Repaid
$
13,600

 
LIBOR +
2.47%
 
$
25,042

 
4.18
%

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During the nine months ended September 30, 2019, we issued three mortgages, collateralized by three properties, which are summarized in the table below (dollars in thousands):

Aggregate Fixed Rate Debt Issued
 
Weighted Average Interest Rate on Fixed Rate Debt
$
41,140

(1)
3.95%

(1)
We issued $10.6 million of fixed rate debt in connection with one property acquired on December 27, 2018 with a maturity date of February 8, 2029. The interest rate is fixed at 4.70% for the first seven years of the mortgage. After the fixed interest rate period expires, we have the option to adjust the interest rate to a fixed interest rate equal to 1.8% plus the three year treasury rate per annum, or a variable interest rate equal to 1.8% plus the 30 day LIBOR rate per annum. On May 31, 2019, we issued $21.6 million of floating rate debt swapped to fixed rate debt of 3.42% in connection with refinancing mortgage debt at one property with a new maturity date of June 1, 2024. We issued $8.9 million of fixed rate debt in connection with our June 18, 2019 property acquisition with a maturity date of June 18, 2024 and a rate of 4.35%.

During the nine months ended September 30, 2019, we extended the maturity date of two mortgages, collateralized by four properties, which is summarized below (dollars in thousands):

Aggregate Variable Rate Debt Extended
 
Weighted Average Interest Rate on Variable Rate Debt Extended
 
Weighted Average Extension Term
$
12,561

 
LIBOR +
2.51%
 
2.4 years

We made payments of $1.4 million and $2.1 million for deferred financing costs during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.3 million for deferred financing costs during the three and nine months ended September 30, 2018, respectively.

Scheduled principal payments of mortgage notes payable for the three months ending December 31, 2019, and each of the five succeeding years and thereafter are as follows (dollars in thousands):
 
Year
 
Scheduled Principal Payments
 
Three Months Ending December 31, 2019
 
$
8,804

 
2020
 
31,118

 
2021
 
37,838

 
2022
 
106,189

 
2023
 
70,465

 
2024
 
47,514

 
Thereafter
 
136,806

 
Total
 
$
438,734

(1)

(1)
This figure does not include $0.3 million of premiums and discounts, net, and $3.8 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets.

We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility.


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Interest Rate Cap and Interest Rate Swap Agreements

We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. 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 and interest rate swaps, 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 September 30, 2019 and December 31, 2018, our interest rate cap agreements and interest rate swap 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. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our condensed consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at September 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
September 30, 2019
 
December 31, 2018
Aggregate Cost
 
Aggregate Notional Amount
 
Aggregate Fair Value
 
Aggregate Notional Amount
 
Aggregate Fair Value
$
1,596

(1)
$
167,062

 
$
368

 
$
134,678

 
$
622


(1)
We have entered into various interest rate cap agreements on variable rate debt with LIBOR caps ranging from 2.50% to 3.00%.

We have assumed or entered into interest rate swap agreements in connection with certain of our acquisitions or mortgage financings, whereby we will pay our counterparty a fixed rate interest rate on a monthly basis, and receive payments from our counterparty equivalent to the stipulated floating rate. The fair values of our interest rate swap agreements are recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at September 30, 2019 and December 31, 2018 (dollars in thousands):

September 30, 2019
 
December 31, 2018
Aggregate Notional Amount
 
Aggregate Fair Value Asset
 
Aggregate Fair Value Liability
 
Aggregate Notional Amount
 
Aggregate Fair Value Asset
 
Aggregate Fair Value Liability
$
45,919

 
$

 
$
(1,609
)
 
$
24,732

 
$
451

 
$
(396
)


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The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands):

 
 
Amount of (Loss) Gain, net recognized in Comprehensive Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Derivatives in cash flow hedging relationships
 
 
 
 
 
 
 
 
Interest rate caps
 
$
(187
)
 
$
107

 
$
(671
)
 
$
576

Interest rate swaps
 
(437
)
 
138

 
(1,664
)
 
452

 
 
 
 
 
 
 
 
 
Total
 
$
(624
)
 
$
245

 
$
(2,335
)
 
$
1,028


The following table sets forth certain information regarding our derivative instruments (dollars in thousands):

 
 
 
 
Asset (Liability) Derivatives Fair Value at
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
September 30, 2019

 
December 31, 2018

Interest rate caps
 
Other assets
 
$
366

 
$
552

Interest rate swaps
 
Other assets
 

 
451

Interest rate swaps
 
Other liabilities
 
(1,609
)
 
(396
)
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
Interest rate caps
 
Other assets
 
$
2

 
$
70

 
 
 
 
 
 
 
Total derivative (liabilities) assets
 
 
 
$
(1,241
)
 
$
677


The fair value of all mortgage notes payable outstanding as of September 30, 2019 was $447.8 million, as compared to the carrying value stated above of $438.7 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.”

Credit Facility

On August 7, 2013, we procured our senior unsecured revolving credit facility (“Revolver”) with KeyBank National Association (“KeyBank”) (serving as revolving lender, a letter of credit issuer and an administrative agent). In October 2015, we expanded our Revolver to $85.0 million and entered into a term loan facility (“Term Loan”) whereby we added a $25.0 million, five-year Term Loan subject to the same leverage tiers as the Revolver, with the interest rate at each leverage tier being five basis points lower than that of the Revolver. We have the option to repay the Term Loan in full, or in part, at any time without penalty or premium prior to the maturity date. We refer to the Revolver and Term Loan collectively herein as the Credit Facility.

On October 27, 2017, we amended the Credit Facility, increasing the Term Loan from $25.0 million, to $75.0 million, with the Revolver commitment remaining at $85.0 million. The Term Loan maturity date was extended to October 27, 2022, and the Revolver maturity date was extended to October 27, 2021. In connection with the amendment, the interest rate for the Credit Facility was reduced by 25 basis points at each of the leverage tiers. At the time of the amendment, we entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR at 2.75% to hedge our exposure to variable interest rates.


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On July 2, 2019, we amended, extended and upsized our Credit Facility, increasing the Term Loan from $75.0 million to $160.0 million, inclusive of a delayed draw component whereby we can incrementally borrow on the Term Loan up to the $160.0 million commitment, and increasing the Revolver from $85.0 million to $100.0 million. The Term Loan has a new five-year term, with a maturity date of July 2, 2024, and the Revolver has a new four-year term, with a maturity date of July 2, 2023. The interest rate for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. We used the net proceeds derived from the amended Credit Facility to repay all previously existing borrowings under the Revolver. We incurred fees of approximately $1.3 million in connection with the Credit Facility amendment. The bank syndicate is now comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association.

As of September 30, 2019, there was $158.1 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 3.63%, and $8.3 million outstanding under letters of credit, at a weighted average interest rate of 1.65%. As of September 30, 2019, the maximum additional amount we could draw under the Credit Facility was $25.8 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2019.

The amount outstanding under the Credit Facility approximates fair value as of September 30, 2019.

7. Commitments and Contingencies

Ground Leases

We are obligated as lessee under four ground leases. Future lease payments due under the terms of these leases as of September 30, 2019 are as follows (dollars in thousands):

Year
 
Future Lease Payments Due Under Operating Leases
Three Months Ending December 31, 2019
 
$
117

2020
 
466

2021
 
477

2022
 
489

2023
 
492

2024
 
493

Thereafter
 
7,799

Total anticipated lease payments
 
$
10,333

Less: amount representing interest
 
(4,447
)
Present value of lease payments
 
$
5,886


Rental expense incurred for properties with ground lease obligations during the three and nine months ended September 30, 2019 was $0.1 million and $0.4 million, respectively, and during the three and nine months ended September 30, 2018 was $0.1 million and $0.4 million, respectively. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the condensed consolidated statements of operations and comprehensive income.

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Future minimum rental payments due under the terms of these leases as of December 31, 2018, are as follows (dollars in thousands):

For the year ended December 31,
 
Minimum Rental Payments Due
2019
 
$
465

2020
 
466

2021
 
392

2022
 
319

2023
 
322

Thereafter
 
3,914

Total
 
$
5,878


Letters of Credit

As of September 30, 2019, there was $8.3 million outstanding under letters of credit. These letters of credit are not reflected on our condensed consolidated balance sheets.

8. Equity and Mezzanine Equity

Stockholders’ Equity

The following table summarizes the changes in our equity for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 

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Three Months Ended September 30,
Nine Months Ended September 30,
Series A and B Preferred Stock
2019
2018
2019
2018
Balance, beginning of period
$
2

$
2

$
2

$
2

Issuance of Series A and B preferred stock, net




Balance, end of period
$
2

$
2

$
2

$
2

Senior Common Stock
 
 
 
 
Balance, beginning of period
$
1

$
1

$
1

$
1

Issuance of senior common stock, net




Balance, end of period
$
1

$
1

$
1

$
1

Common Stock
 
 
 
 
Balance, beginning of period
$
31

$
29

$
29

$
28

Issuance of common stock, net


2

1

Balance, end of period
$
31

$
29

$
31

$
29

Additional Paid in Capital
 
 
 
 
Balance, beginning of period
$
592,706

$
538,276

$
559,977

$
534,790

Issuance of Series A and B preferred stock and common stock, net
7,362

6,619

40,608

10,139

Retirement of senior common stock, net



(34
)
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
(112
)

(629
)

Balance, end of period
$
599,956

$
544,895

$
599,956

$
544,895

Accumulated Other Comprehensive Income
 
 
 
 
Balance, beginning of period
$
(1,859
)
$
818

$
(148
)
$
35

Comprehensive income
(624
)
245

(2,335
)
1,028

Balance, end of period
$
(2,483
)
$
1,063

$
(2,483
)
$
1,063

Distributions in Excess of Accumulated Earnings
 
 
 
 
Balance, beginning of period
$
(331,461
)
$
(287,910
)
$
(310,117
)
$
(268,058
)
Distributions declared to common, senior common, and preferred stockholders
(14,482
)
(13,633
)
(42,674
)
(40,615
)
Net income
2,207

2,677

9,055

9,807

Balance, end of period
$
(343,736
)
$
(298,866
)
$
(343,736
)
$
(298,866
)
Total Stockholders' Equity
 
 
 
 
Balance, beginning of period
$
259,420

$
251,216

$
249,744

$
266,798

Issuance of Series A and B preferred stock and common stock, net
7,362

6,619

40,610

10,140

Retirement of senior common stock, net



(34
)
Distributions declared to common, senior common, and preferred stockholders
(14,482
)
(13,633
)
(42,674
)
(40,615
)
Comprehensive income
(624
)
245

(2,335
)
1,028

Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
(112
)

(629
)

Net income
2,207

2,677

9,055

9,807

Balance, end of period
$
253,771

$
247,124

$
253,771

$
247,124

Non-Controlling Interest
 
 
 
 
Balance, beginning of period
$
4,665

$

$
4,675

$

Distributions declared to Non-controlling OP Unit holders
(279
)

(835
)

Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
112


629


Net income
(16
)

13


Balance, end of period
$
4,482

$

$
4,482

$

Total Equity
$
258,253

$
247,124

$
258,253

$
247,124



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Distributions

We paid the following distributions per share for the three and nine months ended September 30, 2019 and 2018:
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Common Stock and Non-controlling OP Units
 
$
0.375

 
$
0.375

 
$
1.125

 
$
1.125

Senior Common Stock
 
0.2625

 
0.2625

 
0.7875

 
0.7875

Series A Preferred Stock
 
0.4843749

 
0.4843749

 
1.4531247

 
1.4531247

Series B Preferred Stock
 
0.46875

 
0.46875

 
1.4063

 
1.4063

Series D Preferred Stock
 
0.4374999

 
0.4374999

 
1.3124997

 
1.3124997


Recent Activity

Common Stock ATM Program

During the nine months ended September 30, 2019, we sold 2.0 million shares of common stock, raising $40.7 million in net proceeds under our open market sales agreement with Cantor Fitzgerald (the “Common Stock ATM Program”). As of September 30, 2019, we had remaining capacity to sell up to $28.7 million of common stock under the Common Stock ATM Program.

Series A and B Preferred Stock ATM Programs

Under another open market sales agreement with Cantor Fitzgerald (the “Series A and B Preferred ATM Program”), we would, from time to time, offer to sell (i) shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred”), and (ii) shares of our 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred”), having an aggregate offering price of up to $40.0 million, through Cantor Fitzgerald, acting as sales agent and/or principal. We did not sell any shares of our Series A Preferred or Series B Preferred under our Series A and B Preferred ATM Program during the nine months ended September 30, 2019. As of September 30, 2019, we had remaining capacity to sell up to $37.2 million of preferred stock under the Series A and B Preferred ATM Program.

On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor Fitzgerald, as the Series A Preferred and Series B Preferred were fully redeemed on this date.

Mezzanine Equity

Our 7.00% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred”) is classified as mezzanine equity on our condensed consolidated balance sheets because it is redeemable at the option of the shareholder upon a change of control of greater than 50% in accordance with ASC 480-10-S99 “Distinguishing Liabilities from Equity,” which requires mezzanine equity classification for preferred stock issuances with redemption features which are outside of the control of the issuer. A change in control of our company, outside of our control, is only possible if a tender offer is accepted by over 90% of our shareholders. All other change in control situations would require input from our Board of Directors. We will periodically evaluate the likelihood that a change of control greater than 50% will take place, and if we deem this probable, we would adjust the Series D Preferred presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment. We currently believe the likelihood of a change of control greater than 50% is remote.

Under a third open market sales agreement with Cantor Fitzgerald (the “Series D Preferred ATM Program”), we may, from time to time, offer to sell shares of our Series D Preferred, having an aggregate offering price of up to $50.0 million, through Cantor Fitzgerald, acting as sales agent and/or principal. We did not sell any shares of our Series D Preferred under our Series D Preferred ATM Program during the nine months ended September 30, 2019. As of September 30, 2019, we had remaining capacity to sell up to $18.6 million of Series D Preferred under the Series D Preferred ATM Program.


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Amendment to Articles of Incorporation

On April 11, 2018, we filed with the Maryland State Department of Assessments and Taxation an Articles Supplementary reclassifying 3,500,000 authorized but unissued shares of our Senior Common Stock, as authorized but unissued shares of our common stock. As a result of the reclassification, there were 57,969 authorized but unissued shares of Senior Common Stock.

On April 11, 2018, we also filed with the Maryland State Department of Assessments and Taxation an Articles of Amendment to increase the number of shares of capital stock we have authority to issue to 100,000,000 and authorized common stock to 87,700,000 shares.

On September 27, 2019, the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary (i) setting forth the rights, preferences and terms of its newly designated 6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share, with a liquidation preference of $25.00 per share (the “Series E Preferred Stock”) and (ii) reclassifying and designating 4,000,000 shares of the Company’s authorized and unissued shares of Common Stock as shares of Series E Preferred Stock. The reclassification decreased the number of shares classified as Common Stock from 87,700,000 shares immediately prior to the reclassification to 83,700,000 shares immediately after the reclassification. 

Universal Shelf Registration Statement

On January 11, 2019, we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form-S-3/A on January 24, 2019 (collectively referred to as the “Universal Shelf”). The Universal Shelf became effective on February 13, 2019 and replaces our prior universal shelf registration statement. The Universal Shelf allows us to issue up to $500.0 million of securities. As of September 30, 2019, we had the ability to issue up to $462.3 million under the Universal Shelf.

9. Subsequent Events

Debt Activity

On October 2, 2019, we fully repaid one mortgage with an outstanding balance of $6.3 million collateralized by one property. This mortgage had a fixed rate of 6.0%.

Equity Activity

On October 4, 2019, we completed an underwritten public offering of 2,760,000 shares of our Series E Preferred Stock at a public offering price of $25.00 per share, raising $69.0 million in gross proceeds and approximately $66.6 million in net proceeds, after payment of underwriting discounts and commissions. We used the net proceeds from this offering to redeem all outstanding shares of our Series A Preferred and Series B Preferred, and pay down our Credit Facility.

On October 28, 2019, we voluntarily redeemed all 1,000,000 outstanding shares of our Series A Preferred Stock and all 1,264,000 outstanding shares of our Series B Preferred Stock at a redemption price of $25.1506944 per share and $25.1458333 per share, respectively, which represents the liquidation preference per share, plus accrued and unpaid dividends through October 28, 2019 for an aggregate redemption price of approximately $56.9 million.

Distributions

On October 8, 2019, our Board of Directors declared the following monthly distributions for the months of October, November and December of 2019:

 
Record Date
 
Payment Date
 
Common Stock and Non-controlling OP Unit Distributions per Share
 
Series D Preferred Distributions per Share
 
Series E Preferred Distributions per Share
 
October 22, 2019
 
October 31, 2019
 
$
0.125

 
$
0.1458333

 
$
0.128819

(1)
November 19, 2019
 
November 29, 2019
 
0.125

 
0.1458333

 
0.138021

 
December 19, 2019
 
December 31, 2019
 
0.125

 
0.1458333

 
0.138021

 

 
 
 
$
0.375

 
$
0.4374999

 
$
0.404861

 

(1)
Represents a prorated monthly distribution, based upon the issuance date of October 4, 2019.

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Senior Common Stock Distributions
Payable to the Holders of Record During the Month of:
 
Payment Date
 
Distribution per Share
October
 
November 7, 2019
 
$
0.0875

November
 
December 6, 2019
 
0.0875

December
 
January 7, 2020
 
0.0875


 
 
 
$
0.2625


ATM Equity Activity

On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor Fitzgerald, as the Series A Preferred and Series B Preferred were fully redeemed on this date.


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2018. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

All references to “we,” “our,” “us” and the “Company” in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where otherwise noted or where the context indicates that the term means only Gladstone Commercial Corporation.

General

We are an externally-advised real estate investment trust (“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 office mortgage loans; however, we do not have any mortgage loans currently outstanding. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment.

We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately 7 to 15 years and built in rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property.

All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease.

As of October 30, 2019:
 
we owned 109 properties totaling 13.1 million square feet in 24 states;
our occupancy rate was 98.8%;
the weighted average remaining term of our mortgage debt was 5.8 years and the weighted average interest rate was 4.53%; and
the average remaining lease term of the portfolio was 7.1 years.


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Business Environment

In the United States, vacancy rates have decreased for both office and industrial properties in most markets, as increased user demand has led to improved conditions. Vacancy rates in many markets have been reduced to levels last seen at the peak before the most recent U.S. recession and rental rates have increased in most primary and secondary markets. Reports from national research firms reflect that the industrial supply and demand relationship still appears to be in equilibrium, but that office supply and demand in select markets may be moving towards a slight increase in vacancy. Interest rates have been volatile and although interest rates are still low by historical standards, lenders have varied on their required spreads over the last several quarters; however they appear to have somewhat stabilized with recent Federal Reserve announcements. The 2018 fourth quarter and the 2019 first and second quarter statistics reflect that single property listings and investment sales volume are lower by as much as 10% compared to the prior year’s same periods. Preliminary research data suggests that the third quarter investment volume may be less than that of the same quarter for 2018 as well. Entering the 11th year of the current cycle, some national research firms are estimating that both pricing and investment sales volume may have peaked, with the possible exception of industrial product.   

From a more macro-economic perspective, the strength of the global economy and U.S. economy continue to be uncertain. The long-term impact of the recent passage of tax reform in the United States continues to be unknown at this time, although the lowering of the corporate tax rate is generally expected to be beneficial. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term as well as other geo-political issues has increased domestic and global instability. These developments could cause interest rates and borrowing costs to rise, which may adversely affect our ability to access both the equity and debt markets and could have an adverse effect on our tenants as well.

All of our variable rate debt is based upon the one month LIBOR rate, and LIBOR is currently anticipated to be phased out during late 2021. LIBOR is expected to transition to a new standard rate, the Secured Overnight Financing Rate (“SOFR”), which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition, as we cannot assess whether SOFR will become a standard rate for variable rate debt. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one month LIBOR, we believe that there should be minimal impact on our variable rate debt.

We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we only have one partially vacant building and one fully vacant building.

We have three leases expiring during the remainder of 2019, which account for 2.5% of lease revenue recognized during the nine months ended September 30, 2019, eight leases expiring in 2020, which account for 8.0% of lease revenue recognized during the nine months ended September 30, 2019, and 12 leases expiring in 2021, which account for 8.0% of lease revenue recognized during the nine months ended September 30, 2019.

Our available vacant space at September 30, 2019 represents 1.2% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $0.5 million. We continue to actively seek new tenants for these properties.

Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our $100.0 million senior unsecured revolving credit facility (“Revolver”), with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent), which matures in July 2023, and our $160.0 million term loan facility (“Term Loan”), which matures in July 2024. We refer to the Revolver and Term Loan collectively herein as the Credit Facility. While lenders’ credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market, (the “CMBS market”), to issue mortgages to finance our real estate activities.

In addition to obtaining funds through borrowing, we have been active in the equity markets during and subsequent to the nine months ended September 30, 2019. We have issued shares of common stock through our open market sale agreements with Cantor Fitzgerald, discussed in more detail below.


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Recent Developments

2019 Sale Activity

During the nine months ended September 30, 2019, we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions located in our target secondary growth markets, as well as repay outstanding debt. We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. On January 31, 2019, we sold one non-core property located in Maitland, Florida, which is detailed in the table below (dollars in thousands):

Square Footage Sold
 
Sales Price
 
Sales Costs
 
Gain on Sale of Real Estate, net
50,000

 
$
6,850

 
$
532

 
$
2,952


2019 Acquisition Activity

During the nine months ended September 30, 2019, we acquired nine properties, one property located in a suburb of Philadelphia, Pennsylvania, one property in Indianapolis, Indiana, two properties in Ocala, Florida, one property in Columbus, Ohio, one property in Tifton, Georgia, one property in Denton, Texas and two properties in Temple, Texas, which are summarized in the table below (dollars in thousands):
Aggregate Square Footage
 
Weighted Average Lease Term
 
Aggregate Purchase Price
 
Acquisition Costs
 
Aggregate Annualized GAAP Rent
 
Aggregate Mortgage Debt Issued or Assumed
1,463,763

 
14.8 years
 
$
67,272


$
621

(1)
$
5,437

 
$
8,900


(1)
We accounted for these transactions under ASU 2017-01. As a result, we treated these acquisitions as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.6 million of acquisition costs that would otherwise have been expensed under business combination treatment.

2019 Leasing Activity