GLADSTONE COMMERCIAL CORPORATION 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 endedDecember 31, 2020 . 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
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. 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, many of which are corporations
that do not have publicly-rated debt. We have historically entered into, and
intend in the future to enter into, purchase agreements primarily for real
estate having net leases with remaining terms of approximately seven to 15 years
and contractual 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.
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.
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
•we owned 127 properties totaling 15.7 million square feet of rentable space,
located in 27 states;
•our occupancy rate was 97.5%;
•the weighted average remaining term of our mortgage debt was 3.9 years and the
weighted average interest rate was 4.19%; and
•the average remaining lease term of the portfolio was 7.2 years.
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Business Environment
In March 2020 , the World Health Organization characterized COVID-19 as a
pandemic, and infection continues in the United States and many parts of the
world. The rapid spread of the coronavirus identified as COVID-19 resulted in
authorities throughout the United States and the world implementing widespread
measures attempting to contain the spread and impact of COVID-19, such as travel
bans and restrictions, quarantines, shelter in place orders, the promotion of
social distancing and limitations on business activity, including business
closures. These measures and the pandemic have caused a significant national and
global economic downturn, disrupted business operations, including those of
certain of our tenants, increased unemployment and underemployment levels, and
are expected to have an adverse effect on office demand for space in the short
term, at a minimum. The demand for industrial space has continued due to the
continuing growth of e-commerce and appears to be partially counterbalancing the
adverse effects of COVID-19 on the commercial real estate industry. However, the
rising cost of construction materials and product delivery delays caused by
supply chain disruption, and the apparent labor shortage we are facing
nationally, have resulting in inflation and higher costs for both office and
industrial construction projects. Industrial absorption increased on a nominal
basis in 2020, compared to 2019, according to research reports and continues to
be strong through the third quarter of 2021. Construction activity for the
industrial sector remains strong as third quarter 2021 estimates have
approximately $500.0 million of properties under construction with over 30% of
that space pre-leased. Investment sales volume across all product types, but
especially office and retail, in recent months is lower year over year, as
compared to 2020, as a direct result of COVID-19. Research reports also report
that the office sector experienced negative absorption for each of the first
three quarters of 2021 and office space available for sublease has placed
downward pressure on office rental rates.
Interest rates remain volatile in response to competing concerns about
inflationary pressures and the spread and effect of COVID-19 variants. The yield
on the 10 year US Treasury Note has increased by 77% since the beginning of the
year to its current 1.65%. Since the beginning of the second quarter, it has
ranged from 1.19% July and August to 1.73% at the beginning of April, a 54 basis
point, 45% swing. It has increased 39% since the beginning of August alone.
Despite this volatility, interest rates remain low by historical standards.
After completing the 11th year of the current cycle, some national research
firms had been estimating that both pricing and investment sales volume would be
peaking and the national economy would be slowing in the near term. Global
recessionary conditions may occur over the next 12-24 months as a direct result
of the COVID-19 pandemic, although the actual impact and duration are unknown.
See "Impact of COVID-19 on Our Business," below.
From a more macro-economic perspective, there continues to be significant
uncertainties associated with the COVID-19 pandemic, including with respect to
the severity of the disease, the duration of the outbreak, actions that may be
taken by governmental authorities and private businesses to attempt to contain
the COVID-19 outbreak or to mitigate its impact, including adequate production,
distribution and acceptance of vaccines, the extent and duration of social
distancing and the adoption of shelter-in-place orders, or reversal of reopening
orders, and the ongoing impact of COVID-19 on business and economic activity.
Impact of COVID-19 on Our Business
The extent to which the COVID-19 pandemic may impact our business, financial condition, liquidity, results of operations, funds from operations or prospects will depend on numerous evolving factors that we are not able to predict at this time, including the duration and long-term scope of the pandemic; the adequate production, distribution and acceptance of vaccinations; the spread and effect of COVID-19 variants; governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; the impact on economic activity from the pandemic (such as the effect on market rental rates and commercial real estate values) and actions taken in response; the effect on our tenants and their businesses; the ability of our tenants to make their rental payments; any closures of our tenants' properties; and our ability to secure debt financing, service future debt obligations or pay distributions to our stockholders. Any of these events could materially adversely impact our business, financial condition, liquidity, results of operations, funds from operations or prospects. As ofNovember 1, 2021 , we have collected 100% of all outstandingSeptember 2021 cash base rent obligations and approximately 100% ofOctober 2021 cash base rent obligations. We have received and may receive additional rent modification requests in future periods from our tenants. However, we are unable to quantify the outcomes of the negotiation of relief packages, the success of any tenant's financial prospects or the amount of relief requests that we will ultimately receive or grant. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil and gas industries. These industries, among certain others, have generally been severely impacted by COVID-19. Additionally, our properties are located across 27 states, which we believe mitigates our exposure to economic issues, including as a result of COVID-19, in any one geographic market or area. We also have a cap on industry sector concentration to further diversify our portfolio and mitigate risk. 27 -------------------------------------------------------------------------------- Table of Contents We believe we currently have adequate liquidity in the near term, and we believe the availability on our Credit Facility is sufficient to cover all near-term debt obligations and operating expenses and to continue our industrial growth strategy. We are in compliance with all of our debt covenants. We amended our Credit Facility in 2019 to increase our borrowing capacity and extend its maturity date. In addition, onFebruary 11, 2021 , we added a new$65.0 million term loan component. We have had numerous conversations with lenders and credit continues to be available for well capitalized borrowers. We continue to monitor our portfolio and intend to maintain a reasonably conservative liquidity position for the foreseeable future. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our personnel, tenants and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic, including the recent spread of COVID-19 variants, will have on our business, financial condition, liquidity, results of operations, funds from operations or prospects, we believe that it is important to share where we stand today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 continues.
Other Business Environment Considerations
The short-term and long-term economic implications of theBiden Administration's economic program are unknown at this time, inclusive of any subsequent shift in policy, new regulations or the long-term impact of infrastructure spending and tax reform in theU.S. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term, particularly with the ongoing discussions regarding additional fiscal stimulus as well as other geopolitical issues relating to the global economic slowdown has increased domestic and global instability. These developments could cause interest rates and borrowing costs to be volatile, which may adversely affect our ability to access both the equity and debt markets and could have an adverse impact on our tenants as well. All of our variable rate debt is based upon one-month LIBOR, although LIBOR is currently anticipated to be phased out byJune 2023 . LIBOR is expected to transition to a new standard 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. Any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based debt, or the value of our portfolio of LIBOR-indexed, floating-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 have six partially vacant buildings and two fully vacant buildings. Our available vacant space atSeptember 30, 2021 represents 2.3% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately$2.6 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"), withKeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent), which matures inJuly 2023 , our$160.0 million term loan facility ("Term Loan A"), which matures inJuly 2024 and our$65.0 million term loan facility ("Term Loan B"), which matures inFebruary 2026 . We refer to the Revolver, Term Loan A and Term Loan B 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 ("CMBS"), to issue mortgages to finance our real estate activities. 28 --------------------------------------------------------------------------------
Table of Contents Recent Developments Sale Activity During the nine months endedSeptember 30, 2021 , we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to either fund property acquisitions located in our target secondary growth markets or repaid outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the nine months endedSeptember 30, 2021 , we sold two non-core properties, located inRancho Cordova, California andChampaign, Illinois , which are summarized in the table below (dollars in thousands): Aggregate Square Footage Aggregate loss on Sale of Sold Aggregate Sales Price Aggregate Sales Costs Real Estate, net 81,758 $ 5,473 $ 367 $ (882) Acquisition Activity
During the nine months ended
Weighted Average Aggregate Aggregate
Remaining Lease Capitalized Annualized GAAP
Term at Time of Aggregate Acquisition Fixed Lease Aggregate Debt
Aggregate Square Footage Acquisition Purchase Price Expenses Payments Issued
367,716 15.5 years $ 46,225 $ 370 $ 3,513 $ 5,500
Leasing Activity
During and subsequent to the nine months ended
Aggregate Annualized
Weighted Average GAAP Fixed Lease Aggregate Tenant Aggregate Leasing
Aggregate Square Footage Remaining Lease Term Payments Improvement Commissions
1,486,870 7.5 years $ 13,081 $ 4,408 $ 1,845
During the nine months ended
Aggregate Accelerated
Rent Recognized
Aggregate Square Footage Aggregate Square Aggregate
Accelerated through
Reduced Footage Remaining Rent 2021
497,369 (1) 26,220 $ 2,865 $ 1,977
(1)We have signed leases with two replacement tenants for 211,408 square feet with no downtime.
Financing Activity
During the nine months ended
Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid
$ 4,470 4.90%
On
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During the nine months ended
Fixed Rate Debt Issued Interest Rate on Fixed Rate Debt
$ 5,500 (1) 3.24 %
(1)On
Legal Settlement
In
Equity Activities
Series G Preferred Stock Offering
OnJune 28, 2021 , we completed an underwritten public offering of 4,000,000 shares of our newly designated 6.00% Series G Cumulative Redeemable Preferred Stock ("Series G Preferred Stock") at a public offering price of$25.00 per share, raising$100.0 million in gross proceeds and approximately$96.6 million in net proceeds, after payment of underwriting discounts and commissions. We used the net proceeds from this offering to voluntarily redeem all outstanding shares of our 7.00% Series D Cumulative Redeemable Preferred Stock ("Series D Preferred Stock"). Common Stock ATM Program During the nine months endedSeptember 30, 2021 , we sold 1.2 million shares of common stock, raising$24.1 million in net proceeds under our At-the-Market Equity Offering Sales Agreements with sales agentsRobert W. Baird & Co. Incorporated ("Baird"),Goldman Sachs & Co. LLC ("Goldman Sachs"),Stifel, Nicolaus & Company, Incorporated ("Stifel"),BTIG, LLC , andFifth Third Securities, Inc. ("Fifth Third"), pursuant to which we may sell shares of our common stock in an aggregate offering price of up to$250.0 million (the "Common Stock ATM Program"). As ofSeptember 30, 2021 , we had remaining capacity to sell up to$159.4 million of common stock under the Common Stock ATM Program.
Series D Preferred Stock Redemption
OnJune 30, 2021 , we voluntarily redeemed all 3,509,555 outstanding shares of our Series D Preferred Stock at a redemption price of$25.1458333 per share, which represented the liquidation preference per share, plus accrued and unpaid dividends throughJune 30, 2021 , for an aggregate redemption price of approximately$88.3 million . In connection with this redemption, we recognized a$2.1 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred upon issuance of our Series D Preferred Stock.
Preferred Series E ATM Program
We have an At-the-Market Equity Offering Sales Agreement (the "Series E Preferred Stock Sales Agreement"), with sales agentsBaird , Goldman Sachs, Stifel, Fifth Third, andU.S. Bancorp Investments, Inc. , pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to$100.0 million . We did not sell any shares of our Series E Preferred Stock under the agreement during the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we had remaining capacity to sell up to$92.8 million of Series E Preferred Stock under the Series E Preferred Stock Sales Agreement.
Universal Shelf Registration Statements
OnJanuary 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 onJanuary 24, 2019 (collectively referred to as the "2019 Universal Shelf"). The 2019 Universal Shelf became effective onFebruary 13, 2019 and replaced our prior universal shelf registration statement. The 2019 Universal Shelf allows us to issue up to$500.0 million of securities. As ofSeptember 30, 2021 , we had the ability to issue up to$352.7 million of securities under the 2019 Universal Shelf. 30 -------------------------------------------------------------------------------- Table of Contents OnJanuary 29, 2020 , we filed an additional universal registration statement on Form S-3, File No. 333-236143 (the "2020 Universal Shelf"). The 2020 Universal Shelf was declared effective onFebruary 11, 2020 and is in addition to the 2019 Universal Shelf. The 2020 Universal Shelf allows us to issue up to an additional$800.0 million of securities. Of the$800.0 million of available capacity under our 2020 Universal Shelf, approximately$636.5 million is reserved for the sale of our 6.00% Series F Cumulative Redeemable Preferred Stock, par value$0.001 per share (the "Series F Preferred Stock"). As ofSeptember 30, 2021 , we had the ability to issue up to$691.7 million of securities under the 2020 Universal Shelf. Series F Preferred Stock OnFebruary 20, 2020 , we filed with the SDAT Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of our authorized and unissued shares of Common Stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. We sold 217,422 shares of our Series F Preferred Stock, raising$4.9 million in net proceeds during the three and nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we had remaining capacity to sell up to$628.2 million of Series F Preferred Stock.
Non-controlling Interest in
As ofSeptember 30, 2021 andDecember 31, 2020 , we owned approximately 99.3% and 98.6%, respectively, of the outstanding operating partnership units in theOperating Partnership ("OP Units"). During the nine months endedSeptember 30, 2021 , we redeemed 246,039 OP Units for an equivalent amount of common stock.
As of
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Diversity of Our Portfolio
Gladstone Management Corporation , a Delaware corporation (our "Adviser"), seeks
to diversify our portfolio to avoid dependence on any one particular tenant,
industry or geographic market. By diversifying our portfolio, our Adviser
intends to reduce the adverse effect on our portfolio of a single
under-performing investment or a downturn in any particular industry or
geographic market. For the nine months ended September 30, 2021 , our largest
tenant comprised only 2.8% of total lease revenue. The table below reflects the
breakdown of our total lease revenue by tenant industry classification for the
three and nine months ended September 30, 2021 and 2020 (dollars in thousands):
For the three months ended September 30 , For the nine months ended September 30,
2021 2020 2021 2020
Percentage of Percentage of Percentage of Percentage of
Industry Classification Lease Revenue Lease Revenue Lease Revenue Lease Revenue Lease Revenue Lease Revenue Lease Revenue Lease Revenue
Telecommunications $ 5,815 16.7 % $ 5,598 17.0 % $ 16,978 16.8 % $ 16,748 16.8 %
Diversified/Conglomerate Services 4,631 13.5 4,124 12.4 14,148 13.8 12,403 12.4
Healthcare 3,786 11.0 4,077 12.3 11,720 11.4 12,156 12.1
Automotive 3,392 9.9 3,445 10.4 8,845 8.6 11,137 11.1
Banking 2,597 7.6 2,530 7.6 7,713 7.5 7,445 7.4
Buildings and Real Estate 2,331 6.8 2,401 7.2 6,968 6.8 6,794 6.8
Diversified/Conglomerate Manufacturing 1,866 5.4 1,694 5.1 5,748 5.6 4,562 4.5
Personal, Food & Miscellaneous Services 1,540 4.5 1,507 4.5 5,552 5.4 4,513 4.5 Information Technology 1,673 4.9 1,754 5.3 5,011 4.9 5,193 5.2 Beverage, Food & Tobacco 1,497 4.4 1,065 3.2 4,450 4.3 3,033 3.0 Chemicals, Plastics & Rubber 1,208 3.5 900 2.7 3,499 3.4 2,747 2.7 Machinery 970 2.8 934 2.8 2,991 2.9 3,235 3.2 Containers, Packaging & Glass 777 2.3 338 1.0 1,985 1.9 1,412
1.4
Personal & Non-Durable Consumer Products 617 1.8 614 1.9 1,852 1.8 1,838 1.8 Childcare 573 1.7 557 1.7 1,718 1.7 1,671 1.7 Printing & Publishing 571 1.7 348 1.1 1,439 1.4 1,028 1.0 Electronics 166 0.5 936 2.8 796 0.8 3,403 3.4 Education 203 0.6 199 0.6 606 0.6 607 0.6 Home & Office Furnishings 121 0.4 121 0.4 362 0.4 362 0.4 Total$ 34,334 100.0 %$ 33,142 100.0 %$ 102,381 100.0 %$ 100,287 100.0 % 32
-------------------------------------------------------------------------------- Table of Contents The tables below reflect the breakdown of total lease revenue by state for the three and nine months endedSeptember 30, 2021 and 2020 (dollars in thousands): Lease Revenue Number of Leases Lease Revenue Number of Leases for the three for the three for the three for the three months ended months ended months ended months ended September 30, Percentage of September 30, September 30, Percentage of September 30, State 2021 Lease Revenue 2021 2020 Lease Revenue 2020 Florida$ 4,191 12.2 % 10$ 4,120 12.4 % 11 Pennsylvania 3,807 11.1 10 3,491 10.5 9 Texas 3,801 11.1 15 4,847 14.6 15 Ohio 3,671 10.7 15 3,429 10.3 14 Georgia 2,757 8.0 9 2,684 8.1 9 Utah 1,935 5.6 4 2,006 6.1 4 Alabama 1,634 4.8 5 897 2.7 3 Michigan 1,609 4.7 6 1,573 4.7 6 North Carolina 1,604 4.7 7 1,546 4.7 8 South Carolina 1,408 4.1 2 1,230 3.7 2 All Other States 7,917 23.0 48 7,319 22.2 47 Total$ 34,334 100.0 % 131$ 33,142 100.0 % 128 Lease Revenue Number of Leases Lease Revenue Number of Leases for the nine for the nine for the nine for the nine months ended months ended months ended months ended September 30, Percentage of September 30, September 30, Percentage of September 30, State 2021 Lease Revenue 2021 2020 Lease Revenue 2020 Florida$ 12,614 12.3 % 10$ 12,549 12.5 % 11 Pennsylvania 11,409 11.1 10 10,272 10.2 9 Ohio 11,284 11.0 15 10,569 10.5 14 Texas 11,232 11.0 15 15,081 15.0 15 Georgia 8,167 8.0 9 7,616 7.6 9 Utah 5,763 5.6 4 5,941 5.9 4 North Carolina 5,084 5.0 7 4,547 4.5 8 Alabama 4,911 4.8 5 2,694 2.7 3 Michigan 4,765 4.7 6 4,718 4.7 6 South Carolina 4,162 4.1 2 3,628 3.6 2 All Other States 22,990 22.4 48 22,672 22.8 47$ 102,381 100.0 % 131$ 100,287 100.0 % 128 Our Adviser and Administrator Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. OurAdviser and Gladstone Administration, LLC , aDelaware limited liability company (our "Administrator") are controlled by Mr.David Gladstone ,who is also our chairman and chief executive officer.Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr.Terry Lee Brubaker , our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr.Robert Cutlip , our president, also serves as the executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary,Michael LiCalsi (who also serves as our Administrator's president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs. Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly-traded REIT that primarily invests in farmland. With the exception of Mr.Gary Gerson , our chief financial officer, Mr.Jay Beckhorn , our treasurer, and Mr.Robert Cutlip , our president, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception ofMr. Cutlip andMr. Gerson , all of our executive officers and all of our directors, serve as either directors or executive officers, 33 -------------------------------------------------------------------------------- Table of Contents or both, of Gladstone Land Corporation.Mr. Cutlip andMr. Gerson do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private.
Advisory and Administration Agreements
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 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 the executive vice president of commercial and industrial real estate 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. Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors' and officers' insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). 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 itsJuly 2021 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, throughAugust 31, 2022 .
Base Management Fee
OnJuly 14, 2020 , we amended and restated the previous Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between us and the Adviser (the "Sixth Amended Advisory Agreement"). The Sixth Amended Advisory Agreement replaced the previous calculation of the base management fee with a calculation based onGross Tangible Real Estate . The revised base management fee will be payable quarterly in arrears and calculated at an annual rate of 0.425% (0.10625% per quarter) of the prior calendar quarter's "Gross Tangible Real Estate ," defined in the Sixth Amended Advisory Agreement as the current gross value of our property portfolio (meaning the aggregate of each property's original acquisition price plus the cost of any subsequent capital improvements thereon). The calculation of the other fees in the Amended Agreement remain unchanged. The revised base management fee calculation began with the fee calculations for the quarter endedSeptember 30, 2020 . Under the version of the Advisory Agreement in place prior to theJuly 14, 2020 amendment and restatement, the calculation of the annual base management fee equaled 1.5% of our Total Equity, which was 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 was calculated and accrued quarterly as 0.375% per quarter of such Total Equity amount. 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. 34 -------------------------------------------------------------------------------- Table of Contents 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.
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 endedSeptember 30, 2021 or 2020. Termination Fee The Advisory Agreement includes a termination fee clause 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
Under the terms of the Administration Agreement, we pay separately for our allocable portion of our 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 appropriate 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.
Significant Accounting Policies and Estimates
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 to our consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed by us with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 16, 2021 (our "2020 Form 10-K"). There were no material changes to our critical accounting policies or estimates during the nine months endedSeptember 30, 2021 . 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations The weighted average yield on our total portfolio, which was 7.9% and 8.2% as ofSeptember 30, 2021 and 2020, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties.
A comparison of our operating results for the three and nine months ended
For
the three months ended
2021 2020 $ Change % Change
Operating revenues
Lease revenue $ 34,334 $ 33,142 $ 1,192 3.6 %
Total operating revenues $ 34,334 $ 33,142 $ 1,192 3.6 %
Operating expenses
Depreciation and amortization $ 14,760 $ 13,798 $ 962 7.0 %
Property operating expenses 6,807 6,590 217 3.3 %
Base management fee 1,472 1,418 54 3.8 %
Incentive fee 1,266 1,128 138 12.2 %
Administration fee 382 361 21 5.8 %
General and administrative 811 775 36 4.6 %
Impairment charge - 1,184 (1,184) (100.0) %
Total operating expenses $ 25,498 $ 25,254 $ 244 1.0 %
Other (expense) income
Interest expense $ (6,688) $ (6,444) $ (244) 3.8 %
Gain on sale of real estate, net - 1,196 (1,196) (100.0) %
Other income 2,350 204 2,146 1,052.0 %
Total other expense, net $ (4,338) $ (5,044) $ 706 (14.0) %
Net income $ 4,498 $ 2,844 $ 1,654 58.2 %
Distributions attributable to Series D, E,
F, and G preferred stock (2,868) (2,771) (97) 3.5 %
Distributions attributable to senior common
stock (170) (203) 33 (16.3) %
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders $ 1,460 $ (130) $ 1,590 (1,223.1) %
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders per weighted average share
and unit - basic & diluted $ 0.04 $ (0.004) $ 0.044 (1,100.0) %
FFO available to common stockholders and
Non-controlling OP Unitholders - basic (1) $ 16,220 $ 13,656 $ 2,564 18.8 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted
(1) $ 16,390 $ 13,859 $ 2,531 18.3 %
FFO per weighted average share of common
stock and Non-controlling OP Units - basic
(1) $ 0.44 $ 0.39 $ 0.05 12.8 %
FFO per weighted average share of common
stock and Non-controlling OP Units -
diluted (1) $ 0.44 $ 0.39 $ 0.05 12.8 %
(1)Refer to the "Funds from Operations" section below within the Management's
Discussion and Analysis section for the definition of FFO and FFO adjusted for
comparability.
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For
the nine months ended
2021 2020 $ Change % Change
Operating revenues
Lease revenue $ 102,381 $ 100,287 $ 2,094 2.1 %
Total operating revenues $ 102,381 $ 100,287 $ 2,094 2.1 %
Operating expenses
Depreciation and amortization $ 45,661 $ 42,076 $ 3,585 8.5 %
Property operating expenses 20,278 19,098 1,180 6.2 %
Base management fee 4,369 4,219 150 3.6 %
Incentive fee 3,540 3,301 239 7.2 %
Administration fee 1,016 1,194 (178) (14.9) %
General and administrative 2,540 2,406 134 5.6 %
Impairment charge - 2,905 (2,905) (100.0) %
Total operating expense before incentive
fee waiver $ 77,404 $ 75,199 $ 2,205 2.9 %
Incentive fee waiver (16) - (16) 100.0 %
Total operating expenses $ 77,388 $ 75,199 $ 2,189 2.9 %
Other (expense) income
Interest expense $ (20,338) $ (20,411) $ 73 (0.4) %
(Loss) gain on sale of real estate, net (882) 1,184 (2,066) (174.5) %
Other income 2,884 209 2,675 1,279.9 %
Total other expense, net $ (18,336) $ (19,018) $ 682 (3.6) %
Net income $ 6,657 $ 6,070 $ 587 9.7 %
Distributions attributable to Series D, E,
F, and G preferred stock (8,571) (8,137) (434) 5.3 %
Series D preferred stock offering costs
write off (2,141) - (2,141) 100.0 %
Distributions attributable to senior common
stock (534) (615) 81 (13.2) %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders $ (4,589) $ (2,682) $ (1,907) 71.1 %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders per weighted average share and
unit - basic & diluted $ (0.13) $ (0.08) $ (0.05) 62.5 %
FFO available to common stockholders and
Non-controlling OP Unitholders - basic (1) $ 41,954 $ 41,115 $ 839 2.0 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted
(1) $ 42,488 $ 41,730 $ 758 1.8 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted,
as adjusted for comparability (1) $ 44,629 $ 41,730 $ 2,899 6.9 %
FFO per weighted average share of common
stock and Non-controlling OP Unit - basic
(1) $ 1.15 $ 1.20 $ (0.05) (4.2) %
FFO per weighted average share of common
stock and Non-controlling OP Unit - diluted
(1) $ 1.14 $ 1.19 $ (0.05) (4.2) %
FFO per weighted average share of common
stock and Non-controlling OP Unit -
diluted, as adjusted for comparability (1) $ 1.20 $ 1.19 $ 0.01 0.8 %
(1)Refer to the "Funds from Operations" section below within the Management's
Discussion and Analysis section for the definition of FFO and FFO adjusted for
comparability.
Same Store Analysis
For the purposes of the following discussion, same store properties are
properties we owned as of January 1, 2020 , which have not been subsequently
vacated, or disposed of. Acquired and disposed of properties are properties
which were acquired, disposed of or classified as held for sale at any point
subsequent to December 31, 2019 . Properties with vacancy are properties that
were fully vacant or had greater than 5.0% vacancy, based on square footage, at
any point subsequent to January 1, 2020 .
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Operating Revenues
For the
three months ended
(Dollars in Thousands)
Lease Revenues 2021 2020 $ Change % Change
Same Store Properties $ 28,076 $ 27,480 $ 596 2.2 %
Acquired & Disposed Properties 3,783 2,664 1,119 42.0 %
Properties with Vacancy 2,475 2,998 (523) (17.4) %
$ 34,334 $ 33,142 $ 1,192 3.6 %
For the
nine months ended
(Dollars in Thousands)
Lease Revenues 2021 2020 $ Change % Change
Same Store Properties $ 85,011 $ 82,211 $ 2,800 3.4 %
Acquired & Disposed Properties 10,233 7,197 3,036 42.2 %
Properties with Vacancy 7,137 10,879 (3,742) (34.4) %
$ 102,381 $ 100,287 $ 2,094 2.1 %
Lease revenues consist of rental income and operating expense recoveries earned
from our tenants. Lease revenues from same store properties increased for the
three and nine months ended September 30, 2021 , primarily due to increased lease
revenue from the amortization of tenant funded improvements, coupled with
accelerated rent from tenants that have terminated their leases early. One of
the tenants that terminated early will remain in the building through October
2022 , and we fully re-leased the space from two terminations with no downtime.
Lease revenues increased for acquired and disposed of properties for the three
and nine months ended September 30, 2021 , as compared to the three and nine
months ended September 30, 2020 , because we acquired 11 properties subsequent to
September 30, 2020 . This increase was partially offset by a loss of lease
revenues from six properties we sold subsequent to September 30, 2020 . Lease
revenues decreased for our properties with vacancy for the three and nine months
ended September 30, 2021 due to increased vacancy in our portfolio.
Operating Expenses
Depreciation and amortization increased for the three and nine months endedSeptember 30, 2021 , as compared to the three and nine months endedSeptember 30, 2020 , due to depreciation on capital projects completed subsequent to the three and nine months endedSeptember 30, 2020 , coupled with depreciation on the 11 properties acquired subsequent toSeptember 30, 2020 . This increase was partially offset by decreased depreciation on the six properties sold subsequent toSeptember 30, 2020 . For the
three months ended
(Dollars in Thousands)
Property Operating Expenses 2021 2020 $ Change % Change
Same Store Properties $ 4,704 $ 4,617 $ 87 1.9 %
Acquired & Disposed Properties 269 462 (193) (41.8) %
Properties with Vacancy 1,834 1,511 323 21.4 %
$ 6,807 $ 6,590 $ 217 3.3 %
For the
nine months ended
(Dollars in Thousands)
Property Operating Expenses 2021 2020 $ Change % Change
Same Store Properties $ 13,789 $ 13,871 $ (82) (0.6) %
Acquired & Disposed Properties 902 1,318 (416) (31.6) %
Properties with Vacancy 5,587 3,909 1,678 42.9 %
$ 20,278 $ 19,098 $ 1,180 6.2 %
Property operating expenses consist of franchise taxes, property management
fees, insurance, ground lease payments, property maintenance and repair expenses
paid on behalf of certain of our properties. The increase in property operating
expenses for same store properties for the three months ended September 30,
2021 , from the comparable 2020 period, is a result of increased insurance
premiums for our same store portfolio. The decrease in property operating
expenses for same store properties for the
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nine months ended September 30, 2021 , from the comparable 2020 period, is a
result of decreased property operating expenses incurred on behalf of our
tenants due to COVID-19 restrictions that were initially instituted during late
March 2020 , but relaxed during the second quarter of 2021. Prior to March 2020 ,
our tenants were operating at full capacity with no operating restrictions,
while in 2021, many tenants are working towards full occupancy. The increase in
property operating expenses for acquired and disposed of properties for the
three and nine months ended September 30, 2021 , as compared to the three and
nine months ended September 30, 2020 , is primarily a result of increased
property operating expenses from 11 properties acquired subsequent to
September 30, 2020 , partially offset by a reduction of operating expenses from
six properties sold subsequent to September 30, 2020 . The increase in property
operating expenses for properties with vacancy for the three and nine months
ended September 30, 2021 , as compared to the three and nine months ended
September 30, 2020 , is a result of increased vacancy in our portfolio.
The base management fee paid to the Adviser increased for the three and nine
months ended September 30, 2021 , as compared to the three and nine months ended
September 30, 2020 , due to an increase in Gross Tangible Real Estate over the
three and nine months ended September 30, 2021 as compared to the increase in
Total Shareholders' Equity and Gross Tangible Real Estate during the three and
nine months ended September 30, 2020 . The calculation of the base management fee
is described in detail above in "Advisory and Administration Agreements."
The incentive fee paid to the Adviser increased for the three and nine months
ended September 30, 2021 , as compared to the three and nine months ended
September 30, 2020 , due to a higher pre-incentive fee Core FFO. The increase in
Core FFO is a result of an increase in operating revenues, coupled with an
increase in other income due to legal settlements of $2.4 million , net. The
calculation of the incentive fee is described in detail above in "Advisory and
Administration Agreements."
The administration fee paid to the Administrator increased for the three months
ended September 30, 2021 , as compared to the three months ended September 30,
2020 , due to our Administrator incurring greater costs that are allocated to us.
The administration fee paid to the Administrator decreased for the nine months
ended September 30, 2021 , as compared to the nine months ended September 30,
2020 , due to our Administrator incurring fewer costs that are allocated to us.
The calculation of the administration fee is described in detail above in
"Advisory and Administration Agreements."
General and administrative expenses increased for the three and nine months
ended
We did not recognize an impairment charge during the three and nine months endedSeptember 30, 2021 . During the three months endedSeptember 30, 2020 , we recognized impairment charges on ourRancho Cordova, California andChampaign, Illinois assets, after our impairment testing determined the fair market value of these properties was below our respective carrying value, and the respective carrying value was unrecoverable. During the nine months endedSeptember 30, 2020 , we recognized impairment charges on ourRancho Cordova, California ,Champaign, Illinois andBlaine, Minnesota assets, after our impairment testing determined the fair market value of these properties was below our respective carrying value, and the respective carrying value was unrecoverable.
Other Income and Expenses
Interest expense increased for the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 . This increase was primarily a result of us having higher outstanding balances on our Credit Facility. Interest expense decreased for the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 . This decrease was primarily a result of a decrease in interest rates on our LIBOR based variable rate debt, as the nine months endedSeptember 30, 2021 had lower average LIBOR due to central banks having accommodating monetary policy, due to the COVID-19 pandemic, as compared to the nine months endedSeptember 30, 2020 . Loss on sale of real estate, net, for the nine months endedSeptember 30, 2021 , is attributable to two non-core office assets located inRancho Cordova, California andChampaign, Illinois , being sold during the period. Gain on sale of real estate, net, for the nine months endedSeptember 30, 2020 is attributable to one non-core office asset located inCharlotte, North Carolina and one non-core industrial asset located inMaple Heights, Ohio being sold during the period. Other income increased for the three and nine months endedSeptember 30, 2021 , as compared to the three and nine months endedSeptember 30, 2020 , primarily due to$2.4 million , net, legal settlements. 39
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Table of Contents Net Income (Loss) Available (Attributable) to Common Stockholders and Non-controlling OP Unitholders
Net income available to common stockholders and Non-controlling OP Unitholders increased for the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 , primarily due to the increase in operating revenues due to asset acquisition activity during and subsequent toSeptember 30, 2020 , coupled with an increase in other income from$2.4 million , net, in legal settlements. Net loss attributable to common stockholders and Non-controlling OP Unitholders increased for the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to a loss on sale of real estate, net from two property sales, coupled with writing off Series D Preferred Stock offering costs in connection with the voluntary redemption of all outstanding shares of our Series D Preferred Stock, partially offset by an increase in operating revenues due to asset acquisition activity during and subsequent toSeptember 30, 2020 .
Liquidity and Capital Resources
Overview
Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Credit Facility and issuing additional equity securities. Our available liquidity as ofSeptember 30, 2021 , was$36.3 million , consisting of approximately$10.2 million in cash and cash equivalents and available borrowing capacity of$26.1 million under our Credit Facility. Our available borrowing capacity under the Credit Facility increased to$28.2 million as ofNovember 1, 2021 .
Future Capital Needs
We actively seek conservative investments that are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial and office real property, make mortgage loans, or pay down outstanding borrowings under our Revolver. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, refinancing maturing debt and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. We also believe we will be able to refinance our mortgage debt as it matures. Additionally, to satisfy our short-term obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs.
Equity Capital
On
OnJune 30, 2021 , we voluntarily redeemed all 3,509,555 outstanding shares of our Series D Preferred Stock at a redemption price of$25.1458333 per share, which represented the liquidation preference per share, plus accrued and unpaid dividends throughJune 30, 2021 , for an aggregate redemption price of approximately$88.3 million . In connection with this redemption, we recognized a$2.1 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred upon issuance of our Series D Preferred Stock. During the nine months endedSeptember 30, 2021 , we raised net proceeds of$24.1 million of common equity under our Common Stock ATM Program at a net weighted average per share price of$20.08 . We used these proceeds to fund acquisitions, pay down outstanding debt and for other general corporate purposes. We did not sell any of our Series E Preferred Stock under our Series E Preferred Stock Sales Agreement during the nine months endedSeptember 30, 2021 . We raised net proceeds of$4.9 million from sales of our Series F Preferred Stock during the nine months endedSeptember 30, 2021 .
As of
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million of available capacity under our 2019 Universal Shelf, approximately
$151.2 million is reserved for additional sales under our Common Stock ATM
Program, and approximately $92.8 million is reserved for additional sales under
our Series E Preferred Stock Sales Agreement as of November 1, 2021 . We expect
to continue to use our at-the-market programs as a source of liquidity for the
remainder of 2021.
As of November 1, 2021 , we had the ability to raise up to $690.8 million of
additional equity capital through the sale and issuance of securities that are
registered under the 2020 Universal Shelf, in one or more future public
offerings. Of the $690.8 million of available capacity under our 2020 Universal
Shelf, approximately $627.3 million is reserved for the sale of our Series F
Preferred Stock as of November 1, 2021 .
As ofSeptember 30, 2021 , we had 53 mortgage notes payable in the aggregate principal amount of$451.0 million , collateralized by a total of 68 properties with a remaining weighted average maturity of 3.9 years. The weighted-average interest rate on the mortgage notes payable as ofSeptember 30, 2021 was 4.19%.
We continue to see banks and non-bank lenders willing to issue mortgages. Consequently, we are focused on obtaining mortgages through regional banks, non-bank lenders and the CMBS market.
As ofSeptember 30, 2021 , we had mortgage debt in the aggregate principal amount of$13.6 million payable during the remainder of 2021 and$105.8 million payable during 2022. The 2021 principal amount payable includes both amortizing principal payments and two balloon principal payments due during the remaining three months of 2021. We anticipate being able to refinance our mortgages that come due during 2021 and 2022 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities. In addition, we have raised substantial equity under our at-the-market programs and plan to continue to use these programs.
Operating Activities
Net cash provided by operating activities during the nine months endedSeptember 30, 2021 , was$53.7 million , as compared to net cash provided by operating activities of$52.4 million for the nine months endedSeptember 30, 2020 . This change was primarily a result of an increase in operating revenues from our 11 property acquisitions completed subsequent toSeptember 30, 2020 , coupled with$2.4 million , net, in legal settlements, partially offset by an increase in unreimbursed property operating expenses, due to higher portfolio vacancy. The majority of cash from operating activities is generated from the lease revenues that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, Administration fees to our Administrator and other entity-level operating expenses.
Investing Activities
Net cash used in investing activities during the nine months endedSeptember 30, 2021 , was$46.0 million , which primarily consisted of eight property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of two properties. Net cash used in investing activities during the nine months endedSeptember 30, 2020 , was$73.0 million , which primarily consisted of six property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of two properties.
Financing Activities
Net cash used in financing activities during the nine months endedSeptember 30, 2021 , was$8.6 million , which primarily consisted of the repayment of$14.3 million of outstanding mortgage debt, redemption of our Series D Preferred Stock, repayment of$51.8 million , net, on our Revolver, and distributions paid to common, senior common and preferred shareholders, partially offset by the issuance of$130.0 million of common and preferred equity, borrowings from our new Term Loan B of$65.0 million , and the issuance of$5.5 million of new mortgage debt. Net cash provided by financing activities for the nine months endedSeptember 30, 2020 , was$24.4 million , which primarily consisted of$35.9 million in new mortgage borrowings coupled with the issuance of$39.6 million of equity, partially offset by$31.7 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders. 41
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Credit Facility
OnJuly 2, 2019 , we amended, extended and upsized our Credit Facility, expanding Term Loan A from$75.0 million to$160.0 million , and increasing our Revolver from$85.0 million to$100.0 million . Term Loan A has a maturity date ofJuly 2, 2024 , and the Revolver has a maturity date ofJuly 2, 2023 . The interest rate for the Credit Facility is equal to LIBOR plus a spread ranging from 125 to 215 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan A, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. The bank syndicate is comprised ofKeyBank ,Fifth Third Bank ,U.S. Bank National Association ,The Huntington National Bank ,Goldman Sachs Bank USA , andWells Fargo Bank, National Association . OnFebruary 11, 2021 , we added Term Loan B, a new$65.0 million term loan component to our Credit Facility. Term Loan B has a maturity date ofFebruary 11, 2026 and a LIBOR floor of 25 basis points plus a spread ranging from 140 to 225 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan B, which cap LIBOR from 1.50% to 1.75%. We incurred fees of approximately$0.5 million in connection with issuing Term Loan B. As ofSeptember 30, 2021 , there was$65.0 million outstanding under Term Loan B, and we used all net proceeds to repay all outstanding borrowings on the Revolver. As ofSeptember 30, 2021 , there was$227.1 million outstanding under our Credit Facility at a weighted average interest rate of approximately 1.97% and$18.7 million outstanding under letters of credit at a weighted average interest rate of 1.90%. As ofNovember 1, 2021 , the maximum additional amount we could draw under the Credit Facility was$28.2 million . We were in compliance with all covenants under the Credit Facility as ofSeptember 30, 2021 .
For discussion on the impact COVID-19 has had on our liquidity and capital resources, refer to the Impact of COVID-19 on Our Business section under Business Environment.
Contractual Obligations
The following table reflects our material contractual obligations as of
Payments Due by Period
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
Debt Obligations (1) $ 678,102 $ 77,270
79,887 21,829 31,785 16,746 9,527
Operating Lease Obligations (3) 9,395 488 985 980 6,942
Purchase Obligations (4) 4,561 3,116 1,445 - -
$ 771,945 $ 102,703 $ 349,221 $ 149,370 $ 170,651
(1)Debt obligations represent borrowings under our Revolver, which represents
$2.1 million of the debt obligation due in 2023, our Term Loan A, which
represents $160.0 million of the debt obligation due in 2024, our Term Loan B,
which represents $65.0 million of the debt obligation due in 2026 and mortgage
notes payable that were outstanding as of September 30, 2021 . This figure does
not include $(0.1) million of premiums and (discounts), net and $3.9 million of
deferred financing costs, net, which are reflected in mortgage notes payable,
net and borrowings under Term Loan, net on the condensed consolidated balance
sheets.
(2)Interest on debt obligations includes estimated interest on borrowings under
our Revolver and Term Loan and mortgage notes payable. The balance and interest
rate on our Revolver and Term Loan A and Term Loan B is variable; thus, the
interest payment obligation calculated for purposes of this table was based upon
rates and balances as of September 30, 2021 .
(3)Operating lease obligations represent the ground lease payments due on four
of our properties.
(4)Purchase obligations consist of tenant and capital improvements at nine of
our properties.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
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Funds from Operations
The National Association of Real Estate Investment Trusts ("NAREIT") developed
Funds from Operations ("FFO") as a relevant non-GAAP supplemental measure of
operating performance of an equity REIT to recognize that income-producing real
estate historically has not depreciated on the same basis determined under GAAP.
FFO, as defined by NAREIT, is net income (computed in accordance with GAAP),
excluding gains or losses from sales of property and impairment losses on
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash flows from operating activities in accordance with
GAAP, which, unlike FFO, generally reflects all cash effects of transactions and
other events in the determination of net income. FFO should not be considered an
alternative to net income as an indication of our performance or to cash flows
from operations as a measure of liquidity or ability to make distributions.
Comparison of FFO, using the NAREIT definition, to similarly titled measures for
other REITs may not necessarily be meaningful due to possible differences in the
application of the NAREIT definition used by such REITs.
FFO available to common stockholders is FFO adjusted to subtract distributions
made to holders of preferred stock and senior common stock. We believe that net
income available to common stockholders is the most directly comparable GAAP
measure to FFO available to common stockholders.
Basic funds from operations per share ("Basic FFO per share"), and diluted funds
from operations per share ("Diluted FFO per share"), is FFO available to common
stockholders divided by the number of weighted average shares of common stock
outstanding and FFO available to common stockholders divided by the number of
weighted average shares of common stock outstanding on a diluted basis,
respectively, during a period. We believe that FFO available to common
stockholders, Basic FFO per share and Diluted FFO per share are useful to
investors because they provide investors with a further context for evaluating
our FFO results in the same manner that investors use net income and earnings
per share ("EPS"), in evaluating net income available to common stockholders. In
addition, because most REITs provide FFO available to common stockholders, Basic
FFO and Diluted FFO per share information to the investment community, we
believe these are useful supplemental measures when comparing us to other REITs.
We believe that net income is the most directly comparable GAAP measure to FFO,
Basic EPS is the most directly comparable GAAP measure to Basic FFO per share,
and that Diluted EPS is the most directly comparable GAAP measure to Diluted FFO
per share.
We also present FFO available to our common stockholders and Non-controlling OP
Unitholders as adjusted for comparability as an additional supplemental measure,
as we believe it is more reflective of our core operating performance, and
provides investors and analysts an additional measure to compare our performance
across reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance. FFO as adjusted for
comparability is generally calculated as FFO available to common stockholders
and Non-controlling OP Unitholders, excluding certain non-recurring and non-cash
income and expense adjustments, which management believes are not reflective of
the results within our operating real estate portfolio.
The following table provides a reconciliation of our FFO available to common
stockholders for the three and nine months ended September 30, 2021 and 2020,
respectively, to the most directly comparable GAAP measure, net income available
to common stockholders, and a computation of basic and diluted FFO per weighted
average share of common stock:
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For the three months ended September
30, For the nine months ended September 30,
(Dollars in Thousands, Except for Per (Dollars in Thousands, Except for Per
Share Amounts) Share Amounts)
2021 2020 2021 2020
Calculation of basic FFO per share of common
stock and Non-controlling OP Unit
Net income $ 4,498 $
2,844
(3,038) (2,974) (9,105) (8,752)
Less: Series D preferred stock offering
costs write off - - (2,141) -
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders $ 1,460 $ (130) $ (4,589) $ (2,682)
Adjustments:
Add: Real estate depreciation and
amortization $ 14,760 $
13,798
- 1,184 - 2,905
Add: Loss on sale of real estate, net - - 882 -
Less: Gain on sale of real estate, net - (1,196) - (1,184)
FFO available to common stockholders and
Non-controlling OP Unitholders - basic $ 16,220 $
13,656
36,768,779 34,075,147 36,296,414 33,884,007
Weighted average Non-controlling OP Units
outstanding 256,994 503,033 337,205 502,435
Total common shares and Non-controlling OP
Units 37,025,773 34,578,180 36,633,619 34,386,442
Basic FFO per weighted average share of
common stock and Non-controlling OP Unit $ 0.44 $ 0.39 $ 1.15 $ 1.20
Calculation of diluted FFO per share of
common stock and Non-controlling OP Unit
Net income $ 4,498 $
2,844
(3,038) (2,974) (9,105) (8,752)
Less: Series D preferred stock offering
costs write off - - (2,141) -
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders $ 1,460 $ (130) $ (4,589) $ (2,682)
Adjustments:
Add: Real estate depreciation and
amortization $ 14,760 $
13,798
- 1,184 - 2,905
Add: Income impact of assumed conversion of
senior common stock 170 203 534 615
Add: Loss on sale of real estate, net - - 882 -
Less: Gain on sale of real estate, net - (1,196) - (1,184)
FFO available to common stockholders and
Non-controlling OP Unitholders plus assumed
conversions $ 16,390 $
13,859
36,768,779 34,075,147 36,296,414 33,884,007
Weighted average Non-controlling OP Units
outstanding 256,994 503,033 337,205 502,435
Effect of convertible senior common stock 532,785 641,430 532,785 641,430
Weighted average common shares and
Non-controlling OP Units outstanding -
diluted 37,558,558 35,219,610 37,166,404 35,027,872
Diluted FFO per weighted average share of
common stock and Non-controlling OP Unit $ 0.44 $ 0.39 $ 1.14 $ 1.19
Calculation of diluted FFO per share of
common stock and Non-controlling OP Unit, as
adjusted for comparability
FFO available to common stockholders and
Non-controlling OP Unitholders plus assumed
conversions $ 16,390 $
13,859
- - 2,141 -
FFO available to common stockholders and
Non-controlling OP Unitholders plus assumed
conversions, as adjusted for comparability $ 16,390 $ 13,859 $ 44,629 $ 41,730
Weighted average common shares and
Non-controlling OP Units outstanding -
diluted 37,558,558 35,219,610 37,166,404 35,027,872
Diluted FFO per weighted average share of
common stock and Non-controlling OP Unit, as
adjusted for comparability $ 0.44 $
0.39 $ 1.20
$ 0.37545 $ 0.37545 $ 1.12635 $ 1.12635 44
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