GLADSTONE COMMERCIAL CORPORATION The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this Form 10-K.
General
We are an externally-advised REIT that was incorporated under the General Corporation Law of theState of Maryland onFebruary 14, 2003 . We focus on acquiring, owning, and managing primarily industrial and office 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 35 -------------------------------------------------------------------------------- Table of Contents 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 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. 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 129 properties totaling 16.2 million square feet of rentable space, located in 27 states; •our occupancy rate was 97.2%; •the weighted average remaining term of our mortgage debt was 3.8 years and the weighted average interest rate was 4.19%; and •the average remaining lease term of the portfolio was 7.1 years;
Business Environment
InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic, and infection continues inthe United States and many parts of the world. Since the onset of the pandemic, the spread of the coronavirus identified as COVID-19 has resulted in authorities throughoutthe 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, vaccine mandates, the promotion of social distancing and limitations on business activity, including business closures. Generally, although certain restrictive measures were implemented during certain periods of 2021, the prevalence and scale of closures and operating limitations were less severe as compared to 2020. These measures and the pandemic have generally caused significant national and global economic disruption, including disrupted business operations, such as those of certain of our tenants, increased unemployment and underemployment levels, and continue to have an adverse effect on office demand for space in the short term, at a minimum. Economic recovery inthe United States and various other regions of the world has continued but may be threatened by the continued adverse effects of COVID-19 and other factors. 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 increased cost of construction materials and product delivery delays caused by supply chain disruption, and the apparent labor shortage we are facing nationally, have resulted in inflation and higher costs for both industrial and office 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 averaging approximately 100 million square feet of absorption each quarter. Construction activity for the industrial sector remains strong as both third quarter and year end 2021 estimates have approximately$500.0 million of properties under construction with over 30% of that space pre-leased. Research reports also reflect that the office sector experienced negative absorption for each of the first three quarters of 2021 and office space available for sublease has increased and placing 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 and are expected to increase. The yield on the 10 year US Treasury Note has increased significantly since the beginning of 2021 and finished 2021 at 1.51%. 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, acceptance and efficacy of vaccines and other treatments, 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
36
--------------------------------------------------------------------------------
Table of Contents
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, acceptance and efficacy of vaccinations; development
and acceptance of therapeutics; 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 of February 15, 2022 , we have collected 100% of all outstanding rent
collections for calendar year 2021. In the past, we have received rent
modification requests from our tenants, and we may receive additional requests
in the future. 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.
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, on February 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 are unknown, in relation to recent world events including inflation, supply chain disruptions, labor shortages, rising interest rates, the ongoing COVID-19 pandemic and associated government response in addition to any subsequent shift in policy, new regulations or the long-term impact of social and 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, 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 SOFR becomes the standard benchmark for variable rate debt. During the transition further changes or reforms to the determination of 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 only have seven partially vacant buildings and two fully vacant buildings.
We believe our lease expiration schedule for 2022 is quite manageable as it
equates to 4.5% of annual rental income and the expirations are due to occur at
the end of June, July, and October. Property acquisitions increased during the
third and fourth
37
--------------------------------------------------------------------------------
Table of Contents
quarters of the year ended December 31, 2021 equating to over $80.0 million in
volume. Every acquisition was industrial in nature, reinforcing our commitment
to increase our portfolio's industrial allocation.
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 senior unsecured revolving credit facility ("Revolver"),
with KeyBank , which matures in July 2023 , our $160.0 million term loan facility
("Term Loan A"), which matures in July 2024 and our $65.0 million term loan
facility ("Term Loan B"), which matures in February 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.
Recent Developments
Sale Activity
During the year endedDecember 31, 2021 , we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions 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. During the year endedDecember 31, 2021 , we sold three non-core properties, located inRancho Cordova, California ;Champaign, Illinois ; andRichmond, Virginia , which are summarized in the table below (dollars in thousands): Aggregate Loss on Sale Aggregate Square Footage Sold Aggregate Sales Price Aggregate Sales Costs of Real Estate, net 123,971 $ 9,473 $ 633 $ (1,148) Acquisition Activity
During the year ended
Weighted Average Aggregate
Remaining Lease Term Capitalized Aggregate Annualized
at Time of Aggregate Acquisition GAAP Fixed Lease Aggregate Debt
Aggregate Square Footage Acquisition Purchase Price Expenses Payments Issued
949,174 13.4 years $ 100,453 $ 798 $ 7,006 $ 21,500
Leasing Activity
During and subsequent to the year ended December 31, 2021 , we executed 16 lease
extensions and/or modifications, which are summarized below (dollars in
thousands):
Aggregate Annualized
Weighted Average GAAP Fixed Lease Aggregate Tenant Aggregate Leasing
Aggregate Square Footage Remaining Lease Term Payments Improvement Commissions
1,686,194 8.0 years (1) $ 14,660 $ 4,558 $ 1,995
(1)Weighted average remaining lease term is weighted according to the annualized
GAAP rent earned by each lease. Our leases have remaining terms ranging from 0.3
years to 13.6 years.
During the year ended
Aggregate Accelerated Rent
Aggregate Square Footage Recognized through December 31,
Reduced Aggregate Accelerated Rent 2021
497,369 (1) $ 2,865 $ 2,182
(1)We have signed leases with two replacement tenants for 211,408 square feet of the 497,369 square feet reduced with no downtime and sold one of these properties with 42,213 square feet.
38
--------------------------------------------------------------------------------
Table of Contents
Financing Activity
During the year ended
Weighted Average Interest Rate on Fixed Rate Debt
Aggregate Fixed Rate Debt Repaid Repaid
$ 7,669 4.91 %
Variable Rate Debt Repaid Interest Rate on Variable Rate Debt Repaid
$ 7,500 LIBOR + 2.50%
During the year ended
Fixed Rate Debt Issued Interest Rate on Fixed Rate Debt
$ 21,500 (1) 3.36 %
(1)On
Legal Settlement
In
Equity Activity
Common Stock ATM Program
During the year endedDecember 31, 2021 , we sold 1.8 million shares of common stock, raising$36.6 million in net proceeds under our Common ATM Program, 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 ofDecember 31, 2021 , we had a remaining capacity to sell up to$146.9 million of common stock under the Common Stock Sales Agreement. The proceeds from these issuances were used to acquire real estate, repay outstanding debt and for other general corporate purposes.
Amendment to Articles of Restatement
OnJune 23, 2021 , we filed with theState Department of Assessments and Taxation of Maryland ("SDAT") the Articles Supplementary (i) setting forth the rights, preferences and terms of our newly designated Series G Preferred Stock and (ii) reclassifying and designating 4,000,000 shares of our authorized and unissued shares of common stock as shares of Series G Preferred Stock.
Series G Preferred Stock Offering
OnJune 28, 2021 , we completed an underwritten public offering of 4,000,000 shares of our newly designated 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 of our then outstanding shares of our Series D Preferred Stock.
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. 39
--------------------------------------------------------------------------------
Table of Contents
Articles Supplementary Reclassifying Remaining Series D Preferred Stock
OnAugust 5, 2021 , we filed Articles Supplementary (the "Reclassification Articles Supplementary") with the SDAT, pursuant to which our board of directors reclassified and designated the remaining 2,490,445 shares of authorized but unissued Series D Preferred Stock as additional shares of common stock. After giving effect to the filing of the Reclassification Articles Supplementary, our authorized capital stock consists of 62,290,000 shares of common stock, 6,760,000 shares of Series E Preferred Stock, 26,000,000 shares of Series F Preferred Stock, 4,000,000 shares of Series G Preferred Stock, and 950,000 shares of senior common stock. The Reclassification Articles Supplementary did not increase our authorized shares of capital stock.
Series E Preferred ATM Program
We have an At-the-Market Equity Offering Sales Agreement (the "Series E Preferred Stock Sales Agreement") with sales agents Baird, 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 (the "Series E Preferred ATM Program"). We did not sell any shares of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the year endedDecember 31, 2021 . As ofDecember 31, 2021 , we had remaining capacity to sell up to$92.8 million of Series E Preferred Stock under the Series E Preferred ATM Program.
Universal Shelf Registration Statement
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 ofDecember 31, 2021 , we had the ability to issue up to$340.2 million under the 2019 Universal Shelf. 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 Series F Preferred Stock. As ofDecember 31, 2021 , we had the ability to issue up to$689.5 million of securities under the 2020 Universal Shelf.
Preferred Series F Continuous Offering
OnFebruary 20, 2020 , we filed with theMaryland Department of Assessments and Taxation 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 the Company's 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 302,007 shares of our Series F Preferred Stock, raising$6.9 million in net proceeds during the year endedDecember 31, 2021 . As ofDecember 31, 2021 , we had remaining capacity to sell up to$626.0 million of Series F Preferred Stock.
Amendment to Operating Partnership Agreement
In connection with the authorization of the Series F Preferred Stock in February of 2020, theOperating Partnership controlled by the Company through its ownership of GCLP Business Trust II, the general partner of theOperating Partnership , adopted the Second Amendment to its Second Amended and Restated Agreement of Limited Partnership (collectively, the "Amendment"), as amended from time to time, establishing the rights, privileges and preferences of 6.00% Series F Cumulative Redeemable Preferred Units, a newly-designated class of limited partnership interests (the "Series F Preferred Units"). The Amendment provides for theOperating Partnership's establishment and issuance of an equal number of Series F Preferred Units as are issued shares of Series F Preferred Stock by the Company in connection with the offering upon the Company's contribution to theOperating Partnership of the net proceeds of the offering. Generally, the Series F Preferred Units provided for under the Amendment have preferences, distribution rights and other provisions substantially equivalent to those of the Series F Preferred Stock. 40 -------------------------------------------------------------------------------- Table of Contents OnJune 23, 2021 , theOperating Partnership adopted the Third Amendment to its Second Amended and Restated Agreement of Limited Partnership, including Exhibit SGP thereto (collectively, the "Amendment"), establishing the rights, privileges, and preferences of 6.00% Series G Cumulative Redeemable Preferred Units, a newly-designated class of limited partnership interests (the "Series G Term Preferred Units"). The Amendment provides for theOperating Partnership's establishment and issuance of an equal number of Series G Term Preferred Units as are issued shares of Series G Preferred Stock by the Company in connection with the offering of Series G Preferred Stock upon the Company's contribution to theOperating Partnership of the net proceeds of the offering of Series G Preferred Stock. Generally, the Series G Preferred Units provided for under the Amendment have preferences, distribution rights, and other provisions substantially equivalent to those of the Series G Preferred Stock.
Amendment to the Advisory Agreement
OnJuly 14, 2020 , the Company amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the "Sixth Amended Advisory Agreement"). The Company's entrance into the Sixth Amended Advisory Agreement was approved by its Board of Directors, including, specifically, unanimously by its independent directors. The Sixth Amended Advisory Agreement revised and replaced the Fifth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the "Fifth Amended Advisory Agreement"), under which the calculation of the Base Management Fee was based on Total Equity (as was defined in the Fifth Amended Advisory Agreement), with a calculation based onGross Tangible Real Estate (as defined in the Sixth Amended Advisory Agreement). The revised Base Management Fee is 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 as the current gross value of the Company's 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 Advisory Agreement remained unchanged. The revised Base Management Fee calculation began with the fee calculations for the quarter endedSeptember 30, 2020 .
Non-controlling Interests in
As of
The Operating Partnership is required to make distributions on each OP Unit in the same amount as those paid on each share of the Company's common stock, with the distributions on the OP Units held by the Company being utilized to make distributions to the Company's common stockholders.
As of
Personnel Activity
OnJanuary 11, 2022 , the board of directors appointed Mr.Arthur "Buzz" Cooper as our co-president to serve alongside Mr.Robert Cutlip ,who announced his intention to resign on or aboutJune 30, 2022 .Mr. Cutlip's resignation is in connection with his planned retirement.
Our Adviser and Administrator
Gladstone Management Corporation , aDelaware corporation (our "Adviser") is led by a management team with extensive experience purchasing real estate. OurAdviser and Gladstone Administration, LLC , aDelaware limited liability company (our "Administrator") are controlled byMr. 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.Mr. Brubaker , our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator.Mr. Cutlip and Mr. Cooper, our co-presidents, are also executive managing directors of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, and general counsel and secretary (who also serves as our Administrator's president, general counsel, and secretary) 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 ("Gladstone Capital ") and Gladstone Investment Corporation ("Gladstone Investment "), both publicly-traded business development companies, as well as Gladstone Land Corporation ("Gladstone Land"), a publicly-traded REIT that primarily invests in farmland. With the exception ofMr. Gerson , our chief financial officer,Jay Beckhorn , our treasurer, and Messrs. Cutlip and Cooper, our co-presidents, all of our executive 41 -------------------------------------------------------------------------------- Table of Contents officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital and Gladstone Investment. In addition, with the exception of Messrs. Cutlip, Cooper, and Gerson, all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone Land. Messrs. Cutlip, Cooper, and Gerson generally spend all of their time focused on the Company, and 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
Many of the services performed by our Adviser and Administrator in managing our day-to-day activities are summarized below. This summary is provided to illustrate the material functions which our Adviser and Administrator perform for us pursuant to the terms of the Advisory Agreement and Administration Agreement, respectively.
Advisory Agreement
Under the terms of the Amended Advisory Agreement, we continue to be 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 some or all 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 ManagementFee Prior to entering into the Sixth Amended Advisory Agreement in July of 2020, onJanuary 8, 2019 , we entered into a Fifth Amended Advisory Agreement, effective as ofOctober 1, 2018 , to clarify that the definition of Total Equity included outstanding OP Units issued to Non-controlling OP Unitholders. Our entrance into the Advisory Agreement, and all amendments thereto, have been approved unanimously by our Board of Directors. Our Board of Directors also reviews and considers renewing the agreement with our Adviser each July. As a result of the Fifth Amended Advisory Agreement, the calculation of the 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 adjusted total stockholders' 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. OnJuly 14, 2020 , the Company entered into the Sixth Amended Advisory Agreement, which replaced the previous calculation of the Base Management Fee. Under the Sixth Amended Advisory Agreement, the Base Management Fee is payable quarterly in arrears and shall be 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 agreement as the current gross value of the Company's 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 remained unchanged. The revised Base Management Fee calculation began with the fee calculations for the quarter endedSeptember 30, 2020 .
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 equity
(after giving effect to the base management fee but before giving effect to the
incentive fee). We refer to this as the new hurdle rate. The Adviser will
receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the
new hurdle rate. However, in no event shall the incentive fee for a particular
quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us
for the previous four quarters (excluding quarters for which no incentive fee
was paid). Core FFO (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
42
--------------------------------------------------------------------------------
Table of Contents
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 gains-based
incentive fee that will be calculated and payable in arrears as of the end of
each fiscal year (or upon termination of the 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 all-in acquisition
cost 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 years ended
December 31, 2021 , 2020, and 2019.
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 the Company has 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 Advisory 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 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 that the methodology of allocating the Administrator's total expenses by approximate percentage of time services were performed among all companies serviced by our Administrator more closely approximates fees paid to actual services performed.
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 elsewhere in this Annual Report on Form 10-K, as well as a summary of recently issued accounting pronouncements and their expected impact to our current and future financial statements. There were no material changes to our critical accounting policies during the year endedDecember 31, 2021 .
Allocation of Purchase Price
When we acquire real estate with an existing lease, we allocate the purchase
price to (i) the acquired tangible assets and liabilities, consisting of land,
building, tenant improvements and long-term debt and (ii) the identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, in-place leases, unamortized lease origination costs,
tenant relationships and capital lease obligations. We allocate the fair values
in accordance with Accounting Standard Codification 360, Property Plant and
Equipment. All expenses related to the acquisition are capitalized and allocated
among the identified assets.
43
--------------------------------------------------------------------------------
Table of Contents
Our Adviser estimates value using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by
management in its analysis include an estimate of carrying costs during
hypothetical expected lease-up periods, considering current market rental rates
and costs to execute similar leases. Our Adviser also considers information
obtained about each property as a result of our pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of the tangible
and intangible assets and liabilities acquired. In estimating carrying costs,
management also includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the hypothetical
expected lease-up periods, which primarily range from nine to 18 months,
depending on specific local cap rates and discount rates. Our Adviser also
estimates costs to execute similar leases, including leasing commissions, legal
and other related expenses to the extent that such costs are not already
incurred in connection with a new lease origination as part of the transaction.
Our Adviser also considers the nature and extent of our existing business
relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant's credit quality and management's expectations of lease
renewals (including those existing under the terms of the lease agreement),
among other factors. A change in any of the assumptions above, which are very
subjective, could have a material impact on our results of operations.
The allocation of the purchase price directly affects the following in our consolidated financial statements:
•the amount of purchase price allocated to the various tangible and intangible assets and liabilities on our balance sheet;
•the amounts allocated to the value of above-market and below-market lease values are amortized to rental income over the remaining non-cancelable terms of the respective leases. The amounts allocated to all other tangible and intangible assets are amortized to depreciation or amortization expense. Thus, depending on the amounts allocated between land and other depreciable assets, changes in the purchase price allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating performance; and •the period of time over which tangible and intangible assets are depreciated varies greatly, and thus, changes in the amounts allocated to these assets will have a direct impact on our results of operations. Intangible assets are generally amortized over the respective life of the leases, which normally range from 10 to 15 years. Also, we depreciate our buildings over up to 39 years, but do not depreciate our land. These differences in timing could have a material impact on our results of operations.
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. In determining if impairment exists, our Adviser considers such factors as our tenants' payment histories, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industries in which our tenants operate, whether the fair value of our real estate has decreased and whether our hold period has shortened. If any of the factors above indicate the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the carrying amount of such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate cap rates and market rental rates using information that we obtain from market comparability studies and other comparable sources, and apply the undiscounted cash flows against our expected holding period. If impairment were indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property's discounted future cash flows using market derived cap rates, discount rates and market rental rates applied against our expected hold period. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss that we would recognize. Using the methodology discussed above, we evaluated our entire portfolio, as ofDecember 31, 2021 , for any impairment indicators and performed an impairment analysis on select properties that had an indication of impairment.
We will continue to monitor our portfolio for any other indicators of impairment.
Results of Operations
The weighted average yield on our total portfolio, which was 7.9% and 8.1% atDecember 31, 2021 and 2020, respectively, is calculated by taking the annualized straight-line rents, reflected as lease revenue on our consolidated statements of operations, of each acquisition as a percentage of the acquisition cost. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties or other types of existing indebtedness. 44 -------------------------------------------------------------------------------- Table of Contents A comparison of our operating results for the year endedDecember 31, 2021 and 2020 is below (dollars in thousands, except per share amounts):
For the year ended
2021 2020 $ Change % Change
Operating revenues
Lease revenue $ 137,688 $ 133,152 $ 4,536 3.4 %
Total operating revenues $ 137,688 $ 133,152 $ 4,536 3.4 %
Operating expenses
Depreciation and amortization $ 60,311 $ 55,424 $ 4,887 8.8 %
Property operating expenses 27,098 26,004 1,094 4.2 %
Base management fee 5,882 5,648 234 4.1 %
Incentive fee 4,859 4,301 558 13.0 %
Administration fee 1,448 1,598 (150) (9.4) %
General and administrative 3,218 3,259 (41) (1.3) %
Impairment charge - 3,621 (3,621) (100.0) %
Total operating expense before incentive fee waiver
$ 99,855 $ 2,961 3.0 % Incentive fee waiver (16) - (16) 100.0 % Total operating expenses$ 102,800 $ 99,855 $ 2,945 2.9 % Other (expense) income Interest expense$ (26,887) $ (26,803) $ (84) 0.3 % (Loss) gain on sale of real estate, net (1,148) 8,096 (9,244) (114.2) % Other income 2,880 395 2,485 629.1 % Total other expense, net$ (25,155) $ (18,312) $ (6,843) 37.4 % Net income$ 9,733 $ 14,985 $ (5,252) (35.0) %
Distributions attributable to Series D, E, F, and G preferred stock
(11,488) (10,973) (515) 4.7 %
Series D preferred stock offering costs write off (2,141) - (2,141) 100.0 %
Distributions attributable to senior common stock (698) (816) 118 (14.5) %
Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders
$ (4,594) $ 3,196 $ (7,790) (243.7) %
Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted
$ (0.12) $ 0.09 $ (0.21) (233.3) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1)$ 56,865 $ 54,145 $ 2,720 5.0 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1)$ 57,563 $ 54,961 $ 2,602 4.7 %
FFO available to common stockholders and Non-controlling OP Unitholders - diluted, as adjusted for comparability (1)
$ 59,704 $ 54,961 $ 4,743 8.6 %
FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1)
$ 1.54 $ 1.57 $ (0.03) (1.9) %
FFO per weighted average share of common stock and Non-controlling OP Unit - diluted (1)
$ 1.54 $ 1.56 $ (0.02) (1.3) %
FFO per weighted average share of common stock and Non-controlling OP Unit - diluted, as adjusted for comparability (1)
$ 1.60 $ 1.56 $ 0.04 2.6 % (1)Refer to the "Funds from Operations" section below within the Management's Discussion and Analysis section for the definition of FFO and FFO, as adjusted for comparability. Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as ofJanuary 1, 2020 , which have not been subsequently vacated or disposed. Acquired and disposed properties are properties which were either acquired, disposed of or classified as held for sale at any point subsequent toDecember 31, 2019 . Properties with vacancy are properties that were fully vacant or had greater than 5% vacancy, based on square footage, at any point subsequent toJanuary 1, 2020 . 45 -------------------------------------------------------------------------------- Table of Contents Operating Revenues For the year ended December 31, (Dollars in Thousands) Lease Revenues 2021 2020 $ Change % Change Same Store Properties$ 106,035 $ 102,778 $ 3,257 3.2 % Acquired & Disposed Properties 13,874 10,327 3,547 34.3 % Properties with Vacancy 17,779 20,047 (2,268) (11.3) %$ 137,688 $ 133,152 $ 4,536 3.4 % Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties increased for the year endedDecember 31, 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 throughOctober 2022 , and we fully re-leased the space related to two other terminations with no downtime. Lease revenues increased for acquired and disposed of properties for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , primarily as a result of our acquisition of 11 properties during the year endedDecember 31, 2021 , and the inclusion of a full year of lease revenues recorded in 2021 for nine properties acquired during the year endedDecember 31, 2020 , partially offset by a decrease in lease revenues from the nine property sales during and subsequent toDecember 31, 2020 . Lease revenues decreased for properties with vacancy for the year endedDecember 31, 2021 , as our average vacancy has increased from the year endedDecember 31, 2020 .
Operating Expenses
Depreciation and amortization increased for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , primarily due to recognizing a full year of depreciation for the nine properties acquired during the year endedDecember 31, 2020 , as well as increased depreciation expense from the 11 properties acquired during the year endedDecember 31, 2021 , partially offset by a decrease in depreciation expense for the three properties sold during the year endedDecember 31, 2021 . For the year ended December 31, (Dollars in Thousands) Property Operating Expenses 2021 2020 $ Change % Change Same Store Properties$ 16,055 $ 16,065 $ (10) (0.1) % Acquired & Disposed Properties 988 1,644 (656) (39.9) % Properties with Vacancy 10,055 8,295 1,760 21.2 %$ 27,098 $ 26,004 $ 1,094 4.2 % Property operating expenses consist of franchise taxes, management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of tenants at certain of our properties. Property operating expenses remained flat for same store properties for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , as many of our tenants have not been operating fully in their properties sinceMarch 2020 , due to the ongoing COVID-19 pandemic. The decrease in property operating expenses on acquired and disposed of properties for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , is a result of a decrease in property operating expenses from nine property sales during and subsequent toDecember 31, 2020 , partially offset by increased property operating expenses on the 11 properties we acquired during the year endedDecember 31, 2021 , coupled with a full year of property operating expenses for the nine properties acquired during the year endedDecember 31, 2020 . The increase in property operating expenses for properties with vacancy for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , is due to increased average vacancy in our portfolio subsequent toDecember 31, 2020 .
The base management fee paid to the Adviser increased for the year ended
The incentive fee paid to the Adviser increased for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , because of an increase in pre-incentive fee FFO. The increase in pre-incentive fee FFO was primarily due to an increase in lease revenues from the 11 properties acquired during the year endedDecember 31, 2021 , coupled with a full 46 -------------------------------------------------------------------------------- Table of Contents year of lease revenues from the nine properties acquired during the year endedDecember 31, 2020 , partially offset by an increase in property operating expenses due to increased portfolio average vacancy. The calculation of the incentive fee is described in detail above within "Advisory and Administration Agreements." The administration fee paid to the Administrator decreased for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The decrease is a result of our Administrator incurring fewer costs that are allocated to the Company. The calculation of the administration fee is described in detail above within "Advisory and Administration Agreements." General and administrative expenses decreased for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , primarily as a result of a decrease in due diligence expenses, slightly offset by an increase in legal expenses. No impairment charge was recorded during the year endedDecember 31, 2021 . The impairment charge during the year endedDecember 31, 2020 resulted from impairment charges recorded on ourBlaine, Minnesota ,Champaign, Illinois andRancho Cordova, California properties. We subsequently sold theChampaign, Illinois andRancho Cordova, California properties during the year endedDecember 31, 2021 .
Other Income and Expenses
Interest expense increased for the year ended
The loss on sale of real estate, net, during the year endedDecember 31, 2021 is a result of the sale of three properties. The gain on sale of real estate, net, during the year endedDecember 31, 2020 was a result of the sale of six of our properties.
Other income increased during the year ended
Net (Loss) Income (Attributable) Available to Common Stockholders and Non-controlling OP Unitholders
Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders decreased for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , primarily because of losses on sale, net recognized on three property sales and an increase in depreciation and amortization expense from property acquisition activity during and subsequent toDecember 31, 2020 , partially offset by an increase in lease revenues from leasing activity and acquisition activity. A discussion of the results of operations for the year endedDecember 31, 2019 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 16, 2021 , which is available free of charge on theSEC's website at www.sec.gov and on the investors section of our website at www.GladstoneCommercial.com.
Liquidity and Capital Resources
Overview
Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowing capacity under our Revolver and issuing additional equity securities. Our available liquidity as ofDecember 31, 2021 , was$29.2 million , including$8.0 million in cash and cash equivalents and an available borrowing capacity of$21.2 million under our Revolver. Our available borrowing capacity under the Revolver has increased to$24.8 million as ofFebruary 15, 2022 .
Future Capital Needs
We actively seek conservative investments that are likely to produce income to
allow us to pay distributions to our stockholders and Non-controlling OP
Unitholders. 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, 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
47--------------------------------------------------------------------------------
Table of Contents 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
The following table summarizes net proceeds raised from our various equity sales during the year endedDecember 31, 2021 (dollars in thousands, except for share price): Weighted Average Net Proceeds Number of Shares Sold Share Price Common Stock ATM Program$ 36,561 1,771,277 $ 20.91 Series F Preferred Stock Continuous Public Offering 6,869 302,007 24.98 Series G Preferred Stock Public Offering$ 96,573 4,000,000 25.00$ 140,003 6,073,284 As ofFebruary 15, 2022 , we had the ability to raise up to$335.6 million of additional equity capital through the sale and issuance of securities that are registered under our 2019 Universal Shelf, in one or more future public offerings. Of the$335.6 million capacity under our 2019 Universal Shelf, approximately$142.3 million is reserved for additional sales under our Common ATM Program, and approximately$92.8 million is reserved for additional sales under our Series E Preferred Stock Sales Agreement as ofFebruary 15, 2022 . As ofFebruary 15, 2022 , we had the ability to raise up to$688.4 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$688.4 million of available capacity under our 2020 Universal Shelf, approximately$624.9 million is reserved for the sale of our Series F Preferred Stock as ofFebruary 15, 2022 .
As ofDecember 31, 2021 , we had 52 mortgage notes payable in the aggregate principal amount of$452.9 million , collateralized by a total of 67 properties with a remaining weighted average maturity of 3.9 years. The weighted-average interest rate on the mortgage notes payable as ofDecember 31, 2021 was 4.18%. We continue to see banks and other non-bank lenders willing to issue mortgages. Consequently, we remain focused on obtaining mortgages through regional banks, non-bank lenders and the CMBS market. As ofDecember 31, 2021 , we had mortgage debt in the aggregate principal amount of$105.2 million payable during 2022 and$72.7 million payable during 2023. The 2022 principal amounts payable include both amortizing principal payments and nine balloon principal payments. We anticipate being able to refinance our mortgages that come due during 2022 and 2023 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities. We have successfully repaid$15.2 million of debt over the past 12 months with either new mortgage debt or by generating additional availability by adding properties to our unsecured pool under our Credit Facility, as well as additional funds generated from ourJuly 2019 Credit Facility amendment, which resulted in us expanding our Term Loan A from$75.0 million to$160.0 million , and increasing our Revolver from$85.0 million to$100.0 million . In addition, onFebruary 11, 2021 , we added Term Loan B, a new$65.0 million term loan component.
Operating Activities
Net cash provided by operating activities during the year endedDecember 31, 2021 , was$70.1 million , as compared to net cash provided by operating activities of$65.5 million for the year endedDecember 31, 2020 . This increase was primarily a result of an increase in operating revenues received from the properties acquired during the past 12 months, partially offset by an increase in property operating expenses, due to increased average vacancy in our portfolio. The majority of cash from operating 48 -------------------------------------------------------------------------------- Table of Contents activities is generated from the rental payments and operating expense recoveries 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 year endedDecember 31, 2021 , was$94.8 million , which primarily consisted of the acquisition of 11 properties and tenant improvements performed at certain of our properties, coupled with the capital improvements performed at certain of our properties, partially offset by proceeds from the sale of real estate. Net cash used in investing activities during the year endedDecember 31, 2020 , was$100.3 million , which primarily consisted of the acquisition of nine properties, coupled with the capital improvements performed at certain of our properties, partially offset by proceeds from sale of real estate.
Financing Activities
Net cash provided by financing activities during the year endedDecember 31, 2021 , was$21.8 million , which primarily consisted of proceeds from our common and preferred equity offerings, mortgage borrowings on new acquisitions and borrowings from our Term Loan B, partially offset by distributions paid to our stockholders and Non-controlling OP Unitholders. Net cash provided by financing activities for the year endedDecember 31, 2020 , was$39.4 million , which primarily consisted of proceeds from our common stock and Series E Preferred Stock offerings, mortgage borrowings on new acquisitions and borrowings on our Credit Facility, partially offset by distributions paid to our stockholders and Non-controlling OP Unitholders.
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 , inclusive of a delayed draw component whereby we can incrementally borrow on Term Loan A up to the$160.0 million commitment, and increasing the 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 margin 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 Term Loan A, 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 for the Credit Facility is now 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, inclusive of a$15.0 million delayed funding component, which was subsequently funded onJuly 20, 2021 . Term Loan B has a maturity date of 60 months from the closing of the amended Credit Facility and a LIBOR floor of 25 basis points. As ofDecember 31, 2021 , there was$258.6 million outstanding under our Credit Facility at a weighted average interest rate of approximately 2.00% and$19.5 million outstanding under letters of credit at a weighted average interest rate of 1.90%. As ofFebruary 15, 2022 , the maximum additional amount we could draw under the Credit Facility was$24.8 million . We were in compliance with all covenants under the Credit Facility as ofDecember 31, 2021 .
Contractual Obligations
The following table reflects our material contractual obligations as of
Payments Due by Period
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
Debt Obligations (1) $ 711,418 $ 105,204 $ 312,141 $ 146,317 $ 147,756
Interest on Debt
Obligations (2) 78,782 21,961 31,050 16,704 9,067
Operating Lease
Obligations (3) 9,273 489 985 992 6,807
Purchase Obligations (4) 4,518 3,226 1,292 - -
$ 803,991 $ 130,880 $ 345,468 $ 164,013 $ 163,630
49-------------------------------------------------------------------------------- Table of Contents (1)Debt obligations represent borrowings under our Revolver, which represents$33.6 million of the debt obligation due in 2023, Term Loan A, which represents$160.0 million of the debt obligation due in 2024, Term Loan B, which represents$65.0 million of the debt obligation due in 2026 and mortgage notes payable that were outstanding as ofDecember 31, 2021 . This figure does not include$(0.1) million of premiums and (discounts), net, and$3.8 million of deferred financing costs, net, which are reflected in mortgage notes payable, net, borrowings under Revolver, and borrowings under Term Loan A and Term Loan B, net, on the consolidated balance sheet. (2)Interest on debt obligations includes estimated interest on our borrowings under our Revolver, Term Loan A, Term Loan B 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 ofDecember 31, 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 10 of our properties.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
Funds from OperationsThe National Association of Real Estate Investment Trusts ("NAREIT") developed 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 and holders of Non-controlling interests in theOperating Partnership ("Non-controlling OP Unitholders") is FFO adjusted to subtract preferred share and Senior Common Stock share distributions. We believe that net loss attributable to common stockholders is the most directly comparable GAAP measure to FFO available to the aggregate of our common stockholders and Non-controlling OP Unitholders. 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 and Non-controlling OP Unitholders divided by the number of weighted average shares of the aggregate of shares of common stock and OP Units held by Non-controlling OP Unitholders outstanding and FFO available to common stockholders and Non-controlling OP Unitholders divided by the number of weighted average shares of the aggregate of shares of common stock and OP Units held by Non-controlling OP Units outstanding on a diluted basis, respectively, during a period. 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 and FFO as adjusted for comparability for the years endedDecember 31, 2021 and 2020 to the most directly comparable GAAP measure, net income (loss), and a computation of basic and diluted FFO and diluted FFO as adjusted for comparability per weighted average total share: 50
--------------------------------------------------------------------------------
Table of Contents
For
the twelve months ended
(Dollars in Thousands, Except for Per
Share Amounts)
2021 2020
Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income
$
9,733
(12,186) (11,789)
Less: Series D preferred stock offering costs write off (2,141) -
Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders
$ (4,594) $ 3,196 Adjustments: Add: Real estate depreciation and amortization 60,311 55,424 Add: Impairment charge - 3,621 Add: Loss on sale of real estate, net 1,148 - Less: Gain on sale of real estate, net - (8,096)
FFO available to common stockholders and Non-controlling OP Unitholders - basic
$ 56,865 $ 54,145 Weighted average common shares outstanding - basic 36,537,306 34,040,085 Weighted average Non-controlling OP Units outstanding 316,987 502,586 Total common shares and Non-controlling OP Units 36,854,293 34,542,671
Basic FFO per weighted average share of common stock and Non-controlling OP Unit
$ 1.54 $ 1.57
Calculation of diluted FFO per share of common stock and
Non-controlling OP Unit
Net income $
9,733
(12,186) (11,789)
Less: Series D preferred stock offering costs write off (2,141) -
Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders
$ (4,594) $ 3,196 Adjustments: Add: Real estate depreciation and amortization 60,311 55,424 Add: Impairment charge - 3,621 Add: Income impact of assumed conversion of senior common stock 698 816 Add: Loss on sale of real estate, net 1,148 - Less: Gain on sale of real estate, net - (8,096)
FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions
$ 57,563 $ 54,961 Weighted average common shares outstanding - basic 36,537,306 34,040,085 Weighted average Non-controlling OP Units outstanding 316,987 502,586 Effect of convertible senior common stock 503,962 628,263
Weighted average common shares and Non-controlling OP Units outstanding - diluted
37,358,255 35,170,934
Diluted FFO per weighted average share of common stock and Non-controlling OP Unit
$
1.54
$ 57,563 $ 54,961 Add: Series D preferred stock offering costs write off 2,141 -
FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions, as adjusted for comparability
$
59,704
37,358,255 35,170,934
Diluted FFO per weighted average share of common stock and Non-controlling OP Unit, as adjusted for comparability
$ 1.60 $ 1.56
Distributions declared per share of common stock and
Non-controlling OP Unit $ 1.502175 $ 1.501800
51--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
