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, 2021 . 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 135 properties totaling 16.9 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 3.7 years and the
weighted average interest rate was 4.24%; and
•the average remaining lease term of the portfolio was 7.0 years.
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Business Environment
Since the onset of the COVID-19 pandemic in March 2020 , authorities throughout
the United States and the world have implemented widespread measures attempting
to contain its spread and impact, such as travel restrictions, quarantines, the
promotion of social distancing and limitations on business activity. Generally,
year to date 2022 has seen the lifting of certain restrictive measures that were
implemented during 2020 and 2021. These measures, and the pandemic generally,
have caused significant national and global economic disruption, including
disrupted business operations, including those of some of our tenants, and
continue to have an adverse effect on demand for office space in the short term,
including office utilization rates. Economic recovery in the United States and
various other regions of the world has continued, but may be threatened by the
continued adverse effects of COVID-19 and more significantly by continuing
inflationary conditions, rising interest rates and the impact of ongoing or
escalated geopolitical tensions and conflict.
The demand for industrial space has remained strong due to the continuing growth
of e-commerce and reshoring of manufacturing operations, but appears to be only
partially counterbalancing the adverse effects of COVID-19 on the commercial
real estate industry. However, product delivery delays caused by supply chain
disruption, and the apparent national labor shortage, have resulted in inflation
and higher costs for both industrial and office construction projects.
Industrial absorption increased on a nominal basis in 2021, compared to 2020,
according to research reports, and continues to be strong through the first
quarter of 2022, averaging approximately 130 million square feet of absorption
each quarter. Construction activity for the industrial sector remains strong, as
year-end 2021 estimates have approximately 500 million square feet 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
previous four quarters. Office space available for sublease has increased and is
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, coupled
with the threat of a near-term recession. The yield on the 10-year US Treasury
Note has increased significantly during the first half of 2022 to approximately
3%, which adversely affects interest rates on long-term financing. After
completing the 12th year of the current cycle, some national research firms are
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 24 months caused in part by inflation, the
ongoing COVID-19 pandemic, and geopolitical conditions, although the actual
timeline, impact and duration are unknown. See "Impact of COVID-19 on Our
Business," below.
From a more macro-economic perspective, there continue to be significant uncertainties associated with the current economic environment and increasing probability of near-term recession.
Impact of COVID-19 on Our Business
The extent to which the COVID-19 pandemic and subsequent inflationary pressures and supply chain disruption 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 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 ofAugust 1, 2022 , we have collected 100% of all outstanding rent collections for calendar year 2021 and the first half of 2022. In the past, we have received rent modification requests from our tenants, and we may receive additional requests in the future. There are no outstanding COVID-19 related rent modifications in place. We believe we currently have adequate liquidity in the near term, and we believe the availability on our Credit Facility (defined in "Other Business Environment Considerations" below) 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, will have on our business, financial condition, liquidity, results of operations, funds from operations or prospects, we 26 -------------------------------------------------------------------------------- Table of Contents 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, rapidly rising interest rates, the ongoing COVID-19 pandemic and associated government response in addition to any subsequent shift in policy, geopolitical conditions, 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 London Interbank Offered Rate ("LIBOR"), although LIBOR is currently anticipated to be phased out byJune 2023 . LIBOR is expected to transition to a new standard rate, Secured Overnight Financing Rate ("SOFR"), which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition as 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 have seven partially vacant buildings and two fully vacant buildings. Our available vacant space atJune 30, 2022 represents 2.7% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately$4.2 million . We continue to actively seek new tenants for these properties. We believe our lease expiration schedule for the remainder of 2022 is quite manageable, as it equates to only 4.3% of our lease revenue atJune 30, 2022 . Property acquisitions since the beginning of 2019 have totaled nearly$410.0 million and all transactions were industrial in nature, with a weighted average lease term of 12.6 years and a current weighted average lease term today of 10.5 years. 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 ("KeyBank"), 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. Recent Developments Acquisition Activity
During the six 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
742,303 11.7 years $ 51,919 $ 519 $ 3,379 $ 20,000
27-------------------------------------------------------------------------------- Table of Contents Leasing Activity
During and subsequent to the six months ended
Aggregate Annualized
Weighted Average GAAP Fixed Lease Aggregate Tenant Aggregate Leasing
Aggregate Square Footage Remaining Lease Term Payments Improvement Commissions
292,710 10.1 years $ 3,187 $ 3,823 $ 1,107
On
During the six months ended
Aggregate Accelerated Rent
Recognized through June 30,
Aggregate Square Footage Reduced Aggregate Accelerated Rent 2022
155,984 $ 2,138 $ 891
Financing Activity
During the six months ended
.
Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid
$ 14,812 6.10 %
On
On
During the six months ended
.
Weighted Average Interest Rate on Fixed Rate
Aggregate Fixed Rate Debt Issued Debt
$ 20,000 (1) 3.70 %
(1)We issued $10.0 million of fixed rate debt in connection with the
two-property portfolio acquired on May 4, 2022 with a maturity date of May 4,
2027 . The interest rate is fixed at 4.0%. We issued $10.0 million of fixed rate
debt in connection with the three-property acquisition on May 12, 2022 with a
maturity date of June 1, 2032 . The interest rate is fixed at 3.4%.
Variable Rate Debt Issued Interest Rate on Variable Rate Debt
$ 15,000 (1) SOFR + 2.50%
(1)We issued $15.0 million of variable rate debt in connection with refinancing
mortgage debt at two properties with a new maturity date of April 27, 2024 and
interest rate of SOFR plus 2.50%.
During the six months ended June 30, 2022 , we extended the maturity date of two
mortgages, collateralized by four properties, which is summarized in the table
below (dollars in thousands):
Interest Rate on Fixed Rate Debt
Fixed Rate Debt Extended Extended Extension Term
$ 3,585 5.13 % 1.0 year
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Variable Rate Debt Extended Interest Rate on Variable Rate Debt Extended Extension Term $ 7,059 LIBOR + 2.75% 1.0 year OnJuly 27, 2022 , we extended the maturity date of$11.0 million in fixed rate mortgage debt, collateralized by one property, for 1.0 year at an interest rate of 5.50%. Equity Activities Common Stock ATM Program During the six months endedJune 30, 2022 , we sold 1.5 million shares of common stock, raising$31.7 million in net proceeds under our At-the-Market Equity Offering Sales Agreements (the "Common Stock Sales Agreement") with sales agentsRobert W. Baird & Co. Incorporated ,Goldman Sachs & Co. LLC ,Stifel, Nicolaus & Company, Incorporated ,BTIG, LLC , andFifth Third Securities, Inc. OnFebruary 22, 2022 , we entered into Amendment No. 1 to our existing At-the-Market Equity Offering Sales Agreement (the "Common Stock Sales Agreement"), datedDecember 3, 2019 . The amendment permits shares of common stock to be issued pursuant to the Common Stock Sales Agreement under the Company's Registration Statement on Form S-3 (File No. 333-236143) and future registration statements on Form S-3 (the "Common Stock ATM Program"). As ofJune 30, 2022 , we had remaining capacity to sell up to$35.5 million of common stock pursuant to the Common Stock ATM Program under the 2020 Universal Shelf (as defined below).
Universal Shelf Registration Statements
OnJanuary 29, 2020 , we filed a 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 . The 2020 Universal Shelf allows us to issue up to$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") and$63.0 million is reserved for our Common Stock ATM Program. As ofJune 30, 2022 , we had the ability to issue up to$658.7 million of securities under the 2020 Universal Shelf. Series F Preferred Stock 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 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 126,028 shares of our Series F Preferred Stock, raising$2.9 million in net proceeds during the three and six months endedJune 30, 2022 . As ofJune 30, 2022 , we had remaining capacity to sell up to$622.6 million of Series F Preferred Stock.
Non-controlling Interest in
As of
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 six months ended June 30, 2022 , our largest tenant
comprised only 4.3% of total lease revenue. The table below reflects the
breakdown of our total lease revenue by tenant industry classification for the
three and six months ended June 30, 2022 and 2021 (dollars in thousands):
For the three months ended June 30 , For the six months ended June 30,
2022 2021 2022 2021
Lease Percentage of Percentage of Lease Percentage of Percentage of
Industry Classification Revenue Lease Revenue Lease Revenue Lease Revenue Revenue Lease Revenue Lease Revenue Lease Revenue
Telecommunications $ 5,747 15.8 % $ 5,580 16.7 % $ 11,356 15.8 % $ 11,165 16.3 %
Healthcare 4,075 11.2 3,686 11.0 9,275 12.9 5,453 8.0
Automotive 4,640 12.7 2,732 8.2 9,089 12.6 9,513 14.0
Diversified/Conglomerate Services 4,551 12.5 4,822 14.5 8,059 11.2 7,933 11.7
Buildings and Real Estate 2,315 6.4 2,289 6.9 5,419 7.5 3,882
5.7
Diversified/Conglomerate Manufacturing 2,795 7.7 1,883 5.6 5,218 7.3 5,117 7.5 Banking 2,610 7.2 2,576 7.7 4,657 6.5 4,634 6.8 Personal, Food & Miscellaneous Services 1,550 4.3 1,538 4.7 3,097 4.3 4,014
5.9
Chemicals, Plastics & Rubber 1,206 3.3 1,204 3.6 2,787 3.9 2,953 4.3 Information Technology 1,109 3.0 1,685 5.0 2,411 3.4 2,292 3.4 Beverage, Food & Tobacco 1,407 3.9 1,477 4.4 2,155 3.0 3,337 4.9 Personal & Non-Durable Consumer Products 1,104 3.0 617 1.8 1,963 2.7 1,235 1.8 Machinery 975 2.7 1,033 3.1 1,948 2.7 2,022 3.0 Containers, Packaging & Glass 1,009 2.8 617 1.8 1,879 2.6 1,210 1.8 Childcare 573 1.6 572 1.7 1,145 1.6 1,146 1.7 Printing & Publishing 229 0.6 519 1.6 459 0.6 868 1.3 Electronics 179 0.5 219 0.7 406 0.6 402 0.6 Education 202 0.6 201 0.6 361 0.5 630 0.9 Home & Office Furnishings 123 0.2 121 0.4 246 0.3 241 0.4 Total$ 36,399 100.0 %$ 33,371 100.0 %$ 71,930 100.0 %$ 68,047 100.0 % 30
-------------------------------------------------------------------------------- Table of Contents The tables below reflect the breakdown of total lease revenue by state for the three and six months endedJune 30, 2022 and 2021 (dollars in thousands): Number of Number of Lease Revenue Leases for the Lease Revenue Leases for the for the three three months for the three three months months ended Percentage of ended June 30, months ended Percentage of ended June 30, State June 30, 2022 Lease Revenue 2022 June 30, 2021 Lease Revenue 2021 Texas$ 5,359 14.7 % 14$ 3,302 9.9 % 14 Florida 4,230 11.6 9 4,197 12.6 10 Pennsylvania 3,704 10.2 10 3,780 11.3 10 Ohio 3,550 9.8 16 3,854 11.5 15 Georgia 2,945 8.1 10 2,738 8.2 9 North Carolina 2,146 5.9 10 1,629 4.9 7 Alabama 1,763 4.8 6 1,692 5.1 5 Michigan 1,608 4.4 6 1,585 4.7 6 South Carolina 1,418 3.9 2 1,551 4.6 2 Utah 1,326 3.6 3 1,937 5.8 4 All Other States 8,350 23.0 50 7,106 21.4 46 Total$ 36,399 100.0 % 136$ 33,371 100.0 % 128 Number of Number of Lease Revenue Leases for the Lease Revenue Leases for the for the six six months for the six six months months ended % of Lease ended June 30, months ended % of Lease ended June 30, State June 30, 2022 Revenue 2022 June 30, 2021 Revenue 2021 Texas$ 10,524 14.6 % 14$ 7,431 10.9 % 14 Florida 8,467 11.8 9 8,418 12.4 10 Pennsylvania 7,437 10.3 10 7,602 11.2 10 Ohio 7,137 9.9 16 7,615 11.2 15 Georgia 5,853 8.1 10 5,408 7.9 9 North Carolina 4,033 5.6 10 3,482 5.1 7 Alabama 3,319 4.6 6 3,277 4.8 5 Michigan 3,215 4.5 6 3,158 4.6 6 South Carolina 2,811 3.9 2 2,754 4.0 2 Utah 2,648 3.8 3 3,827 5.6 4 All Other States 16,486 22.9 50 15,075 22.3 46$ 71,930 100.0 % 136$ 68,047 100.0 % 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.Arthur "Buzz" Cooper , our current sole president (as Mr.Bob Cutlip , our previous other co-president with Mr. Cooper, retired onJune 30, 2022 ), also serves as 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. Cooper, 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 of Mr. Cooper andMr. Gerson , all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone 31
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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. 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 2022 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, throughAugust 31, 2023 .
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. 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.
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.
The Incentive Fee is used by the Adviser primarily for performance-based
compensation related to certain of its employees.
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Capital Gain Fee
Under the Advisory Agreement, we will pay to the Adviser a capital gain-based
incentive fee that will be calculated and payable in arrears as of the end of
each fiscal year (or upon termination of the Advisory Agreement). In determining
the capital gain fee, we will calculate aggregate realized capital gains and
aggregate realized capital losses for the applicable time period. For this
purpose, aggregate realized capital gains and losses, if any, equals the
realized gain or loss calculated by the difference between the sales price of
the property, less any costs to sell the property and the current gross value of
the property (equal to the property's original acquisition price plus any
subsequent non-reimbursed capital improvements) of the disposed property. At the
end of the fiscal year, if this number is positive, then the capital gain fee
payable for such time period shall equal 15.0% of such amount. No capital gain
fee was recognized during the three and six months ended June 30, 2022 or 2021.
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, 2021 , filed by us with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 15, 2022 (our "2021 Form 10-K"). There were no material changes to our critical accounting policies or estimates during the six months endedJune 30, 2022 .
Results of Operations
The weighted average yield on our total portfolio, which was 7.6% and 8.0% as ofJune 30, 2022 and 2021, 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. 33
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A comparison of our operating results for the three and six months ended
For
the three months ended
2022 2021 $ Change % Change
Operating revenues
Lease revenue $ 36,399 $ 33,371 $ 3,028 9.1 %
Total operating revenues $ 36,399 $ 33,371 $ 3,028 9.1 %
Operating expenses
Depreciation and amortization $ 15,219 $ 14,191 $ 1,028 7.2 %
Property operating expenses 6,959 6,910 49 0.7 %
Base management fee 1,577 1,452 125 8.6 %
Incentive fee 1,339 1,039 300 28.9 %
Administration fee 399 338 61 18.0 %
General and administrative 958 1,073 (115) (10.7) %
Impairment charge 1,374 - 1,374 100.0 %
Total operating expense before incentive
fee waiver $ 27,825 $ 25,003 $ 2,822 11.3 %
Incentive fee waiver - (16) 16 (100.0) %
Total operating expenses $ 27,825 $ 24,987 $ 2,838 11.4 %
Other (expense) income
Interest expense $ (7,121) $ (6,486) $ (635) 9.8 %
Other income 119 223 (104) (46.6) %
Total other expense, net $ (7,002) $ (6,263) $ (739) 11.8 %
Net income $ 1,572 $ 2,121 $ (549) (25.9) %
Distributions attributable to Series D, E,
F, and G preferred stock (2,967) (2,856) (111) 3.9 %
Series D Preferred Stock offering costs
write off - (2,141) 2,141 (100.0) %
Distributions attributable to senior common
stock (114) (177) 63 (35.6) %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders $ (1,509) $ (3,053) $ 1,544 (50.6) %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders per weighted average share and
unit - basic & diluted $ (0.04) $ (0.08) $ 0.04 (50.0) %
FFO available to common stockholders and
Non-controlling OP Unitholders - basic (1)
35.4 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted
(1) $ 15,198 $ 11,315 $ 3,883 34.3 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted,
as adjusted for comparability (1) $ 15,198 $ 13,456 $ 1,742 12.9 %
FFO per weighted average share of common
stock and Non-controlling OP Units - basic
(1) $ 0.39 $ 0.30 $ 0.09 30.0 %
FFO per weighted average share of common
stock and Non-controlling OP Units -
diluted (1) $ 0.39 $ 0.30 $ 0.09 30.0 %
FFO per weighted average share of common
stock and Non-controlling OP Units -
diluted, as adjusted for comparability (1) $ 0.39 $ 0.36 $ 0.03 8.3 %
(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 six months ended
2022 2021 $ Change % Change
Operating revenues
Lease revenue $ 71,930 $ 68,047 $ 3,883 5.7 %
Total operating revenues $ 71,930 $ 68,047 $ 3,883 5.7 %
Operating expenses
Depreciation and amortization $ 29,907 $ 30,901 $ (994) (3.2) %
Property operating expenses 13,582 13,471 111 0.8 %
Base management fee 3,124 2,896 228 7.9 %
Incentive fee 2,679 2,274 405 17.8 %
Administration fee 861 634 227 35.8 %
General and administrative 1,955 1,729 226 13.1 %
Impairment charge 1,374 - 1,374 100.0 %
Total operating expense before incentive
fee waiver $ 53,482 $ 51,905 $ 1,577 3.0 %
Incentive fee waiver - (16) 16 (100.0) %
Total operating expenses $ 53,482 $ 51,889 $ 1,593 3.1 %
Other (expense) income
Interest expense $ (13,706) $ (13,650) $ (56) 0.4 %
Loss on sale of real estate, net - (882) 882 (100.0) %
Other income 223 534 (311) (58.2) %
Total other expense, net $ (13,483) $ (13,998) $ 515 (3.7) %
Net income $ 4,965 $ 2,160 $ 2,805 129.9 %
Distributions attributable to Series D, E,
F, and G preferred stock (5,913) (5,703) (210) 3.7 %
Series D preferred stock offering costs
write off - (2,141) 2,141 (100.0) %
Distributions attributable to senior common
stock (230) (364) 134 (36.8) %
Loss on extinguishment of Series F
preferred stock (5) - (5) 100.0 %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders $ (1,183) $ (6,048) $ 4,865 (80.4) %
Net loss attributable to common
stockholders and Non-controlling OP
Unitholders per weighted average share and
unit - basic & diluted $ (0.03) $ (0.17) $ 0.14 (82.4) %
FFO available to common stockholders and
Non-controlling OP Unitholders - basic (1)
17.0 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted
(1) $ 30,328 $ 26,099 $ 4,229 16.2 %
FFO available to common stockholders and
Non-controlling OP Unitholders - diluted,
as adjusted for comparability (1) $ 30,328 $ 28,240 $ 2,088 7.4 %
FFO per weighted average share of common
stock and Non-controlling OP Unit - basic
(1) $ 0.78 $ 0.71 $ 0.07 9.9 %
FFO per weighted average share of common
stock and Non-controlling OP Unit - diluted
(1) $ 0.78 $ 0.71 $ 0.07 9.9 %
FFO per weighted average share of common
stock and Non-controlling OP Unit -
diluted, as adjusted for comparability (1) $ 0.78 $ 0.76 $ 0.02 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 adjusted for
comparability.
Same Store Analysis
For the purposes of the following discussion, same store properties are
properties we owned as of January 1, 2021 , 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, 2020 . 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, 2021 .
35
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Operating Revenues
For the three months ended June 30,
(Dollars in Thousands)
Lease Revenues 2022 2021 $ Change % Change
Same Store Properties $ 28,742 $ 28,460 $ 282 1.0 %
Acquired & Disposed Properties 3,475 1,444 2,031 140.7 %
Properties with Vacancy 4,182 3,467 715 20.6 %
$ 36,399 $ 33,371 $ 3,028 9.1 %
For the six months ended June 30,
(Dollars in Thousands)
Lease Revenues 2022 2021 $ Change % Change
Same Store Properties $ 57,124 $ 57,729 $ (605) (1.0) %
Acquired & Disposed Properties 6,193 2,866 3,327 116.1 %
Properties with Vacancy 8,613 7,452 1,161 15.6 %
$ 71,930 $ 68,047 $ 3,883 5.7 %
Lease revenues consist of rental income and operating expense recoveries earned
from our tenants. Lease revenues from same store properties increased for the
three months ended June 30, 2022 , primarily due to accelerated rent recognized
during the three months ended June 30, 2022 from one tenant that terminated
their lease early. Lease revenues from same store properties decreased for the
six months ended June 30, 2022 , primarily due to accelerated rent recognized
during the six months ended June 30, 2021 from two tenants that terminated their
leases early, partially offset by increased rent from lease amendments executed
subsequent to June 30, 2021 . We fully re-leased the space from the two
terminations with no downtime. Lease revenues increased for acquired and
disposed of properties for the three and six months ended June 30, 2022 , as
compared to the three and six months ended June 30, 2021 , because we acquired 16
properties subsequent to June 30, 2021 . This increase was partially offset by a
loss of lease revenues from one property we sold subsequent to June 30, 2021 .
Lease revenues increased for our properties with vacancy for the three and six
months ended June 30, 2022 due to vacant space being leased.
Operating Expenses
Depreciation and amortization expense increased for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , due to an increase in depreciation and amortization expense on the 16 properties acquired subsequent toJune 30, 2021 . Depreciation and amortization expense decreased for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , primarily due to accelerated depreciation and amortization related to two tenants with early lease terminations during the six months endedJune 30, 2021 , partially offset by an increase in depreciation and amortization expense on the 16 properties we acquired subsequent toJune 30, 2021 . For
the three months ended
(Dollars in Thousands)
Property Operating Expenses 2022 2021 $ Change % Change
Same Store Properties $ 4,344 $ 4,349 $ (5) (0.1) %
Acquired & Disposed Properties 436 235 201 85.5 %
Properties with Vacancy 2,179 2,326 (147) (6.3) %
$ 6,959 $ 6,910 $ 49 0.7 %
For the six months ended June 30,
(Dollars in Thousands)
Property Operating Expenses 2022 2021 $ Change % Change
Same Store Properties $ 8,622 $ 8,482 $ 140 1.7 %
Acquired & Disposed Properties 629 560 69 12.3 %
Properties with Vacancy 4,331 4,429 (98) (2.2) %
$ 13,582 $ 13,471 $ 111 0.8 %
36-------------------------------------------------------------------------------- Table of Contents 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 decrease in property operating expenses for same store properties for the three months endedJune 30, 2022 , from the comparable 2021 period, is a result of reduced real estate tax expense during the period, partially offset by general cost increases due to the inflationary environment during the three months endedJune 30, 2022 . The increase in property operating expenses for same store properties for the six months endedJune 30, 2022 , from the comparable 2021 period, is a result of general cost increases due to the inflationary environment during the six months endedJune 30, 2022 . The increase in property operating expenses for acquired and disposed of properties for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , is primarily a result of our 16 property acquisitions subsequent toJune 30, 2021 , partially offset by the sale of one property subsequent toJune 30, 2021 . The decrease in property operating expenses for properties with vacancy for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , is a result of reduced real estate tax expense during the period, partially offset by general cost increases due to the inflationary environment during the three and six months endedJune 30, 2022 . The base management fee paid to the Adviser increased for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , due to an increase inGross Tangible Real Estate over the three and six months endedJune 30, 2022 as compared to the increase inGross Tangible Real Estate during the three and six months endedJune 30, 2021 . 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 six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , due to a higher pre-incentive fee Core FFO. The increase in Core FFO is a result of an increase in operating revenues. 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 and six
months ended
General and administrative expenses decreased for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , primarily as a result of a decrease in legal costs. General and administrative expenses increased for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , primarily as a result of an increase in accounting fees and shareholder related expenses, partially offset by a decrease in legal costs.
Other Income and Expenses
Interest expense increased for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 . This increase was primarily a result of increased interest costs on variable rate debt, as global interest rates have increased to counteract growing inflation. We did not sell any properties during the six months endedJune 30, 2022 , and as a result, incurred no gain or loss. Loss on sale of real estate, net, for the three and six months endedJune 30, 2021 , is attributable to two non-core office assets located inRancho Cordova, California andChampaign, Illinois , being sold during the period.
Other income decreased for the three and six months ended
Net Loss Attributable to Common Stockholders and Non-controlling OP Unitholders
Net loss attributable to common stockholders and Non-controlling OP Unitholders decreased for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , primarily due to the increase in operating revenues due to asset acquisition activity during and subsequent toJune 30, 2021 , partially offset by an increase in interest expense due to higher borrowing costs on variable rate debt due to global interest rate expansion. 37 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 30, 2022 , was$29.1 million , consisting of approximately$10.7 million in cash and cash equivalents and available borrowing capacity of$18.4 million under our Credit Facility. Our available borrowing capacity under the Credit Facility increased to$34.6 million as ofAugust 1, 2022 .
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
During the six months endedJune 30, 2022 , we raised net proceeds of$31.7 million of common equity under our Common Stock ATM Program at a net weighted average per share price of$20.84 . 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 six months endedJune 30, 2022 . We raised net proceeds of$2.9 million from sales of our Series F Preferred Stock during the six months endedJune 30, 2022 . As ofAugust 1, 2022 , we had the ability to raise up to$650.7 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$650.7 million of available capacity under our 2020 Universal Shelf, approximately$28.0 million is reserved for additional sales under our Common Stock ATM Program, and approximately$622.2 million is reserved for the sale of our Series F Preferred Stock as ofAugust 1, 2022 . We expect to continue to use our Common Stock ATM Program as a source of liquidity for the remainder of 2022.Debt Capital As ofJune 30, 2022 , we had 54 mortgage notes payable in the aggregate principal amount of$465.8 million , collateralized by a total of 70 properties with a remaining weighted average maturity of 3.7 years. The weighted-average interest rate on the mortgage notes payable as ofJune 30, 2022 was 4.18%.
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 ofJune 30, 2022 , we had mortgage debt in the aggregate principal amount of$72.9 million payable during the remainder of 2022 and$83.6 million payable during 2023. The 2022 principal amount payable includes both amortizing principal payments and six balloon principal payments due during the remaining six months of 2022. 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. In addition, we have raised substantial equity under our at-the-market programs and plan to continue to use these programs. 38 -------------------------------------------------------------------------------- Table of Contents Operating Activities Net cash provided by operating activities during the six months endedJune 30, 2022 , was$34.6 million , as compared to net cash provided by operating activities of$34.4 million for the six months endedJune 30, 2021 . This change was primarily a result of an increase in operating revenues from our 16 property acquisitions completed subsequent toJune 30, 2021 , partially offset by an increase in interest expense due to higher interest rates on variable rate debt. 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 six months endedJune 30, 2022 , was$57.8 million , which primarily consisted of seven property acquisitions, coupled with capital improvements performed at certain of our properties. Net cash used in investing activities during the six months endedJune 30, 2021 , was$17.1 million , which primarily consisted of two 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 provided in financing activities during the six months endedJune 30, 2022 , was$25.3 million , which primarily consisted of the issuance of$35.3 million of common and preferred equity, partially offset by the repayment of$22.0 million of outstanding mortgage debt, and distributions paid to common, senior common and preferred shareholders. Net cash used in financing activities for the six months endedJune 30, 2021 , was$14.1 million , which primarily consisted of$10.9 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders, partially offset by$5.5 million in new mortgage borrowings coupled with the issuance of$120.8 million of equity.
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 ofJune 30, 2022 , 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 ofJune 30, 2022 , there was$272.0 million outstanding under our Credit Facility at a weighted average interest rate of approximately 3.68% and$19.5 million outstanding under letters of credit at a weighted average interest rate of 1.90%. As ofAugust 1, 2022 , the maximum additional amount we could draw under the Credit Facility was$34.6 million . We were in compliance with all covenants under the Credit Facility as ofJune 30, 2022 .
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.
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Contractual Obligations
The following table reflects our material contractual obligations as of June 30,
2022 (in thousands):
Payments Due by Period
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
Debt Obligations (1) $ 737,777 $ 155,582
84,289 26,104 33,723 16,188 8,274
Operating Lease Obligations (3) 9,029 491 986 996 6,556
Purchase Obligations (4) 8,081 4,310 3,771 - -
$ 839,176 $ 186,487 $ 337,990 $ 179,253 $ 135,446
(1)Debt obligations represent borrowings under our Revolver, which represents
$47.0 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 June 30, 2022 . This figure does not
include $(0.1) million of premiums and (discounts), net and $3.7 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 June 30, 2022 .
(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 11 of our
properties.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
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. 40 -------------------------------------------------------------------------------- Table of Contents 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 six months endedJune 30, 2022 and 2021, 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: 41
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For the three months ended June 30, For the six months ended June 30,
(Dollars in Thousands, Except for Per (Dollars in Thousands, Except for Per
Share Amounts) Share Amounts)
2022 2021 2022 2021
Calculation of basic FFO per share of common
stock and Non-controlling OP Unit
Net income $ 1,572 $
2,121
(3,081) (3,033) (6,143) (6,067)
Less: Series D preferred stock offering
costs write off - (2,141) - (2,141)
Less: Loss on extinguishment of Series F
preferred stock - - (5) -
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders $ (1,509) $ (3,053) $ (1,183) $ (6,048)
Adjustments:
Add: Real estate depreciation and
amortization $ 15,219 $
14,191
1,374 - 1,374 -
Add: Loss on sale of real estate, net - - - 882
FFO available to common stockholders and
Non-controlling OP Unitholders - basic $ 15,084 $
11,138
38,745,751 36,394,767 38,326,531 36,056,317
Weighted average Non-controlling OP Units
outstanding 256,994 256,994 256,994 377,975
Total common shares and Non-controlling OP
Units 39,002,745 36,651,761 38,583,525 36,434,292
Basic FFO per weighted average share of
common stock and Non-controlling OP Unit $ 0.39 $ 0.30 $ 0.78 $ 0.71
Calculation of diluted FFO per share of
common stock and Non-controlling OP Unit
Net income $ 1,572 $
2,121
(3,081) (3,033) (6,143) (6,067)
Less: Series D preferred stock offering
costs write off - (2,141) - (2,141)
Less: Loss on extinguishment of Series F
preferred stock - - (5) -
Net income (loss) available (attributable)
to common stockholders and Non-controlling
OP Unitholders $ (1,509) $ (3,053) $ (1,183) $ (6,048)
Adjustments:
Add: Real estate depreciation and
amortization $ 15,219 $
14,191
1,374 - 1,374 -
Add: Income impact of assumed conversion of
senior common stock 114 177 230 364
Add: Loss on sale of real estate, net - - - 882
FFO available to common stockholders and
Non-controlling OP Unitholders plus assumed
conversions $ 15,198 $
11,315
38,745,751 36,394,767 38,326,531 36,056,317
Weighted average Non-controlling OP Units
outstanding 256,994 256,994 256,994 377,975
Effect of convertible senior common stock 363,246 558,038 363,246 558,038
Weighted average common shares and
Non-controlling OP Units outstanding -
diluted 39,365,991 37,209,799 38,946,771 36,992,330
Diluted FFO per weighted average share of
common stock and Non-controlling OP Unit $ 0.39 $ 0.30 $ 0.78 $ 0.71
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 $ 15,198 $
11,315
- 2,141 - 2,141
FFO available to common stockholders and
Non-controlling OP Unitholders plus assumed
conversions, as adjusted for comparability $ 15,198 $ 13,456 $ 30,328 $ 28,240
Weighted average common shares and
Non-controlling OP Units outstanding -
diluted 39,365,991 37,209,799 38,946,771 36,992,330
Diluted FFO per weighted average share of
common stock and Non-controlling OP Unit, as
adjusted for comparability $ 0.39 $
0.36
$ 0.37620 $ 0.37545 $ 0.75240 $ 0.75090 42
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