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 large private and public companies, many of which are corporations that do not have publicly-rated debt. We have historically 34 -------------------------------------------------------------------------------- Table of Contents 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 137 properties totaling 17.2 million square feet of rentable space, located in 27 states; •our occupancy rate was 95.9%; •the weighted average remaining term of our mortgage debt was 4.1 years and the weighted average interest rate was 5.15%; and •the average remaining lease term of the portfolio was 6.9 years.
Business Environment
The demand for industrial space has continued due to the continuing growth of e-commerce and recent trend of manufacturing onshoring, which appears to have partially rebounded from the adverse effects of COVID-19 on the commercial real estate industry in 2020, 2021, and early 2022. However, the increased cost of construction materials and product delivery delays caused by supply chain disruption and related inventory management issues, and the apparent labor shortage we are facing nationally, have resulted in inflation and higher costs for both industrial and office construction projects. Further, a tightening of available financing due primarily to higher interest rates has caused a slowdown in new construction starts throughout the fourth quarter of 2022, as compared to the record breaking third quarter of 2022, which should lead to lowered deliveries into 2024. The industrial market recorded its strongest year in 2021, surpassing 500 million square feet in net absorption, according to research, and continued to remain strong through the third quarter of 2022 absorbing over 350 million square feet through the end of 2022. Construction activity for the industrial sector saw record amounts of groundbreakings in the third quarter of 2022, bringing the total amount under development to over 600 million square feet. Industrial markets continued to tighten, bringing the vacancy rate to an all-time low of 3.3% at the end of the third quarter of 2022. The office sector struggled less in 2022 than 2021, posting negative net absorption of 37 million square feet in 2022 compared to negative net absorption of 59 million square feet in 2021. Tenants continue to put their space up for sublease to reduce costs, with year-end sublease vacancy totaling 136 million square feet. Industry expectations are for an increase in office vacancy rates as leases roll over the next few years, which will lead to downsizing and lower renewal rates for spaces currently offered for sublease. Interest rates remain volatile in response to competing concerns about inflationary pressures, and interest rate increases by theFederal Reserve and are expected to increase. The yield on the 10-yearU.S. Treasury Note has increased significantly since the beginning of 2022 and finished 2022 at 3.88%. Global recessionary conditions may occur over the next 6-24 months as a direct result of central bank intervention to curb inflation. As ofFebruary 22, 2023 , we have collected 100% of all outstanding rent collections for calendar year 2022. 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. Additionally, our properties are located across 27 states, which we believe mitigates our exposure to economic issues, including regulations or laws implemented by state and local governments in response to public health emergencies, 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, onAugust 18, 2022 , we added a new$150.0 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. 35
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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 and related inventory management issues, labor shortages, rising interest rates, public health emergencies such as the COVID-19 pandemic and associated governmental responses 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. The London Inter-bank Offered Rate ("LIBOR") is anticipated to be phased out byJune 2023 , and LIBOR is being transitioned to a new standard rate, the Secured Overnight Financing Rate ("SOFR"). During 2022, we began transitioning our variable rate debt to SOFR, and, atDecember 31, 2022 , all of our variable rate debt was based upon SOFR, with the exception of$41.8 million of hedged variable rate mortgages still based on LIBOR, which we are planning to transition to SOFR prior to the mid-2023 phase out of LIBOR. 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. AtDecember 31, 2022 , we only had five partially vacant buildings and three fully vacant buildings. We believe our lease expiration schedule for 2023 is quite manageable as it equates to 7.0% of annual rental income with a majority of the expirations due to occur in the second half of the year. Property acquisitions increased during the third and fourth quarters of the year endedDecember 31, 2022 equating to almost$63.0 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$125.0 million senior unsecured revolving credit facility ("Revolver"), withKeyBank , which matures inAugust 2026 , our$160.0 million term loan facility ("Term Loan A"), which matures inAugust 2027 , our$60.0 million term loan facility ("Term Loan B"), which matures inFebruary 2026 , and our$150.0 million term loan facility ("Term Loan C"), which matures inFebruary 2028 . We refer to the Revolver, Term Loan A, Term Loan B, and Term Loan C, collectively, herein as the Credit Facility. While lenders' credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market ("CMBS"), to issue mortgages to finance our real estate activities. Recent Developments Sale Activity During the year endedDecember 31, 2022 , we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions in our target secondary growth markets, as well as repay outstanding debt. We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the year endedDecember 31, 2022 , we sold five non-core properties, located inJupiter, Florida ,Parsippany, New Jersey ,Boston Heights, Ohio ,Columbus, Ohio , andAllen, Texas , which are summarized in the table below (dollars in thousands): Aggregate Impairment Charge for the Aggregate Gain on Aggregate Square Aggregate Sales Aggregate Sales Twelve Months Ended Sale of Real Estate, Footage Sold Price Costs December 31, 2022 net 291,604$ 41,270 $ 1,771 $ 1,374 $ 10,052 Acquisition Activity
During the year ended
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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
1,238,680 14.5 years $ 115,364 $ 1,014 $ 8,138 $ 47,913
Leasing Activity
During the year ended
Aggregate Annualized
Weighted Average GAAP Fixed Lease Aggregate Tenant Aggregate Leasing
Aggregate Square Footage Remaining Lease Term Payments Improvement Commissions
628,499 7.8 years (1) $ 7,724 $ 7,969 $ 2,488
(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 1.9
years to 15.0 years.
During the year ended
Aggregate Accelerated Rent
Aggregate Square Footage Recognized through December 31,
Reduced Aggregate Accelerated Rent 2022
216,095 $ 5,888 $ 5,710
Financing Activity
During the year ended
Weighted Average Interest Rate on Fixed Rate Debt
Aggregate Fixed Rate Debt Repaid Repaid
$ 104,906 4.64 %
Aggregate Variable Rate Debt Weighted Average Interest Rate on Variable Rate Debt
Repaid Repaid
$ 30,336 LIBOR/SOFR + 2.50%
During the year ended
Weighted Average Interest Rate on Fixed Rate
Aggregate Fixed Rate Debt Issued Debt
$ 47,913 (1) 4.60 %
(1)We issued $10.0 million of fixed rate debt with a maturity date of May 4,
2027 , in connection with our two-property portfolio we acquired on May 4, 2022 .
The interest rate is fixed at 4.00%. We issued $10.0 million of fixed rate debt
with a maturity date of June 1, 2032 , in connection with our three-property
acquisition on May 12, 2022 . The interest rate is fixed at 3.40%. We issued
$16.9 million of fixed rate debt with a maturity date of August 1, 2027 , in
connection with our two-property acquisition on August 5, 2022 . The interest
rate is fixed at 4.95%. We issued $4.4 million of swapped to fixed rate debt
with a maturity date of September 16, 2029 , in connection with our property
acquisition on September 16, 2022 . The interest rate is swapped to a fixed rate
of 5.39%. We issued $6.6 million of swapped to fixed rate debt with a maturity
date of September 16, 2029 , in connection with the property acquisition on
October 26, 2022 . The interest rate is swapped to a fixed rate of 5.90%.
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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%. This mortgage was repaid on August 18, 2022 .
During the year ended December 31, 2022 , we extended the maturity date of three
mortgages, collateralized by five properties, which is summarized in the table
below (dollars in thousands):
Aggregate Fixed Rate Debt Weighted Average Interest Rate on
Extended Fixed Rate Debt Extended Extension Term
$ 14,633 5.41 % 1.0 year
Interest Rate on Variable RateDebt
Variable Rate Debt Extended Extended Extension Term $ 7,059 (1) LIBOR + 2.75% 1.0 year
(1)We repaid this mortgage on
Equity Activity
Common Stock ATM Program
During the year endedDecember 31, 2022 , we sold 2.1 million shares of common stock, raising approximately$43.2 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, 2022 , we had a remaining capacity to sell up to$23.9 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. We terminated the Common Stock Sales Agreement effectiveFebruary 10, 2023 in connection with the expiration of our registration statement on Form S-3 (File No. 333-236143) (the "2020 Registration Statement") onFebruary 11, 2023 .
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.
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 38 -------------------------------------------------------------------------------- Table of Contents Supplementary inAugust 2021 , our authorized capital stock consisted 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
During the year endedDecember 31, 2022 , we had an At-the-Market Equity Offering Sales Agreement (the "Series E Preferred Stock Sales Agreement") with sales agentsBaird , Goldman Sachs, Stifel, Fifth Third, andU.S. Bancorp Investments, Inc. , pursuant to which we could, 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, 2022 . As ofDecember 31, 2022 , we had remaining capacity to sell up to$92.8 million of Series E Preferred Stock under the Series E Preferred ATM Program. We terminated the Series E Preferred Stock Sales Agreement effectiveFebruary 10, 2023 in connection with the expiration of the 2020 Registration Statement onFebruary 11, 2023 .
Universal Shelf Registration Statement
OnJanuary 11, 2019 , we filed a 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 Registration Statement"). The 2019 Registration Statement became effective onFebruary 13, 2019 and replaced our prior shelf registration statement. The 2019 Registration Statement allowed us to issue up to$500.0 million of securities and expired onFebruary 13, 2022 . OnJanuary 29, 2020 , we filed the 2020 Registration Statement. The 2020 Registration Statement was declared effective onFebruary 11, 2020 and was in addition to the 2019 Registration Statement. The 2020 Registration Statement allowed us to issue up to an additional$800.0 million of securities. Of the$800.0 million of available capacity under our 2020 Registration Statement, approximately$636.5 million was reserved for the sale of Series F Preferred Stock. As ofDecember 31, 2022 , we had the ability to issue up to$644.0 million of securities under the 2020 Registration Statement. The 2020 Registration Statement expired onFebruary 11, 2023 . OnNovember 23, 2022 , we filed an automatic registration statement on Form S-3 (File No. 333-268549) (the "2022 Registration Statement"). There is no limit on the aggregate amount of the securities that we may offer pursuant to the 2022 Registration Statement.
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 238,100 shares of our Series F Preferred Stock, raising$5.4 million in net proceeds, during the year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had remaining capacity to sell up to$619.6 million of Series F Preferred Stock.
Amendments 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. 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 "Third Amendment"), establishing the rights, privileges, 39 -------------------------------------------------------------------------------- Table of Contents 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 Third 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 Third Amendment have preferences, distribution rights, and other provisions substantially equivalent to those of the Series G Preferred Stock. OnAugust 5, 2021 , theOperating Partnership adopted the Fourth Amendment to its Second Amended and Restated Agreement of Limited Partnership, including Exhibit SGP thereto, to remove all references to the 7.00% Series D Cumulative Redeemable Preferred Units of the Partnership and update the rights, privileges, and preferences accordingly.
Amendments to the Advisory Agreement
OnJuly 14, 2020 , we amended and restated our existing advisory agreement with our Advisor (as defined herein), as amended from time to time (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 . OnJanuary 10, 2023 , we amended the Sixth Amended Advisory Agreement, by entering into the Seventh Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the "Seventh Amended Advisory Agreement"), which was approved unanimously by our board of directors, including specifically, our independent directors. The Seventh Amended Advisory Agreement waived the payment of the incentive fee, as applicable, for the quarters endingMarch 31, 2023 andJune 30, 2023 . The calculation of the other fees remains unchanged.
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 was in connection with his planned retirement.Mr. Cutlip resigned as ofJune 30, 2022 , and Mr. Cooper is now our sole president. 40 -------------------------------------------------------------------------------- Table of Contents Our Adviser and AdministratorGladstone 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. Cooper, our president, is also an executive managing director 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 Mr. Cooper, our president, all of our executive 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. 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. 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 with our Advisor and an administration agreement with our Administrator (the "Administration Agreement").
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 2022 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, throughAugust 31, 2023 . 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. 41 -------------------------------------------------------------------------------- Table of Contents 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 . OnJanuary 10, 2023 , we amended and restated the Sixth Amended Advisory Agreement, by entering into the Seventh Amended Advisory Agreement, which was approved unanimously by our board of directors, including specifically, our independent directors. The Seventh Amended Advisory Agreement waived the payment of the incentive fee, as applicable, for the quarters endingMarch 31, 2023 andJune 30, 2023 . The calculation of the other fees remains unchanged.
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 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 endedDecember 31, 2022 , 2021, and 2020.
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
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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, 2022 .
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. 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.
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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 of
December 31, 2022 , 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 7.7% and 7.9% atDecember 31, 2022 and 2021, 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.
A comparison of our operating results for the year ended
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For the year ended December 31,
2022 2021 $ Change % Change
Operating revenues
Lease revenue $ 148,981 $ 137,688 $ 11,293 8.2 %
Total operating revenues $ 148,981 $ 137,688 $ 11,293 8.2 %
Operating expenses
Depreciation and amortization $ 61,664 $ 60,311 $ 1,353 2.2 %
Property operating expenses 26,832 27,098 (266) (1.0) %
Base management fee 6,331 5,882 449 7.6 %
Incentive fee 5,270 4,859 411 8.5 %
Administration fee 1,864 1,448 416 28.7 %
General and administrative 3,705 3,218 487 15.1 %
Impairment charge 12,092 - 12,092 100.0 %
Total operating expense before incentive fee waiver
$ 102,816 $ 14,942 14.5 % Incentive fee waiver - (16) 16 (100.0) % Total operating expenses$ 117,758 $ 102,800 $ 14,958 14.6 % Other (expense) income Interest expense$ (32,457) $ (26,887) $ (5,570) 20.7 % Gain (loss) on sale of real estate, net 10,052 (1,148) 11,200 (975.6) % Other income 454 2,880 (2,426) (84.2) % Total other expense, net$ (21,951) $ (25,155) $ 3,204 (12.7) % Net income$ 9,272 $ 9,733 $ (461) (4.7) %
Distributions attributable to Series D, E, F, and G preferred stock
(11,903) (11,488) (415) 3.6 %
Series D preferred stock offering costs write off - (2,141) 2,141 (100.0) %
Distributions attributable to senior common stock (458) (698) 240 (34.4) %
Loss on extinguishment of Series F preferred stock (10) - (10) 100.0 %
Gain on repurchase of Series G preferred stock 37 - 37 100.0 %
Net loss attributable to common stockholders and
Non-controlling OP Unitholders $ (3,062) $ (4,594) $ 1,532 (33.3) %
Net loss attributable to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted
$ (0.08) $ (0.12) $ 0.04 (33.3) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1)$ 60,642 $ 56,865 $ 3,777 6.6 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1)$ 61,100 $ 57,563 $ 3,537 6.1 %
FFO available to common stockholders and Non-controlling OP Unitholders - diluted, as adjusted for comparability (1)
$ 61,100 $ 59,704 $ 1,396 2.3 %
FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1)
$ 1.55 $ 1.54 $ 0.01 0.6 %
FFO per weighted average share of common stock and Non-controlling OP Unit - diluted (1)
$ 1.54 $ 1.54 $ - - %
FFO per weighted average share of common stock and Non-controlling OP Unit - diluted, as adjusted for comparability (1)
$ 1.54 $ 1.60 $ (0.06) (3.8) % (1)Refer to the "Funds from Operations" section below within the Management's Discussion and Analysis section for the definition of FFO and FFO, as adjusted for comparability. Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as ofJanuary 1, 2021 , 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, 2020 . 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, 2021 . 45 --------------------------------------------------------------------------------
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Operating Revenues
For the year ended December 31,
(Dollars in Thousands)
Lease Revenues 2022 2021 $ Change % Change
Same Store Properties $ 110,270 $ 108,689 $ 1,581 1.5 %
Acquired & Disposed Properties 20,510 12,080
8,430 69.8 %
Properties with Vacancy 18,201 16,919 1,282 7.6 %
$ 148,981 $ 137,688 $ 11,293 8.2 %
Lease revenues consist of rental income and operating expense recoveries earned
from our tenants. Lease revenues from same store properties increased for the
year ended December 31, 2022 , primarily due to accelerated rent from one tenant
that terminated their lease early and will remain in the building through
January 2023 , partially offset by less income recognized from tenant funded
projects, where our tenants used their capital to improve our buildings. Lease
revenues increased for acquired and disposed of properties for the year ended
December 31, 2022 , as compared to the year ended December 31, 2021 , primarily
due to accelerated rent from two lease terminations, one of which related to a
property we sold. This was coupled with our acquisition of 13 properties during
the year ended December 31, 2022 , and the inclusion of a full year of lease
revenues recorded in 2022 for 11 properties acquired during the year ended
December 31, 2021 , partially offset by a decrease in lease revenues from the
eight properties sold during and subsequent to December 31, 2021 . Lease revenues
increased for properties with vacancy for the year ended December 31, 2022 due
to vacant space being leased.
Operating Expenses
Depreciation and amortization increased for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , primarily due to recognizing a full year of depreciation for the 11 properties acquired during the year endedDecember 31, 2021 , as well as increased depreciation expense from the 13 properties acquired during the year endedDecember 31, 2022 , partially offset by a decrease in depreciation expense for the five properties sold during the year endedDecember 31, 2022 . For the year ended December 31, (Dollars in Thousands) Property Operating Expenses 2022 2021 $ Change % Change Same Store Properties$ 16,463 $ 16,164 $ 299 1.8 % Acquired & Disposed Properties 2,081 2,226 (145) (6.5) % Properties with Vacancy 8,288 8,708 (420) (4.8) %$ 26,832 $ 27,098 $ (266) (1.0) % 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 increased for same store properties for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , due to general cost increases due to the inflationary environment. The decrease in property operating expenses on acquired and disposed of properties for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is a result of a decrease in property operating expenses from eight property sales during and subsequent toDecember 31, 2021 , partially offset by increased property operating expenses on the 13 properties we acquired during the year endedDecember 31, 2022 , coupled with a full year of property operating expenses for the 11 properties acquired during the year endedDecember 31, 2021 . The decrease in property operating expenses for properties with vacancy for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is a result of reduced real estate tax during the period, partially offset by general cost increases due to the inflationary environment.
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, 2022 , as compared to the year endedDecember 31, 2021 , due to an increase in pre-incentive fee Core FFO. The increase in pre-incentive fee Core FFO was primarily due to an increase in lease revenues from the 13 properties acquired during the year endedDecember 31, 2022 , 46 -------------------------------------------------------------------------------- Table of Contents coupled with a full year of lease revenues from the 11 properties acquired during the year endedDecember 31, 2021 . The calculation of the incentive fee is described in detail above within "Advisory and Administration Agreements." The administration fee paid to the Administrator increased for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The increase is a result of our Administrator incurring greater 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 increased for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , primarily as a result of an increase in due diligence expenses for potential acquisition targets that were not completed, coupled with an increase in legal fees. We recorded an impairment charge during the year endedDecember 31, 2022 on two properties, as we had determined the carrying value of these properties was in excess of the fair market value and not recoverable. Accordingly, we impaired these properties to fair market value. We did not record an impairment charge during the year endedDecember 31, 2021 .
Other Income and Expenses
Interest expense increased for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . This increase is primarily a result of increased borrowing costs, as global interest rates have increased to counteract growing inflation, coupled with expensed deferred financing fees associated with mortgage repayments and the Credit Facility amendment. The gain on sale of real estate, net, during the year endedDecember 31, 2022 is a result of the sale of five properties. The loss on sale of real estate, net, during the year endedDecember 31, 2021 was a result of the sale of three of our properties.
Other income decreased during the year 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 year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , primarily due to asset acquisition activity causing an increase in operating revenues during and subsequent toDecember 31, 2021 , coupled with a gain on sale of real estate, net, from five property sales, partially offset by an increase in interest expense due to higher borrowing costs due to global interest rate expansion. A discussion of the results of operations for the year endedDecember 31, 2020 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 15, 2022 , 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, 2022 , was$60.0 million , including$11.7 million in cash and cash equivalents and an available borrowing capacity of$48.3 million under our Revolver. Our available borrowing capacity under the Revolver has increased to$86.4 million as ofFebruary 22, 2023 .
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
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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, 2022 (dollars in thousands, except for share price): Weighted Average Net Proceeds Number of Shares Sold Share Price Common Stock ATM Program$ 43,170 2,130,056 $ 20.53 Series F Preferred Stock Continuous Public Offering 5,415 238,100 24.96$ 48,585 2,368,156 As ofFebruary 22, 2023 , there is no limit on the aggregate amount of the securities that we may offer pursuant to the 2022 Registration Statement. AtDecember 31, 2022 , we had the ability to raise up to$644.0 million of additional equity capital through the sale and issuance of securities that were registered under the 2020 Registration Statement. Of the$644.0 million of available capacity under our 2020 Registration Statement, approximately$23.9 million was reserved for additional sales under our Common Stock ATM Program, and approximately$619.6 million was reserved for the sale of our Series F Preferred Stock as ofFebruary 22, 2023 .
As ofDecember 31, 2022 , we had 44 mortgage notes payable in the aggregate principal amount of$362.0 million , collateralized by a total of 50 properties with a remaining weighted average maturity of 4.3 years. The weighted-average interest rate on the mortgage notes payable as ofDecember 31, 2022 was 4.24%. 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, to a lesser extent, the commercial mortgage backed securities market. As ofDecember 31, 2022 , we had mortgage debt in the aggregate principal amount of$67.3 million payable during 2023 and$20.4 million payable during 2024. The 2023 principal amounts payable include both amortizing principal payments and five balloon principal payments. We anticipate being able to refinance our mortgages that come due during 2023 and 2024 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities. We have successfully repaid$135.2 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 our 2022 Credit Facility amendment, which resulted in us reducing our Term Loan B from$65.0 million to$60.0 million , increasing our Revolver from$100.0 million to$125.0 million , and adding Term Loan C, a new$150.0 million term loan component.
Operating Activities
Net cash provided by operating activities during the year endedDecember 31, 2022 , was$69.2 million , as compared to net cash provided by operating activities of$70.1 million for the year endedDecember 31, 2021 . This change 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 interest expense due to higher interest rates on variable rate debt. The majority of cash from operating 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. 48
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Investing Activities
Net cash used in investing activities during the year endedDecember 31, 2022 , was$82.5 million , which primarily consisted of the acquisition of 13 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, 2021 , was$94.8 million , which primarily consisted of the acquisition of 11 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, 2022 , was$16.2 million , which primarily consisted of proceeds from our common and preferred equity offerings, mortgage borrowings on new acquisitions and a net increase in Credit Facility borrowings, partially offset by the repayment of outstanding mortgage debt and distributions paid to our stockholders and Non-controlling OP Unitholders. Net cash provided by financing activities for the year endedDecember 31, 2021 , was$21.8 million , which primarily consisted of proceeds from our common and 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. We entered into multiple interest rate cap agreements on Term Loan B, which cap LIBOR from 1.50% to 1.75%. OnAugust 18, 2022 , we amended, extended and upsized our Credit Facility, increasing our Revolver from$100.0 million to$120.0 million (and its term toAugust 2026 ), adding the new$140.0 million Term Loan C, decreasing the principal balance of Term Loan B to$60.0 million and extending the maturity date of Term Loan A toAugust 2027 . Term Loan C has a maturity date ofFebruary 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. OnSeptember 27, 2022 we further increased the Revolver to$125.0 million and Term Loan C to$150.0 million , as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates ranging from 3.15% to 3.75%. We also entered into an interest rate swap agreement on Term Loan A to replace the expiring rate caps, which swaps the interest rate to a fixed rate of 3.70%. We incurred fees of approximately$4.2 million in connection with extending and upsizing our Credit Facility. As ofDecember 31, 2022 , there was$150.0 million outstanding under Term Loan C, and we used all net proceeds to repay all outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility's current bank syndicate is comprised ofKeyBank ,Fifth Third Bank ,The Huntington National Bank , Bank of America,Synovus Bank ,United Bank ,First Financial Bank , andS&T Bank . As ofDecember 31, 2022 , there was$393.3 million outstanding under our Credit Facility at a weighted average interest rate of approximately 5.75% and$15.6 million outstanding under letters of credit at a weighted average interest rate of 1.50%. As ofFebruary 22, 2023 , the maximum additional amount we could draw under the Credit Facility was$86.4 million . We were in compliance with all covenants under the Credit Facility as ofDecember 31, 2022 .
Contractual Obligations
The following table reflects our material contractual obligations as of
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Payments Due by Period
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
Debt Obligations (1) $ 755,287 $ 67,296 $ 59,309 $ 380,479 $ 248,203
Interest on Debt
Obligations (2) 161,865 36,473 67,481 48,837 9,074
Operating Lease
Obligations (3) 8,784 492 987 1,004 6,301
Purchase Obligations (4) 8,504 2,754 3,772 1,978 -
$ 934,440 $ 107,015 $ 131,549 $ 432,298 $ 263,578
(1)Debt obligations represent borrowings under our Revolver, which represents
$23.3 million of the debt obligation due in 2026, Term Loan A, which represents
$160.0 million of the debt obligation due in 2027, Term Loan B, which represents
$60.0 million of the debt obligation due in 2026, Term Loan C, which represents
$150.0 million of the debt obligation due in 2028 and mortgage notes payable
that were outstanding as of December 31, 2022 . This figure does not include
$(0.1) million of premiums and (discounts), net, and $6.0 million of deferred
financing costs, net, which are reflected in mortgage notes payable, net,
borrowings under Revolver, and borrowings under Term Loan A, Term Loan B and
Term Loan C, 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, Term Loan C and mortgage notes
payable. The balance and interest rate on our Revolver and Term Loan A, Term
Loan B, Term Loan C is variable; thus, the interest payment obligation
calculated for purposes of this table was based upon rates and balances as of
December 31, 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 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 50 -------------------------------------------------------------------------------- Table of Contents 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, 2022 and 2021 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: 51
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For
the twelve months ended
(Dollars in Thousands, Except for Per
Share Amounts)
2022 2021
Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income
$
9,272
(12,361) (12,186)
Less: Series D preferred stock offering costs write off - (2,141)
Less: Loss on extinguishment of Series F preferred stock (10) -
Add: Gain on repurchase of Series G preferred stock 37 -
Net loss attributable to common stockholders and Non-controlling OP Unitholders
$ (3,062) $ (4,594) Adjustments: Add: Real estate depreciation and amortization 61,664 60,311 Add: Impairment charge 12,092 - Add: Loss on sale of real estate, net - 1,148 Less: Gain on sale of real estate, net (10,052) -
FFO available to common stockholders and Non-controlling OP Unitholders - basic
$ 60,642 $ 56,865 Weighted average common shares outstanding - basic 38,950,734 36,537,306 Weighted average Non-controlling OP Units outstanding 294,941 316,987 Total common shares and Non-controlling OP Units 39,245,675 36,854,293
Basic FFO per weighted average share of common stock and Non-controlling OP Unit
$ 1.55 $ 1.54
Calculation of diluted FFO per share of common stock and
Non-controlling OP Unit
Net income $
9,272
(12,361) (12,186)
Less: Series D preferred stock offering costs write off - (2,141)
Less: Loss on extinguishment of Series F preferred stock (10) -
Add: Gain on repurchase of Series G preferred stock 37 -
Net loss attributable to common stockholders and Non-controlling OP Unitholders
$ (3,062) $ (4,594) Adjustments: Add: Real estate depreciation and amortization 61,664 60,311 Add: Impairment charge 12,092 - Add: Income impact of assumed conversion of senior common stock 458 698 Add: Loss on sale of real estate, net - 1,148 Less: Gain on sale of real estate, net (10,052) -
FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions
$ 61,100 $ 57,563 Weighted average common shares outstanding - basic 38,950,734 36,537,306 Weighted average Non-controlling OP Units outstanding 294,941 316,987 Effect of convertible senior common stock 363,246 503,962
Weighted average common shares and Non-controlling OP Units outstanding - diluted
39,608,921 37,358,255
Diluted FFO per weighted average share of common stock and Non-controlling OP Unit
$
1.54
$ 61,100 $ 57,563 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
$
61,100
39,608,921 37,358,255
Diluted FFO per weighted average share of common stock and Non-controlling OP Unit, as adjusted for comparability
$ 1.54 $ 1.60
Distributions declared per share of common stock and
Non-controlling OP Unit $ 1.504800 $ 1.502175
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