GLADSTONE COMMERCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. All references to “we,” “our,” “us” and the “Company” in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where otherwise noted or where the context indicates that the term means only Gladstone Commercial Corporation. General We are an externally-advised real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning, and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and office mortgage loans; however, we do not have any mortgage loans currently outstanding. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment. We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately 7 to 15 years and built in rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property. All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. As of November 5, 2020: • we owned 120 properties totaling 15.0 million square feet in 28 states; • our occupancy rate was 95.1%; • the weighted average remaining term of our mortgage debt was 4.6 years and the weighted average interest rate was 4.28%; and • the average remaining lease term of the portfolio was 7.3 years. 27 Table of Contents Business Environment In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and widespread infection continues in the United States and many parts of the world. The rapid spread of the coronavirus identified as COVID-19 resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter in place orders, the promotion of social distancing and limitations on business activity, including business closures. These measures and the pandemic have caused a significant national and global economic downturn, disrupted business operations, including those of certain of our tenants, significantly increased unemployment and underemployment levels, and are expected to have an adverse effect on office demand for space in the short term, at a minimum. The demand for industrial space has moderated as well, but the continuing growth of e-commerce is counterbalancing the adverse effects from COVID-19. Interest rates have been volatile and although interest rates are still low by historical standards (and in some cases have been reduced to help curb the impact of COVID-19), lenders have varied on their required spreads over the last several quarters. Investment sales volume across all product types, but especially office and retail, in recent months is lower year over year, as compared to 2019 as a direct result of COVID-19. After completing the 11th year of the current cycle, some national research firms had been estimating that both pricing and investment sales volume would be peaking and the national economy would be slowing in the near term, prior to the rapid spread of COVID-19. Global recessionary conditions are currently expected for the remainder of 2020 as a direct result of the COVID-19 pandemic, although the actual impact and duration are unknown. See “Impact of COVID-19 on Our Business” below for the impact on the COVID-19 pandemic on our business. From a more macro-economic perspective, there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact, the extent and duration of social distancing and the adoption of shelter-in-place orders, or reversal of reopening orders, and the ongoing impact of COVID-19 on business and economic activity. Much of the United States economy is now in the process of re-opening, but at the same time the COVID-19 pandemic is intensifying in many areas of the country. Impact of COVID-19 on Our Business The extent to which the COVID-19 pandemic may impact our business, financial condition, liquidity, results of operations, funds from operations or prospects will depend on numerous evolving factors that we are not be able to predict at this time, including the nature, duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact on economic activity from the pandemic (such as the effect on market rental rates and commercial real estate values) and actions taken in response; the effect on our tenants and their businesses; the ability of our tenants to make their rental payments, any closures of our tenants’ properties, our ability to secure debt financing, service future debt obligations or pay distributions to our stockholders. Any of these events could materially adversely impact our business, financial condition, liquidity, results of operations, funds from operations or prospects. As of November 5, 2020, we have collected 100% of all outstanding October cash base rent obligations and approximately 99% of third quarter 2020 cash base rent obligations. In April 2020, we granted rent deferrals to three tenants representing approximately 2% of total portfolio rents. The agreements with these tenants include current partial payment in exchange for rent deferrals of varying terms with deferred amounts to be paid by the respective tenant back to us, for the period starting in July 2020 and ending through March 2021. In connection with one of the rent deferrals, we were able to obtain short term mortgage payment relief from our lender on the loan associated with those properties. We collected all cash base rent obligations during the first nine months of 2020 that were not subject to rent deferral agreements. We may pursue additional loan relief agreements in the future. We have received and may receive additional rent modification requests in future periods from our tenants. However, we are unable to quantify the outcomes of the negotiation of relief packages, the success of any tenant’s financial prospects or the amount of relief requests that we will ultimately receive or grant. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil and gas industries. These industries, among certain others, have generally been severely impacted by the COVID-19. Additionally, our properties are located in 28 states, which we believe mitigates our exposure to economic issues, including as a result of COVID-19, in any one geographic market or area. We 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. We are in compliance with all of our debt covenants, and we amended our Credit Facility in 2019 to increase our borrowing capacity and extend its maturity date. We have had numerous conversations with lenders and do not believe there will be a credit freeze in the near term. We continue to monitor our portfolio and intend to maintain a reasonably conservative liquidity position for the foreseeable future. 28 Table of Contents 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 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 progresses. Other Business Environment Considerations The short-term and long-term economic implications of the presidential election result are unknown at this time, inclusive of the long-term impact of tax reform in the U.S. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term, particularly with the ongoing discussions regarding additional fiscal stimulus as well as other geopolitical issues relating to the global economic slowdown has increased domestic and global instability. These developments could cause interest rates and borrowing costs to be volatile, which may adversely affect our ability to access both the equity and debt markets and could have an adverse impact on our tenants as well. All of our variable rate debt is based upon the one month London Inter-bank Offered Rate (“LIBOR”), although LIBOR is currently anticipated to be phased out during late 2021. LIBOR is expected to transition to a new standard rate, the Secured Overnight Financing Rate (“SOFR”), which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition, as we cannot assess whether SOFR will become a standard rate for variable rate debt. Any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based debt, or the value of our portfolio of LIBOR-indexed, floating rate debt. We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have three partially vacant buildings and four fully vacant buildings. We have no leases expiring during the remainder of 2020, 10 leases expiring in 2021, which account for 5.1% of lease revenue recognized during the nine months ended September 30, 2020, and eight leases expiring in 2022, which account for 6.3% of lease revenue recognized during the nine months ended September 30, 2020. Our available vacant space at September 30, 2020 represents 5.0% 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. Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our $100.0 million senior unsecured revolving credit facility (“Revolver”), with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent), which matures in July 2023, and our $160.0 million term loan facility (“Term Loan”), which matures in July 2024. We refer to the Revolver and Term Loan collectively herein as the Credit Facility. While lenders’ credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market, (the “CMBS market”), to issue mortgages to finance our real estate activities. 29 Table of Contents Recent Developments 2020 Sale Activity During the nine months ended September 30, 2020, we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions located in our target secondary growth markets, as well as repay outstanding debt. We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the nine months ended September 30, 2020, we sold two non-core properties, located in Charlotte, North Carolina and Maple Heights, Ohio, which are detailed in the table below (dollars in thousands): Aggregate Square Footage Sold Sales Price Sales Costs Gain on Sale of Real Estate, net 411,948 $ 15,501 $ 1,138 $ 1,184 On October 21, 2020, we sold three of our Champaign, Illinois properties for $13.4 million, resulting in a gain on sale, net, of $4.1 million. 2020 Acquisition Activity During the nine months ended September 30, 2020, we acquired six industrial properties, one property located in Indianapolis, Indiana, a three-property portfolio in Houston, Texas; Charlotte, North Carolina; and St. Charles, Missouri, one property in Chatsworth, Georgia, and one property in Indianapolis, Indiana, which are summarized in the table below (dollars in thousands): Aggregate Square Footage Weighted Average Lease Term Aggregate Purchase Price Capitalized Acquisition Expenses Aggregate Annualized GAAP Fixed Lease Payments Aggregate Debt Issued or Assumed 1,043,638 14.2 years $ 82,599 $ 339 $ 6,146 $ 35,855 On October 14, 2020, we purchased a 240,714 square foot industrial facility in Montgomery, Alabama, for $14.3 million. This property is fully leased to one tenant on a triple net basis with a remaining lease term of seven years. 2020 Leasing Activity During the nine months ended September 30, 2020, we executed 13 leases, which are summarized below (dollars in thousands): Aggregate Square Footage Weighted Average Remaining Lease Term Aggregate Annualized GAAP Fixed Lease Payments Aggregate Tenant Improvement Aggregate Leasing Commissions 987,902 7.9 years $ 8,340 $ 2,903 $ 1,285 During the nine months ended September 30, 2020, we had one lease termination, which is summarized below (dollars in thousands): Aggregate Square Footage Reduced Aggregate Termination Fee Aggregate Deferred Rent Write Off 61,358 $ 1,119 $ 225 2020 Financing Activity During the nine months ended September 30, 2020, we repaid four mortgages, collateralized by five properties, which are summarized in the table below (dollars in thousands): 30 Table of Contents Aggregate Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid $ 5,918 6.00% Aggregate Variable Rate Debt Repaid Weighted Average Interest Rate on Variable Rate Debt Repaid $ 16,107 LIBOR + 2.19% During the nine months ended September 30, 2020, we issued four mortgages, collateralized by four properties, which are summarized below (dollars in thousands): Aggregate Fixed Rate Debt Issued Weighted Average Interest Rate on Fixed Rate Debt $ 35,855 (1) 3.22 % (1) We issued $18.3 million of fixed rate debt in connection with the three-property portfolio acquired on January 27, 2020, with a maturity date of February 1, 2030. The interest rate is fixed at 3.625%. On March 9, 2020, we issued $17.5 million of floating rate debt swapped to fixed rate debt of 2.8% in connection with the one property acquisition. On October 14, 2020, we repaid $12.2 million of fixed rate debt, collateralized by two properties, at a weighted average interest rate of 4.79% and repaid $3.2 million of variable rate debt, collateralized by one property, at an interest rate of LIBOR + 2.25%. 2020 Equity Activities Common Stock ATM Program During the nine months ended September 30, 2020, we sold 1.6 million shares of common stock, raising $32.4 million in net proceeds under our At-the-Market Equity Offering Sales Agreements with sales agents Robert W. Baird & Co. Incorporated (“Baird”), Goldman Sachs & Co. LLC (“Goldman Sachs”), Stifel, Nicolaus & Company, Incorporated (“Stifel”), BTIG, LLC, and Fifth Third Securities, Inc. (“Fifth Third”), pursuant to which we may sell shares of our common stock in an aggregate offering price of up to $250.0 million (the “Common Stock ATM Program”). As of September 30, 2020, we had remaining capacity to sell up to $204.6 million of common stock under the Common Stock ATM Program. Preferred Series E ATM Program We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”), with sales agents Baird, Goldman Sachs, Stifel, Fifth Third, and U.S. Bancorp Investments, Inc., pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $100.0 million. We sold 239,399 shares of our Series E Preferred Stock, raising $5.6 million in net proceeds pursuant to the Series E Preferred Stock Sales Agreement during the nine months ended September 30, 2020. As of September 30, 2020, we had remaining capacity to sell up to $94.4 million of Series E Preferred Stock under the Series E Preferred Stock Sales Agreement. Universal Shelf Registration Statements On January 11, 2019, we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form S-3/A on January 24, 2019 (collectively referred to as the “2019 Universal Shelf”). The 2019 Universal Shelf became effective on February 13, 2019 and replaced our prior universal shelf registration statement. The 2019 Universal Shelf allows us to issue up to $500.0 million of securities. As of September 30, 2020, we had the ability to issue up to $399.5 million under the 2019 Universal Shelf. On January 29, 2020, we filed an additional universal registration statement on Form S-3, File No. 333-236143 (the “2020 Universal Shelf”). The 2020 Universal Shelf was declared effective on February 11, 2020 and is in addition to the 2019 Universal Shelf. The 2020 Universal Shelf allows us to issue up to an additional $800.0 million of securities. Of the $800.0 million of available capacity under our 2020 Universal Shelf, approximately $636.5 million is reserved for the sale of our 6.00% Series F Cumulative Redeemable Preferred Stock of the Company, par value $0.001 per share (the “Series F Preferred Stock”). As of September 30, 2020, we had the ability to issue up to $798.9 million of securities under the 2020 Universal Shelf. 31 Table of Contents Series F Preferred Stock On February 20, 2020, we filed with the Maryland 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 45,102 shares of our Series F Preferred Stock, raising $1.0 million in net proceeds during the three and nine months ended September 30, 2020. As of September 30, 2020, we had remaining capacity to sell up to $635.4 million of Series F Preferred Stock. Amendment to Operating Partnership Agreement In connection with the authorization of the Series F Preferred Stock, Gladstone Commercial Limited Partnership (the “Operating Partnership”), a Delaware limited partnership controlled by the Company through its ownership of GCLP Business Trust II, the general partner of the Operating Partnership, adopted the Second Amendment to its Second Amended and Restated Agreement of Limited Partnership, including Exhibit SFP thereto (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 the Operating 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 the Operating 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. Amendment to the Advisory Agreement On July 14, 2020, the Company amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Amended Agreement”). The Company’s entrance into the Amended Agreement was approved by its Board of Directors, including, specifically, unanimously by its independent directors. The Amended Agreement revised and replaced the previous calculation of the Base Management Fee (as defined therein), which was based on Total Equity (as defined therein), with a calculation based on Gross Tangible Real Estate. The revised Base Management Fee will be 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 Amended 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 in the Amended Agreement remain unchanged. The revised Base Management Fee calculation began with the fee calculations for the quarter ended September 30, 2020. 32 Table of Contents Diversity of Our Portfolio Gladstone Management Corporation, a Delaware corporation (our “Adviser”) seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the nine months ended September 30, 2020, our largest tenant comprised only 2.7% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Industry Classification Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Telecommunications $ 5,598 17.0 % $ 4,756 16.6 % $ 16,748 16.8 % $ 14,331 17.0 % Diversified/Conglomerate Services 4,124 12.4 4,053 14.1 12,403 12.4 11,321 13.3 Healthcare 4,077 12.3 3,329 11.6 12,156 12.1 9,880 11.6 Automobile 3,445 10.4 3,778 13.2 11,137 11.1 11,332 13.3 Banking 2,530 7.6 2,002 7.0 7,445 7.4 5,991 7.0 Buildings and Real Estate 2,401 7.2 832 2.9 6,794 6.8 3,059 3.6 Information Technology 1,754 5.3 1,534 5.4 5,193 5.2 4,603 5.4 Diversified/Conglomerate Manufacturing 1,694 5.1 1,265 4.4 4,562 4.5 3,799 4.5 Personal, Food & Miscellaneous Services 1,507 4.5 1,498 5.2 4,513 4.5 4,497 5.3 Electronics 936 2.8 1,140 4.0 3,403 3.4 3,409 4.0 Machinery 934 2.8 664 2.3 3,235 3.2 1,795 2.1 Beverage, Food & Tobacco 1,065 3.2 790 2.8 3,033 3.0 1,936 2.3 Chemicals, Plastics & Rubber 900 2.7 774 2.7 2,747 2.7 2,320 2.7 Personal & Non-Durable Consumer Products 614 1.9 605 2.1 1,838 1.8 1,815 2.1 Childcare 557 1.7 557 1.9 1,671 1.7 1,670 2.0 Containers, Packaging & Glass 338 1.0 503 1.8 1,412 1.4 1,472 1.7 Printing & Publishing 348 1.1 301 1.0 1,028 1.0 902 1.1 Education 199 0.6 165 0.6 607 0.6 495 0.6 Home & Office Furnishings 121 0.4 121 0.4 362 0.4 374 0.4 Total $ 33,142 100.0 % $ 28,667 100.0 % $ 100,287 100.0 % $ 85,001 100.0 % 33 Table of Contents The tables below reflect the breakdown of total lease revenue by state for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): State Lease Revenue for the three months ended September 30, 2020 Percentage of Lease Revenue Number of Leases for the three months ended September 30, 2020 Lease Revenue for the three months ended September 30, 2019 Percentage of Lease Revenue Number of Leases for the three months ended September 30, 2019 Texas $ 4,847 14.6 % 15 $ 4,092 14.3 % 14 Florida 4,120 12.4 11 3,898 13.6 11 Pennsylvania 3,491 10.5 9 3,393 11.8 9 Ohio 3,429 10.3 14 2,836 9.9 17 Georgia 2,684 8.1 9 1,596 5.6 7 Utah 2,006 6.1 4 1,744 6.1 4 Michigan 1,573 4.7 6 1,507 5.3 6 North Carolina 1,546 4.7 8 1,265 4.4 7 South Carolina 1,230 3.7 2 1,160 4.0 2 Alabama 897 2.7 3 889 3.1 3 All Other States 7,319 22.2 47 6,287 21.9 35 Total $ 33,142 100.0 % 128 $ 28,667 100.0 % 115 State Lease Revenue for the nine months ended September 30, 2020 Percentage of Lease Revenue Number of Leases for the nine months ended September 30, 2020 Lease Revenue for the nine months ended September 30, 2019 Percentage of Lease Revenue Number of Leases for the nine months ended September 30, 2019 Texas $ 15,081 15.0 % 15 $ 12,037 14.2 % 14 Florida 12,549 12.5 11 11,440 13.5 11 Ohio 10,569 10.5 14 8,280 9.7 17 Pennsylvania 10,272 10.2 9 10,154 11.9 9 Georgia 7,616 7.6 9 4,073 4.8 7 Utah 5,941 5.9 4 5,193 6.1 4 Michigan 4,718 4.7 6 4,517 5.3 6 North Carolina 4,547 4.5 8 4,385 5.2 7 South Carolina 3,628 3.6 2 3,478 4.1 2 Minnesota 3,507 3.5 6 2,814 3.3 6 All Other States 21,859 22.0 44 18,630 21.9 32 $ 100,287 100.0 % 128 $ 85,001 100.0 % 115 Our Adviser and Administrator Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser and Gladstone Administration, LLC, a Delaware limited liability company (our “Administrator”) are controlled by Mr. David Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr. Terry Lee Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr. Robert Cutlip, our president, also serves as the executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary, Michael LiCalsi (who also serves as our Administrator’s president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs. 34 Table of Contents 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. Michael Sodo, our chief financial officer, Mr. Jay Beckhorn, our treasurer, and Mr. Robert Cutlip, our president, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception of Mr. Cutlip and Mr. Sodo, all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone Land Corporation. Mr. Cutlip and Mr. Sodo do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private. Advisory and Administration Agreements We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary, as well as executive vice president of administration of our Adviser. We have entered into an advisory agreement with our Adviser, as amended from time to time (including the Sixth Amended and Restated Investment Advisory Agreement dated July 14, 2020, 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 its July 2020 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2021. Base Management Fee On July 14, 2020, the Company amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Amended Agreement”). The Company’s entrance into the Amended Agreement was approved by its Board of Directors, including, specifically, unanimously by its independent directors. The Amended Agreement revised and replaced the previous calculation of the Base Management Fee, which was based on Total Equity, with a calculation based on Gross Tangible Real Estate. The revised Base Management Fee will be 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 Amended 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 in the Amended Agreement remain unchanged. The revised Base Management Fee calculation began with the fee calculations for the quarter ended September 30, 2020. Under the Advisory Agreement prior to the July 14, 2020 amendment and restatement, the calculation of the annual base management fee equaled 1.5% of our Total Equity, which is our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges) and adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include OP Units held by Non-controlling OP Unitholders. The fee was calculated and accrued quarterly as 0.375% per quarter of such Total Equity 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. 35 Table of Contents Incentive Fee Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP. Capital Gain Fee Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2020 or 2019. Termination Fee The Advisory Agreement includes a termination fee whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the 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, Michael LiCalsi (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. 36 Table of Contents 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 ended December 31, 2019, filed by us with the U.S. Securities and Exchange Commission (the “SEC”) on February 12, 2020 (our “2019 Form 10-K”). On January 1, 2020, we completed the integration of the accounting records of certain of our triple net leased third-party asset managed properties into our accounting system and paid out of our operating bank accounts. For periods prior to January 1, 2020, we recorded property operating expenses and offsetting lease revenues for these certain triple net leased properties on a net basis. Beginning January 1, 2020, we are recording the property operating expenses and offsetting lease revenues for these triple net leased properties on a gross basis, as we have amended our process whereby we are paying operating expenses on behalf of our tenants and receiving reimbursement, whereas, previously these tenants were paying these expenses directly with limited insight provided to us. There were no other material changes to our critical accounting policies or estimates during the nine months ended September 30, 2020. Results of Operations The weighted average yield on our total portfolio, which was 8.2% and 8.6% as of September 30, 2020 and 2019, 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. 37 Table of Contents A comparison of our operating results for the three and nine months ended September 30, 2020 and 2019 is below (dollars in thousands, except per share amounts) : For the three months ended September 30, 2020 2019 $ Change % Change Operating revenues Lease revenue $ 33,142 $ 28,667 $ 4,475 15.6 % Total operating revenues 33,142 28,667 4,475 15.6 % Operating expenses Depreciation and amortization 13,798 12,979 819 6.3 % Property operating expenses 6,590 3,202 3,388 105.8 % Base management fee 1,418 1,292 126 9.8 % Incentive fee 1,128 965 163 16.9 % Administration fee 361 411 (50) (12.2) % General and administrative 775 596 179 30.0 % Impairment charge 1,184 — 1,184 100.0 % Total operating expenses 25,254 19,445 5,809 29.9 % Other (expense) income Interest expense (6,444) (7,170) 726 (10.1) % Gain on sale of real estate, net 1,196 — 1,196 100.0 Other income, net 204 139 65 46.8 % Total other expense, net (5,044) (7,031) 1,987 (28.3) % Net income 2,844 2,191 653 29.8 % Distributions attributable to Series A, B, D, E, and F preferred stock (2,771) (2,612) (159) 6.1 % Distributions attributable to senior common stock (203) (226) 23 (10.2) % Net loss attributable to common stockholders and Non-controlling OP Unitholders $ (130) $ (647) $ 517 (79.9) % Net loss attributable to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted $ (0.004) $ (0.02) $ 0.02 (100.0) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 13,656 $ 12,332 $ 1,324 10.7 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 13,859 $ 12,558 $ 1,301 10.4 % FFO per weighted average share of common stock and Non-controlling OP Units - basic (1) $ 0.39 $ 0.39 $ — — % FFO per weighted average share of common stock and Non-controlling OP Units - diluted (1) $ 0.39 $ 0.39 $ — — % (1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO. 38 Table of Contents For the nine months ended September 30, 2020 2019 $ Change % Change Operating revenues Lease revenue $ 100,287 $ 85,001 $ 15,286 18.0 % Total operating revenues 100,287 85,001 15,286 18.0 % Operating expenses Depreciation and amortization 42,076 38,611 3,465 9.0 % Property operating expenses 19,098 9,330 9,768 104.7 % Base management fee 4,219 3,852 367 9.5 % Incentive fee 3,301 2,720 581 21.4 % Administration fee 1,194 1,222 (28) (2.3) % General and administrative 2,406 2,035 371 18.2 % Impairment charge 2,905 — 2,905 100.0 % Total operating expenses 75,199 57,770 17,429 30.2 % Other (expense) income Interest expense (20,411) (21,406) 995 (4.6) % Gain on sale of real estate, net 1,184 2,952 (1,768) (59.9) % Other income 209 291 (82) (28.2) % Total other expense, net (19,018) (18,163) (855) 4.7 % Net income 6,070 9,068 (2,998) (33.1) % Distributions attributable to Series A, B, D, E, and F preferred stock (8,137) (7,837) (300) 3.8 % Distributions attributable to senior common stock (615) (675) 60 (8.9) % Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (2,682) $ 556 $ (3,238) (582.4) % Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders per weighted average share of total stock - basic & diluted $ (0.08) $ 0.02 $ (0.10) (500.0) % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 41,115 $ 36,215 $ 4,900 13.5 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 41,730 $ 36,890 $ 4,840 13.1 % FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1) $ 1.20 $ 1.17 $ 0.03 2.6 % FFO per weighted average share of common stock and Non-controlling OP Unit - diluted (1) $ 1.19 $ 1.16 $ 0.03 2.6 % (1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO. Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as of January 1, 2019, 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, 2018. 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, 2019. Operating Revenues For the three months ended September 30, (Dollars in Thousands) Lease Revenues 2020 2019 $ Change % Change Same Store Properties $ 25,975 $ 23,438 $ 2,537 10.8 % Acquired & Disposed Properties 4,690 1,586 3,104 195.7 % Properties with Vacancy 2,477 3,643 (1,166) (32.0) % $ 33,142 $ 28,667 $ 4,475 15.6 % 39 Table of Contents For the nine months ended September 30, (Dollars in Thousands) Lease Revenues 2020 2019 $ Change % Change Same Store Properties $ 77,314 $ 70,125 $ 7,189 10.3 % Acquired & Disposed Properties 13,457 4,174 9,283 222.4 % Properties with Vacancy 9,516 10,702 (1,186) (11.1) % $ 100,287 $ 85,001 $ 15,286 18.0 % Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties increased for the three and nine months ended September 30, 2020 from the comparable 2019 period, primarily due to increases in rental charges from lease renewals and increased operating expense recoveries from triple net leased properties. Lease revenues increased for acquired and disposed of properties for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, because we acquired 18 properties during and subsequent to September 30, 2019, partially offset by a loss of lease revenues from two properties we sold subsequent to the three and nine months ended September 30, 2019 pursuant to our capital recycling program. Lease revenues decreased for our properties with vacancy for the three and nine months ended September 30, 2020 due to increased vacancy in our portfolio. On January 1, 2020, we completed the integration of the accounting records of certain of our triple net leased third-party asset managed properties into our accounting system and paid out of our operating bank accounts. For periods prior to January 1, 2020, we recorded property operating expenses and offsetting lease revenues for these certain triple net leased properties on a net basis. Beginning January 1, 2020, we are recording the property operating expenses and offsetting lease revenues for these triple net leased properties on a gross basis, as we have amended our process whereby we are paying operating expenses on behalf of our tenants and receiving reimbursement, whereas, previously these tenants were paying these expenses directly with limited insight provided to us. See table below for a reconciliation of lease revenue for the nine months ended September 30, 2020, and the comparable 2019 period. Fixed rental payments consist of fixed rental charges that are contractually due us, and variable rental payments consist of operating expense recoveries that we collect to pay for property operating expenses incurred at certain properties. Lease revenues relating to the 2019 reporting period have not been amended. For the three months ended September 30, (Dollars in Thousands) Lease revenue reconciliation 2020 2019 $ Change % Change Fixed lease payments $ 29,116 $ 27,660 $ 1,456 5.3 % Variable lease payments 4,026 1,007 3,019 299.8 % $ 33,142 $ 28,667 $ 4,475 15.6 % For the nine months ended September 30, (Dollars in Thousands) Lease revenue reconciliation 2020 2019 $ Change % Change Fixed lease payments $ 88,286 $ 82,076 $ 6,210 7.6 % Variable lease payments 12,001 2,925 9,076 310.3 % $ 100,287 $ 85,001 $ 15,286 18.0 % Operating Expenses Depreciation and amortization increased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to depreciation on capital projects completed subsequent to the three and nine months ended September 30, 2019, coupled with depreciation on the 18 properties acquired during and subsequent to the three and nine months ended September 30, 2019, partially offset by decreased depreciation on the two properties sold subsequent to the three and nine months ended September 30, 2019. For the three months ended September 30, (Dollars in Thousands) Property Operating Expenses 2020 2019 $ Change % Change Same Store Properties $ 4,866 $ 2,774 $ 2,092 75.4 % Acquired & Disposed Properties 344 109 235 215.6 % Properties with Vacancy 1,380 319 1,061 332.6 % $ 6,590 $ 3,202 $ 3,388 105.8 % 40 Table of Contents For the nine months ended September 30, (Dollars in Thousands) Property Operating Expenses 2020 2019 $ Change % Change Same Store Properties $ 14,334 $ 8,106 $ 6,228 76.8 % Acquired & Disposed Properties 971 307 664 216.3 % Properties with Vacancy 3,793 917 2,876 313.6 % $ 19,098 $ 9,330 $ 9,768 104.7 % Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The increase in property operating expenses for same store properties for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, is a result of an increase in our property operating expenses at our triple net leased properties. The increase in property operating expenses for acquired and disposed of properties for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, is primarily a result of increased property operating expenses from 18 properties acquired during and subsequent to September 30, 2019, partially offset by a reduction of operating expenses from two properties sold subsequent to September 30, 2019. The increase in property operating expenses for properties with vacancy for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, is a result of increased vacancy in our portfolio. The base management fee paid to the Adviser increased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to an increase in total equity and gross tangible real estate over the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019. The calculation of the base management fee is described in detail above in “Advisory and Administration Agreements.” The incentive fee paid to the Adviser increased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to pre-incentive fee Core FFO increasing faster than the hurdle rate. The increase in FFO is a result of an increase in total operating revenues, partially offset by an increase in total operating expenses and interest expense. The calculation of the incentive fee is described in detail above in “Advisory and Administration Agreements.” The administration fee paid to the Administrator decreased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to our Administrator incurring fewer costs that are allocated to the Company. The calculation of the administration fee is described in detail above in “Advisory and Administration Agreements.” General and administrative expenses increased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, primarily as a result of an increase in legal and accounting fees. We recorded an impairment charge for our Champaign, Illinois and Rancho Cordova, California properties during the three months ended September 30, 2020, when our held and used impairment testing determined that the carrying value of these properties was unrecoverable. We recorded an impairment charge for our Champaign, Illinois, Rancho Cordova, California and Blaine, Minnesota properties during the nine months ended September 30, 2020, when our held and used impairment testing determined that the carrying value of these properties was unrecoverable. We did not record an impairment charge during the three and nine months ended September 30, 2019. Other Income and Expenses Interest expense decreased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019. This decrease was primarily a result of a decrease in interest rates on our LIBOR based variable rate debt, partially offset by increased interest expense due to higher mortgage borrowings and higher Credit Facility balances outstanding. Gain on sale of real estate, net, for the nine months ended September 30, 2020, is attributable to one non-core office asset located in Charlotte, North Carolina, and one non-core industrial asset located in Maple Heights, Ohio being sold during the period. Gain on sale of real estate, net, for the nine months ended September 30, 2019 is attributable to one non-core office asset located in Maitland, Florida being sold during the period. 41 Table of Contents 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 months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to the increase in lease revenues due to asset acquisition activity during and subsequent to September 30, 2019, coupled with a decrease in interest expense due to lower LIBOR rates on our variable rate debt, partially offset by an increase in property operating expenses on our triple net leased properties. Net loss attributable to common-stock holders and Non-controlling OP Unitholders increased for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, primarily due to impairment charges recognized during the nine months ended September 30, 2020, coupled with an increase in property operating expenses, partially offset by an increase in lease revenue due to asset acquisition activity during and subsequent to September 30, 2019. Liquidity and Capital Resources Overview Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Revolver and issuing additional equity securities. Our available liquidity as of September 30, 2020, was $38.2 million, consisting of approximately $10.4 million in cash and cash equivalents and available borrowing capacity of $27.8 million under our Credit Facility. Our available borrowing capacity under the Credit Facility increased to $30.0 million as of November 5, 2020. 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 nine months ended September 30, 2020, we raised net proceeds of $32.4 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 pay down outstanding debt and for other general corporate purposes. We raised net proceeds of $5.6 million from our Series E Preferred Stock pursuant to our Series E Preferred Stock Sales Agreement during the nine months ended September 30, 2020. We raised net proceeds of $1.0 million from sales of our Series F Preferred Stock during the nine months ended September 30, 2020. As of November 5, 2020, we had the ability to raise up to $396.8 million of additional equity capital through the sale and issuance of securities that are registered under the 2019 Universal Shelf, in one or more future public offerings. Of the $396.8 million of available capacity under our 2019 Universal Shelf, approximately $203.2 million is reserved for additional sales under our Common Stock ATM Program, and approximately $93.1 million is reserved for additional sales under our Series E Preferred Stock Sales Agreement as of November 5, 2020. We expect to continue to use our at-the-market programs as a source of liquidity for the remainder of 2020. As of November 5, 2020, we had the ability to raise up to $798.4 million of additional equity capital through the sale and issuance of securities that are registered under the 2020 Universal Shelf, in one or more future public offerings. Of the $798.4 million of available capacity under our 2020 Universal Shelf, approximately $634.9 million is reserved for the sale of our Series F Preferred Stock as of November 5, 2020. 42 Table of Contents Debt Capital As of September 30, 2020, we had 54 mortgage notes payable in the aggregate principal amount of $462.1 million, collateralized by a total of 69 properties with a remaining weighted average maturity of 4.6 years. The weighted-average interest rate on the mortgage notes payable as of September 30, 2020 was 4.28%. We continue to see banks and other 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 of September 30, 2020, we had mortgage debt in the aggregate principal amount of $6.0 million payable during the remainder of 2020 and $33.6 million payable during 2021. The 2020 principal amount payable includes both amortizing principal payments and one balloon principal payment due during the remaining three months of 2020. Subsequent to September 30, 2020, we repaid the balloon payment. We anticipate being able to refinance our mortgages that come due during 2021 with a combination of new debt and the issuance of additional equity securities. In addition, we have raised substantial equity under our at-the-market programs and plan to continue to use these programs. Operating Activities Net cash provided by operating activities during the nine months ended September 30, 2020, was $52.4 million, as compared to net cash provided by operating activities of $43.1 million for the nine months ended September 30, 2019. This change was primarily a result of an increase in operating revenues from our 18 property acquisitions completed during and subsequent to September 30, 2019, coupled with contractual lease revenue increases on the in-place portfolio, partially offset by an increase in general and administrative expenses, base management fees and incentive fees. The majority of cash from operating activities is generated from the lease revenues that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, Administration fees to our Administrator and other entity-level operating expenses. Investing Activities Net cash used in investing activities during the nine months ended September 30, 2020, was $73.0 million, which primarily consisted of six property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of two properties. Net cash used in investing activities during the nine months ended September 30, 2019, was $63.6 million, which primarily consisted of nine property acquisitions, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of one property. Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2020, was $24.4 million, which primarily consisted of the issuance of $39.6 million of common and preferred equity, borrowings from our Term Loan of $37.7 million, and the issuance of $35.9 million of new mortgage debt, partially offset by the repayment of $31.7 million of mortgage principal and distributions paid to common, senior common and preferred shareholders. Net cash provided by financing activities for the nine months ended September 30, 2019, was $20.4 million, which primarily consisted of $41.1 million in new mortgage borrowings coupled with the issuance of $41.2 million of common equity, partially offset by $48.1 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders. Credit Facility On July 2, 2019, we amended, extended and upsized our Credit Facility, expanding the Term Loan from $75.0 million to $160.0 million, inclusive of a delayed Term Loan draw component whereby we can incrementally borrow on the Term Loan up to the $160.0 million commitment, and increasing the Revolver from $85.0 million to $100.0 million. The Term Loan has a new five-year term, with a maturity date of July 2, 2024, and the Revolver has a new four-year term, with a maturity date of July 2, 2023. The interest rate for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. We used the net proceeds derived from the amended Credit Facility to repay all previously existing borrowings under the Revolver. We incurred fees of approximately $1.3 million in connection with the Credit Facility amendment. The bank syndicate is now comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank. 43 Table of Contents As of September 30, 2020, there was $203.8 million outstanding under our Credit Facility at a weighted average interest rate of approximately 1.76% and $13.7 million outstanding under letters of credit at a weighted average interest rate of 1.65%. As of November 5, 2020, the maximum additional amount we could draw under the Credit Facility was $30.0 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2020. Contractual Obligations The following table reflects our material contractual obligations as of September 30, 2020 (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) $ 665,910 $ 25,556 $ 235,325 $ 243,532 $ 161,497 Interest on Debt Obligations (2) 93,387 22,319 37,806 19,290 13,972 Operating Lease Obligations (3) 9,866 472 980 986 7,428 Purchase Obligations (4) 2,824 1,508 1,308 8 — $ 771,987 $ 49,855 $ 275,419 $ 263,816 $ 182,897 (1) Debt obligations represent borrowings under our Revolver, which represents $43.8 million of the debt obligation due in 2023, our Term Loan, which represents $160.0 million of the debt obligation due in 2024, and mortgage notes payable that were outstanding as of September 30, 2020. This figure does not include $0.2 million of premiums and discounts, net and $5.1 million of deferred financing costs, net, which are reflected in mortgage notes payable, net, borrowings under Revolver, 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 is variable; thus, the interest payment obligation calculated for purposes of this table was based upon rates and balances as of September 30, 2020. (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 seven of our properties. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of September 30, 2020. 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. 44 Table of Contents 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. 45 Table of Contents The following table provides a reconciliation of our FFO available to common stockholders for the three and nine months ended September 30, 2020 and 2019, 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: For the three months ended September 30, For the nine months ended September 30, (Dollars in Thousands, Except for Per Share Amounts) (Dollars in Thousands, Except for Per Share Amounts) 2020 2019 2020 2019 Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income $ 2,844 $ 2,191 $ 6,070 $ 9,068 Less: Distributions attributable to preferred and senior common stock (2,974) (2,838) (8,752) (8,512) Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (130) $ (647) $ (2,682) $ 556 Adjustments: Add: Real estate depreciation and amortization $ 13,798 $ 12,979 $ 42,076 $ 38,611 Add: Impairment charge 1,184 — 2,905 — Less: Gain on sale of real estate, net (1,196) — (1,184) (2,952) FFO available to common stockholders and Non-controlling OP Unitholders - basic $ 13,656 $ 12,332 $ 41,115 $ 36,215 Weighted average common shares outstanding - basic 34,075,147 31,032,802 33,884,007 30,338,690 Weighted average Non-controlling OP Units outstanding 503,033 742,937 502,435 742,937 Total common shares and Non-controlling OP Units 34,578,180 31,775,739 34,386,442 31,081,627 Basic FFO per weighted average share of common stock and Non-controlling OP Unit $ 0.39 $ 0.39 $ 1.20 $ 1.17 Calculation of diluted FFO per share of common stock and Non-controlling OP Unit Net income $ 2,844 $ 2,191 $ 6,070 $ 9,068 Less: Distributions attributable to preferred and senior common stock (2,974) (2,838) (8,752) (8,512) Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders $ (130) $ (647) $ (2,682) $ 556 Adjustments: Add: Real estate depreciation and amortization $ 13,798 $ 12,979 $ 42,076 $ 38,611 Add: Impairment charge 1,184 — 2,905 — Add: Income impact of assumed conversion of senior common stock 203 226 615 675 Less: Gain on sale of real estate, net (1,196) — (1,184) (2,952) FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions $ 13,859 $ 12,558 $ 41,730 $ 36,890 Weighted average common shares outstanding - basic 34,075,147 31,032,802 33,884,007 30,338,690 Weighted average Non-controlling OP Units outstanding 503,033 742,937 502,435 742,937 Effect of convertible senior common stock 641,430 709,906 641,430 709,906 Weighted average common shares and Non-controlling OP Units outstanding - diluted 35,219,610 32,485,645 35,027,872 31,791,533 Diluted FFO per weighted average share of common stock and Non-controlling OP Unit $ 0.39 $ 0.39 $ 1.19 $ 1.16 Distributions declared per share of common stock and Non-controlling OP Unit $ 0.37545 $ 0.37500 $ 1.12635 $ 1.12500 46 Table of Contents