What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-16 compared with 2020-02-12 · 269 added, 201 removed, 221 unchanged (68% of the section changed)

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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 receivable 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, many of which are corporations that do not have publicly-rated debt.

We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately seven to 15 years and built in rental rate increases Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property.

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.

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As of February 16, 2021:

we owned 122 properties totaling 14.6 million square feet of rentable space in 28 states;

• we owned 122 properties totaling 15.6 million square feet of rentable space, located in 28 states;

• our occupancy rate was 95.4%;

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Business Environment

vacancy rates have decreased for both office and industrial properties in most markets, as increased user demand has led to improved conditions.

Vacancy rates in many markets have been reduced to levels last seen at the peak before the most recent U.S.

recession and rental rates have increased in most primary and secondary markets.

Reports from national research firms reflect that the industrial supply and demand relationship still appears to be in equilibrium, but that office supply and demand in select markets may be moving towards a slight increase in vacancy.

Interest rates have been volatile and although interest rates are still low by historical standards, lenders have varied on their required spreads over the last several quarters;

however, they appear to have somewhat stabilized with recent Federal Reserve announcements.

Third quarter 2019 statistics reflect that single property listings and investment sales volume are lower as compared to the prior year’s same period.

Additionally, preliminary research data suggests that the fourth quarter 2019 investment volume may be less than that of the same quarter for 2018.

Completing the eleventh year of the current cycle, some national research firms are estimating that both pricing and investment sales volume may be peaking, with the possible exception of industrial properties.

From a macro-economic perspective, the strength of the global economy and U.S.

economy continue to be uncertain.

The long-term impact of tax reform in the U.S.

continues to be unknown at this time, although the lowering of the corporate tax rate is generally expected to be beneficial and the overall U.S.

economy appears to be healthy.

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 geo-political issues has increased domestic and global instability.

These developments could cause interest rates and borrowing costs to rise, which may adversely affect our ability to access both the equity and debt markets and could have an adverse effect on our tenants as well.

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 continued due to the continuing growth of e-commerce and appears to be partially counterbalancing the adverse effects of COVID-19 on the commercial real estate industry.

Industrial absorption increased by greater than 10% compared to 2019 according to research reports.

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 during 2021 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, including adequate production and distribution of vaccines, the extent and duration of social distancing and the adoption of shelter-in-place orders, or reversal of reopening orders, and the ongoing impact of COVID-19 on business and economic activity.

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 most 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 duration and long-term scope of the pandemic;

the adequate production and distribution of vaccinations;

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 February 16, 2021, we have col lected 97% of all outstanding February 2021 cash base rent obligations and approximately 98% of January 2021 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 in March 2021.

Two of these tenants have repaid their deferred rent balance in full as of December 31, 2020.

The other tenant was granted a second rent deferral in November 2020 in exchange for one year of additional lease term.

The deferred rent will be repaid beginning May 2021 and through the tenant’s remaining lease term.

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 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, and we amended our Credit Facility in 2019 to increase our borrowing capacity and extend its maturity date.

In addition, on February 11, 2021, we added a new $65.0 million term loan component, inclusive of a $15.0 million delayed funding component .

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.

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 any subsequent shift in policy, new regulations or 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 LIBOR rate, although LIBOR is currently anticipated to be phased out during late 2021.

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We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases.

Currently, we only have two partially vacant buildings and three fully vacant buildings, with one of these fully vacant buildings classified as held for sale as of December 31, 2019 .

We have eight leases expiring in 2020 , which account for 8.0% of lease revenue recognized during the year ended December 31, 2019 , 12 leases expiring in 2021 , which account for 7.9% of lease revenue recognized during the year ended December 31, 2019 , and eight leases expiring in 2022 , which account for 5.8% of lease revenue recognized during the year ended December 31, 2019 .

Our available vacant space at December 31, 2019 represents 3.0% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $1.1 million .

Currently, we only have two partially vacant buildings and four fully vacant buildings, with one of these fully vacant buildings classified as held for sale as of December 31, 2020.

Our available vacant space as of December 31, 2020 represents 4.7% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $4.2 million.

We continue to actively seek new tenants for these properties.

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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 CMBS market, to issue mortgages to finance our real estate activities.

In addition to obtaining funds through borrowing, we were active in the equity markets during 2019 by issuing shares of common stock under our ATM Programs, pursuant to our Common Stock Sales Agreement with the Common Stock Sales Agents, discussed in more detail below, and formerly with Cantor.

We also completed an underwritten public offering for our newly designated Series E Preferred stock and entered into an at-the-market program for the Series E Preferred Stock pursuant to our Series E Preferred Stock Sales Agreement with the Series E Preferred Stock Sales Agents.

In addition to obtaining funds through borrowing, we were active in the equity markets during 2020 by issuing shares of common stock and preferred stock under our ATM Programs, pursuant to our Common Stock Sales Agreement with the Common Stock Sales Agents, and the Series E Preferred Stock Sales Agreement with the Series E Preferred Stock Sales Agents, discussed in more detail below.

We also began the Offering our newly designated Series F Preferred Stock and issued shares during the 3rd and 4th quarters of 2020.

Recent Developments

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We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available.

During the year ended December 31, 2019, we sold one non-core property, located in Maitland, Florida, which is detailed in the table below (dollars in thousands):

Aggregate Square Footage Sold

Gain on Sale of Real Estate, net

During the year ended December 31, 2020, we sold six non-core properties, located in Charlotte, North Carolina;

Maple Heights, Ohio;

Champaign, Illinois;

and Austin, Texas, which are summarized in the table below (dollars in thousands):

Aggregate Square Footage Sold Sales Price Sales Costs Gain on Sale of Real Estate, net

551,743 $ 37,532 $ 1,698 $ 8,096

Acquisition Activity

During the year ended December 31, 2019 , we acquired 18 properties, which are summarized below (dollars in thousands):

Aggregate Square Footage

Weighted Average Lease Term

Aggregate Purchase Price

Acquisition Costs

Aggregate Annualized GAAP Rent

Aggregate Mortgage Debt Issued or Assumed

On January 8, 2020, we purchased a 64,800 square foot industrial property in Indianapolis, Indiana for $5.3 million.

This property is fully leased to three tenants with a weighted average lease term of 7.2 years.

On January 27, 2020, we purchased a 320,838 square foot, three building industrial portfolio with location in Houston, Texas;

Charlotte, North Carolina;

Charles, Missouri for $34.7 million.

This industrial portfolio is fully leased to one tenant on a 20 year lease term.

2019 Leasing Activities

During the year ended December 31, 2019 , we executed six lease extensions and/or modifications, which are summarized below (dollars in thousands):

Aggregate Square Footage

Weighted Average Remaining Lease Term

Aggregate Annualized GAAP Rent

Aggregate Tenant Improvement

Aggregate Leasing Commissions

Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease.

Our leases have terms ranging from 5.0 years to 11.5 years.

On January 9, 2020, a tenant in one of our Springfield, Missouri properties renewed their lease for an additional five years, with a new maturity date of May 31, 2026.

On January 23, 2020, the tenant in our Englewood, Colorado property renewed their lease for an additional five years, with a new maturity date of December 31, 2026

During the year ended December 31, 2019 , we had three lease contractions, which are aggregated below (dollars in thousands):

Aggregate Square Footage Reduced

Aggregate Square Footage Remaining

Aggregate Termination Fee

December 31, 2019

A tenant in one of our Columbus, Ohio properties exercised a lease termination option effective October 31, 2019.

In connection with this termination, we earned a termination fee of $0.1 million , which was recognized through lease revenue on the consolidated statements of operations and comprehensive income.

The tenant in our Fridley, Minnesota property executed a termination agreement to vacate the property on March 31, 2020.

In connection with the early termination, we will earn a termination fee of $0.2 million , which is recognized through lease revenue on the consolidated statements of operations and comprehensive income through the remaining lease term.

The tenant in one of our Mason, Ohio properties executed a lease contraction in conjunction with a lease renewal.

At the conclusion of their current lease term on June 30, 2020, they will continue to lease 39,417 square feet through June 30, 2030.

During the year ended December 31, 2020, we acquired nine properties, which are summarized 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

1,717,502 12.2 years $ 129,974 $ 814 $ 9,696 $ 52,578

On January 22, 2021, we purchased a 180,152 square foot industrial property in Findlay, Ohio for $11.1 million.

This property is fully leased to one tenant on a 14.2 year lease.

Leasing Activity

During the year ended December 31, 2020, we executed 20 lease extensions and/or modifications, 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

1,122,543 7.7 years (1) $ 11,266 $ 3,383 $ 1,354

(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 1.3 years to 12.0 years.

During the year ended December 31, 2020, we had two lease contractions, which are aggregated below (dollars in thousands):

Aggregate Square Footage Reduced Aggregate Termination Fee Aggregate Deferred Rent Write Off

63,664 $ 1,239 $ 239

Financing Activity

During the year ended December 31, 2019 , we partially repaid one mortgage collateralized by three properties, releasing one of the collateralized properties that we sold on January 31, 2019, and fully repaid four mortgages collateralized by eight properties, all of which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Repaid

Weighted Average Interest Rate on Fixed Rate Debt Repaid

Aggregate Variable Rate Debt Repaid

Weighted Average Interest Rate on Variable Rate Debt Repaid

During the year ended December 31, 2019 , we issued 11 mortgages, collateralized by 11 properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Issued

Weighted Average Interest Rate on Fixed Rate Debt

We issued $10.6 million of fixed rate debt in connection with one property acquired on December 27, 2018 , with a maturity date of February 8, 2029 .

The interest rate is fixed at 4.7% for the first seven years of the mortgage.

After the fixed interest rate period expires, we have the option to adjust the interest rate to a fixed interest rate equal to 1.8% , plus the three-year treasury rate per annum, or a variable interest rate equal to 1.8% , plus the 30 day LIBOR rate per annum.

On May 31, 2019 , we issued $21.6 million of floating rate debt swapped to fixed rate debt of 3.42% in connection with refinancing mortgage debt on one property with a new maturity date of June 1, 2024 .

We issued $8.9 million of fixed rate debt in connection with our June 18, 2019 property acquisition with a maturity date of June 18, 2024 and a rate of 4.35% .

We issued $4.8 million of fixed rate debt in connection with our December 16, 2019 property acquisition with a maturity date of December 10, 2026 and a rate of 3.97% .

We issued $4.2 million of fixed rate debt in connection with our December 17, 2019 property acquisition with a maturity date of December 17, 2026 and a rate of 3.97% .

We issued an aggregate of $19.5 million of fixed rate debt in connection with our six property portfolio acquisition December 17, 2019 , with a maturity date of January 1, 2027 and a rate of 3.75% .

On January 27, 2020, we issued an aggregate of $18.3 million of fixed rate debt in connection with the three property industrial portfolio acquired on this same date.

The maturity date is February 1, 2030 and the interest rate is 3.625%.

During the year ended December 31, 2019 , we extended the maturity dates of two mortgages, collateralized by four properties, which are summarized below (dollars in thousands):

Aggregate Variable Rate Debt Extended

Weighted Average Interest Rate on Variable Rate Debt Extended

Weighted Average Extension Term

On July 2, 2019, we amended, extended and upsized our Credit Facility, increasing 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, National Association (“Wells Fargo Bank”).

2019 Equity Activities

During the year ended December 31, 2020, we repaid seven mortgages, collateralized by eight properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Repaid Weighted Average Interest Rate on Fixed Rate Debt Repaid

$ 18,109 5.19 %

Aggregate Variable Rate Debt Repaid Weighted Average Interest Rate on Variable Rate Debt Repaid

$ 19,284 LIBOR + 2.20%

During the year ended December 31, 2020, we issued six mortgages, collateralized by six properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Issued Weighted Average Interest Rate on Fixed Rate Debt

$ 52,578 (1) 3.18 %

(1) We issued an aggregate of $18.3 million of fixed rate debt in connection with our three property portfolio acquisition on January 27, 2020, with a maturity date of February 1, 2030 and a rate of 3.625%.

We issued $17.5 million of floating rate debt swapped to fixed of 2.8% in connection with our March 9, 2020 property acquisition, with a maturity date of March 9, 2030.

We issued $10.3 million of fixed rate debt in connection with our December 18, 2020 property acquisition, with a maturity date of January 1, 2028 and a rate of 3.0%.

We issued $6.4 million of floating rate debt swapped to fixed of 3.25% in connection with our December 21, 2020 property acquisition, with a maturity date of December 23, 2030.

On January 22, 2021, we issued $5.5 million of floating rate debt swapped to a fixed rate of 3.24% in connection with the industrial property acquisition on the same date, with a maturity date of February 15, 2031.

Equity Activity

Common Stock ATM Program

On December 3, 2019, we entered into the Common Stock Sales Agreement, with the Common Stock Sales Agents, pursuant to which we may sell shares of our common stock in an aggregate offering price of up to $250.0 million.

Previously, we had a common stock ATM program with Cantor that was terminated upon entering into the Common Stock Sales Agreement.

Under these programs, during the year ended December 31, 2019 , we sold 3.0 million shares of common stock, raising $64.5 million in net proceeds.

During the year ended December 31, 2020, we sold 2.7 million shares of common stock, raising $52.8 million in net proceeds under our At-the-Market Equity Offering Sales Agreements with sales agents Robert W.

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 December 31, 2020, we had a remaining capacity to sell up to $183.9 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.

Series A and B Preferred Stock ATM Programs

Previously, under another open market sales agreement with Cantor (the “Series A and B Preferred ATM Program”), we could, from time to time, offer to sell (i) shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), and (ii) shares of our 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”), having an aggregate offering price of up to $40.0 million , through Cantor, acting as sales agent and/or principal.

We did not sell any shares of our Series A or Series B Preferred Stock during the year ended December 31, 2019 .

On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor, as the Series A Preferred and Series B Preferred were fully redeemed on this date.

Series A and B Preferred Stock Redemption

On October 28, 2019 , we voluntarily redeemed all 1,000,000 outstanding shares of our Series A Preferred Stock and all 1,264,000 outstanding shares of our Series B Preferred Stock at a redemption price of $25.1506944 per share and $25.1458333 per share, respectively, which represented the liquidation preference per share, plus accrued and unpaid dividends through October 28, 2019 for an aggregate redemption price of approximately $56.9 million .

In connection with this redemption, we recognized a $2.7 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred upon issuance of our Series A and B Preferred stock.

Mezzanine Equity

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All other change in control situations would require input from our Board of Directors.

In addition, our Series E Preferred Stock is redeemable at the option of the shareholder in the event a delisting event occurs.

In addition, our Series E Preferred Stock is redeemable at the option

of the shareholder in the event a delisting event occurs.

We will periodically evaluate the likelihood that a change of control or delisting event of greater than 50% will take place, and if we deem this probable, we would adjust the Series D Preferred Stock and Series E Preferred Stock presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment.

We currently believe the likelihood of a change of control of greater than 50% is remote.

Under a third open market sales agreement with Cantor (the “Series D Preferred ATM Program”), we could, from time to time, offer to sell shares of our Series D Preferred Stock, having an aggregate offering price of up to $50.0 million through Cantor, acting as sales agent and/or principal.

We did not sell any Series D Preferred stock during the year ended December 31, 2019 .

We have not allocated any funds on our Universal Shelf (defined below) towards the Series D Preferred ATM Program.

Series E Preferred Stock

On October 4, 2019 , we completed an underwritten public offering of 2,760,000 shares of our newly designated Series E Preferred Stock at a public offering price of $25.00 per share, raising $69.0 million in gross proceeds and approximately $66.6 million in net proceeds, after payment of underwriting discounts and commissions.

We used the net proceeds from this offering to redeem all outstanding shares of our Series A Preferred Stock and Series B Preferred Stock, and pay down our Credit Facility.

On December 3, 2019, we entered into the Series E Preferred Stock Sales Agreement with the Series E Preferred Stock Sales Agents, pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $100.0 million.

We did not sell any shares of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the year ended December 31, 2019 .

Amendments to Articles of Incorporation

On April 11, 2018 , we filed with the Maryland State Department of Assessments and Taxation an Articles Supplementary reclassifying 3,500,000 authorized but unissued shares of our convertible senior common stock (the “Senior Common Stock”), as authorized but unissued shares of our common stock.

As a result of the reclassification, there were 57,969 authorized but unissued shares of Senior Common Stock.

On April 11, 2018 , we also filed with the Maryland State Department of Assessments and Taxation an Articles of Amendment to increase the number of shares of capital stock we have authority to issue to 100,000,000 and authorized common stock to 87,700,000 shares.

On September 27, 2019 , the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary (i) setting forth the rights, preferences and terms of its newly designated Series E Preferred Stock and (ii) reclassifying and designating 4,000,000 shares of the Company’s authorized and unissued shares of common stock as shares of Series E Preferred Stock.

The reclassification decreased the number of shares classified as common stock from 87,700,000 shares immediately prior to the reclassification to 83,700,000 shares immediately after the reclassification.

On December 2, 2019, the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary reclassifying 2,600,000 authorized but unissued shares of our Series A Preferred Sock as 2,590,000 shares of our Common Stock and 10,000 shares of our Series E Preferred Stock, and reclassifying 2,750,000 authorized but unissued shares of our Series B Preferred Stock as 2,750,000 shares of our Series E Preferred Stock.

After giving effect to such reclassifications, we have authorized 86,290,000 shares of common stock, 6,000,000 shares of Series D Preferred Stock, 6,760,000 shares of Series E Preferred Stock and 950,000 shares of Senior Common Stock.

We do not have an active At-the-Market program for our Series D Preferred Stock as of the date of the filing of this Annual Report on Form 10-K.

Series E Preferred ATM Program

We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”) with sales agents Baird, Goldman Sachs, Stifel, Fifth Third, 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 (the “Series E Preferred ATM Program”).

We sold 0.3 million shares of our Series E Preferred Stock, raising $7.1 million in net proceeds pursuant to the Series E Preferred Stock Sales Agreement during the year ended December 31, 2020.

As of December 31, 2020, we had remaining capacity to sell up to $92.8 million of Series E Preferred Stock under the program.

Universal Shelf Registration Statement

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As of December 31, 2020, we had the ability to issue up to $377.2 million under the Universal Shelf.

On January 29, 2020, we filed a universal registration statement on Form S-3, File No.

On January 29, 2020, we filed an additional universal registration statement on Form S-3, File No.

333-236143 (the “2020 Universal Shelf”).

Upon its effectiveness, the 2020 Universal Shelf will allow us to issue up to $800.0 million of securities.

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 December 31, 2020, we had the ability to issue up to $797.1 million of securities under the 2020 Universal Shelf.

Preferred Series F Continuous Offering

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 0.1 million shares of our Series F Preferred Stock, raising $2.7 million in net proceeds during the year ended December 31, 2020.

As of December 31, 2020, we had remaining capacity to sell up to $633.6 million of Series F Preferred Stock.

Amendment to Operating Partnership Agreement

In connection with the authorization of the Series F Preferred Stock in February of 2020, the Operating 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 (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 “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 on Gross Tangible Real Estate (as defined in the Sixth Amended Advisory Agreement).

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 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 ended September 30, 2020.

Non-controlling Interests in Operating Partnership

As of December 31, 2019 and 2018 , we owned approximately 98.6% and 97.5% , respectively, of the outstanding OP Units.

As of each of December 31, 2020 and 2019, we owned approximately 98.6%, of the outstanding OP Units.

On October 30, 2018, we issued 742,937 OP units as partial consideration to acquire a 218,703 square foot, two property portfolio located in Detroit, Michigan for $21.7 million.

During November 2019, 263,300 OP units were redeemed for common stock.

On January 8, 2020, we issued 23,396 OP units as partial consideration to acquire a 64,800 square foot property located in Indianapolis, Indiana for $5.3 million.

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 December 31, 2019 and 2018 , there were 479,637 and 742,937 outstanding OP Units held by Non-controlling OP Unitholders,

respectively.

On January 8, 2020, we issued 23,396 additional OP Units in connection with the Indianapolis, Indiana acquisition that was completed on the same date.

As of December 31, 2020 and 2019, there were 503,033 and 479,637 outstanding OP Units held by Non-controlling OP Unitholders, respectively.

Our Adviser and Administrator

Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans.

Our Adviser is led by a management team with extensive experience purchasing real estate.

Our Adviser and Administrator are controlled by Mr.

David Gladstone, who is also our chairman and chief executive officer.

Gladstone, who is also our chairman and chief executive officer.

Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator.

Terry Lee Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator.

Robert Cutlip, our president, is also an executive managing director of our Adviser.

Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator.

Cutlip, our president, is also an executive managing director of our Adviser.

The 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.

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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 and Gladstone Investment.

Sodo, our chief financial officer, Jay Beckhorn, our treasurer, and Mr.

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 and Gladstone Investment.

In addition, with the exception of Mr.

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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 and Administration Agreements, respectively.

This summary is provided to illustrate the material functions which our Adviser and Administrator perform for us pursuant to the terms of the Advisory Agreement and Administration Agreement, respectively.

Advisory Agreement

Under the terms of the Advisory Agreement we are responsible for all expenses incurred for our direct benefit.

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.

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Base Management Fee

On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement with the Adviser, effective as of October 1, 2018 to clarify that the agreement’s definition of Total Equity includes outstanding OP Units issued to Non-controlling OP Unitholders.

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 2019 meeting, our Board of Directors reviewed and renewed the Advisory Agreement for an additional year, through August 31, 2020.

Under the Advisory Agreement, the calculation of the annual base management fee equals 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), 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 is calculated and accrued quarterly as 0.375% per quarter of such adjusted total stockholders’ equity figure.

Prior to entering into the Sixth Amended Advisory Agreement in July of 2020, on January 8, 2019, we entered into a Fifth Amended Advisory Agreement, effective as of October 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.

On July 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 ended September 30, 2020.

Incentive Fee

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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 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.

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

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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 adopted ASU 2017-01 and allocate the fair values in accordance with ASC 360, Property Plant and Equipment.

We allocate the fair values in accordance with ASC 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 conditions and costs to execute similar leases.

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 market conditions.

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.

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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 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 applied against our expected hold period.

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.

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, 2019 , for any impairment indicators and performed an impairment analysis on those select properties that had an indication of impairment.

We incurred $1.8 million of impairment expense during the year ended December 31, 2019 when we impaired a property we classified as held for sale to be equal to fair market value.

Using the methodology discussed above, we evaluated our entire portfolio, as of December 31, 2020, 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.

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For the year ended December 31,

2020 2019 $ Change % Change

Operating revenues

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Gain on sale of real estate, net 8,096 2,952 5,144 174.3 %

Other income 395 712 (317) (44.5) %

Total other expense, net (18,312) (24,615) 6,303 (25.6) %

Distributions attributable to Series A, B, D, and E preferred stock

Net income 14,985 9,541 5,444 57.1 %

Distributions attributable to Series A, B, D, E, and F preferred stock (10,973) (10,822) (151) 1.4 %

Series A and B preferred stock offering costs write off — (2,674) 2,674 (100.0) %

Distributions attributable to senior common stock (816) (892) 76 (8.5) %

Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders

Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders per weighted average share of total stock - basic & diluted

Net income (loss) available (attributable) available to common stockholders and Non-controlling OP Unitholders $ 3,196 $ (4,847) $ 8,043 (165.9) %

Net income (loss) available (attributable) available to common stockholders and Non-controlling OP Unitholders per weighted average share of total stock - basic & diluted $ 0.09 $ (0.16) $ 0.25 (156.3) %

FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 54,145 $ 46,053 $ 8,092 17.6 %

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FFO available to common stockholders and Non-controlling OP Unitholders - diluted, as adjusted for comparability (2) $ 54,961 $ 49,619 $ 5,342 10.8 %

(Loss) gain per weighted average share of common stock and Non-controlling OP Unit - basic & diluted

FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1) $ 1.57 $ 1.47 $ 0.10 6.8 %

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FFO per weighted average share of common stock and Non-controlling OP Unit - diluted, as adjusted for comparability (2) $ 1.56 $ 1.55 $ 0.01 0.6 %

(1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO.

(2) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO as adjusted for comparability.

Same Store Analysis

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(Dollars in Thousands)

Lease Revenues

Lease Revenues 2020 2019 $ Change % Change

Same Store Properties $ 102,154 $ 92,700 $ 9,454 10.2 %

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Properties with Vacancy 11,320 13,910 (2,590) (18.6) %

$ 133,152 $ 114,387 $ 18,765 16.4 %

Lease revenues consist of rental income and operating expense recoveries earned from our tenants.

Lease revenues from same store properties increased for the year ended December 31, 2019 , primarily due to increased operating expense recoveries from leases with base year expense stops at certain of our properties that were running above their base year, coupled with increased operating expense recoveries from amortizing capital improvements paid for by our tenants at certain properties.

Lease revenues increased for acquired and disposed of properties for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , because we acquired 18 properties during the year ended December 31, 2019 , and we included a full year of lease revenues recorded in 2019 for five properties acquired during the year ended December 31, 2018 , offset by a decrease in lease revenues from the one property we sold during 2019 .

Lease revenues increased for properties with vacancy, as we were able to successfully lease previously vacant space in these properties and collect lease termination fees at certain of these properties.

Lease revenues from same store properties increased for the year ended December 31, 2020, primarily due to increased 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 year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of our acquisition of nine properties during the year ended December 31, 2020, and the inclusion of a full year of lease revenues recorded in 2020 for 18 properties acquired during the year ended December 31, 2019, partially offset by a decrease in lease revenues from the six properties that we sold during the year ended December 31, 2020.

Lease revenues decreased for properties with vacancy for the year ended December 31, 2020, as our occupancy percentage has decreased from December 31, 2019, due to 2020 lease expirations for certain properties that have not yet been re-leased.

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 property operating expenses 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 now record 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 the table below for a reconciliation of lease revenue for the year ended December 31, 2020, and the comparable 2019 period.

Fixed rental payments consist of fixed rental charges that are contractually due to 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 related to the December 31, 2019 reporting period have not been amended.

For the twelve months ended December 31,

(Dollars in Thousands)

Lease revenue reconciliation 2020 2019 $ Change % Change

Fixed lease payments $ 117,248 $ 110,273 $ 6,975 6.3 %

Variable lease payments 15,904 4,114 11,790 286.6 %

$ 133,152 $ 114,387 $ 18,765 16.4 %

Operating Expenses

Depreciation and amortization increased for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , primarily due to recognizing a full year of depreciation for the five properties acquired during the year ended December 31, 2018 , as well as increased depreciation expense from the 18 properties acquired during the year ended December 31, 2019 , partially offset by a decrease in depreciation expense for the one property sold during the year ended December 31, 2019 .

Depreciation and amortization increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily due to recognizing a full year of depreciation for the 18 properties acquired during the year ended December 31, 2019, as well as increased depreciation expense from the nine properties acquired during the year ended December 31, 2020, partially offset by a decrease in depreciation expense for the six properties sold during the year ended December 31, 2020.

For the year ended December 31,

(Dollars in Thousands)

Property Operating Expenses

Property Operating Expenses 2020 2019 $ Change % Change

Same Store Properties $ 18,973 $ 10,682 $ 8,291 77.6 %

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Properties with Vacancy 5,552 1,237 4,315 348.8 %

Property operating expenses consist of franchise taxes, 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 year ended December 31, 2019 , as compared to the year ended December 31, 2018 , is primarily a result of an increase in our property operating expenses at our base year expense stop leased properties.

The increase in property operating expenses on acquired and disposed of properties for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , is a result of property operating expenses on the 18 properties we acquired during the year ended December 31, 2019 , coupled with a full year of property operating expenses for the five properties acquired during the year ended December 31, 2018 , partially offset by a decrease in property operating expenses for the one property sold during the year ended December 31, 2019 .

The base management fee paid to the Adviser increased for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , due to an increase in total equity, the main component of the base management fee calculation.

$ 26,004 $ 12,592 $ 13,412 106.5 %

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.

The increase in property operating expenses for same store properties for the year ended December 31, 2020, as compared to the year ended December 31, 2019, is primarily a result of an increase in our property operating expenses at our triple net leased properties.

The increase in property operating expenses on acquired and disposed of properties for the year ended December 31, 2020, as compared to the year ended December 31, 2019, is a result of property operating expenses on the nine properties we acquired during the year ended December 31, 2020, coupled with a full year of property operating expenses for the 18 properties acquired during the year ended December 31, 2019, partially offset by a decrease in property operating expenses for the six properties sold during the year ended December 31, 2020.

The increase in property operating expenses for properties with vacancy for the year ended December 31, 2020, as compared to the year ended December 31, 2019, is due to increased vacancy in our portfolio due to 2020 lease expirations for certain properties that have not been re-leased.

The base management fee paid to the Adviser increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, due to an increase in total equity and gross tangible real estate, the main components of the base management fee calculation under the Amended Advisory Agreement and the prior version thereof, respectively.

The calculation of the base management fee is described in detail above within “Advisory and Administration Agreements.”

The incentive fee paid to the Adviser increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, because of an increase in pre-incentive fee FFO.

The increase in pre-incentive fee FFO was primarily due to an increase in lease revenues from the 18 properties acquired during the year ended December 31, 2019 , coupled with a full year of lease revenues from the five properties acquired during the year ended December 31, 2018 , partially offset by an increase in property operating expenses resulting from our lease portfolio containing additional base year leases.

The increase in pre-incentive fee FFO was primarily due to an increase in lease revenues from the nine properties acquired during the year ended December 31, 2020, coupled with a full year of lease revenues from the 18 properties acquired during the year ended December 31, 2019, partially offset by an increase in property operating expenses due to increased portfolio vacancy.

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 ended December 31, 2019 , as compared to the year ended December 31, 2018 .

The increase is a result of the Company using a greater share of the Administrator’s resources for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , coupled with an overall increase in the cost of such services.

The administration fee paid to the Administrator decreased for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease is a result of our Administrator incurring fewer costs that are allocated to the Company.

The calculation of the administration fee is described in detail above within “ Advisory and Administration Agreements.”

General and administrative expenses increased for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , primarily as a result of an increase in legal, accounting and due diligence expenses.

The impairment charge during the year ended December 31, 2019 resulted from an impairment recorded on our Charlotte, North Carolina property as we determined a portion of the carrying value of this property was unrecoverable through our held for sale analysis of this property where we impaired this property to fair market value.

We did not recognize an impairment charge during the year ended December 31, 2018 .

General and administrative expenses increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of an increase in legal and accounting expenses, slightly offset by a decrease in due diligence expenses.

The impairment charge during the year ended December 31, 2020 resulted from impairment charges recorded on our Blaine, Minnesota, Champaign, Illinois and Rancho Cordova, California properties.

The impairment charge during the year ended December 31, 2019 resulted from an impairment charge on our Charlotte, North Carolina property.

This property was sold during the year ended December 31, 2020.

Other Income and Expenses

Interest expense increased for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 .

This increase is primarily a result of an increase in borrowings on our Credit Facility coupled with increased mortgage borrowings.

The gain on sale of real estate, net, during the year ended December 31, 2019 is a result of a gain on sale from one property.

The gain on sale of real estate, net, during the year ended December 31, 2018 was a result of the sale of three of our properties.

Other income increased during the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , from settlement income earned from certain tenants vacating our properties.

Net (Loss) Income (Attributable) Available to Common Stockholders and Non-controlling OP Unitholders

Net (loss) income (attributable) available to common stockholders and Non-controlling OP Unitholders increased for the year ended December 31, 2019 , as compared to the year ended December 31, 2018 , primarily because of an increase in operating expenses due to increases in depreciation and amortization expense and an impairment charge on one property coupled with an increase in interest expense due to higher average Credit Facility balances and a write off of our Series A and Series B Preferred Stock offering costs, due to our voluntary redemption of these shares.

This is partially offset by an increase in lease revenues due to our acquisition of 18 properties during the year ended December 31, 2019 .

A discussion of the results of operations for the year ended December 31, 2017 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018 , filed with the SEC on February 13, 2019, which is available free of charge on the SECs website at www.sec.gov and on the investor relations section of our website at www.GladstoneCommercial.com

Interest expense decreased for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

This decrease is primarily a result of a decrease in one month LIBOR, which is what our variable rate debt is based upon.

As a result of the COVID-19 pandemic, central banks across the world loosened monetary policy, including by lowering interest rates, and one month LIBOR decreased from 1.76% at December 31, 2019 to 0.14% at December 31, 2020.

The gain on sale of real estate, net, during the year ended December 31, 2020 is a result of a gain on sale from six property sales.

The gain on sale of real estate, net, during the year ended December 31, 2019 was a result of the sale of one of our properties.

Other income decreased during the year ended December 31, 2020, as compared to the year ended December 31, 2019, from decreased settlement income earned from certain tenants vacating our properties.

Net Income (Loss) Available (Attributable) to Common Stockholders and Non-controlling OP Unitholders

Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily because of gains on sale, net recognized on six property sales, an increase in lease revenue due to nine property acquisitions during 2020, and a decrease in interest expense due to lower interest rates on our LIBOR based debt due to the COVID-19 pandemic.

This is partially offset by

an increase in property operating expenses, impairment charges on three of our properties and increased base management and incentive fees due to portfolio growth and FFO growth.

A discussion of the results of operations for the year ended December 31, 2018 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 12, 2020, which is available free of charge on the SECs website at www.sec.gov and on the investors section of our website at www.GladstoneCommercial.com

Liquidity and Capital Resources

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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, make mortgage loans, or pay down outstanding borrowings under our Revolver.

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.

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The following table summarizes net proceeds raised from our various equity sales during the year ended December 31, 2020 (dollars in thousands, except for share price):

Number of Shares Sold

Weighted Average Share Price

Net Proceeds Number of Shares Sold Weighted Average Share Price

Common Stock ATM Program $ 52,835 2,691,971 $ 19.89

Series E Preferred Stock Public Offering

Series E Preferred Stock ATM Program 7,132 301,448 23.85

Series F Preferred Stock Continuous Public Offering 2,654 116,674 24.75

$ 62,621 3,110,093

As of February 16, 2021, we had the ability to raise up to $370.4 million of additional equity capital through the sale and issuance of securities that are registered under our Universal Shelf, in one or more future public offerings.

Of the $409.7 million capacity under our Universal Shelf, approximately $209.2 million is reserved for additional sales under our Common ATM Program, and approximately $100.0 million is reserved for additional sales under our Series E Preferred ATM Program as of February 12, 2020 .

We have the ability to raise an additional $800.0 million of equity capital under the 2020 Universal Shelf filed on January 29, 2020.

We expect to continue to use our ATM Programs as a source of liquidity during 2020 .

Of the $370.4 million capacity under our Universal Shelf, approximately $177.1 million is reserved for additional sales under our Common ATM Program, and approximately $92.8 million is reserved for additional sales under our Series E Preferred Stock Sales Agreement as of February 16, 2021.

As of February 16, 2021, we had the ability to raise up to $797.1 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 $797.1 million of available capacity under our 2020 Universal Shelf, approximately $633.6 million is reserved for the sale of our Series F Preferred Stock as of February 16, 2021.

As of December 31, 2020, we had 53 mortgage notes payable in the aggregate principal amount of $459.8 million, collateralized by a total of 68 properties with a remaining weighted average maturity of 4.6 years.

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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.

Consequently, we remain focused on obtaining mortgages through regional banks, non-bank lenders and the CMBS market.

As of December 31, 2020, we had mortgage debt in the aggregate principal amount of $23.1 million payable during 2021 and $105.8 million payable during 2022.

The 2020 principal amounts payable include both amortizing principal payments and four balloon principal payments.

The 2021 principal amounts payable include both amortizing principal payments and two balloon principal payments.

We anticipate being able to refinance our mortgages that come due during 2021 and 2022 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities.

We have successfully repaid $45.0 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 July 2019 Credit Facility amendment, which resulted in us expanding our Term Loan from $75.0 million to $160.0 million, inclusive of a delayed draw component whereby we can incrementally borrow on the Term Loan up to the $160.0 million commitment and increasing our Revolver from $85.0 million to $100.0 million.

We have successfully repaid $37.4 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 July 2019 Credit Facility amendment, which resulted in us expanding our Term Loan from $75.0 million to $160.0 million, and increasing our Revolver from $85.0 million to $100.0 million.

In addition, on February 11, 2021, we added a new $65.0 million term loan component, inclusive of a $15.0 million delayed funding component.

Operating Activities

Net cash provided by operating activities during the year ended December 31, 2020, was $65.5 million, as compared to net cash provided by operating activities of $60.2 million for the year ended December 31, 2019.

This increase was primarily a result of an increase in operating revenues received from the properties acquired during the past 12 months, partially offset by an increase in interest expense due to higher borrowings on our Credit Facility, higher mortgage borrowings, and increased property operating expenses resulting from base year leases added to our lease portfolio.

This increase was primarily a result of an increase in operating revenues received from the properties acquired during the past 12 months, coupled with a decrease in interest expense due to one month LIBOR decreasing as a result of the COVID-19 pandemic, partially offset by an increase in property operating expenses, due to increased portfolio vacancy.

The majority of cash from operating activities is generated from the rental payments and operating expense recoveries that we receive from our tenants.

The increase in operating expense recoveries is a result of buying properties with base year expense stops, whereby the operating expenses are offset by a like amount of expense recovery income that is included in the first year gross rental income.

We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, administration fees to our Administrator and other entity-level operating expenses.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2019 , was $132.0 million , which primarily consisted of the acquisition of 18 properties and tenant 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 ended December 31, 2018 , was $34.4 million , which primarily consisted of the acquisition of five properties, partially offset by proceeds from sale of real estate.

Net cash used in investing activities during the year ended December 31, 2020, was $100.3 million, which primarily consisted of the acquisition of nine properties and tenant improvements performed at certain of our properties, coupled with the capital improvements performed at certain of our properties, partially offset by proceeds from the sale of real estate.

Net cash used in investing activities during the year ended December 31, 2019, was $132.0 million, which primarily consisted of the acquisition of 18 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 ended December 31, 2019 , was $74.2 million , which primarily consisted of proceeds from our common stock and Series E Preferred Stock offerings, mortgage borrowings on new acquisitions and borrowings on our Credit Facility, partially offset by distributions paid to our stockholders and Non-controlling OP Unitholders.

Net cash used in financing activities for the year ended December 31, 2018 , was $21.2 million , which primarily consisted of repayments of outstanding mortgage principal coupled with distributions paid to our stockholders and Non-controlling OP Unitholders, partially offset by borrowings on our Credit Facility.

Net cash provided by financing activities during the year ended December 31, 2020, was $39.4 million, which primarily consisted of proceeds from our common and preferred equity offerings, mortgage borrowings on new acquisitions and borrowings from our Term Loan, partially offset by distributions paid to our stockholders and Non-controlling OP Unitholders.

Net cash provided by financing activities for the year ended December 31, 2019, was $74.2 million, which primarily consisted of proceeds from our common stock and Series E Preferred Stock offerings, mortgage borrowings on new acquisitions and borrowings on our Credit Facility, partially offset by distributions paid to our stockholders and Non-controlling OP Unitholders.

Credit Facility

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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.

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 of KeyBank, Fifth Third Bank, U.S.

Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association.

On February 11, 2021, we added a new $65 million term loan component, inclusive of a $15 million delayed funding component.

The New Term Loan has a maturity date of 60 months from the closing of the amended Credit Facility and a London Inter-bank Offered Rate floor of 25 basis points.

As of December 31, 2020, there was $213.9 million outstanding under our Credit Facility at a weighted average interest rate of approximately 1.76% and $16.4 million outstanding under letters of credit at a weighted average interest rate of 1.65%.

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Payments Due by Period

Contractual Obligations

Less than 1 Year

More than 5 Years

Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

Debt Obligations (1) $ 673,738 $ 23,056 $ 232,151 $ 247,187 $ 171,344

2 unchanged sentences

Purchase Obligations (4) 2,818 2,810 — 8 —

$ 777,108 $ 48,115 $ 269,681 $ 266,849 $ 192,463

(1) Debt obligations represent borrowings under our Revolver, which represents $53.9 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 December 31, 2020.

4 unchanged sentences

(3) Operating lease obligations represent the ground lease payments due on four of our properties.

Purchase obligations consist of tenant and capital improvements at 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 December 31, 2020.

Funds from Operations

The 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 the Operating Partnership (“Non-controlling OP Unitholders”) is FFO adjusted to subtract preferred share and Senior Common Stock share distributions.

We believe that net loss attributable to common stockholders is the most directly comparable GAAP measure to FFO available to the aggregate of our common stockholders and Non-controlling OP Unitholders.

Basic funds from operations per share (“Basic FFO per share”), and diluted funds from operations per share (“Diluted FFO per share”), is FFO available to common stockholders and Non-controlling OP Unitholders divided by the number of weighted average shares of the aggregate of shares of common stock and OP Units held by Non-controlling OP Unitholders outstanding and FFO available to common stockholders and Non-controlling OP Unitholders divided by the number of weighted average shares of the aggregate of shares of common stock and OP Units held by Non-controlling OP Units outstanding on a diluted basis, respectively, during a period.

We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that Diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share.

We also present FFO available to our common stockholders and Non-controlling OP Unitholders as adjusted for comparability as an additional supplemental measure, as we believe it is more reflective of our core operating performance, and provides investors and analysts an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

FFO as adjusted for comparability is generally calculated as FFO available to common stockholders and Non-controlling OP Unitholders, excluding certain non-recurring and non-cash income and expense adjustments, which management believes are not reflective of the results within our operating real estate portfolio.

The following table provides a reconciliation of our FFO and FFO as adjusted for comparability for the years ended December 31, 2020 and 2019 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:

For the twelve months ended December 31,

(Dollars in Thousands, Except for Per Share Amounts)

Calculation of basic FFO per share of common stock and Non-controlling OP Unit

Net income $ 14,985 $ 9,541

Distributions attributable to preferred and senior common stock (11,789) (14,388)

Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders $ 3,196 $ (4,847)

Real estate depreciation and amortization 55,424 52,039

Impairment charge 3,621 1,813

Gain on sale of real estate, net (8,096) (2,952)

FFO available to common stockholders and Non-controlling OP Unitholders - basic $ 54,145 $ 46,053

Weighted average common shares outstanding - basic 34,040,085 30,695,902

Weighted average Non-controlling OP Units outstanding 502,586 700,924

Total common shares and Non-controlling OP Units 34,542,671 31,396,826

Basic FFO per weighted average share of common stock and Non-controlling OP Unit $ 1.57 $ 1.47

Calculation of diluted FFO per share of common stock and Non-controlling OP Unit

Net income $ 14,985 $ 9,541

Distributions attributable to preferred and senior common stock (11,789) (14,388)

Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders $ 3,196 $ (4,847)

Real estate depreciation and amortization 55,424 52,039

Impairment charge 3,621 1,813

Income impact of assumed conversion of senior common stock 816 892

Gain on sale of real estate, net (8,096) (2,952)

FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions $ 54,961 $ 46,945

Weighted average common shares outstanding - basic 34,040,085 30,695,902

Weighted average Non-controlling OP Units outstanding 502,586 700,924

Effect of convertible senior common stock 628,263 674,611

Weighted average common shares and Non-controlling OP Units outstanding - diluted 35,170,934 32,071,437

Diluted FFO per weighted average share of common stock and Non-controlling OP Unit $ 1.56 $ 1.46

Calculation of diluted FFO per share of common stock and Non-controlling OP Unit, as adjusted for comparability

FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions $ 54,961 $ 46,945

Series A and B preferred stock offering costs write off — 2,674

FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions, as adjusted for comparability $ 54,961 $ 49,619

Weighted average common shares and Non-controlling OP Units outstanding - diluted 35,170,934 32,071,437

Diluted FFO per weighted average share of common stock and Non-controlling OP Unit, as adjusted for comparability $ 1.56 $ 1.55

Distributions declared per share of common stock and Non-controlling OP Unit $ 1.5018 $ 1.5000

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis