Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this Form 10-K.
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General
We are an externally-advised REIT that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning, and managing primarily office and industrial properties. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies, many of which are corporations that do not have publicly-rated debt. We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately seven to 15 years and built-in rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property.
We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment.
All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease.
As of February 16, 2021:
• we owned 122 properties totaling 15.6 million square feet of rentable space, located in 28 states;
• our occupancy rate was 95.4%;
• the weighted average remaining term of our mortgage debt was 4.5 years and the weighted average interest rate was 4.22%; and
• the average remaining lease term of the portfolio was 7.1 years;
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 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;
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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. LIBOR is expected to transition to a new standard rate, SOFR, which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition, as 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 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.
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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.
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, and borrowings under our 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 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 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
Sale Activity
During the year ended December 31, 2020, we continued to execute our capital recycling program, whereby we sell non-core properties and redeploy proceeds to fund property acquisitions in our target secondary growth markets, as well as repay outstanding debt. We will continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the year 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, 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.
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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, 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
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. 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 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.
Mezzanine Equity
Both our Series D Preferred Stock, and Series E Preferred Stock are classified as mezzanine equity in our consolidated balance sheet because both are redeemable at the option of the shareholder upon a change of control of greater than 50% in accordance with ASC 480-10-S99 “Distinguishing Liabilities from Equity,” which requires mezzanine equity classification for preferred stock issuances with redemption features which are outside of the control of the issuer. A change in control of our company, outside of our control, is only possible if a tender offer is accepted by over 90% of our shareholders. 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
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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.
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
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 “Universal Shelf”). The Universal Shelf became effective on February 13, 2019 and replaced our prior universal shelf registration statement. The Universal Shelf allows us to issue up to $500.0 million of securities. 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 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 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
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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 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, 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. Our Adviser and Administrator are controlled by Mr. Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator. Mr. Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator. Mr. Cutlip, 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.
Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital and Gladstone Investment, both publicly-traded business development companies, as well as Gladstone Land, a publicly-traded REIT that primarily invests in farmland. With the exception of Mr. 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. 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. Mr. Cutlip and Mr. Sodo generally spend all of their time focused on Gladstone Commercial, and do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private.
Advisory and Administration Agreements
Many of the services performed by our Adviser and Administrator in managing our day-to-day activities are summarized below. This summary is provided to illustrate the material functions which our Adviser and Administrator perform for us pursuant to the terms of the Advisory Agreement and Administration Agreement, respectively.
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Advisory Agreement
Under the terms of the Amended Advisory Agreement, we continue to be responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors’ and officers’ insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers).
Base Management Fee
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
Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the new hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the new hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.
Capital Gain Fee
Under the Advisory Agreement, we will pay to the Adviser a capital gains-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the all-in acquisition cost of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the years ended December 31, 2020, 2019, and 2018.
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Termination Fee
The Advisory Agreement includes a termination fee whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the Advisory Agreement after the Company has defaulted and applicable cure periods have expired. The Advisory Agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the Advisory Agreement to include if the Adviser breaches any material provisions of the agreement, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.
Administration Agreement
Under the terms of the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. We believe that the methodology of allocating the Administrator’s total expenses by approximate percentage of time services were performed among all companies serviced by our Administrator more closely approximates fees paid to actual services performed.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP, requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, as well as a summary of recently issued accounting pronouncements and their expected impact to our current and future financial statements. There were no material changes to our critical accounting policies during the year ended December 31, 2020.
Allocation of Purchase Price
When we acquire real estate with an existing lease, we allocate the purchase price to (i) the acquired tangible assets and liabilities, consisting of land, building, tenant improvements and long-term debt and (ii) the identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, in-place leases, unamortized lease origination costs, tenant relationships and capital lease obligations. We allocate the fair values in accordance with 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 rental rates and costs to execute similar leases. Our Adviser also considers information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the hypothetical expected lease-up periods, which primarily range from nine to 18 months, depending on specific local cap rates and discount rates. Our Adviser also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. Our Adviser also considers the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and management’s expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. A change in any of the assumptions above, which are very subjective, could have a material impact on our results of operations.
The allocation of the purchase price directly affects the following in our consolidated financial statements:
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• the amount of purchase price allocated to the various tangible and intangible assets and liabilities on our balance sheet;
• the amounts allocated to the value of above-market and below-market lease values are amortized to rental income over the remaining non-cancelable terms of the respective leases. The amounts allocated to all other tangible and intangible assets are amortized to depreciation or amortization expense. Thus, depending on the amounts allocated between land and other depreciable assets, changes in the purchase price allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating performance; and
• the period of time over which tangible and intangible assets are depreciated varies greatly, and thus, changes in the amounts allocated to these assets will have a direct impact on our results of operations. Intangible assets are generally amortized over the respective life of the leases, which normally range from 10 to 15 years. Also, we depreciate our buildings over up to 39 years, but do not depreciate our land. These differences in timing could have a material impact on our results of operations.
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. In determining if impairment exists, our Adviser considers such factors as our tenants’ payment histories, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industries in which our tenants operate, whether the fair value of our real estate has decreased and whether our hold period has shortened. If any of the factors above indicate the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the carrying amount of such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate cap rates and market rental rates using information that we obtain from market comparability studies and other comparable sources, and apply the undiscounted cash flows against our expected holding period. If impairment were indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows using market derived cap rates, discount rates and market rental rates applied against our expected hold period. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss that we would recognize.
Using the methodology discussed above, we evaluated our entire portfolio, as 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.
Results of Operations
The weighted average yield on our total portfolio, which was 8.1% and 8.5% at December 31, 2020 and 2019, respectively, is calculated by taking the annualized straight-line rents, reflected as lease revenue on our consolidated statements of operations, of each acquisition as a percentage of the acquisition cost. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties or other types of existing indebtedness.
A comparison of our operating results for the year ended December 31, 2020 and 2019 is below (dollars in thousands, except per share amounts):
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For the year ended December 31,
2020 2019 $ Change % Change
Operating revenues
Lease revenue $ 133,152 $ 114,387 $ 18,765 16.4 %
Total operating revenues 133,152 114,387 18,765 16.4 %
Operating expenses
Depreciation and amortization 55,424 52,039 3,385 6.5 %
Property operating expenses 26,004 12,592 13,412 106.5 %
Base management fee 5,648 5,174 474 9.2 %
Incentive fee 4,301 3,688 613 16.6 %
Administration fee 1,598 1,690 (92) (5.4) %
General and administrative 3,259 3,235 24 0.7 %
Impairment charge 3,621 1,813 1,808 99.7 %
Total operating expenses 99,855 80,231 19,624 24.5 %
Other (expense) income
Interest expense (26,803) (28,279) 1,476 (5.2) %
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) %
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 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 %
FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 54,961 $ 46,945 $ 8,016 17.1 %
FFO available to common stockholders and Non-controlling OP Unitholders - diluted, as adjusted for comparability (2) $ 54,961 $ 49,619 $ 5,342 10.8 %
FFO per weighted average share of common stock and Non-controlling OP Unit - basic (1) $ 1.57 $ 1.47 $ 0.10 6.8 %
FFO per weighted average share of common stock and Non-controlling OP Unit - diluted (1) $ 1.56 $ 1.46
$ 0.10 6.8 %
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
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. Acquired and disposed properties are properties which were either 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% vacancy, based on square footage, at any point subsequent to January 1, 2019.
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Operating Revenues
For the year ended December 31,
(Dollars in Thousands)
Lease Revenues 2020 2019 $ Change % Change
Same Store Properties $ 102,154 $ 92,700 $ 9,454 10.2 %
Acquired & Disposed Properties 19,678 7,777 11,901 153.0 %
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, 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, 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 2020 2019 $ Change % Change
Same Store Properties $ 18,973 $ 10,682 $ 8,291 77.6 %
Acquired & Disposed Properties 1,479 673 806 119.8 %
Properties with Vacancy 5,552 1,237 4,315 348.8 %
$ 26,004 $ 12,592 $ 13,412 106.5 %
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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 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 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, 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 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
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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
Overview
Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowing capacity under our Revolver and issuing additional equity securities. Our available liquidity as of December 31, 2020, was $30.2 million, including $11.0 million in cash and cash equivalents and an available borrowing capacity of $19.2 million under our Revolver. Our available borrowing capacity under the Revolver has increased to $20.3 million as of February 16, 2021.
Future Capital Needs
We actively seek conservative investments that are likely to produce income to allow us to pay distributions to our stockholders and Non-controlling OP Unitholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial and office real property, or pay down outstanding borrowings under our Revolver. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, refinancing maturing debt and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments.
We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. We also believe we will be able to refinance our mortgage debt as it matures. Additionally, to satisfy our short-term obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. We further believe that our cash flow from operations, coupled with the financing capital available to us in the future, are sufficient to fund our long-term liquidity needs.
Equity Capital
The following table summarizes net proceeds raised from our various equity sales during the year ended December 31, 2020 (dollars in thousands, except for 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 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 $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.
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Debt Capital
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. The weighted-average interest rate on the mortgage notes payable as of December 31, 2020 was 4.24%.
We continue to see banks and other non-bank lenders willing to issue mortgages. Consequently, we remain focused on obtaining mortgages through regional banks, non-bank lenders and 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 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 $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, 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. 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, 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, 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
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 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 margin for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on 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
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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%. As of February 16, 2021, the maximum additional amount we could draw under the Credit Facility was $20.3 million. We were in compliance with all covenants under the Credit Facility as of December 31, 2020.
Contractual Obligations
The following table reflects our material contractual obligations as of December 31, 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) $ 673,738 $ 23,056 $ 232,151 $ 247,187 $ 171,344
Interest on Debt Obligations (2) 90,802 21,772 36,549 18,667 13,814
Operating Lease Obligations (3) 9,750 477 981 987 7,305
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. This figure does not include $(0.2) million of premiums and (discounts), net, and $4.9 million of deferred financing costs, net, which are reflected in mortgage notes payable, net, borrowings under Revolver, and borrowings under Term Loan, net, on the consolidated balance sheet.
(2) Interest on debt obligations includes estimated interest on our 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 December 31, 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 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.
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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:
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For the twelve months ended December 31,
(Dollars in Thousands, Except for Per Share Amounts)
2020 2019
Calculation of basic FFO per share of common stock and Non-controlling OP Unit
Net income $ 14,985 $ 9,541
Less: 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)
Adjustments:
Add: Real estate depreciation and amortization 55,424 52,039
Add: Impairment charge 3,621 1,813
Less: 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
Less: 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)
Adjustments:
Add: Real estate depreciation and amortization 55,424 52,039
Add: Impairment charge 3,621 1,813
Add: Income impact of assumed conversion of senior common stock 816 892
Less: 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
Add: 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
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