GLADSTONE COMMERCIAL CORP 10-K

Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Report of Management on Internal Controls over Financial Reporting 55 Report of Independent Registered Public Accounting Firm 56 Consolidated Balance Sheets as of December 31, 2020 and 2019 58 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 59 Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018 60 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 62 Notes to Consolidated Financial Statements 64 Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2020 86 54 Table of Contents Report of Management on Internal Controls over Financial Reporting To the Stockholders and Board of Directors of Gladstone Commercial Corporation: Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets, provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO). Based on our assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. February 16, 2021 55 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Gladstone Commercial Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Gladstone Commercial Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Controls over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 56 Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment Assessment of Real Estate – Undiscounted Future Cash Flows As described in Notes 1, 4, and 5 to the consolidated financial statements, the Company’s consolidated total real estate, net balance was $900.2 million as of December 31, 2020. During 2020, the Company recognized an impairment charge of $3.6 million. Management periodically reviews the carrying value of each property to determine if circumstances indicate impairment of the carrying value of the investment exists. If circumstances indicate the possibility of impairment, management prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the carrying value of the investment in such property is recoverable. As disclosed by management, in preparing the projection of undiscounted future cash flows, management estimates cap rates and market rental rates using information obtained from market comparability studies and other comparable sources, and applies the undiscounted cash flows against their expected holding period. The principal considerations for our determination that performing procedures relating to the undiscounted future cash flows used in the impairment assessment of real estate is a critical audit matter are the significant judgment by management when determining the projection of undiscounted future cash flows, which led to a high degree of auditor judgment, subjectivity and effort in applying procedures and evaluating audit evidence relating to the cap rates, market rental rates and expected holding period assumptions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment of real estate, including controls over the projection of undiscounted future cash flows. These procedures also included, among others (i) testing management’s process for determining the projection of undiscounted future cash flows; (ii) evaluating the appropriateness of the model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of the cap rates, market rental rates and expected holding period assumptions. Evaluating management’s assumptions related to the cap rates, market rental rates and expected holding period involved evaluating whether the assumptions were reasonable considering the consistency with external market and industry data and evidence obtained in other areas of the audit. /s/ PricewaterhouseCoopers LLP McLean, Virginia February 16, 2021 We have served as the Company’s auditor since 2003. 57 Table of Contents Gladstone Commercial Corporation Consolidated Balance Sheets (Dollars in Thousands, Except Share and Per Share Data) December 31, 2020 December 31, 2019 ASSETS Real estate, at cost $ 1,128,683 $ 1,056,978 Less: accumulated depreciation 228,468 207,523 Total real estate, net 900,215 849,455 Lease intangibles, net 117,379 115,465 Real estate and related assets held for sale 8,498 3,990 Cash and cash equivalents 11,016 6,849 Restricted cash 5,060 4,639 Funds held in escrow 9,145 7,226 Right-of-use assets from operating leases 5,582 5,794 Deferred rent receivable, net 36,555 37,177 Other assets 4,458 8,913 TOTAL ASSETS $ 1,097,908 $ 1,039,508 LIABILITIES, MEZZANINE EQUITY AND EQUITY LIABILITIES Mortgage notes payable, net (1) $ 456,177 $ 453,739 Borrowings under Revolver, net 53,312 51,579 Borrowings under Term Loan, net 159,203 121,276 Deferred rent liability, net 20,633 19,322 Operating lease liabilities 5,687 5,847 Asset retirement obligation 3,086 3,137 Accounts payable and accrued expenses 4,459 5,573 Liabilities related to assets held for sale — 21 Due to Adviser and Administrator (1) 2,960 2,904 Other liabilities 17,068 12,920 TOTAL LIABILITIES $ 722,585 $ 676,318 Commitments and contingencies (2) MEZZANINE EQUITY Series D and E redeemable preferred stock, net, par value $ 0.001 per share; $ 25 per share liquidation preference; 12,760,000 shares authorized; and 6,571,003 and 6,269,555 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3) $ 159,286 $ 152,153 TOTAL MEZZANINE EQUITY $ 159,286 $ 152,153 EQUITY Senior common stock, par value $ 0.001 per share; 950,000 shares authorized; and 750,372 and 806,435 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3) $ 1 $ 1 Common stock, par value $ 0.001 per share, 60,290,000 and 86,290,000 shares authorized and 35,331,970 and 32,593,651 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3) 35 32 Series F redeemable preferred stock, par value $ 0.001 per share; $ 25 per share liquidation preference; 26,000,000 and 0 shares authorized and 116,674 and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3) — — Additional paid in capital 626,533 571,205 Accumulated other comprehensive income ( 4,345 ) ( 2,126 ) Distributions in excess of accumulated earnings ( 409,041 ) ( 360,978 ) TOTAL STOCKHOLDERS' EQUITY $ 213,183 $ 208,134 OP Units held by Non-controlling OP Unitholders (3) 2,854 2,903 TOTAL EQUITY $ 216,037 $ 211,037 TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY $ 1,097,908 $ 1,039,508 (1) Refer to Note 2 “Related-Party Transactions ” (2) Refer to Note 7 “Commitments and Contingencies ” (3) Refer to Note 8 “Equity and Mezzanine Equity” The accompanying notes are an integral part of these consolidated financial statements. 58 Table of Contents Gladstone Commercial Corporation Consolidated Statements of Operations and Comprehensive Income (Dollars in Thousands, Except Share and Per Share Data) For the year ended December 31, 2020 2019 2018 Operating revenues Lease revenue $ 133,152 $ 114,387 $ 106,798 Total operating revenues $ 133,152 $ 114,387 $ 106,798 Operating expenses Depreciation and amortization $ 55,424 $ 52,039 $ 47,620 Property operating expenses 26,004 12,592 11,458 Base management fee (1) 5,648 5,174 5,054 Incentive fee (1) 4,301 3,688 3,042 Administration fee (1) 1,598 1,690 1,605 General and administrative 3,259 3,235 2,358 Impairment charge 3,621 1,813 — Total operating expenses $ 99,855 $ 80,231 $ 71,137 Other (expense) income Interest expense $ ( 26,803 ) $ ( 28,279 ) $ ( 26,172 ) Gain on sale of real estate, net 8,096 2,952 2,763 Other income 395 712 72 Total other expense, net $ ( 18,312 ) $ ( 24,615 ) $ ( 23,337 ) Net income $ 14,985 $ 9,541 $ 12,324 Net (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 47 ) 87 ( 4 ) Net income attributable to the Company $ 14,938 $ 9,628 $ 12,320 Distributions attributable to Series A, B, D, E, and F preferred stock ( 10,973 ) ( 10,822 ) ( 10,416 ) Series A and B Preferred Stock offering costs write off — ( 2,674 ) — Distributions attributable to senior common stock ( 816 ) ( 892 ) ( 931 ) Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973 Earnings (loss) per weighted average share of common stock - basic & diluted Earnings (loss) available (attributable) to common shareholders $ 0.09 $ ( 0.16 ) $ 0.03 Weighted average shares of common stock outstanding Basic and Diluted 34,040,085 30,695,902 28,675,934 Distributions declared per common share $ 1.5018 $ 1.5000 $ 1.5000 Earnings per weighted average share of senior common stock $ 1.05 $ 1.05 $ 1.05 Weighted average shares of senior common stock outstanding - basic 774,658 849,348 887,081 Comprehensive income Change in unrealized loss related to interest rate hedging instruments, net $ ( 2,219 ) $ ( 1,978 ) $ ( 183 ) Other Comprehensive loss ( 2,219 ) ( 1,978 ) ( 183 ) Net income $ 14,985 $ 9,541 $ 12,324 Comprehensive income $ 12,766 $ 7,563 $ 12,141 Comprehensive (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 47 ) 87 ( 4 ) Total comprehensive income available to the Company $ 12,719 $ 7,650 $ 12,137 (1) Refer to Note 2 “Related-Party Transactions” The accompanying notes are an integral part of these consolidated financial statements. 59 Table of Contents Gladstone Commercial Corporation Consolidated Statements of Equity (Dollars in Thousands) Series A and B Preferred Stock Series F Preferred Stock Common Stock Senior Common Stock Series A and B Preferred Stock Senior Common Stock Common Stock Series F Preferred Stock Additional Paid in Capital Accumulated Other Comprehensive Income Distributions in Excess of Accumulated Earnings Total Stockholders' Equity Non-Controlling Interest Total Equity Balance at December 31, 2017 2,264,000 — 28,384,016 904,819 $ 2 $ 1 $ 28 $ — $ 534,790 $ 35 $ ( 268,058 ) $ 266,798 $ — $ 266,798 Issuance of Series A and B preferred stock and common stock, net — — 841,338 — — — 1 — 16,103 — — 16,104 — 16,104 Conversion of senior common stock to common stock — — 29,545 ( 36,294 ) — — — — — — — — — — Retirement of senior common stock, net — — — ( 2,266 ) — — — — ( 34 ) — — ( 34 ) — ( 34 ) Distributions declared to common, senior common and preferred stockholders — — — — — — — — — — ( 54,379 ) ( 54,379 ) ( 186 ) ( 54,565 ) Comprehensive income — — — — — — — — — ( 183 ) — ( 183 ) — ( 183 ) Issuance of Non-controlling OP Units as consideration in real estate acquisitions, net — — — — — — — — — — — — 13,975 13,975 Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — 9,118 — — 9,118 ( 9,118 ) — Net income — — — — — — — — — — 12,320 12,320 4 12,324 Balance at December 31, 2018 2,264,000 — 29,254,899 866,259 $ 2 $ 1 $ 29 $ — $ 559,977 $ ( 148 ) $ ( 310,117 ) $ 249,744 $ 4,675 $ 254,419 Issuance of Series A and B preferred stock and common stock, net — — 3,025,727 — — — 3 — 64,539 — — 64,542 — 64,542 Conversion of senior common stock to common stock — — 49,725 ( 59,824 ) — — — — — — — — — — Redemption of Series A and B preferred stock, net ( 2,264,000 ) — — — ( 2 ) — — — ( 53,924 ) — ( 2,674 ) ( 56,600 ) — ( 56,600 ) Distributions declared to common, senior common, preferred stockholders and Non-controlling OP Unit holders — — — — — — — — ( 23 ) — ( 57,815 ) ( 57,838 ) ( 1,049 ) ( 58,887 ) Comprehensive income — — — — — — — — — ( 1,978 ) — ( 1,978 ) — ( 1,978 ) Redemptions of OP Units — — 263,300 — — — — — 6,143 — — 6,143 ( 6,143 ) — Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — ( 5,507 ) — — ( 5,507 ) 5,507 — Net income — — — — — — — — — — 9,628 9,628 ( 87 ) 9,541 Balance at December 31, 2019 — — 32,593,651 806,435 $ — $ 1 $ 32 $ — $ 571,205 $ ( 2,126 ) $ ( 360,978 ) $ 208,134 $ 2,903 $ 211,037 Issuance of common stock and Series F preferred stock, net — 116,674 2,691,971 — — — 3 — 55,485 — — 55,488 — 55,488 Conversion of senior common stock to common stock — — 46,348 ( 56,063 ) — — — — — — — — — — Distributions declared to common, senior common, preferred stockholders and Non-controlling OP Unit holders — — — — — — — — — — ( 63,001 ) ( 63,001 ) ( 756 ) ( 63,757 ) Comprehensive income — — — — — — — — — ( 2,219 ) — ( 2,219 ) — ( 2,219 ) 60 Table of Contents Issuance of Non-controlling OP Units as consideration in real estate acquisitions, net — — — — — — — — — — — — 503 503 Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — ( 157 ) — — ( 157 ) 157 — Net income — — — — — — — — — — 14,938 14,938 47 14,985 Balance at December 31, 2020 — 116,674 35,331,970 750,372 $ — $ 1 $ 35 $ — $ 626,533 $ ( 4,345 ) $ ( 409,041 ) $ 213,183 $ 2,854 $ 216,037 The accompanying notes are an integral part of these consolidated financial statements. 61 Table of Contents Gladstone Commercial Corporation Consolidated Statements of Cash Flows (Dollars in Thousands) For the year ended December 31, 2020 2019 2018 Cash flows from operating activities: Net income $ 14,985 $ 9,541 $ 12,324 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55,424 52,039 47,620 Impairment charge 3,621 1,813 — Gain on sale of real estate, net ( 8,096 ) ( 2,952 ) ( 2,763 ) Amortization of deferred financing costs 1,531 1,641 1,445 Amortization of deferred rent asset and liability, net ( 1,930 ) ( 1,446 ) ( 728 ) Amortization of discount and premium on assumed debt, net 57 62 ( 20 ) Asset retirement obligation expense 98 119 121 Amortization of right-of-use asset from operating leases and operating lease liabilities, net 52 53 — Bad debt expense 56 152 — Operating changes in assets and liabilities Decrease (increase) in other assets 2,875 ( 2,170 ) ( 445 ) Increase in deferred rent receivable ( 1,899 ) ( 1,477 ) ( 2,548 ) (Decrease) increase in accounts payable and accrued expenses ( 1,680 ) 1,540 515 Increase in amount due to Adviser and Administrator 56 381 234 Increase in other liabilities 1,808 2,075 246 Leasing commissions paid ( 1,464 ) ( 1,177 ) ( 402 ) Net cash provided by operating activities $ 65,494 $ 60,194 $ 55,599 Cash flows from investing activities: Acquisition of real estate and related intangible assets $ ( 127,931 ) $ ( 130,313 ) $ ( 42,353 ) Improvements of existing real estate ( 6,360 ) ( 7,570 ) ( 4,328 ) Proceeds from sale of real estate 35,834 6,318 12,835 Receipts from lenders for funds held in escrow 1,310 2,664 1,769 Payments to lenders for funds held in escrow ( 3,229 ) ( 3,880 ) ( 2,376 ) Receipts from tenants for reserves 2,406 4,782 2,682 Payments to tenants from reserves ( 1,988 ) ( 2,496 ) ( 2,669 ) Deposits on future acquisitions ( 300 ) ( 1,542 ) — Net cash used in investing activities $ ( 100,258 ) $ ( 132,037 ) $ ( 34,440 ) Cash flows from financing activities: Proceeds from issuance of equity $ 63,609 $ 134,527 $ 18,565 Offering costs paid ( 988 ) ( 3,431 ) ( 295 ) Retirement of senior common stock — — ( 34 ) Redemption of Series A and B perpetual preferred stock — ( 56,600 ) — Borrowings under mortgage notes payable 52,578 69,650 14,125 Payments for deferred financing costs ( 606 ) ( 2,480 ) ( 386 ) Principal repayments on mortgage notes payable ( 50,662 ) ( 57,438 ) ( 27,850 ) Proceeds from issuance of term loan facility 37,700 47,300 — Borrowings from revolving credit facility 142,700 165,400 88,600 Repayments on revolving credit facility ( 141,200 ) ( 163,600 ) ( 59,400 ) Decrease in security deposits ( 22 ) ( 192 ) 83 Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders ( 63,757 ) ( 58,887 ) ( 54,565 ) Net cash provided by (used in) financing activities $ 39,352 $ 74,249 $ ( 21,157 ) Net increase in cash, cash equivalents, and restricted cash $ 4,588 $ 2,406 $ 2 Cash, cash equivalents, and restricted cash at beginning of period $ 11,488 $ 9,082 $ 9,080 Cash, cash equivalents, and restricted cash at end of period $ 16,076 $ 11,488 $ 9,082 SUPPLEMENTAL AND NON-CASH INFORMATION Cash paid during year for interest $ 26,098 $ 25,685 $ 24,987 Tenant funded fixed asset improvements $ 2,978 $ 2,787 $ 1,608 Acquisition of real estate and related intangible assets $ 1,542 $ — $ — Assumed mortgage in connection with acquisition $ — $ — $ 6,918 Reserves released by title company to tenant $ — $ — $ 3,966 Capital improvements and leasing commissions included in accounts payable and accrued expenses $ 1,070 $ 390 $ 311 62 Table of Contents Unrealized loss related to interest rate hedging instruments, net $ ( 2,219 ) $ ( 1,978 ) $ ( 183 ) Increase in asset retirement obligation assumed in acquisition $ — $ 164 $ — Non-controlling OP Units issued in connection with acquisition $ 503 $ — $ 13,975 Series A and B Preferred Stock offering cost write off $ — $ 2,674 $ — Right-of-use asset from operating leases $ — $ 5,998 $ — Operating lease liabilities $ — $ ( 5,998 ) $ — Property manager other assets $ — $ 1,676 $ — Property manager accrued expenses and other liabilities $ — $ ( 1,676 ) $ — The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (dollars in thousands): For the year ended December 31, 2020 2019 2018 Cash and cash equivalents $ 11,016 $ 6,849 $ 6,591 Restricted cash 5,060 4,639 2,491 Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows $ 16,076 $ 11,488 $ 9,082 Restricted cash consists of security deposits and receipts from tenants for reserves. These funds will be released to the tenants upon completion of agreed upon tasks, as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings and upon receipt by us of evidence of insurance and tax payments. The accompanying notes are an integral part of these consolidated financial statements. 63 Table of Contents Gladstone Commercial Corporation Notes to Consolidated Financial Statements 1. Organization, Basis of Presentation and Significant Accounting Policies Gladstone Commercial Corporation was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. We focus on acquiring, owning and managing primarily office and industrial properties. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company (the “Administrator”), each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”). All further references herein to “we,” “our,” “us” and the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation. A ll references herein and throughout the Notes to Consolidated Financial Statements to the number of properties and square footage are unaudited. Subsidiaries We conduct substantially all of our operations through the Operating Partnership. We currently control the sole general partner of the Operating Partnership and own, directly or indirectly, a majority of the limited partnership interests in the Operating Partnership (“Non-controlling OP Units”) through two of our subsidiaries, GCLP Business Trust I and II. The financial position and results of operations of the Operating Partnership are consolidated within our financial statements. As of December 31, 2020 and 2019, the Company owned 98.6 % and 98.6 %, respectively, of the outstanding OP Units (See Note 8, “Equity and Mezzanine Equity” for additional discussion regarding OP Units). Gladstone Commercial Lending, LLC, a Delaware limited liability company (“Gladstone Commercial Lending”), a subsidiary of ours, was created to conduct all operations related to our real estate mortgage loans. As the Operating Partnership currently owns all of the membership interests of Gladstone Commercial Lending, the financial position and results of operations of Gladstone Commercial Lending are consolidated with ours. Gladstone Commercial Advisers, Inc., a Delaware corporation (“Commercial Advisers”), and wholly-owned taxable REIT subsidiary (“TRS”) of ours, was created to collect any non-qualifying income related to our real estate portfolio. There has been no such income earned to date. Since we own 100 % of the voting securities of Commercial Advisers, the financial position and results of operations of Commercial Advisers are consolidated within our financial statements. GCLP Business Trust I and GCLP Business Trust II, each a subsidiary and business trust of ours, were formed under the laws of the Commonwealth of Massachusetts on December 28, 2005 . We transferred our 99 % limited partnership interest in the Operating Partnership to GCLP Business Trust I in exchange for 100 shares of the trust. Gladstone Commercial Partners, LLC, a subsidiary of ours, transferred its 1 % general partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100 trust shares. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. Real Estate and Lease Intangibles We record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as such costs are incurred. We compute depreciation using the straight-line method over the estimated useful life, or up to 39 years, for buildings and improvements, five to 20 years for equipment and fixtures, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests. 64 Table of Contents Most properties that we acquire are already being operated as rental properties, which we consider to be asset acquisitions under Accounting Standards Codification (“ASC”) 360, “Property Plant and Equipment” (“ASC 360”). When an acquisition is considered an asset acquisition, ASC 360 requires that the purchase price of real estate be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt assumed and identified intangible assets and liabilities, typically the value of above-market and below-market leases, the value of in-place leases, the value of lease origination costs and the value of tenant relationships, based in each case on their fair values. ASC 360 allows us to capitalize all expenses related to an acquisition accounted for as an asset acquisition into the cost of the acquisition. Management’s estimates of fair value are made 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. We also consider 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 acquired and liabilities assumed. In estimating carrying costs, management also includes lost reimbursement of real estate taxes, insurance and other operating expenses as well as estimates of lost rents at market rates during the hypothetical expected lease-up periods, which generally range from nine to 18 months, depending on specific local market conditions. Management 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. We allocate purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets on the date of acquisition. Above-market and below-market in-place lease fair values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. When determining the non-cancelable term of the lease, we evaluate which fixed-rate renewal options, if any, should be included. The capitalized above-market lease values, included in the accompanying consolidated balance sheets as part of deferred rent receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to above-market lease values was $ 0.8 million, $ 1.1 million, and $ 1.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. The capitalized below-market lease values, included in the accompanying consolidated balance sheets as part of deferred rent liability, are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases, including any below market renewal periods. Total amortization related to below-market lease values was $ 2.8 million, $ 2.5 million, and $ 2.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total amount of the remaining intangible assets acquired, which consists of in-place lease values, lease origination costs, and customer relationship intangible values, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in determining these values include 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 our expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. The value of in-place leases and lease origination costs are amortized to amortization expense over the remaining term of the respective leases, which generally range from seven to 15 years. The value of customer relationship intangibles, which is the benefit to us resulting from the likelihood of an existing tenant renewing its lease, are amortized to amortization expense over the remaining term and any anticipated renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Total amortization expense related to these intangible assets and liabilities was $ 19.4 million, $ 19.2 million, and $ 17.7 million for the years ended December 31, 2020, 2019, and 2018, respectively. Should a tenant terminate its lease, the unamortized portion of the above-market and below-market lease values would be charged to rental income and the unamortized portion of in-place lease values, lease origination costs and customer relationship intangibles will be charged to amortization expense through the revised termination date. 65 Table of Contents Impairment Charges We account for the impairment of real estate in accordance with ASC 360-10-35, “Property, Plant, and Equipment,” which requires us to periodically review the carrying value of each property to determine if circumstances indicate impairment of the carrying value of the investment exists or that depreciation periods should be modified. If circumstances 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 value of the investment in such property is recoverable. In performing the analysis, we consider such factors as each tenant’s payment history and financial condition, the likelihood of lease renewal, business conditions in the industry in which the tenants operate, whether there are indications that the fair value of the real estate has decreased or our intended holding period of the property is shortened. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. We evaluate our entire portfolio of properties each quarter for any impairment indicators and perform an impairment analysis on those select properties that have an indication of impairment. Held for Sale Property For properties considered held for sale, we cease depreciating and amortizing the property and value the property at the lower of depreciated and amortized cost or fair value, less costs to dispose. We present qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as held for sale, as discontinued operations in all periods when the sale meets the definition of discontinued operations. Under GAAP, the definition of discontinued operations is the disposal of a component or group of components that is disposed or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on our operations and financial results. The components of the property’s net income (loss) that are reflected as discontinued operations if classified as such include operating results, depreciation, amortization, and interest expense. When properties are considered held for sale, but do not qualify as a discontinued operation, we present qualifying assets and liabilities as held for sale in the consolidated balance sheet in all periods that the qualifying assets and liabilities meet the held for sale criteria under ASC 360-10-49-9. The components of the held for sale property’s net income (loss) is recorded within continuing operations under the consolidated statement of operations and comprehensive income. Cash and Cash Equivalents We consider cash equivalents to be short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase, except that any such investments purchased with funds held in escrow or similar accounts are classified as restricted cash. Items classified as cash equivalents include money-market deposit accounts. At times, the balance of our cash and cash equivalents may exceed federally insurable limits. Restricted Cash Restricted cash consists of security deposits and receipts from tenants for reserves. These funds will be released to the tenants upon completion of agreed upon tasks, as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings and upon receipt by us of evidence of insurance and tax payments. For purposes of the consolidated statements of cash flows, changes in restricted cash caused by changes in reserves held for tenants are shown as investing activities. Changes in restricted cash caused by changes in security deposits are reflected as financing activities. Funds Held in Escrow Funds held in escrow consist of funds held by certain of our lenders for properties held as collateral by these lenders. These funds will be released to us upon completion of agreed upon tasks, as specified in the mortgage agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the lenders. For the purposes of the consolidated statements of cash flows, changes in funds held in escrow caused by changes in lender held reserve balances are shown as investing activities. Deferred Financing Costs Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administrative fees. The costs are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the secured financing. We made payments of $ 0.6 million, $ 2.5 million, and $ 0.4 million for deferred financing costs during the years ended December 31, 2020, 2019, and 2018, respectively. Total amortization expense related to deferred 66 Table of Contents financing costs is included in interest expense and was $ 1.5 million, $ 1.6 million, and $ 1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Gains on Sale of Real Estate, Net Gains on sale of real estate, net, consist of the excess consideration received for a property over the property carrying value at the time of sale, or gains on real estate, offset by consideration received for a property less than the property carrying value at the time of sale, or loss on sale of real estate. Lease Revenue Lease revenue includes rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. Most of our leases contain rental increases at specified intervals. We recognize such revenues on a straight-line basis. Deferred rent receivable in the accompanying consolidated balance sheet includes the cumulative difference between lease revenue, as recorded on a straight-line basis, and rents received from the tenants in accordance with the lease terms, along with the capitalized above-market in-place lease values of certain acquired properties. Deferred rent liability in the accompanying consolidated balance sheet includes the capitalized below-market in-place lease values of certain acquired properties. Accordingly, we determine, in our judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. We review deferred rent receivable, as it relates to straight line rents, on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the geographic area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, we record an allowance for uncollectible accounts or record a direct write-off of the specific rent receivable. We incurred $ 0.2 million in deferred rent write offs during each of the years ended December 31, 2020 and 2018, respectively. No such reserves or direct write offs were recorded during the year ended 2019. Tenant recovery revenue includes payments from tenants as reimbursements for franchise taxes, management fees, insurance, maintenance and repairs, utilities, and ground lease payments. We recognize tenant recovery revenue in the same periods that we incur the related expenses. We do not record any tenant recovery revenues or operating expenses associated with costs paid directly by our tenants for our net leased properties. On January 1, 2020, we completed the integration of the accounting records of certain of our triple net leased third-party asset managed properties into our accounting system and paid out property operating expenses 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 began to 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. Income Taxes We have operated and intend to continue to operate in a manner that will allow us to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and, accordingly, will not be subject to federal income taxes on amounts distributed to stockholders (except income from foreclosure property), provided that we distribute at least 90 % of our REIT taxable income to our stockholders and meet certain other conditions. To the extent that we satisfy the distribution requirement but distribute less than 100 % of our taxable income, we will be subject to federal corporate income tax on our undistributed income. Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though Commercial Advisers has had no activity to date, we would account for any future income taxes in accordance with the provisions of ASC 740, “Income Taxes.” Under ASC 740-10-25, we would account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not (defined as a likelihood of more than 50 %) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite our belief that the filing position is supportable, the benefit of that tax position is not recognized in the statements of operations. We recognize interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. We recognize unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the 67 Table of Contents uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation. For the years ended December 31, 2020, 2019, and 2018, we did no t record any provisions for uncertain tax positions. Asset Retirement Obligations ASC 410, “Asset Retirement and Environmental Obligation,” requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. ASC 410-20-20 clarifies that the term “Conditional Asset Retirement Obligation” refers to a legal obligation (pursuant to existing laws or by contract) to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. ASC 410-20-25-6 clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We have accrued a liability at the present value of the estimated payments expected to be made and corresponding increase to the cost of the related properties for disposal related to all properties constructed prior to 1985 that have, or may have, asbestos present in the building. The liabilities are accreted to their estimated obligation over the life of the leases for the respective properties. We accrued $ 0.2 million of liabilities in connection with acquisitions for the year ended December 31, 2019, and no liabilities in connection with acquisitions for the years ended December 31, 2020 and 2018. We recorded accretion expense of $ 0.1 million in each of the years ended December 31, 2020, 2019, and 2018, respectively, to general and administrative expense. Costs of future expenditures for obligations are discounted to their present value. The aggregate undiscounted obligation on all properties is $ 5.6 million and the discount rates used in the calculations range from 2.5 % to 7.0 %. We do not expect to make any material payments in conjunction with these obligations in each of the next five years. Stock Issuance Costs We account for stock issuance costs in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 5.A, which states that incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. Accordingly, we record costs incurred related to our ongoing equity offerings to other assets on our consolidated balance sheet and ratably apply these amounts to the cost of equity as stock is issued. If an equity offering is subsequently terminated and there are amounts remaining in other assets that have not been allocated to the cost of the offering, the remaining amounts are recorded as a general and administrative expense on our consolidated statements of operations. Comprehensive Income We record the effective portion of changes in the fair value of the interest rate cap and swap agreements that qualify as cash flow hedges to accumulated other comprehensive income. For the years ended December 31, 2020, 2019, and 2018, we reconciled net income to comprehensive income on the consolidated statements of operations and comprehensive income in the accompanying consolidated financial statements. Segment Reporting We manage our operations on an aggregated, single segment basis for purposes of assessing performance and making operating decisions, and, accordingly, have only one reporting and operating segment. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). The new standard requires more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair market value through net income. The standard also requires that financial assets measured at amortized cost be presented at the net amounts anticipated to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. We are required to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. We adopted ASU 2016-13 beginning with the three months ended March 31, 2020. Adopting ASU 2016-13 has not resulted in a material impact to our consolidated financial statements, as we do not have any loans receivable outstanding. In March 2020, the FASB issued Accounting Standards Update 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), subsequently clarified in January 2021 by Accounting Standards Update 2021-01 “Reference Rate Reform (Topic 848)” (“ASU 2021-01”). The main provisions of this update provide optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate 68 Table of Contents expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020, and ASU 2021-01 is effective for all entities as of January 31, 2021. We adopted ASU 2020-04 beginning with the three months ended March 31, 2020, and ASU 2021-01 as of January 31, 2021. Adopting ASU 2020-04 and ASU 2021-01 has not resulted in a material impact to our consolidated statements, as ASU 2020-04 and ASU 2021-01 allows for prospective application of any changes in the effective interest rate for our LIBOR based debt, and allows for practical expedients that will allow us to treat our derivative instruments designated as cash flow hedges consistent with how they are currently accounted for. In April 2020, the FASB issued a staff question-and-answer document, Topic 842 and Topic 840: Accounting for Lease Concessions related to the Effects of the COVID-19 Pandemic (“COVID-19 Q&A”), to address frequently asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the tenant, which would be addressed under the lease modification accounting framework, or if a lease concession was under the enforceable rights and obligations within the existing lease agreement, which would not fall under the lease modification accounting framework. The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease modification, as long as the concession does not result in a substantial increase in rights of the lessor or obligations of the lessee. This election is available for concessions that result in the total payments required by the modified contract being substantially the same as or less than the total payments required by the original contract. At this time, we have granted rent deferrals to three tenants representing approximately 2 % of total portfolio rents. The agreements with these tenants include current partial payments 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. We have elected to not evaluate these leases under the lease modification accounting framework. 2. Related-Party Transactions Gladstone Management Corporation and Gladstone Administration, LLC We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Cutlip, is an executive managing director of our Adviser. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary. We have entered into an advisory agreement with our Adviser, as amended from time to time (the “Advisory Agreement”), and an administration agreement with our Administrator (the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. At December 31, 2020 and December 31, 2019, $ 3.0 million and $ 2.9 million, respectively, was collectively due to our Adviser and Administrator. Base Management Fee On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement (the “Fifth Amended 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 also reviews and considers renewing the agreement with our Adviser each July. Under the Fifth Amended Advisory Agreement, the calculation of the annual 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 did 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 Total Equity figure. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. On July 14, 2020, the Company amended and restated the Fifth Amended 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 Sixth Amended Advisory Agreement replaced the Fifth Amended Advisory Agreement’s previous calculation of the base management fee with a calculation based on Gross Tangible Real Estate. The revised Base Management 69 Table of Contents Fee will be payable quarterly in arrears and shall be calculated at an annual rate of 0.425 % ( 0.10625 % per quarter) of the prior calendar quarter’s “Gross Tangible Real Estate,” defined in the Sixth Amended Advisory Agreement as the current gross value of the Company’s property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any subsequent capital improvements thereon). The calculation of the other fees in the agreement remained unchanged. The revised Base Management Fee calculation began with the fee calculations for the quarter ended September 30, 2020. For the years ended December 31, 2020, 2019, and 2018, we recorded a base management fee of $ 5.6 million, $ 5.2 million, and $ 5.1 million, respectively. Incentive Fee Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0 % quarterly, or 8.0 % annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the 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. For the years ended December 31, 2020, 2019, and 2018, we recorded an incentive fee of $ 4.3 million, $ 3.7 million, and $ 3.0 million, respectively. The Adviser did no t waive any portion of the incentive fee for the years ended December 31, 2020, 2019, and 2018. Waivers cannot be recouped by the Adviser in the future. 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. 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 we have 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 agreement to include if the Adviser breaches any material provisions thereof, 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. For the years ended December 31, 2020, 2019, and 2018, we recorded an administration 70 Table of Contents fee of $ 1.6 million, $ 1.7 million, and $ 1.6 million, respectively. Our Board of Directors reviews and considers approving or renewing the Administration Agreement each July. Gladstone Securities, LLC Gladstone Securities, LLC (“Gladstone Securities”), is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities. Mortgage Financing Arrangement Agreement We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15 % to a maximum of 1.0 % of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $ 0.1 million, $ 0.2 million, and $ 0.1 million during the years ended December 31, 2020, 2019, and 2018, respectively, which are included in mortgage notes payable, net, in the consolidated balance sheets, or 0.25 %, 0.20 %, and 0.11 % of total mortgage principal secured or extended during the respective periods. Our Board of Directors renewed the agreement for an additional year, through August 31, 2021, at its July 2020 meeting. Dealer Manager Agreement On February 20, 2020 we entered into a dealer manager agreement (the “Dealer Manager Agreement”), whereby Gladstone Securities will act as the exclusive dealer manager in connection with our offering (the “Offering”) of up to (i) 20,000,000 shares of our 6.00 % Series F Cumulative Redeemable Preferred Stock of the Company, par value $ 0.001 per share (the “Series F Preferred Stock”) on a “reasonable best efforts” basis (the “Primary Offering”), and (ii) 6,000,000 shares of Series F Preferred Stock pursuant to our distribution reinvestment plan (the “DRIP”) to those holders of the Series F Preferred Stock who participate in such DRIP. The Series F Preferred Stock is registered with the SEC pursuant to a registration statement on Form S-3 (File No. 333-236143), as the same may be amended and/or supplemented (the “Registration Statement”), under the Securities Act of 1933, as amended, and will be offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020 relating to the Registration Statement (the “Prospectus”). Under the Dealer Manager Agreement, Gladstone Securities, as dealer manager, will provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay Gladstone Securities (i) selling commissions of 6.0 % of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Selling Commissions”), and (ii) a dealer manager fee of 3.0 % of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Dealer Manager Fee”). No Selling Commissions or Dealer Manager Fee shall be paid with respect to Shares sold pursuant to the DRIP. Gladstone Securities may, in its sole discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. 3. Earnings per Share of Common Stock The following tables set forth the computation of basic and diluted earnings (loss) per share of common stock for the years ended December 31, 2020, 2019 and 2018, respectively. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted earnings per share calculation, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of income would also be added back to net income. Net income figures are presented net of such non-controlling interests in the earnings per share calculation. We computed basic earnings (loss) per share for the years ended December 31, 2020, 2019 and 2018, respectively, using the weighted average number of shares outstanding during the periods. Diluted earnings (loss) per share for the years ended December 31, 2020, 2019 and 2018, reflects additional shares of common stock related to our convertible Senior Common Stock, if the effect would be dilutive, that would have been outstanding if dilutive potential shares of common stock had been 71 Table of Contents issued, as well as an adjustment to net income (loss) available (attributable) to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts). For the year ended December 31, 2020 2019 2018 Calculation of basic earnings (loss) per share of common stock: Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973 Denominator for basic weighted average shares of common stock (1) 34,040,085 30,695,902 28,675,934 Basic earnings (loss) per share of common stock $ 0.09 $ ( 0.16 ) $ 0.03 Calculation of diluted earnings (loss) per share of common stock: Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973 Net income (loss) available (attributable) to common stockholders plus assumed conversions (2) $ 3,149 $ ( 4,760 ) $ 973 Denominator for basic weighted average shares of common stock (1) 34,040,085 30,695,902 28,675,934 Effect of convertible Senior Common Stock (2) — — — Denominator for diluted weighted average shares of common stock (2) 34,040,085 30,695,902 28,675,934 Diluted earnings (loss) per share of common stock $ 0.09 $ ( 0.16 ) $ 0.03 (1) The weighted average number of OP Units held by Non-controlling OP Unitholders was 502,586 , 700,924 , and 128,233 for the years ended December 31, 2020, 2019, and 2018, respectively. (2) We excluded convertible shares of Senior Common Stock of 628,263 , 674,611 and 724,336 from the calculation of diluted earnings per share for the years ended December 31, 2020, 2019 and 2018, respectively, because it was anti-dilutive. 4. Real Estate and Intangible Assets Real Estate The following table sets forth the components of our investments in real estate as of December 31, 2020 and 2019, respectively, excluding real estate held for sale as of December 31, 2020 and 2019, respectively (dollars in thousands): December 31, 2020 December 31, 2019 Real estate: Land (1) $ 142,853 $ 137,532 Building and improvements 916,601 851,245 Tenant improvements 69,229 68,201 Accumulated depreciation ( 228,468 ) ( 207,523 ) Real estate, net $ 900,215 $ 849,455 (1) This amount includes $ 4,436 of land value subject to land lease agreements which we may purchase at our option for a nominal fee. Real estate depreciation expense on building and tenant improvements was $ 36.0 million, $ 32.8 million, and $ 29.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Acquisitions During the year ended December 31, 2020 and 2019 we acquired nine and 18 properties, respectively, which are summarized below (dollars in thousands): Year Ended Aggregate Square Footage Weighted Average Lease Term Aggregate Purchase Price Capitalized Acquisition Costs December 31, 2020 (1) 1,717,502 12.2 years $ 129,974 $ 814 (3) December 31, 2019 (2) 2,562,483 12.8 years $ 130,313 $ 1,231 (3) (1) On January 8, 2020, we acquired a 64,800 square foot property in Indianapolis, Indiana for $ 5.3 million. The property is leased to three tenants, with a weighted average lease term of 7.2 years. On January 27, 2020, we acquired a 320,838 square foot, three -property portfolio in Houston, Texas, Charlotte, North Carolina, and St. Charles, Missouri for $ 34.7 72 Table of Contents million. The portfolio has a weighted average lease term of 20.0 years. On March 9, 2020, we acquired a 504,400 square foot property in Crandall, Georgia for $ 32.0 million. This property is fully leased to one tenant for 10.5 years. On September 1, 2020, we acquired a 153,600 square foot property in Terre Haute, Indiana for $ 10.6 million. This property is fully leased to one tenant for 9.7 years. On October 14, 2020, we acquired a 240,714 square foot property in Montgomery, Alabama for $ 14.3 million. This property is fully leased to one tenant for 7.2 years. On December 18, 2020, we acquired a 277,883 square foot property in Huntsville, Alabama for $ 20.0 million. This property is fully leased to one tenant for 9.2 years. On December 21, 2020, we acquired a 155,267 square foot property in Pittsburgh, Pennsylvania for $ 13.0 million. This property is fully leased to one tenant for 10.0 years. (2) On February 8, 2019, we acquired a 26,050 square foot property in Moorestown, New Jersey for $ 2.7 million. This property is fully leased to one tenant for 15.1 years. On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $ 3.6 million. This property is fully leased to one tenant for 10.0 years. On April 5, 2019, we acquired a 383,000 square foot, two property portfolio located in Ocala, Florida for $ 19.2 million. This portfolio is leased to one tenant, and has a weighted average lease term of 20.1 years. On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio for $ 3.2 million. This property is fully leased to one tenant for 7.0 years. On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $ 17.9 million. This property is fully leased to one tenant for 8.5 years. On July 30, 2019, we acquired a 78,452 square foot property in Denton, Texas, for $ 6.6 million. This property is fully leased to one tenant for 11.9 years. On September 26, 2019, we acquired a 211,000 square foot two property portfolio in Temple, Texas, for $ 14.1 million. This portfolio is leased to one tenant, and has a weighted average lease term of 20.0 years. On November 14, 2019, we acquired a 231,509 square foot property in Indianapolis, Indiana, for $ 8.2 million. This property is fully leased to one tenant for 13.5 years. On December 16, 2019, we acquired a 241,000 square foot property in Jackson, Tennessee, for $ 9.1 million. This property is fully leased to one tenant for 9.7 years. On December 17, 2019, we acquired a 117,000 square foot property in Carrollton, Georgia, for $ 8.1 million. This property is fully leased to one tenant for 12.0 years. On December 17, 2019, we acquired a 509,211 square foot six property portfolio, for $ 37.6 million. The portfolio is fully leased to one tenant, and has a weighted average lease term of 10.0 years. (3) During the years ended December 31, 2020 and 2019, we capitalized $0.8 million and $1.2 million, respectively, of acquisition costs. We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2020 and 2019, respectively, as follows (dollars in thousands): Year ended December 31, 2020 Year ended December 31, 2019 Acquired assets and liabilities Purchase price Purchase price Land $ 11,264 (1) $ 12,351 Building 97,101 93,502 Tenant Improvements 2,684 3,119 In-place Leases 9,076 9,013 Leasing Costs 6,352 7,274 Customer Relationships 5,239 5,019 Above Market Leases 529 (2) 1,950 Below Market Leases ( 2,271 ) (3) ( 1,915 ) (4) Total Purchase Price $ 129,974 $ 130,313 (1) This amount includes $ 2,711 of land value subject to a land lease agreement, which we may purchase for a nominal fee. (2) This amount includes $ 53 of loans receivable included in Other assets on the consolidated balance sheets. (3) This amount includes $ 62 of prepaid rent included in Other liabilities on the consolidated balance sheets. (4) This amount includes $ 187 of prepaid rent included in Other liabilities on the consolidated balance sheets. Future Lease Payments Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands): 73 Table of Contents Year Tenant Lease Payments 2021 $ 110,417 2022 106,438 2023 99,170 2024 91,083 2025 83,418 Thereafter 323,814 $ 814,340 In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay operating expenses on the respective properties in the event the tenants fail to pay them. Lease Revenue Reconciliation The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the years ended December 31, 2020 and 2019, respectively (dollars in thousands): 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 % Intangible Assets The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of December 31, 2020 and 2019, excluding real estate held for sale as of December 31, 2020 and 2019, respectively (dollars in thousands): December 31, 2020 December 31, 2019 Lease Intangibles Accumulated Amortization Lease Intangibles Accumulated Amortization In-place leases $ 99,254 $ ( 54,168 ) $ 92,906 $ ( 48,468 ) Leasing costs 73,707 ( 37,801 ) 68,256 ( 33,705 ) Customer relationships 68,268 ( 31,881 ) 65,363 ( 28,887 ) $ 241,229 $ ( 123,850 ) $ 226,525 $ ( 111,060 ) Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion Above market leases $ 15,076 $ ( 10,670 ) $ 16,502 $ ( 10,005 ) Below market leases and deferred revenue ( 38,319 ) 17,686 ( 34,322 ) 15,000 $ ( 23,243 ) $ 7,016 $ ( 17,820 ) $ 4,995 Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $ 19.4 million, $ 19.2 million, and $ 17.7 million for the years ended December 31, 2020, 2019, and 2018, respectively, and is included in depreciation and amortization expense in the consolidated statement of operations and comprehensive income. Total amortization related to above-market lease values was $ 0.8 million, $ 1.1 million, and $ 1.1 million for the years ended December 31, 2020, 2019, and 2018, respectively, and is included in lease revenue in the consolidated statement of operations and comprehensive income. Total amortization related to below-market lease values was $ 2.8 million, $ 2.5 million, and $ 2.0 million for the years ended December 31, 2020, 2019, and 2018, respectively, and is included in lease revenue in the consolidated statement of operations and comprehensive income. 74 Table of Contents The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2020 and 2019, respectively, were as follows: Intangible Assets & Liabilities 2020 2019 In-place leases 14.2 13.6 Leasing costs 14.2 13.6 Customer relationships 17.8 19.0 Above market leases 14.8 10.7 Below market leases 13.3 10.3 All intangible assets & liabilities 15.0 15.0 The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs and customer relationships for each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of December 31, 2020 (dollars in thousands): Year Estimated Amortization Expense of In-Place Leases, Leasing Costs and Customer Relationships 2021 $ 19,828 2022 17,890 2023 15,435 2024 13,211 2025 11,467 Thereafter 39,548 $ 117,379 The estimated aggregate rental income to be recorded for the amortization of both above and below market leases for each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of December 31, 2020 (dollars in thousands): Year Net Increase to Rental Income Related to Above and Below Market Leases (1) 2021 $ 3,527 2022 2,575 2023 2,154 2024 2,009 2025 1,626 Thereafter 4,160 $ 16,051 (1) Does not include ground lease amortization of $ 176 . 5. Real Estate Dispositions, Held for Sale, and Impairment Charges Real Estate Dispositions During the year ended December 31, 2020, we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to 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): 75 Table of Contents Aggregate Square Footage Sold Sales Price Sales Costs Gain on Sale of Real Estate, net 551,743 $ 37,532 $ 1,698 $ 8,096 Our 2020 dispositions were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will they have a major effect on our operations and financial results. Accordingly, the operating results of these properties are included within continuing operations for all periods reported. The table below summarizes the components of operating income from the real estate and related assets disposed of during the years ended December 31, 2020, 2019, and 2018, respectively (dollars in thousands): For the year ended December 31, 2020 2019 2018 Operating revenue $ 2,703 $ 3,176 $ 3,919 Operating expense 1,534 3,697 1,609 Other income (expense), net 8,181 (1) ( 54 ) ( 586 ) Income (expense) from real estate and related assets sold $ 9,350 $ ( 575 ) $ 1,724 (1) Includes an $ 8.1 million gain on sale of real estate, net. Real Estate Held for Sale At December 31, 2020, we had three properties classified as held for sale, located in Boston Heights, Ohio, Rancho Cordova, California, and Champaign, Illinois. We considered these assets to be non-core to our long term strategy. At December 31, 2019, we had one property classified as held for sale, located in Charlotte, North Carolina. This property was sold during the year ended December 31, 2020. Our assets classified as held for sale at December 31, 2020 were not classified as discontinued operations because it does not represent a strategic shift in our operations, and it does not have a major effect on our financial results. The table below summarizes the components of income from real estate and related assets held for sale at December 31, 2020 (dollars in thousands): For the year ended December 31, 2020 2019 2018 Operating revenue $ 1,861 $ 1,769 $ 1,288 Operating expense 2,938 (1) 985 792 Other expense, net ( 388 ) ( 364 ) ( 394 ) (Loss) income from real estate and related assets held for sale $ ( 1,465 ) $ 420 $ 102 (1) Includes a $ 1.9 million impairment charge. The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying consolidated balance sheet (dollars in thousands): December 31, 2020 December 31, 2019 Assets Held for Sale Total real estate held for sale $ 8,114 $ 3,990 Lease intangibles, net 384 — Total Assets Held for Sale $ 8,498 $ 3,990 Liabilities Held for Sale Asset retirement obligation $ — $ 21 Total Liabilities Held for Sale $ — $ 21 Impairment Charges 76 Table of Contents We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the year ended December 31, 2020 and identified three held and used assets, located in Blaine, Minnesota, Champaign, Illinois, and Rancho Cordova, California, which were impaired by an aggregate of $ 3.6 million during the year ended December 31, 2020 when we determined the carrying value of these assets was unrecoverable based on an undiscounted cash flow analysis. As a result, we recorded an impairment charge to reflect the fair market value of these assets. The Rancho Cordova, California property was further impaired when we classified the property as held for sale as of December 31, 2020 to record the carrying value equal to the fair value less costs of sale and recorded an impairment charge to our Rancho Cordova, California asset of $ 0.7 million, which is reflected in aggregate impairment charge of $ 3.6 million during the year ended December 31, 2020. We classified one property as held for sale at December 31, 2019. We performed an analysis of the property classified as held for sale and compared the fair market value of the asset less selling costs against the carrying value of the asset available for sale. As a result of this analysis, we recorded an impairment charge of $ 1.8 million during the year ended December 31, 2019, as the fair market value minus selling costs was less than the carrying value. Fair market value for this asset was calculated using Level 3 inputs (defined in Note 6 “Mortgage Notes Payable and Credit Facility”), which were determined using a negotiated sales price from an executed purchase and sale agreement with a third party. We continue to evaluate our properties on a quarterly basis for changes that could create the need to record impairment. Future impairment losses may result, and could be significant, should market conditions deteriorate in the markets in which we hold our assets or we are unable to secure leases at terms that are favorable to us, which could impact the estimated cash flow of our properties over the period in which we plan to hold our properties. Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis. The fair values for the above properties were calculated using Level 3 inputs which were calculated using an estimated sales price, less estimated costs to sell. The estimated sales price was determined using executed purchase and sale agreements. 6. Mortgage Notes Payable and Credit Facility Our revolving credit facility and term loan facility are collectively referred to herein as the Credit Facility. Our mortgage notes payable and Credit Facility as of December 31, 2020 and December 31, 2019 are summarized below (dollars in thousands): Encumbered properties at Carrying Value at Stated Interest Rates at Scheduled Maturity Dates at December 31, 2020 December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2020 Mortgage and other secured loans: Fixed rate mortgage loans 61 $ 435,029 $ 412,771 (1) (2) Variable rate mortgage loans 7 24,809 45,151 (3) (2) Premiums and discounts, net - ( 182 ) ( 239 ) N/A N/A Deferred financing costs, mortgage loans, net - ( 3,479 ) ( 3,944 ) N/A N/A Total mortgage notes payable, net 68 $ 456,177 $ 453,739 (4) Variable rate revolving credit facility 50 (6) $ 53,900 $ 52,400 LIBOR + 1.65 % 7/2/2023 Deferred financing costs, revolving credit facility - ( 588 ) ( 821 ) N/A N/A Total revolver, net 50 $ 53,312 $ 51,579 Variable rate term loan facility - $ 160,000 $ 122,300 LIBOR + 1.60 % 7/2/2024 Deferred financing costs, term loan facility - ( 797 ) ( 1,024 ) N/A N/A Total term loan, net N/A $ 159,203 $ 121,276 Total mortgage notes payable and credit facility 118 $ 668,692 $ 626,594 (5) (1) Interest rates on our fixed rate mortgage notes payable vary from 2.80 % to 6.63 %. (2) We have 53 mortgage notes payable with maturity dates ranging from 11/1/2021 through 8/1/2037 . (3) Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.35 % to one month LIBOR + 2.75 %. At December 31, 2020, one month LIBOR was approximately 0.14 %. 77 Table of Contents (4) The weighted average interest rate on the mortgage notes outstanding at December 31, 2020, was approximately 4.24 %. (5) The weighted average interest rate on all debt outstanding at December 31, 2020, was approximately 3.45 %. (6) The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 50 unencumbered properties as of December 31, 2020. N/A - Not Applicable Mortgage Notes Payable As of December 31, 2020, we had 53 mortgage notes payable, collateralized by a total of 68 properties with a net book value of $ 687.6 million. We have limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. As of December 31, 2020, we did not have any recourse mortgage. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. 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. Scheduled principal payments of mortgage notes payable for each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands): Year Scheduled Principal Payments 2021 $ 23,056 2022 105,756 2023 72,495 2024 49,616 2025 37,571 Thereafter 171,344 $ 459,838 (1) (1) This figure is does not include $( 0.2 ) million premiums and (discounts), net, and $ 3.5 million of deferred financing costs, which are reflected in mortgage notes payable on the consolidated balance sheet. 78 Table of Contents We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility. Interest Rate Caps and Swaps We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps and interest rate swaps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At December 31, 2020 and 2019, our interest rate cap and interest rate swap agreements were valued using Level 2 inputs. The fair value of the interest rate cap agreements is recorded in other assets on our accompanying consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at December 31, 2020 and 2019 (dollars in thousands): December 31, 2020 December 31, 2019 Aggregate Cost Aggregate Notional Amount Aggregate Fair Value Aggregate Notional Amount Aggregate Fair Value $ 1,537 (1) $ 177,060 $ 9 $ 166,728 $ 250 (1) We have entered into various interest rate cap agreements on new variable rate debt with LIBOR caps ranging from 1.50 % to 2.75 %. We have assumed or entered into interest rate swap agreements in connection with certain of our acquisitions, whereby we will pay our counterparty a fixed interest rate on a monthly basis, and receive payments from our counterparty equivalent to the stipulated floating rate. The fair value of our interest rate swap agreements are recorded in other liabilities on our accompanying consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the respective interest rate swap agreement to accumulated other comprehensive income on the consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at December 31, 2020 and 2019 (dollars in thousands): December 31, 2020 December 31, 2019 Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability $ 68,829 $ — $ ( 3,055 ) $ 45,777 $ — $ ( 1,173 ) The following tables present the impact of our derivative instruments in the consolidated financial statements (dollars in thousands): 79 Table of Contents Amount of loss recognized in Comprehensive Income 2020 2019 2018 Derivatives in cash flow hedging relationships Interest rate caps $ ( 337 ) $ ( 749 ) $ 77 Interest rate swaps ( 1,882 ) ( 1,229 ) ( 260 ) Total $ ( 2,219 ) $ ( 1,978 ) $ ( 183 ) The following table sets forth certain information regarding our derivative instruments (dollars in thousands): Asset (Liability) Derivatives Fair Value at Derivatives Designated as Hedging Instruments Balance Sheet Location December 31, 2020 December 31, 2019 Interest rate caps Other assets $ 9 $ 250 Interest rate swaps Other liabilities ( 3,055 ) ( 1,173 ) Total derivative liabilities, net $ ( 3,046 ) $ ( 923 ) The fair value of all mortgage notes payable outstanding as of December 31, 2020 was $ 468.6 million, as compared to the carrying value stated above of $ 456.2 million. The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.” Credit Facility On August 7, 2013, we procured our senior unsecured revolving credit facility (“Revolver”) with KeyBank National Association (“KeyBank”) (serving as revolving lender, a letter of credit issuer and an administrative agent). In October 2015, we expanded our Revolver to $ 85.0 million and entered into a term loan facility (“Term Loan”) whereby we added a $ 25.0 million, five -year Term Loan subject to the same leverage tiers as the Revolver, with the interest rate at each leverage tier being five basis points lower than that of the Revolver. We have the option to repay the Term Loan in full, or in part, at any time without penalty or premium prior to the maturity date. On October 27, 2017, we amended this Credit Facility, increasing the Term Loan from $ 25.0 million, to $ 75.0 million, with the Revolver commitment remaining at $ 85.0 million. The Term Loan maturity date was extended to October 27, 2022, and the Revolver maturity date was extended to October 27, 2021. In connection with the amendment, the interest rate for the Credit Facility was reduced by 25 basis points at each of the leverage tiers. At the time of amendment, we entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR at 2.75 % to hedge our exposure to variable interest rates. 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 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. 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 December 31, 2020, the maximum additional amount we could draw under the Credit Facility was $ 19.2 million. We were in compliance with all covenants under the Credit Facility as of December 31, 2020. The amount outstanding under the Credit Facility approximates fair value as of December 31, 2020. 80 Table of Contents 7. Commitments and Contingencies Ground Leases We are obligated as lessee under four ground leases. Future minimum rental payments due under the terms of these leases as of December 31, 2020, are as follows (dollars in thousands): Year Future Lease Payments Due Under Operating Leases 2021 $ 477 2022 489 2023 492 2024 493 2025 494 Thereafter 7,305 Total anticipated lease payments $ 9,750 Less: amount representing interest ( 4,063 ) Present value of lease payments $ 5,687 Rental expense incurred for properties with ground lease obligations was $ 0.5 million each for the years ended December 31, 2020, 2019 and 2018. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the consolidated statements of operations and comprehensive income. Our ground leases have a weighted average remaining lease term of 20.1 years and weighted average discount rate of 5.32 %. Letters of Credit As of December 31, 2020, there was $ 16.4 million outstanding under letters of credit. These letters of credit are not reflected on our consolidated balance sheet. 8. Equity and Mezzanine Equity Distributions We paid the following distributions per share for the years ended December 31, 2020, 2019, and 2018: For the year ended December 31, 2020 2019 2018 Common Stock and Non-controlling OP Units $ 1.5018 $ 1.5000 $ 1.5000 Senior Common Stock 1.0500 1.0500 1.0500 Series A Preferred Stock — (1) 1.6038191 (1) 1.9374996 Series B Preferred Stock — (1) 1.5521 (1) 1.8750 Series D Preferred Stock 1.7500 1.7500 1.7500 Series E Preferred Stock 1.656252 0.404900 (3) — Series F Preferred Stock 0.7500 (2) — — (1) We fully redeemed our Series A and B Preferred Stock on October 28, 2019. (2) Prior to July 1, 2020, Series F Preferred Stock distributions were declared, but not paid, as there were no Series F Preferred Stock shares outstanding on the applicable dividend record dates. (3) We issued our Series E Preferred Stock on October 4, 2019. For federal income tax purposes, distributions paid to stockholders may be characterized as ordinary income, capital gains, return of capital or a combination of the foregoing. The characterization of distributions during each of the last three years is reflected in the table below: 81 Table of Contents Ordinary Income Return of Capital Long-Term Capital Gains Common Stock and OP Units For the year ended December 31, 2018 24.46913 % 75.53087 % — % For the year ended December 31, 2019 44.46159 % 55.53841 % — % For the year ended December 31, 2020 37.28754 % 62.71246 % — % Senior Common Stock For the year ended December 31, 2018 100.00000 % — % — % For the year ended December 31, 2019 100.00000 % — % — % For the year ended December 31, 2020 100.00000 % — % — % Series A Preferred Stock For the year ended December 31, 2018 100.00000 % — % — % For the year ended December 31, 2019 100.00000 % — % — % For the year ended December 31, 2020 — % — % — % Series B Preferred Stock For the year ended December 31, 2018 100.00000 % — % — % For the year ended December 31, 2019 100.00000 % — % — % For the year ended December 31, 2020 — % — % — % Series D Preferred Stock For the year ended December 31, 2018 100.00000 % — % — % For the year ended December 31, 2019 100.00000 % — % — % For the year ended December 31, 2020 100.00000 % — % — % Series E Preferred Stock For the year ended December 31, 2018 — % — % — % For the year ended December 31, 2019 100.00000 % — % — % For the year ended December 31, 2020 100.00000 % — % — % Series F Preferred Stock For the year ended December 31, 2018 — % — % — % For the year ended December 31, 2019 — % — % — % For the year ended December 31, 2020 100.00000 % — % — % Recent Activity Common Stock ATM Program On December 3, 2019, we entered into an At-the-Market Equity Offering Sales Agreement (the “Common Stock Sales Agreement”), with 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”) (collectively 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 (the “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 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 7.00 % Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”), and 6.625 % Series E Cumulative Redeemable Preferred Stock (“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 the 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 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 82 Table of Contents offset to gain (loss) on extinguishment. We currently believe the likelihood of a change of control of greater than 50% is remote. We did not have an active At-the-Market program for our Series D Preferred Stock during the year ended December 31, 2020. Series E Preferred Stock ATM Program We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”), with sales agents Baird, Goldman Sachs, Stifel, Fifth Third, and U.S. Bancorp Investments, Inc., pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $ 100.0 million. We sold 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 Series E Preferred Stock Sales Agreement. 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 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. Non-controlling Interests in Operating Partnership As of December 31, 2020 and 2019, we owned approximately 98.6 % and 98.6 %, respectively, 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. 83 Table of Contents 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. 9. Subsequent Events Distributions On January 12, 2021, our Board of Directors declared the following monthly distributions for the months of January, February, and March of 2021: Record Date Payment Date Common Stock and Non-controlling OP Unit Distributions per Share Series D Preferred Distributions per Share Series E Preferred Distributions per Share January 22, 2021 January 29, 2021 $ 0.12515 $ 0.1458333 $ 0.138021 February 17, 2021 February 26, 2021 0.12515 0.1458333 0.138021 March 18, 2021 March 31, 2021 0.12515 0.1458333 0.138021 $ 0.37545 $ 0.4374999 $ 0.414063 Series F Preferred Stock Distributions Record Date Payment Date Distribution per Share January 27, 2021 February 5, 2021 $ 0.125 February 24, 2021 March 5, 2021 0.125 March 24, 2021 April 5, 2021 0.125 $ 0.375 Senior Common Stock Distributions Payable to the Holders of Record During the Month of: Payment Date Distribution per Share January February 5, 2021 $ 0.0875 February March 5, 2021 0.0875 March April 5, 2021 0.0875 $ 0.2625 Equity Activity Subsequent to December 31, 2020 and through February 16, 2021, we raised $ 6.8 million in net proceeds from the sale of 0.4 million shares of common stock under our Common Stock ATM Program and $ 0.03 million in net proceeds from the sale of 1,200 sales of Series F Preferred Stock. We made no sales under our Series E Preferred ATM Program subsequent to December 31, 2020 and through February 16, 2021. Acquisition Activity 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. 84 Table of Contents Financing Activity 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. On February 11, 2021, we added a new $ 65.0 million term loan component to our Credit Facility, inclusive of a $ 15.0 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. 85 Table of Contents GLADSTONE COMMERCIAL CORPORATION SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2020 (Dollars in Thousands) Initial Cost Total Cost Location of Property Encumbrances Land Buildings & Improvements Improvement Costs Capitalized Subsequent to Acquisition Land Buildings & Improvements Total (1) Accumulated Depreciation (2) Net Real Estate (3) Year Construction/ Improvements Date Acquired Raleigh, North Carolina (4) Office Building $ — $ 960 $ 4,481 $ 1,039 $ 960 $ 5,520 $ 6,480 $ 2,409 $ 4,071 1997 12/23/2003 Canton, Ohio (4) Office Building — 186 3,083 500 187 3,582 3,769 1,658 2,111 1994 1/30/2004 Akron, Ohio (4) Office Building — 1,973 6,771 3,107 1,974 9,877 11,851 3,653 8,198 1968 / 1999 4/29/2004 Canton, North Carolina Industrial Building 3,123 150 5,050 7,285 150 12,335 12,485 3,298 9,187 1998 / 2014 7/6/2004 Crenshaw, Pennsylvania (4) Industrial Building — 100 6,574 269 100 6,843 6,943 2,903 4,040 1991 8/5/2004 Lexington, North Carolina (4) Industrial Building — 820 2,107 69 820 2,176 2,996 954 2,042 1986 8/5/2004 Mt. Pocono, Pennsylvania (4) Industrial Building — 350 5,819 18 350 5,837 6,187 2,463 3,724 1995 / 1999 10/15/2004 San Antonio, Texas (4) Office Building — 843 7,514 2,240 843 9,754 10,597 3,964 6,633 1999 2/10/2005 Big Flats, New York Industrial Building 2,049 275 6,459 515 275 6,974 7,249 2,632 4,617 2001 4/15/2005 Wichita, Kansas (4) Office Building — 1,525 9,703 327 1,525 10,030 11,555 4,138 7,417 2000 5/18/2005 Eatontown, New Jersey Office Building 2,574 1,351 3,520 534 1,351 4,054 5,405 1,700 3,705 1991 7/7/2005 Duncan, South Carolina (4) Industrial Building — 783 10,790 1,889 783 12,679 13,462 4,919 8,543 1984 / 2001 / 2007 7/14/2005 Duncan, South Carolina (4) Industrial Building — 195 2,682 470 195 3,152 3,347 1,223 2,124 1984 / 2001 / 2007 7/14/2005 Clintonville, Wisconsin (4) Industrial Building — 55 4,717 3,250 55 7,967 8,022 2,665 5,357 1992 / 2013 10/31/2005 Richmond, Virginia (4) Office Building — 736 5,336 486 736 5,822 6,558 2,207 4,351 1972 12/30/2005 Champaign, Illinois (5) Office Building — 687 2,036 ( 1,057 ) 326 1,340 1,666 754 912 1996 2/21/2006 Burnsville, Minnesota Office Building 7,764 3,511 8,746 7,329 3,511 16,075 19,586 6,654 12,932 1984 5/10/2006 Menomonee Falls, Wisconsin (4) Industrial Building — 625 6,911 686 625 7,597 8,222 2,914 5,308 1986 / 2000 6/30/2006 Baytown, Texas (4) Medical Office Building — 221 2,443 2,478 221 4,921 5,142 1,931 3,211 1997 7/11/2006 Mason, Ohio Office Building 3,560 797 6,258 725 797 6,983 7,780 2,792 4,988 2002 1/5/2007 Raleigh, North Carolina (4) Industrial Building — 1,606 5,513 4,148 1,606 9,661 11,267 3,576 7,691 1994 2/16/2007 Tulsa, Oklahoma Industrial Building — — 14,057 548 — 14,605 14,605 5,872 8,733 2004 3/1/2007 Hialeah, Florida Industrial Building — 3,562 6,672 769 3,562 7,441 11,003 2,697 8,306 1956 / 1992 3/9/2007 Mason, Ohio (4) Retail Building — 1,201 4,961 — 1,201 4,961 6,162 1,749 4,413 2007 7/1/2007 Cicero, New York (4) Industrial Building — 299 5,019 — 299 5,019 5,318 1,714 3,604 2005 9/6/2007 Grand Rapids, Michigan Office Building 4,886 1,629 10,500 308 1,629 10,808 12,437 3,819 8,618 2001 9/28/2007 Bolingbrook, Illinois (4) Industrial Building — 1,272 5,003 991 1,272 5,994 7,266 2,287 4,979 2002 9/28/2007 Decatur, Georgia (4) Medical Office Building — 783 3,241 — 783 3,241 4,024 1,140 2,884 1989 12/13/2007 Decatur, Georgia (4) Medical Office Building — 205 847 — 205 847 1,052 298 754 1989 12/13/2007 Decatur, Georgia (4) Medical Office Building — 257 1,062 — 257 1,062 1,319 374 945 1989 12/13/2007 Lawrenceville, Georgia (4) 86 Table of Contents Initial Cost Total Cost Location of Property Encumbrances Land Buildings & Improvements Improvement Costs Capitalized Subsequent to Acquisition Land Buildings & Improvements Total (1) Accumulated Depreciation (2) Net Real Estate (3) Year Construction/ Improvements Date Acquired Medical Office Building — 678 2,807 — 678 2,807 3,485 988 2,497 2005 12/13/2007 Snellville, Georgia (4) Medical Office Building — 176 727 — 176 727 903 256 647 1986 12/13/2007 Covington, Georgia (4) Medical Office Building — 232 959 — 232 959 1,191 338 853 2000 12/13/2007 Conyers, Georgia (4) Medical Office Building — 296 1,228 — 296 1,228 1,524 432 1,092 1994 12/13/2007 Cumming, Georgia Medical Office Building 2,634 738 3,055 2,524 741 5,576 6,317 1,621 4,696 2004 12/13/2007 Reading, Pennsylvania Industrial Building 3,337 491 6,202 — 491 6,202 6,693 2,062 4,631 2007 1/29/2008 Fridley, Minnesota Office Building 4,380 1,354 8,074 1,768 1,383 9,813 11,196 3,390 7,806 1985 / 2006 2/26/2008 Pineville, North Carolina Industrial Building 1,940 669 3,028 293 669 3,321 3,990 1,097 2,893 1985 4/30/2008 Marietta, Ohio Industrial Building 4,734 829 6,607 529 829 7,136 7,965 2,265 5,700 1992 / 2007 8/29/2008 Chalfont, Pennsylvania Industrial Building 4,275 1,249 6,420 854 1,249 7,274 8,523 2,365 6,158 1987 8/29/2008 Orange City, Iowa Industrial Building 5,353 258 5,861 6 258 5,867 6,125 1,843 4,282 1990 12/15/2010 Hickory, North Carolina Office Building 5,728 1,163 6,605 357 1,163 6,962 8,125 2,911 5,214 2008 4/4/2011 Springfield, Missouri (4) Office Building — 1,700 12,038 924 1,845 12,817 14,662 3,600 11,062 2006 6/20/2011 Boston Heights, Ohio Office Building 2,263 449 3,010 10 449 3,020 3,469 1,145 2,324 2011 10/20/2011 Parsippany, New Jersey (4) Office Building — 1,696 7,077 252 1,696 7,329 9,025 2,454 6,571 1984 10/28/2011 Dartmouth, Massachusetts Retail Location 3,304 — 4,236 — — 4,236 4,236 1,078 3,158 2011 11/18/2011 Springfield, Missouri Retail Location 1,222 — 2,275 — — 2,275 2,275 742 1,533 2005 12/13/2011 Pittsburgh, Pennsylvania Office Building 2,326 281 3,205 743 281 3,948 4,229 1,271 2,958 1968 12/28/2011 Ashburn, Virginia Office Building 6,052 706 7,858 — 705 7,859 8,564 2,314 6,250 2002 1/25/2012 Ottumwa, Iowa Industrial Building 2,708 212 5,072 310 212 5,382 5,594 1,515 4,079 1970 5/30/2012 New Albany, Ohio Office Building 6,908 1,658 8,746 — 1,658 8,746 10,404 2,760 7,644 2007 6/5/2012 Columbus, Georgia Office Building 3,779 1,378 4,520 — 1,378 4,520 5,898 1,592 4,306 2012 6/21/2012 Columbus, Ohio (4) Office Building — 542 2,453 134 542 2,587 3,129 993 2,136 1981 6/28/2012 Jupiter, Florida (4) Office Building — 1,160 11,994 — 1,160 11,994 13,154 3,026 10,128 2011 9/26/2012 Fort Worth, Texas Industrial Building 10,321 963 15,647 — 963 15,647 16,610 3,881 12,729 2005 11/8/2012 Columbia, South Carolina Office Building 14,890 1,905 20,648 438 1,905 21,086 22,991 7,224 15,767 2010 11/21/2012 Egg Harbor, New Jersey Office Building 2,949 1,627 3,017 315 1,627 3,332 4,959 964 3,995 1985 3/28/2013 Vance, Alabama (4) Industrial Building — 457 10,529 6,692 457 17,221 17,678 3,440 14,238 2013 5/9/2013 Blaine, Minnesota (5) Office Building 7,193 1,060 10,518 ( 1,702 ) 842 9,034 9,876 3,327 6,549 2009 5/10/2013 Austin, Texas Office Building 30,827 2,330 44,021 134 2,330 44,155 46,485 16,922 29,563 1999 7/9/2013 Allen, Texas Office Building 7,620 2,699 7,945 1,467 2,699 9,412 12,111 3,357 8,754 1998 7/10/2013 Englewood, Colorado (4) Office Building — 1,503 11,739 208 1,503 11,947 13,450 3,652 9,798 2008 12/11/2013 Novi, Michigan Industrial Building 3,701 352 5,626 — 352 5,626 5,978 1,365 4,613 1988 12/27/2013 Allen, Texas Retail Building 2,728 874 3,634 — 874 3,634 4,508 849 3,659 2004 3/27/2014 Colleyville, Texas 87 Table of Contents Initial Cost Total Cost Location of Property Encumbrances Land Buildings & Improvements Improvement Costs Capitalized Subsequent to Acquisition Land Buildings & Improvements Total (1) Accumulated Depreciation (2) Net Real Estate (3) Year Construction/ Improvements Date Acquired Retail Building 2,518 1,277 2,424 — 1,277 2,424 3,701 591 3,110 2000 3/27/2014 Rancho Cordova, California (5) Office Building 4,486 752 6,176 ( 541 ) 641 5,746 6,387 1,509 4,878 1986 4/22/2014 Coppell, Texas Retail Building 2,900 1,448 3,349 — 1,448 3,349 4,797 765 4,032 2005 5/8/2014 Columbus, Ohio (4) Office Building — 990 8,017 2,860 990 10,877 11,867 3,058 8,809 1986 5/13/2014 Taylor, Pennsylvania Industrial Building 21,600 3,101 25,405 1,248 3,101 26,653 29,754 5,283 24,471 2000 / 2006 6/9/2014 Aurora, Colorado (4) Industrial Building — 2,882 3,917 96 2,882 4,013 6,895 1,028 5,867 1983 7/1/2014 Indianapolis, Indiana Office Building 5,455 502 6,422 1,859 498 8,285 8,783 2,152 6,631 1981 / 2014 9/3/2014 Denver, Colorado (4) Industrial Building — 1,621 7,071 243 1,621 7,314 8,935 1,646 7,289 1985 10/31/2014 Monroe, Michigan Industrial Building 9,632 658 14,607 — 657 14,608 15,265 2,761 12,504 2004 12/23/2014 Monroe, Michigan Industrial Building 6,742 460 10,225 — 460 10,225 10,685 1,933 8,752 2004 12/23/2014 Richardson, Texas Office Building 12,991 2,728 15,372 1,135 2,728 16,507 19,235 4,086 15,149 1985 / 2008 3/6/2015 Birmingham, Alabama (4) Office Building — 650 2,034 60 650 2,094 2,744 567 2,177 1982 / 2010 3/20/2015 Dublin, Ohio Office Building 3,800 1,338 5,058 1,086 1,338 6,144 7,482 1,374 6,108 1980 /Various 5/28/2015 Draper, Utah Office Building 11,930 3,248 13,129 74 3,248 13,203 16,451 2,998 13,453 2008 5/29/2015 Hapeville, Georgia Office Building 6,845 2,272 8,778 263 2,272 9,041 11,313 1,801 9,512 1999 / 2007 7/15/2015 Villa Rica, Georgia Industrial Building 3,477 293 5,277 18 293 5,295 5,588 1,030 4,558 2000 / 2014 10/20/2015 Taylorsville, Utah Office Building 8,867 3,008 10,659 435 3,008 11,094 14,102 2,703 11,399 1997 5/26/2016 Fort Lauderdale, Florida Office Building 12,625 4,117 15,516 3,378 4,117 18,894 23,011 3,664 19,347 1984 9/12/2016 King of Prussia, Pennsylvania Office Building 14,401 3,681 15,739 473 3,681 16,212 19,893 2,918 16,975 2001 12/14/2016 Conshohocken, Pennsylvania Office Building 10,095 1,996 10,880 — 1,996 10,880 12,876 1,532 11,344 1996 6/22/2017 Philadelphia, Pennsylvania Industrial Building 14,924 5,896 16,282 27 5,906 16,299 22,205 2,669 19,536 1994 / 2011 7/7/2017 Maitland, Florida Office Building 15,356 3,073 19,661 431 3,091 20,074 23,165 3,714 19,451 1998 7/31/2017 Maitland, Florida Office Building 7,699 2,095 9,339 — 2,095 9,339 11,434 1,328 10,106 1999 7/31/2017 Columbus, Ohio Office Building 8,939 1,926 11,410 ( 1 ) 1,925 11,410 13,335 1,723 11,612 2007 12/1/2017 Salt Lake City, Utah (4) Office Building — 4,446 9,938 771 4,446 10,709 15,155 1,606 13,549 2007 12/1/2017 Vance, Alabama (4) Industrial Building — 459 12,224 44 469 12,258 12,727 1,260 11,467 2018 3/9/2018 Columbus, Ohio Industrial Building 4,524 681 6,401 — 681 6,401 7,082 756 6,326 1990 9/20/2018 Detroit, Michigan Industrial Building 6,389 1,458 10,092 10 1,468 10,092 11,560 793 10,767 1997 10/30/2018 Detroit, Michigan (4) Industrial Building — 662 6,681 10 672 6,681 7,353 534 6,819 2002 / 2016 10/30/2018 Lake Mary, Florida Office Building 10,316 3,018 11,756 87 3,020 11,841 14,861 1,023 13,838 1997 / 2018 12/27/2018 Moorestown, New Jersey (4) Industrial Building — 471 1,825 — 471 1,825 2,296 213 2,083 1991 2/8/2019 Indianapolis, Indiana (4) Industrial Building — 255 2,809 — 255 2,809 3,064 203 2,861 1989 / 2019 2/28/2019 Ocala, Florida (4) Industrial Building — 1,286 8,535 — 1,286 8,535 9,821 505 9,316 2001 4/5/2019 Ocala, Florida (4) Industrial Building — 725 4,814 253 725 5,067 5,792 285 5,507 1965 / 2007 4/5/2019 Delaware, Ohio (4) 88 Table of Contents Initial Cost Total Cost Location of Property Encumbrances Land Buildings & Improvements Improvement Costs Capitalized Subsequent to Acquisition Land Buildings & Improvements Total (1) Accumulated Depreciation (2) Net Real Estate (3) Year Construction/ Improvements Date Acquired Industrial Building — 316 2,355 — 316 2,355 2,671 165 2,506 2005 4/30/2019 Tifton, Georgia Industrial Building 8,467 — 15,190 1,725 1,725 15,190 16,915 785 16,130 1995 / 2003 6/18/2019 Denton, Texas (4) Industrial Building — 1,497 4,151 — 1,496 4,152 5,648 262 5,386 2012 7/30/2019 Temple, Texas (4) Industrial Building — 200 4,335 65 200 4,400 4,600 225 4,375 1973 / 2006 9/26/2019 Temple, Texas (4) Industrial Building — 296 6,425 99 296 6,524 6,820 334 6,486 1978 / 2006 9/26/2019 Indianapolis, Indiana (4) Industrial Building — 1,158 5,162 4 1,162 5,162 6,324 354 5,970 1967 / 1998 11/14/2019 Jackson, Tennessee Industrial Building 4,656 311 7,199 — 311 7,199 7,510 250 7,260 2019 12/16/2019 Carrollton, Georgia Industrial Building 4,138 291 6,720 — 292 6,719 7,011 225 6,786 2015 / 2019 12/17/2019 New Orleans, Louisiana Industrial Building 3,706 2,168 4,667 ( 2 ) 2,166 4,667 6,833 256 6,577 1975 12/17/2019 San Antonio, Texas Industrial Building 3,804 775 6,877 ( 2 ) 773 6,877 7,650 268 7,382 1985 12/17/2019 Port Allen, Louisiana Industrial Building 2,819 292 3,411 ( 2 ) 291 3,410 3,701 168 3,533 1983 / 2005 12/17/2019 Albuquerque, New Mexico Industrial Building 1,824 673 2,291 ( 3 ) 671 2,290 2,961 93 2,868 1998 / 2017 12/17/2019 Tucson, Arizona Industrial Building 3,414 819 4,636 ( 2 ) 817 4,636 5,453 176 5,277 1987 / 1995 / 2005 12/17/2019 Albuquerque, New Mexico Industrial Building 3,453 818 5,219 ( 4 ) 815 5,218 6,033 195 5,838 2000 / 2018 12/17/2019 Indianapolis, Indiana (4) Industrial Building — 489 3,956 206 493 4,158 4,651 137 4,514 1987 1/8/2020 Houston, Texas Industrial Building 9,772 1,714 14,170 3 1,717 14,170 15,887 385 15,502 2000 / 2018 1/27/2020 Charlotte, North Carolina Industrial Building 5,279 1,458 6,778 4 1,461 6,779 8,240 234 8,006 1995 / 1999 / 2006 1/27/2020 St. Charles, Missouri Industrial Building 2,920 924 3,749 4 928 3,749 4,677 105 4,572 2012 1/27/2020 Crandall, Georgia Industrial Building 17,224 2,711 26,632 115 2,711 26,747 29,458 641 28,817 2020 3/9/2020 Terre Haute, Indiana (4) Industrial Building — 502 8,076 — 502 8,076 8,578 81 8,497 2010 9/1/2020 Montgomery, Alabama (4) Industrial Building — 599 11,290 3 602 11,290 11,892 96 11,796 1990 / 1997 10/14/2020 Huntsville, Alabama Industrial Building 10,348 1,445 15,040 — 1,445 15,040 16,485 21 16,464 2001 12/18/2020 Pittsburgh, Pennsylvania Industrial Building 6,375 1,422 10,094 — 1,422 10,094 11,516 13 11,503 1994 12/21/2020 $ 459,838 $ 142,993 $ 925,501 $ 71,711 $ 144,269 $ 995,936 $ 1,140,205 $ 231,876 $ 908,329 (1) The aggregate cost for land and building improvements for federal income tax purposes is the same as the total gross cost of land, building improvements and acquisition costs capitalized for asset acquisitions under ASC 360, which is $ 1,140.2 million. (2) Depreciable life of all buildings is the shorter of the useful life of the asset or 39 years. Depreciable life of all improvements is the shorter of the useful life of the assets or the life of the respective leases on each building, which range from 5 - 20 years. (3) The net real estate figure includes real estate held for sale as of December 31, 2020 of $ 8.1 million. (4) These properties are in our unencumbered pool of assets on our Credit Facility. (5) These properties were impaired during the year ended December 31, 2020. 89 Table of Contents The following table reconciles the change in the balance of real estate during the years ended December 31, 2020, 2019 and 2018, respectively (in thousands): 2020 2019 2018 Balance at beginning of period $ 1,064,389 $ 949,822 $ 906,850 Additions: Acquisitions during period 111,049 108,972 53,432 Improvements 11,696 10,580 4,824 Deductions: Dispositions during period ( 43,383 ) ( 3,172 ) ( 15,284 ) Impairments during period ( 3,546 ) ( 1,813 ) — Balance at end of period $ 1,140,205 (1) $ 1,064,389 (2) $ 949,822 (3) (1) The real estate figure includes $ 11.5 million of real estate held for sale as of December 31, 2020. (2) The real estate figure includes $ 7.4 million of real estate held for sale as of December 31, 2019. (3) The real estate figure includes $ 3.2 million of real estate held for sale as of December 31, 2018. The following table reconciles the change in the balance of accumulated depreciation during the years ended December 31, 2020, 2019 and 2018, respectively (in thousands): 2020 2019 2018 Balance at beginning of period $ 210,944 $ 178,475 $ 153,387 Additions during period 36,034 32,838 29,915 Dispositions during period ( 15,102 ) ( 369 ) ( 4,827 ) Balance at end of period $ 231,876 (1) $ 210,944 (2) $ 178,475 (3) (1) The accumulated depreciation figure includes $ 3.4 million of real estate held for sale as of December 31, 2020. (2) The accumulated depreciation figure includes $ 3.4 million of real estate held for sale as of December 31, 2019. (3) The accumulated depreciation figure includes $ 0.2 million of real estate held for sale as of December 31, 2018. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. 90 Table of Contents