GLADSTONE COMMERCIAL CORP 10-Q

Item 1. Financial Statements Gladstone Commercial Corporation Condensed Consolidated Balance Sheets (Dollars in Thousands, Except Share and Per Share Data) (Unaudited) September 30, 2023 December 31, 2022 ASSETS Real estate, at cost $ 1,226,461 $ 1,287,297 Less: accumulated depreciation 291,986 286,150 Total real estate, net 934,475 1,001,147 Lease intangibles, net 102,629 111,622 Real estate and related assets held for sale 29,350 3,293 Cash and cash equivalents 18,263 11,653 Restricted cash 3,811 4,339 Funds held in escrow 8,509 8,818 Right-of-use assets from operating leases 4,951 5,131 Deferred rent receivable, net 40,462 38,884 Other assets 24,706 17,746 TOTAL ASSETS $ 1,167,156 $ 1,202,633 LIABILITIES, MEZZANINE EQUITY AND EQUITY LIABILITIES Mortgage notes payable, net (1) $ 310,974 $ 359,389 Borrowings under Revolver 70,950 23,250 Borrowings under Term Loan A, Term Loan B and Term Loan C, net 367,085 366,567 Deferred rent liability, net 31,814 39,997 Operating lease liabilities 5,148 5,308 Asset retirement obligation 4,843 4,793 Accounts payable and accrued expenses 13,583 9,606 Liabilities related to assets held for sale 631 — Due to Adviser and Administrator (1) 2,552 3,356 Other liabilities 12,949 14,617 TOTAL LIABILITIES $ 820,529 $ 826,883 Commitments and contingencies (2) MEZZANINE EQUITY Series E and G redeemable preferred stock, net, par value $ 0.001 per share; $ 25 per share liquidation preference; 10,750,886 and 10,751,486 shares authorized; and 7,052,334 and 7,052,934 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (3) $ 170,041 $ 170,056 TOTAL MEZZANINE EQUITY $ 170,041 $ 170,056 EQUITY Senior common stock, par value $ 0.001 per share; 950,000 shares authorized; and 406,425 and 431,064 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (3) $ 1 $ 1 Common stock, par value $ 0.001 per share, 62,323,441 and 62,305,727 shares authorized; and 39,917,995 and 39,744,359 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (3) 39 39 Series F redeemable preferred stock, par value $ 0.001 per share; $ 25 per share liquidation preference; 25,975,673 and 25,992,787 shares authorized and 899,049 and 670,895 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (3) 1 1 Additional paid in capital 729,400 721,327 Accumulated other comprehensive income 19,795 11,640 Distributions in excess of accumulated earnings ( 574,113 ) ( 529,104 ) TOTAL STOCKHOLDERS' EQUITY $ 175,123 $ 203,904 OP Units held by Non-controlling OP Unitholders (3) 1,463 1,790 TOTAL EQUITY $ 176,586 $ 205,694 TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY $ 1,167,156 $ 1,202,633 (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 condensed consolidated financial statements. 4 Table of Contents Gladstone Commercial Corporation Condensed Consolidated Statements of Operations and Comprehensive Income (Dollars in Thousands, Except Share and Per Share Data) (Unaudited) For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Operating revenues Lease revenue $ 36,464 $ 39,834 $ 111,675 $ 111,764 Total operating revenues $ 36,464 $ 39,834 $ 111,675 $ 111,764 Operating expenses Depreciation and amortization $ 12,485 $ 15,474 $ 44,125 $ 45,279 Property operating expenses 6,821 6,536 20,286 20,118 Base management fee (1) 1,597 1,603 4,808 4,727 Incentive fee (1) — 1,513 — 4,193 Administration fee (1) 624 481 1,734 1,342 General and administrative 1,306 833 3,437 2,788 Impairment charge 6,754 10,718 13,577 12,092 Total operating expenses $ 29,587 $ 37,158 $ 87,967 $ 90,539 Other income (expense) Interest expense $ ( 9,936 ) $ ( 9,107 ) $ ( 27,845 ) $ ( 22,813 ) Gain on sale of real estate, net 4,696 8,902 4,245 8,902 Other income 155 316 262 538 Total other (expense) income, net $ ( 5,085 ) $ 111 $ ( 23,338 ) $ ( 13,373 ) Net income $ 1,792 $ 2,787 $ 370 $ 7,852 Net (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 3 ) 4 78 12 Net income available to the Company $ 1,789 $ 2,791 $ 448 $ 7,864 Distributions attributable to Series E, F, and G preferred stock ( 3,099 ) ( 2,987 ) ( 9,179 ) ( 8,900 ) Distributions attributable to senior common stock ( 108 ) ( 114 ) ( 323 ) ( 344 ) Loss on extinguishment of Series F preferred stock ( 1 ) — ( 12 ) ( 5 ) Gain on repurchase of Series G preferred stock — — 3 — Net loss attributable to common stockholders $ ( 1,419 ) $ ( 310 ) $ ( 9,063 ) $ ( 1,385 ) Loss per weighted average share of common stock - basic & diluted Loss attributable to common shareholders $ ( 0.04 ) $ ( 0.01 ) $ ( 0.23 ) $ ( 0.04 ) Weighted average shares of common stock outstanding Basic and Diluted 39,917,995 39,504,734 39,939,660 38,723,581 Earnings per weighted average share of senior common stock $ 0.27 $ 0.26 $ 0.79 $ 0.78 Weighted average shares of senior common stock outstanding - basic 406,425 431,064 411,075 438,556 Comprehensive income Change in unrealized gain related to interest rate hedging instruments, net $ 5,089 $ 6,790 $ 7,218 $ 13,660 Other Comprehensive gain 5,089 6,790 7,218 13,660 Net income $ 1,792 $ 2,787 $ 370 $ 7,852 Comprehensive income $ 6,881 $ 9,577 $ 7,588 $ 21,512 Comprehensive (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 3 ) 4 78 12 Total comprehensive income available to the Company $ 6,878 $ 9,581 $ 7,666 $ 21,524 (1) Refer to Note 2 “Related-Party Transactions” The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents Gladstone Commercial Corporation Condensed Consolidated Statements of Cash Flows (Dollars in Thousands) (Unaudited) For the nine months ended September 30, 2023 2022 Cash flows from operating activities: Net income $ 370 $ 7,852 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,125 45,279 Impairment charge 13,577 12,092 Gain on sale of real estate, net ( 4,245 ) ( 8,902 ) Amortization of deferred financing costs 1,248 3,066 Amortization of deferred rent asset and liability, net ( 5,772 ) ( 2,483 ) Amortization of discount and premium on assumed debt, net 31 36 Asset retirement obligation expense 94 68 Amortization of right-of-use asset from operating leases and operating lease liabilities, net 20 23 Operating changes in assets and liabilities Decrease (increase) in other assets 2,279 ( 1,476 ) Decrease in deferred rent receivable ( 2,524 ) ( 1,192 ) Increase in accounts payable and accrued expenses 2,320 3,388 (Decrease) increase in amount due to Adviser and Administrator ( 804 ) 273 (Decrease) increase in other liabilities ( 894 ) 598 Leasing commissions paid ( 1,336 ) ( 1,724 ) Net cash provided by operating activities $ 48,489 $ 56,898 Cash flows from investing activities: Acquisition of real estate and related intangible assets $ ( 17,539 ) $ ( 95,882 ) Improvements of existing real estate ( 6,369 ) ( 2,490 ) Proceeds from sale of real estate 22,174 26,847 Receipts from lenders for funds held in escrow 3,662 3,529 Payments to lenders for funds held in escrow ( 3,353 ) ( 5,689 ) Receipts from tenants for reserves 352 1,513 Payments to tenants from reserves ( 2,165 ) ( 3,106 ) Deposits on future acquisitions ( 350 ) ( 258 ) Net cash used in investing activities $ ( 3,588 ) $ ( 75,536 ) Cash flows from financing activities: Proceeds from issuance of equity $ 9,775 $ 45,232 Offering costs paid ( 500 ) ( 895 ) Redemption of Series F preferred stock ( 413 ) ( 55 ) Retirement of Senior Common stock ( 55 ) — Repurchase of Series G preferred stock ( 12 ) — Repurchase of common stock ( 998 ) — Borrowings under mortgage notes payable 9,000 56,313 Payments for deferred financing costs ( 375 ) ( 5,202 ) Principal repayments on mortgage notes payable ( 57,637 ) ( 138,889 ) Borrowings from revolving credit facility 93,100 87,250 Repayments on revolving credit facility ( 45,400 ) ( 113,050 ) Borrowings on term loan — 150,000 Repayments on term loan — ( 5,000 ) Increase in security deposits 141 464 Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders ( 45,445 ) ( 53,022 ) Net cash (used in) provided by financing activities $ ( 38,819 ) $ 23,146 Net increase in cash, cash equivalents, and restricted cash $ 6,082 $ 4,508 Cash, cash equivalents, and restricted cash at beginning of period $ 15,992 $ 13,178 6 Table of Contents Cash, cash equivalents, and restricted cash at end of period $ 22,074 $ 17,686 SUPPLEMENTAL AND NON-CASH INFORMATION Tenant funded fixed asset improvements included in deferred rent liability, net $ ( 1,312 ) $ 16,668 Unrealized gain related to interest rate hedging instruments, net $ 7,218 $ 13,660 Capital improvements and leasing commissions included in accounts payable and accrued expenses $ 3,099 $ 1,142 Increase in asset retirement obligation assumed in acquisition $ — $ 718 Non-controlling OP Units issued in connection with acquisition $ — $ 2,393 Dividends paid on Series F Preferred Stock via additional share issuances $ 355 $ 284 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (dollars in thousands): For the nine months ended September 30, 2023 2022 Cash and cash equivalents $ 18,263 $ 13,540 Restricted cash 3,811 4,146 Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows $ 22,074 $ 17,686 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents Gladstone Commercial Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization, Basis of Presentation and Significant Accounting Policies Gladstone Commercial Corporation is a real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily industrial and office 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 other 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 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. Interim Financial Information Our interim financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 22, 2023. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year. Revision of Previously Issued Financial Statements In connection with the preparation of its financial statements for the second quarter of 2023, the Company identified errors in the calculation of depreciation of tenant funded improvement assets at a number of its properties. The Company had depreciated these assets through a term that was different than their useful lives, the correction of which resulted in changes to depreciation expense, a non-cash amount, and net income. The correction of these errors had an immaterial impact on the Incentive Fee for each period presented and had no impact on any other Advisory fees. The identified errors were included in the Company's previously issued 2021 quarterly and annual financial statements, 2022 quarterly and annual financial statements, and quarterly financial statements for the three months ended March 31, 2023. The Company evaluated the errors and determined that the related impact was not material to the Consolidated Statements of Operations and Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Cash Flows or Consolidated Statements of Equity for any period impacted. The Company has revised the previously issued Condensed Consolidated Statements of Operations and Comprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity tables as of and for the three and nine months ended September 30, 2022 to correct for such errors and these revisions are reflected in this Form 10-Q. The Company will also correct previously reported financial information for these errors in its future filings, as applicable. A summary of the corrections to the impacted financial statement line items to the Company’s previously issued Consolidated Statements of Operations and Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Equity for each affected period is presented in Note 9, “Revision of Previously Issued Financial Statements.” Use of Estimates The preparation of financial statements in conformity with 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. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant Accounting Policies 8 Table of Contents The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature and requires management to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2023. 2. Related-Party Transactions Gladstone Management and Gladstone Administration We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Lee Brubaker (our chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Arthur “Buzz” Cooper, is also executive vice president of commercial and industrial real estate of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary, as well as executive vice president of administration of our Adviser. We have entered into an advisory agreement with our Adviser, as amended from time to time (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. As of September 30, 2023 and December 31, 2022, $ 2.6 million and $ 3.4 million, respectively, were collectively due to our Adviser and Administrator. Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreements with our Adviser and Administrator each July. During their July 2023 meeting, our Board of Directors reviewed and renewed the Administration Agreement for an additional year, through August 31, 2024 and simultaneously entered into the Eighth Amended and Restated Investment Advisory Agreement (the “Eighth Amended Advisory Agreement”). Base Management Fee On July 14, 2020, we amended and restated the Advisory Agreement, which replaced the previous calculation of the base management fee with a calculation based on Gross Tangible Real Estate. The revised base management fee is payable quarterly in arrears and calculated at an annual rate of 0.425 % ( 0.10625 % per quarter) of the prior calendar quarter’s “Gross Tangible Real Estate,” defined in the Advisory Agreement as the current gross value of our property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any subsequent capital improvements thereon). The calculation of the other fees in the Advisory Agreement was unchanged. For the three and nine months ended September 30, 2023, we recorded a base management fee of $ 1.6 million and $ 4.8 million, respectively. For the three and nine months ended September 30, 2022, we recorded a base management fee of $ 1.6 million and $ 4.7 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 hurdle rate. The Adviser will receive 15.0 % of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0 % (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net (loss) income (attributable) 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 (loss) income (attributable) available to common stockholders for the period, and one-time events pursuant to changes in GAAP. On January 10, 2023, the Company amended and restated the Advisory Agreement by entering into the Seventh Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Seventh Amended Advisory Agreement”), as approved unanimously by our Board of Directors, including specifically, our independent directors. The 9 Table of Contents Seventh Amended Advisory Agreement contractually eliminated the payment of the incentive fee for the quarters ended March 31, 2023 and June 30, 2023. The calculation of the other fees was unchanged. On July 11, 2023, the Company entered into the Eighth Amended Advisory Agreement, as approved unanimously by our Board of Directors, including specifically, our independent directors. The Eighth Amended Advisory Agreement contractually eliminated the payment of the incentive fee for the quarters ending September 30, 2023 and December 31, 2023. In addition, the Eighth Amended Advisory Agreement also clarified that for any future quarter whereby an incentive fee would exceed by greater than 15 % the average quarterly incentive fee paid, the measurement would be versus the last four quarters where an incentive fee was actually paid. The calculation of the other fees remains unchanged. For the three and nine months ended September 30, 2023, the contractually eliminated incentive fee would have been $ 0.9 million and $ 3.4 million, respectively. For the three and nine months ended September 30, 2022, we recorded an incentive fee of $ 1.5 million and $ 4.2 million, respectively. The Adviser did no t waive any portion of the incentive fee for the three and nine months ended September 30, 2022. Capital Gain Fee Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0 % of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2023 or 2022. Termination Fee The Advisory Agreement includes a termination fee clause 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 the 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 three and nine months ended September 30, 2023, we recorded an administration fee of $ 0.6 million and $ 1.7 million, respectively. For the three and nine months ended September 30, 2022, we recorded an administration fee of $ 0.5 million and $ 1.3 million, respectively. Gladstone Securities 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. 10 Table of Contents 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 1.00 % 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 $ 0.03 million and $ 0.1 million during the three and nine months ended September 30, 2023, which are included in mortgage payable, net, in the condensed consolidated balance sheets, or 0.38 % and 0.29 % of the mortgage principal secured. We paid financing fees to Gladstone Securities of $ 0.1 million and $ 0.3 million during the three and nine months ended September 30, 2022, which are included in mortgage payable, net, in the condensed consolidated balance sheets, or 0.29 % and 0.32 % of the mortgage principal secured. Our Board of Directors renewed the agreement for an additional year, through August 31, 2024, at its July 2023 meeting. Dealer Manager Agreement On February 20, 2020, we entered into a dealer manager agreement, as amended on February 9, 2023 (together, the “Dealer Manager Agreement”), whereby Gladstone Securities acts as the exclusive dealer manager in connection with our offering (the “Offering”) of up to (i) 20,000,000 shares of 6.00 % Series F Cumulative Redeemable Preferred Stock, 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 an automatic registration statement on Form S-3 (File No. 333-268549), as the same may be amended and/or supplemented (the “2022 Registration Statement”), under the Securities Act of 1933, as amended, and is offered and sold pursuant to a prospectus supplement, dated February 9, 2023, and a base prospectus dated November 23, 2022 relating to the 2022 Registration Statement. During the years ended December 31, 2020, 2021 and 2022, the Series F Preferred Stock was registered with the SEC pursuant to a registration statement on Form S-3 (File No. 333-236143) (the “2020 Registration Statement”), and offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020. Under the Dealer Manager Agreement, Gladstone Securities, as dealer manager, provides certain sales, promotional and marketing services to us in connection with the Offering, and we 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 are paid with respect to shares sold pursuant to the DRIP. Gladstone Securities may, in its sole discretion, re-allow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. We paid fees of $ 0.1 million and $ 0.5 million to Gladstone Securities during the three and nine months ended September 30, 2023, respectively, in connection with the Offering. We paid fees of $ 0.1 million and $ 0.4 million to Gladstone Securities during the three and nine months ended September 30, 2022, respectively, in connection with the Offering. 3. Loss Per Share of Common Stock The following tables set forth the computation of basic and diluted loss per share of common stock for the three and nine months ended September 30, 2023 and 2022. The operating partnership units in the Operating Partnership (“OP Units”) held by holders who do not control the Operating Partnership (“Non-controlling OP Unitholders”) (which may be redeemed for shares of common stock) have been excluded from the diluted loss per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of loss would also be added back to net loss. Net loss figures are presented net of such non-controlling interests in the loss per share calculation. 11 Table of Contents We computed basic loss per share for the three and nine months ended September 30, 2023 and 2022 using the weighted average number of shares outstanding during the respective periods. Diluted loss per share for the three and nine months ended September 30, 2023 and 2022 reflects additional shares of common stock related to our convertible senior common stock (the “Senior Common Stock”), if the effect of conversion would be dilutive, that would have been outstanding if such dilutive potential shares of common stock had been issued, as well as an adjustment to net loss 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 three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Calculation of basic loss per share of common stock: Net loss attributable to common stockholders $ ( 1,419 ) $ ( 310 ) $ ( 9,063 ) $ ( 1,385 ) Denominator for basic weighted average shares of common stock (1) 39,917,995 39,504,734 39,939,660 38,723,581 Basic loss per share of common stock $ ( 0.04 ) $ ( 0.01 ) $ ( 0.23 ) $ ( 0.04 ) Calculation of diluted loss per share of common stock: Net loss attributable to common stockholders $ ( 1,419 ) $ ( 310 ) $ ( 9,063 ) $ ( 1,385 ) Net loss attributable to common stockholders plus assumed conversions (2) $ ( 1,419 ) $ ( 310 ) $ ( 9,063 ) $ ( 1,385 ) Denominator for basic weighted average shares of common stock (1) 39,917,995 39,504,734 39,939,660 38,723,581 Effect of convertible Senior Common Stock (2) — — — — Denominator for diluted weighted average shares of common stock (2) 39,917,995 39,504,734 39,939,660 38,723,581 Diluted loss per share of common stock $ ( 0.04 ) $ ( 0.01 ) $ ( 0.23 ) $ ( 0.04 ) (1) The weighted average number of OP Units held by Non-controlling OP Unitholders was 391,468 and 391,468 for the three and nine months ended September 30, 2023, respectively, and 273,072 and 262,412 for the three and nine months ended September 30, 2022, respectively. (2) We excluded convertible shares of Senior Common Stock of 345,132 and 363,246 from the calculation of diluted earnings per share for the three and nine months ended September 30, 2023 and 2022, respectively, because they were 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 September 30, 2023 and December 31, 2022, respectively, excluding real estate held for sale as of September 30, 2023 and December 31, 2022 (dollars in thousands): September 30, 2023 December 31, 2022 Real estate: Land (1) $ 143,815 $ 152,916 Building and improvements 1,025,384 1,069,407 Tenant improvements 57,262 64,974 Accumulated depreciation ( 291,986 ) ( 286,150 ) Real estate, net $ 934,475 $ 1,001,147 (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 $ 8.9 million and $ 31.2 million for the three and nine months ended September 30, 2023, respectively. Real estate depreciation expense on building and tenant improvements was $ 10.7 million and $ 30.7 million for the three and nine months ended September 30, 2022, respectively. Acquisitions We acquired three properties during the nine months ended September 30, 2023 and acquired 11 industrial properties during the nine months ended September 30, 2022. The acquisitions are summarized below (dollars in thousands): 12 Table of Contents Nine Months Ended Aggregate Square Footage Weighted Average Lease Term Aggregate Purchase Price Aggregate Capitalized Acquisition Costs September 30, 2023 (1) 183,803 18.7 years $ 17,539 $ 349 September 30, 2022 (2) 1,105,006 13.8 years $ 98,276 $ 776 (1) On April 14, 2023, we acquired a 76,089 square foot property in Riverdale, Illinois for $ 5.4 million. The property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. On July 10, 2023, we acquired a 7,714 square foot property in Dallas-Fort Worth, Texas for $ 3.0 million. The property is fully leased to one tenant and had 9.9 years of remaining lease term at the time we acquired the property. On July 28, 2023, we acquired a 100,000 square foot property in Dallas-Fort Worth, Texas for $ 9.2 million. The property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. (2) On February 24, 2022, we acquired an 80,000 square foot property in Wilkesboro, North Carolina for $ 7.5 million. The property is fully leased to one tenant and had 12.7 years of remaining lease term at the time we acquired the property. On March 11, 2022, we acquired a 56,000 square foot property in Oklahoma City, Oklahoma for $ 6.0 million. The property is fully leased to one tenant and had 7.0 years of remaining lease term at the time we acquired the property. On May 4, 2022, we acquired a two -property, 260,719 square foot portfolio in Cleveland, Ohio and Fort Payne, Alabama for $ 19.5 million. The properties are fully leased to one tenant and had 11.4 years of remaining lease term at the time we acquired the properties. On May 12, 2022, we acquired a three -property, 345,584 square foot portfolio in Wilmington, North Carolina for $ 18.9 million. The properties are fully leased to one tenant and had 13.1 years of remaining lease term at the time we acquired the properties. On August 5, 2022, we acquired a two -property, 246,000 square foot portfolio in Bridgeton, New Jersey and Vineland, New Jersey for $ 32.7 million. The properties are fully leased to one tenant and had 15.1 years of remaining lease term at the time we acquired the properties. On September 16, 2022, we acquired a 67,328 square foot property in Jacksonville, Florida for $ 8.1 million. The property is fully leased to one tenant and had 20.0 years of remaining lease term at the time we acquired the property. On September 20, 2022, we acquired a 49,375 square foot property in Fort Payne, Alabama for $ 5.6 million. The property is fully leased to one tenant and had 14.8 years of remaining lease term at the time we acquired the property. We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2023 and 2022 as follows (dollars in thousands): Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Acquired assets and liabilities Purchase price Purchase price Land $ 2,714 $ 5,949 Building 11,423 77,903 Tenant Improvements 692 1,468 In-place Leases 1,001 4,907 Leasing Costs 1,270 5,387 Customer Relationships 439 2,937 Above Market Leases — 328 (1) Below Market Leases — ( 603 ) (2) Total Purchase Price $ 17,539 $ 98,276 (1) This amount includes $ 9 of loans receivable included in Other assets on the condensed balance sheets. (2) This amount includes $ 32 of prepaid rent included in Other liabilities on the condensed consolidated balance sheets. Future Lease Payments Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the three months ending December 31, 2023 and each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of September 30, 2023 (dollars in thousands): 13 Table of Contents Year Tenant Lease Payments Three Months Ending December 31, 2023 $ 28,906 2024 112,878 2025 112,342 2026 106,748 2027 90,440 2028 75,223 Thereafter 357,055 In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant directly, or reimbursed to us from 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 three and nine months ended September 30, 2023 and 2022, respectively (dollars in thousands): For the three months ended September 30, (Dollars in Thousands) Lease revenue reconciliation 2023 2022 $ Change % Change Fixed lease payments $ 31,945 $ 35,752 $ ( 3,807 ) ( 10.6 ) % Variable lease payments 4,519 4,082 437 10.7 % $ 36,464 $ 39,834 $ ( 3,370 ) ( 8.5 ) % For the nine months ended September 30, (Dollars in Thousands) Lease revenue reconciliation 2023 2022 $ Change % Change Fixed lease payments $ 98,465 $ 98,961 $ ( 496 ) ( 0.5 ) % Variable lease payments 13,210 12,803 407 3.2 % $ 111,675 $ 111,764 $ ( 89 ) ( 0.1 ) % 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 September 30, 2023 and December 31, 2022, respectively, excluding real estate held for sale as of September 30, 2023 and December 31, 2022 (dollars in thousands): September 30, 2023 December 31, 2022 Lease Intangibles Accumulated Amortization Lease Intangibles Accumulated Amortization In-place leases $ 98,904 $ ( 62,270 ) $ 104,394 $ ( 63,240 ) Leasing costs 83,075 ( 45,170 ) 85,038 ( 45,501 ) Customer relationships 63,614 ( 35,524 ) 69,586 ( 38,655 ) $ 245,593 $ ( 142,964 ) $ 259,018 $ ( 147,396 ) Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion Above market leases $ 13,431 $ ( 10,546 ) $ 15,371 $ ( 11,909 ) Below market leases and deferred revenue ( 60,927 ) 29,113 ( 66,138 ) 26,141 Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $ 3.6 million and $ 12.9 million for the three and nine months ended September 30, 2023, respectively, and $ 4.7 million and $ 14.5 14 Table of Contents million for the three and nine months ended September 30, 2022, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and comprehensive income. Total amortization related to above-market lease values was $ 0.1 million and $ 0.4 million for the three and nine months ended September 30, 2023, respectively, and $ 0.2 million and $ 0.6 million for the three and nine months ended September 30, 2022, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income. Total amortization related to below-market lease values was $ 1.8 million and $ 6.2 million for the three and nine months ended September 30, 2023, respectively, and $ 1.5 million and $ 3.1 million for the three and nine months ended September 30, 2022, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income. The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2023 and 2022, were as follows: Intangible Assets & Liabilities September 30, 2023 September 30, 2022 In-place leases 18.0 14.2 Leasing costs 18.0 14.2 Customer relationships 22.7 20.2 Above market leases 0.0 15.7 Below market leases 0.0 13.0 All intangible assets & liabilities 19.6 15.7 5. Real Estate Dispositions, Held for Sale and Impairment Charges Real Estate Dispositions We sold five properties during the nine months ended September 30, 2023 and three properties during the nine months ended September 30, 2022. During the nine months ended September 30, 2023, we continued to execute our capital recycling program, whereby we sold non-core properties 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, and use the sales proceeds to acquire properties in our target, secondary growth markets or pay down outstanding debt. During the nine months ended September 30, 2023, we sold five non-core properties, located in Baytown, Texas; Birmingham, Alabama; Pittsburgh, Pennsylvania; Eatontown, New Jersey; and Taylorsville, Utah, which are summarized in the table below (dollars in thousands): Aggregate Square Footage Sold Aggregate Sales Price Aggregate Sales Costs Aggregate Impairment Charge for the Nine Months Ended September 30, 2023 Aggregate Gain on Sale of Real Estate, net 206,278 $ 23,650 $ 1,476 $ 3,591 $ 4,245 Our dispositions during the nine months ended September 30, 2023 were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will such dispositions 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 real estate and related assets disposed of during the three and nine months ended September 30, 2023 and 2022 (dollars in thousands): 15 Table of Contents For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Operating revenue $ 184 $ 565 $ 1,209 $ 2,501 Operating expense 60 510 4,427 (2) 2,251 Other income (expense), net 4,443 (1) ( 189 ) 3,790 (3) ( 502 ) Income (expense) from real estate and related assets sold $ 4,567 $ ( 134 ) $ 572 $ ( 252 ) (1) Includes a $ 4.7 million gain on sale of real estate, net, on three property sales. (2) Includes a $ 3.6 million impairment charge on one property. (3) Includes a $ 4.2 million gain on sale of real estate, net, on five property sales. Real Estate Held for Sale At September 30, 2023, we had four properties classified as held for sale, located in Columbia, South Carolina; Richardson, Texas; Columbus, Ohio; and Blaine, Minnesota. We consider these assets to be non-core to our long term strategy. At December 31, 2022, we had one property classified as held for sale, located in Columbia, South Carolina. The table below summarizes the components of the assets and liabilities held for sale at September 30, 2023 and December 31, 2022 reflected on the accompanying condensed consolidated balance sheets (dollars in thousands): September 30, 2023 December 31, 2022 Assets Held for Sale Total real estate held for sale $ 28,972 $ 3,293 Lease intangibles, net 369 — Deferred rent receivable, net 9 — Total Assets Held for Sale $ 29,350 $ 3,293 Liabilities Held for Sale Deferred rent liability, net $ 631 $ — Total Liabilities Held for Sale $ 631 $ — Impairment Charges We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the nine months ended September 30, 2023 and identified two held and used assets, located in Columbus, Ohio and Draper, Utah, which were impaired by $ 9.0 million. We also recognized an impairment charge of $ 4.6 million on two held for sale assets, located in Richardson, Texas and Taylorsville, Utah during the nine months ended September 30, 2023. In performing our held for sale assessment, the carrying value of these assets were above the fair value, less costs of sale. As a result, we impaired these properties to equal the fair market value less costs of sale. We recognized an impairment charge of $ 12.1 million during the nine months ended September 30, 2022 on two held for sale assets, located in Columbia, South Carolina and Parsippany, New Jersey. In performing our held for sale assessment, the carrying value of this asset was above the fair value, less costs of sale. As a result, we impaired this property to equal the fair market value less costs of sale. 16 Table of Contents 6. Mortgage Notes Payable and Credit Facility Our $ 125.0 million unsecured revolving credit facility (“Revolver”), $ 160.0 million term loan facility (“Term Loan A”), $ 60.0 million term loan facility (“Term Loan B”), and $ 150.0 million term loan facility (“Term Loan C”), are collectively referred to herein as the Credit Facility. Our mortgage notes payable and Credit Facility as of September 30, 2023 and December 31, 2022 are summarized below (dollars in thousands): Encumbered properties at Carrying Value at Stated Interest Rates at Scheduled Maturity Dates at September 30, 2023 September 30, 2023 December 31, 2022 September 30, 2023 September 30, 2023 Mortgage and other secured loans: Fixed rate mortgage loans 49 $ 313,400 $ 362,037 (1) (2) Premiums and discounts, net — ( 52 ) ( 83 ) N/A N/A Deferred financing costs, mortgage loans, net — ( 2,374 ) ( 2,565 ) N/A N/A Total mortgage notes payable, net 49 $ 310,974 $ 359,389 (3) Variable rate revolving credit facility 82 (6) $ 70,950 $ 23,250 SOFR + 1.50 % (4) 8/18/2026 Total revolver 82 $ 70,950 $ 23,250 Variable rate term loan facility A — (6) $ 160,000 $ 160,000 SOFR + 1.45 % (4) 8/18/2027 Variable rate term loan facility B — (6) 60,000 60,000 SOFR + 1.45 % (4) 2/11/2026 Variable rate term loan facility C — (6) 150,000 150,000 SOFR + 1.45 % (4) 2/18/2028 Deferred financing costs, term loan facility — ( 2,915 ) ( 3,433 ) N/A N/A Total term loan, net N/A $ 367,085 $ 366,567 Total mortgage notes payable and credit facility 131 $ 749,009 $ 749,206 (5) (1) As of September 30, 2023, interest rates on our fixed rate mortgage notes payable varied from 2.80 % to 6.63 %. (2) As of September 30, 2023, we had 43 mortgage notes payable with maturity dates ranging from January 1, 2024 through August 1, 2037. (3) The weighted average interest rate on the mortgage notes outstanding as of September 30, 2023 was approximately 4.20 %. (4) As of September 30, 2023, Secured Overnight Financing Rate (“SOFR”) was approximately 5.31 %. (5) The weighted average interest rate on all debt outstanding as of September 30, 2023 was approximately 5.70 %. (6) The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 82 unencumbered properties as of September 30, 2023. N/A - Not Applicable Mortgage Notes Payable As of September 30, 2023, we had 43 mortgage notes payable, collateralized by a total of 49 properties with a net book value of $ 496.5 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 September 30, 2023, we did not have any mortgages subject to recourse. 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 nine months ended September 30, 2023, we repaid four mortgages, collateralized by four properties, which are summarized in the table below (dollars in thousands): 17 Table of Contents Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid $ 46,530 4.78 % During the nine months ended September 30, 2023, we issued three mortgages, collateralized by three properties, which are summarized in the table below (dollars in thousands): Aggregate Fixed Rate Debt Issued Weighted Average Interest Rate on Fixed Rate Debt $ 9,000 6.10 % During the nine months ended September 30, 2023, we extended the maturity date of one mortgage, collateralized by one property, which is summarized in the table below (dollars in thousands): Fixed Rate Debt Extended Interest Rate on Fixed Rate Debt Extended Extension Term $ 8,769 6.50 % 1.0 year We made payments of $ 0.3 million and $ 0.4 million for deferred financing costs during the three and nine months ended September 30, 2023. We made payments of $ 5.6 million and $ 6.2 million for deferred financing costs during the three and nine months ended September 30, 2022. Scheduled principal payments of mortgage notes payable for the three months ending December 31, 2023, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands): Year Scheduled Principal Payments Three Months Ending December 31, 2023 $ 11,995 2024 28,400 2025 36,420 2026 35,084 2027 95,040 2028 37,116 Thereafter 69,345 Total $ 313,400 (1) (1) This figure does not include $( 0.1 ) million of premiums and (discounts), net, and $ 2.4 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets. 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 Cap and Interest Rate Swap Agreements 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 September 30, 2023 and December 31, 2022, our interest rate cap agreements and interest rate swaps were valued using Level 2 inputs. 18 Table of Contents The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed 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 condensed 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. During the next 12 months, we estimate that an additional $ 6.9 million will be reclassified out of accumulated other comprehensive income into interest expense in our condensed consolidated statements of operations and comprehensive income, as a reduction to interest expense. The following table summarizes the interest rate caps at September 30, 2023 and December 31, 2022 (dollars in thousands): September 30, 2023 December 31, 2022 Aggregate Cost Aggregate Notional Amount Aggregate Fair Value Aggregate Notional Amount Aggregate Fair Value $ 141 (1) $ 65,000 $ 1,340 $ 225,000 $ 4,629 (1) We have entered into various interest rate cap agreements on variable rate debt with SOFR caps ranging from 1.49 % to 1.75 %. We have assumed or entered into interest rate swap agreements in connection with certain of our mortgage financings and Credit Facility, whereby we will pay our counterparty a fixed rate 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 is recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed 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 September 30, 2023 and December 31, 2022 (dollars in thousands): September 30, 2023 December 31, 2022 Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability $ 361,969 $ 17,015 $ — $ 362,832 $ 8,264 $ ( 897 ) The following table presents the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands): Amount of gain, net, recognized in Comprehensive Income Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Derivatives in cash flow hedging relationships Interest rate caps $ ( 654 ) $ 1,758 $ ( 2,429 ) $ 4,520 Interest rate swaps 5,743 5,032 9,647 9,140 Total $ 5,089 $ 6,790 $ 7,218 $ 13,660 The following table presents the reclassifications of our derivative instruments out of accumulated other comprehensive income into interest expense in the condensed consolidated financial statements (dollars in thousands): Amount reclassified out of Accumulated Other Comprehensive Income Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest rate caps $ 409 $ ( 52 ) $ 937 $ ( 52 ) Total $ 409 $ ( 52 ) $ 937 $ ( 52 ) The following table sets forth certain information regarding our derivative instruments (dollars in thousands): 19 Table of Contents Asset (Liability) Derivatives Fair Value at Derivatives Designated as Hedging Instruments Balance Sheet Location September 30, 2023 December 31, 2022 Interest rate caps Other assets $ 1,340 $ 4,629 Interest rate swaps Other assets 17,015 8,264 Interest rate swaps Other liabilities — ( 897 ) Total derivative liabilities, net $ 18,355 $ 11,996 The fair value of all mortgage notes payable outstanding as of September 30, 2023 was $ 273.2 million, as compared to the carrying value stated above of $ 311.0 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 18, 2022, we amended, extended and upsized our Credit Facility, increasing our Revolver from $ 100.0 million to $ 120.0 million (and its term to August 2026), adding the new $ 140.0 million Term Loan C, decreasing the principal balance of Term Loan B to $ 60.0 million and extending the maturity date of Term Loan A to August 2027. Term Loan C has a maturity date of February 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. On September 27, 2022, we further increased the Revolver to $ 125.0 million and Term Loan C to $ 150.0 million, as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates from 3.15 % to 3.75 %. We incurred fees of approximately $ 4.2 million in connection with extending and upsizing our Credit Facility. The net proceeds of the transaction were used to repay the then-outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility’s current bank syndicate is comprised of KeyBank, Fifth Third Bank, The Huntington National Bank, Bank of America, Synovus Bank, United Bank, First Financial Bank, and S&T Bank. As of September 30, 2023, there was $ 441.0 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 6.77 %, and $ 2.9 million outstanding under letters of credit, at a weighted average interest rate of 1.50 %. As of September 30, 2023, the maximum additional amount we could draw under the Credit Facility was $ 44.9 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2023. The amount outstanding under the Credit Facility approximates fair value as of September 30, 2023. 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 for the three months ending December 31, 2023 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands): Year Future Lease Payments Due Under Operating Leases Three Months Ending December 31, 2023 $ 124 2024 493 2025 494 2026 498 2027 506 2028 510 Thereafter 5,790 Total anticipated lease payments $ 8,415 Less: amount representing interest ( 3,267 ) Present value of lease payments $ 5,148 20 Table of Contents Rental expense incurred for properties with ground lease obligations during the three and nine months ended September 30, 2023 was $ 0.1 million and $ 0.3 million, respectively, and during the three and nine months ended September 30, 2022 was $ 0.1 million and $ 0.3 million, respectively. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the condensed consolidated statements of operations and comprehensive income. Our ground leases have a weighted average remaining lease term of 17.9 years and a weighted average discount rate of 5.33 %. Letters of Credit As of September 30, 2023, there was $ 2.9 million outstanding under letters of credit. These letters of credit are not reflected on our condensed consolidated balance sheets. 8. Equity and Mezzanine Equity Stockholders’ Equity The following table summarizes the changes in our equity for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Senior Common Stock Balance, beginning of period $ 1 $ 1 $ 1 $ 1 Issuance of senior common stock, net — — — — Balance, end of period $ 1 $ 1 $ 1 $ 1 Common Stock Balance, beginning of period $ 39 $ 39 $ 39 $ 37 Issuance of common stock, net — — 1 2 Repurchase of common stock, net — — ( 1 ) — Balance, end of period $ 39 $ 39 $ 39 $ 39 Series F Preferred Stock Balance, beginning of period $ 1 $ 1 $ 1 $ — Issuance of Series F preferred stock, net — — — 1 Balance, end of period $ 1 $ 1 $ 1 $ 1 Additional Paid in Capital Balance, beginning of period $ 728,580 $ 705,629 $ 721,327 $ 671,134 Issuance of common stock and Series F preferred stock, net 690 9,856 6,725 44,513 Repurchase of common stock, net — — 998 — Redemption of Series F preferred stock, net 183 — 401 55 Retirement of senior common stock, net — — 52 — Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership ( 53 ) 1,613 ( 103 ) 1,396 Balance, end of period $ 729,400 $ 717,098 $ 729,400 $ 717,098 Accumulated Other Comprehensive Income Balance, beginning of period $ 14,297 $ 5,524 $ 11,640 $ ( 1,346 ) Comprehensive income 5,089 6,790 7,218 13,660 Reclassification into interest expense 409 52 937 52 Balance, end of period $ 19,795 $ 12,366 $ 19,795 $ 12,366 Distributions in Excess of Accumulated Earnings Balance, beginning of period $ ( 560,719 ) $ ( 498,856 ) $ ( 529,104 ) $ ( 468,908 ) Distributions declared to common, senior common, and preferred stockholders ( 15,182 ) ( 17,984 ) ( 45,445 ) ( 53,000 ) Redemption of Series F preferred stock, net ( 1 ) — ( 12 ) ( 5 ) Net income attributable to the Company 1,789 2,791 448 7,864 Balance, end of period $ ( 574,113 ) $ ( 514,050 ) $ ( 574,113 ) $ ( 514,050 ) Total Stockholders' Equity 21 Table of Contents Balance, beginning of period $ 182,199 $ 212,338 $ 203,904 $ 200,918 Issuance of common stock and Series F preferred stock, net 690 9,856 6,726 44,516 Repurchase of common stock, net — — 997 — Redemption of Series F preferred stock, net 182 — 389 50 Retirement of senior common stock, net — — 52 — Distributions declared to common, senior common, and preferred stockholders ( 15,182 ) ( 17,984 ) ( 45,445 ) ( 53,000 ) Comprehensive income 5,089 6,790 7,218 13,660 Reclassification into interest expense 409 52 937 52 Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership ( 53 ) 1,613 ( 103 ) 1,396 Net income attributable to the Company 1,789 2,791 448 7,864 Balance, end of period $ 175,123 $ 215,455 $ 175,123 $ 215,455 Non-Controlling Interest Balance, beginning of period $ 1,524 $ 1,275 $ 1,790 $ 1,259 Distributions declared to Non-controlling OP Unit holders ( 117 ) ( 114 ) ( 352 ) ( 307 ) Issuance of Non-controlling OP Units as consideration in real estate acquisitions, net — 2,394 — 2,394 Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership 53 ( 1,613 ) 103 ( 1,396 ) Net income (loss) available (attributable) to OP units held by Non-controlling OP Unitholders 3 ( 4 ) ( 78 ) ( 12 ) Balance, end of period $ 1,463 $ 1,938 $ 1,463 $ 1,938 Total Equity $ 176,586 $ 217,393 $ 176,586 $ 217,393 Distributions We paid the following distributions per share for the three and nine months ended September 30, 2023 and 2022: For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Common Stock and Non-controlling OP Units $ 0.30000 $ 0.37620 $ 0.90000 $ 1.12860 Senior Common Stock 0.2625 0.2625 0.7875 0.7875 Series E Preferred Stock 0.414063 0.414063 1.242189 1.242189 Series F Preferred Stock 0.375 0.375 1.125 1.125 Series G Preferred Stock 0.375 0.375 1.125 1.125 Recent Activity Common Stock ATM Programs On February 22, 2022, we entered into Amendment No. 1 to the At-the-Market Equity Offering Sales Agreement, dated December 3, 2019 (together, the “Prior Common Stock Sales Agreement”). The amendment permitted shares of common stock to be issued pursuant to the Prior Common Stock Sales Agreement under the 2020 Registration Statement, and future registration statements on Form S-3 (the “Prior Common Stock ATM Program”). During the nine months ended September 30, 2023, we sold 0.2 million shares of common stock, raising approximately $ 4.0 million in net proceeds under our At-the-Market Equity Offering Sales Agreement with sales agents Robert W. Baird & Co. Incorporated (“Baird”), Goldman Sachs & Co. LLC (“Goldman Sachs”), Stifel, Nicolaus & Company, Incorporated, (“Stifel”) BTIG, LLC, and Fifth Third Securities, Inc. (“Fifth Third”). We terminated the Prior Common Stock Sales Agreement effective as of February 10, 2023 in connection with the expiration of the 2020 Registration Statement on February 11, 2023. 22 Table of Contents On March 3, 2023, we entered into an At-the-Market Equity Offering Sales Agreement (the “2023 Common Stock Sales Agreement”), with BofA Securities, Inc. (“BofA”), Goldman Sachs, Baird, KeyBanc Capital Markets Inc. (“KeyBanc”), and Fifth Third (collectively the “Common Stock Sales Agents”). In connection with the 2023 Common Stock Sales Agreement, we filed prospectus supplements dated March 3, 2023 and March 7, 2023, to the prospectus dated November 23, 2022, with the SEC, for the offer and sale of an aggregate offering amount of up to $ 250.0 million of common stock. During the nine months ended September 30, 2023, we did not sell any shares of common stock under the 2023 Common Stock Sales Agreement. Common Stock Buyback Program During the nine months ended September 30, 2023, we repurchased $ 1.0 million worth of our common stock through our common stock repurchase program. Mezzanine Equity Our 6.625 % Series E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”), and our 6.00 % Series G Cumulative Redeemable Preferred Stock (“Series G Preferred Stock”) are classified as mezzanine equity in our condensed consolidated balance sheets because both are redeemable at the option of the shareholder upon a change of control of greater than 50 %. A change in control of our company, outside of our control, is only possible if a tender offer is accepted by over 90 % of our shareholders. All other change in control situations would require input from our Board of Directors. In addition, our Series E Preferred Stock and Series G Preferred Stock are redeemable at the option of the applicable shareholder in the event a delisting event occurs. We will periodically evaluate the likelihood that a delisting event or change of control of greater than 50 % will take place, and if we deem this probable, we adjust the Series E Preferred Stock, and Series G Preferred Stock presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment. We currently believe the likelihood of a change of control of greater than 50%, or a delisting event, is remote. Prior to February 10, 2023, we had 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 could, from time to time, offer to sell shares of our Series E Preferred Stock, in an aggregate offering price of up to $ 100.0 million. We did not sell any shares of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the nine months ended September 30, 2023. However, we terminated the agreement effective as of February 10, 2023. Universal Shelf Registration Statements On January 29, 2020, we filed the 2020 Registration Statement. The 2020 Registration Statement was declared effective on February 11, 2020. The 2020 Registration Statement allowed us to issue up to $ 800.0 million of securities. Of the $ 800.0 million of available capacity under our 2020 Registration Statement, approximately $ 636.5 million was reserved for the sale of our Series F Preferred Stock, and $ 63.0 million was reserved for our Prior Common Stock ATM Program. The 2020 Registration Statement expired on February 11, 2023. On November 23, 2022, we filed the 2022 Registration Statement. There is no limit on the aggregate amount of the securities that we may offer pursuant to the 2022 Registration Statement. Series F Preferred Stock On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of our 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 229,677 shares of our Series F Preferred Stock, raising $ 5.2 million in net proceeds, during the nine months ended September 30, 2023. Non-controlling Interest in Operating Partnership As of September 30, 2023 and December 31, 2022, we owned approximately 99.0 % and 99.0 %, re spectively, of the outstanding OP Units. 23 Table of Contents The Operating Partnership is required to make distributions on each OP Unit in the same amount as those paid on each share of our common stock, with the distributions on the OP Units held by us being utilized to make distributions to our common stockholders. As of September 30, 2023 and December 31, 2022, there were 391,468 and 391,468 outstanding OP Units held by Non-controlling OP Unitholders, respectively. 9. Revision of Previously Issued Financial Statements As discussed in Note 1, the Company identified errors in its calculation of the depreciation of tenant funded improvement assets at a number of its properties. A summary of the corrections to the impacted financial statement line items in the Company’s previously issued Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows and Consolidated Statements of Equity for the quarter ended September 30, 2022, and Consolidated Balance Sheets for the year ended December 31, 2022 included in previously filed Annual Reports on Form 10-K and Condensed Consolidated Statements of Operations and Comprehensive Income, Condensed Consolidated Statements of Cash Flows and the Stockholders’ Equity tables for periods presented below, which were presented in previously filed Quarterly Reports on Form 10-Q, is as follows: Condensed Consolidated Statements of Operations and Comprehensive Income Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 As Previously Reported Adjustments As Revised As Previously Reported Adjustments As Revised Operating expenses Depreciation and amortization $ 15,764 $ ( 290 ) $ 15,474 $ 45,672 $ ( 393 ) $ 45,279 Total operating expense before incentive fee waiver $ 37,448 $ ( 290 ) $ 37,158 $ 90,932 $ ( 393 ) $ 90,539 Total operating expenses $ 37,448 $ ( 290 ) $ 37,158 $ 90,932 $ ( 393 ) $ 90,539 Net income $ 2,497 $ 290 $ 2,787 $ 7,459 $ 393 $ 7,852 Net income available to the Company $ 2,501 $ 290 $ 2,791 $ 7,471 $ 393 $ 7,864 Net loss attributable to common stockholders $ ( 600 ) $ 290 $ ( 310 ) $ ( 1,778 ) $ 393 $ ( 1,385 ) Loss per weighted average share of common stock - basic & diluted Loss attributable to common shareholders $ ( 0.02 ) $ 0.01 $ ( 0.01 ) $ ( 0.05 ) $ 0.01 $ ( 0.04 ) Comprehensive income Net income $ 2,497 $ 290 $ 2,787 $ 7,459 $ 393 $ 7,852 Total comprehensive income available to the Company $ 9,291 $ 290 $ 9,581 $ 21,131 $ 393 $ 21,524 Consolidated Balance Sheets As of December 31, 2022 As Previously Reported Adjustments As Revised ASSETS Less: accumulated depreciation $ 286,994 $ ( 844 ) $ 286,150 Total real estate, net $ 1,000,303 $ 844 $ 1,001,147 Real estate and related assets held for sale $ 3,013 $ 280 $ 3,293 TOTAL ASSETS $ 1,201,509 $ 1,124 $ 1,202,633 EQUITY Distributions in excess of accumulated earnings $ ( 530,228 ) $ 1,124 $ ( 529,104 ) TOTAL STOCKHOLDERS' EQUITY $ 202,780 $ 1,124 $ 203,904 TOTAL EQUITY $ 204,570 $ 1,124 $ 205,694 TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY $ 1,201,509 $ 1,124 $ 1,202,633 24 Table of Contents Stockholders’ Equity Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 As Previously Reported Adjustments As Revised As Previously Reported Adjustments As Revised Distributions in Excess of Accumulated Earnings Balance, beginning of period $ ( 498,574 ) $ ( 282 ) $ ( 498,856 ) $ ( 468,523 ) $ ( 385 ) $ ( 468,908 ) Net income attributable to the Company 2,501 290 2,791 7,471 393 7,864 Balance, end of period $ ( 514,057 ) $ 7 $ ( 514,050 ) $ ( 514,057 ) $ 7 $ ( 514,050 ) Total Stockholders' Equity Balance, beginning of period $ 212,620 $ ( 282 ) $ 212,338 $ 201,303 $ ( 385 ) $ 200,918 Net income attributable to the Company 2,501 290 2,791 7,471 393 7,864 Balance, end of period $ 215,448 $ 7 $ 215,455 $ 215,448 $ 7 $ 215,455 Total Equity $ 217,386 $ 7 $ 217,393 $ 217,386 $ 7 $ 217,393 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2022 As Previously Reported Adjustments As Revised Cash flows from operating activities: Net income $ 7,459 $ 393 $ 7,852 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 45,672 ( 393 ) 45,279 10. Subsequent Events Distributions On October 10, 2023, our Board of Directors declared the following monthly distributions for the months of October, November and December of 2023: Record Date Payment Date Common Stock and Non-controlling OP Unit Distributions per Share Series E Preferred Distributions per Share Series G Preferred Distributions per Share October 20, 2023 October 31, 2023 $ 0.10 $ 0.138021 $ 0.125 November 20, 2023 November 30, 2023 0.10 0.138021 0.125 December 18, 2023 December 29, 2023 0.10 0.138021 0.125 $ 0.30 $ 0.414063 $ 0.375 Senior Common Stock Distributions Payable to the Holders of Record During the Month of: Payment Date Distribution per Share October November 3, 2023 $ 0.0875 November December 5, 2023 0.0875 December January 5, 2024 0.0875 $ 0.2625 25 Table of Contents Series F Preferred Stock Distributions Record Date Payment Date Distribution per Share October 25, 2023 November 3, 2023 $ 0.125 November 28, 2023 December 5, 2023 0.125 December 27, 2023 January 5, 2024 0.125 $ 0.375 Equity Activity Subsequent to September 30, 2023 and through November 6, 2023, we raised $ 0.1 million in net proceeds from the sale of 4,318 shares of Series F Preferred Stock. Acquisition Activity On October 12, 2023, we purchased a 69,920 square foot industrial property in Allentown, Pennsylvania for $ 7.8 million. The property is fully leased to one tenant on a 20-year lease. On November 3, 2023, we purchased a 67,709 square foot industrial property in Indianapolis, Indiana for $ 4.5 million. The property is fully leased to one tenant on a 20-year lease. Sale Activity On October 2, 2023, we sold our 146,483 square foot office property in Columbia, South Carolina for $ 7.0 million. We realized a $ 2.9 million gain on sale, net. Financing Activity On October 2, 2023, we repaid $ 9.0 million in fixed rate debt, collateralized by one property, at an interest rate of 4.04 %. We realized a $ 2.8 million gain on debt extinguishment. 26 Table of Contents