GLADSTONE COMMERCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2023. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. This Quarterly Report includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We have not independently verified the information contained in such sources. All references to “we,” “our,” “us” and the “Company” in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where otherwise noted or where the context indicates that the term means only Gladstone Commercial Corporation. General We are an externally advised real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning, and managing primarily office and industrial properties. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies, many of which are corporations that do not have publicly rated debt. We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately seven to 15 years and contractual rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment. All references to annualized generally accepted accounting principles (“GAAP”) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. As of May 6, 2024: • we owned 131 properties totaling 16.7 million square feet of rentable space, located in 27 states; • our occupancy rate was 98.9%; • the weighted average remaining term of our mortgage debt was 3.9 years and the weighted average interest rate was 4.16%; and • the average remaining lease term of the portfolio was 6.9 years. 24 Table of Contents Business Environment The commercial real estate sector continued to face uncertainty and volatility in the first quarter of 2024. Although the Federal Reserve hinted at potential rate cuts at the end of 2023, higher than expected CPI data, as reported by the U.S. Bureau of Labor Statistics for all urban consumers, during the first quarter of 2024 has led to a rise in long-term interest rates. This increase has slowed the mortgage market and consequently dampened acquisition activity. As a result, real estate transaction volumes have remained low, with tightened credit standards and rising capital costs preventing many investors from entering the market. Despite capital markets volatility, the industrial sector continues to demonstrate strong fundamentals, consistently outperforming other real estate categories. Cushman & Wakefield plc (“Cushman”) reported healthy leasing activity in the first quarter of 2024, with transactions amounting to 128.7 million square feet, a 3% increase over the 10-year pre-pandemic average (2010-2019). Net absorption fell quarter over quarter from 48 million square feet to 14 million square feet, but the four-quarter rolling average of 42 million square feet remains in Cushman’s range for 2024. Although new completions continue to exceed net absorption, leading to a rise in the overall vacancy rate, the vacancy rate of 5.8% in Q1 2024 remains below the historical average of 7.0% according to Cushman. Year-over-year, Cushman reports that industrial rents increased by 6%, compared to 10% in 2023 and 20% in 2022. Notably, Cushman reports that eight markets recorded net occupancy gains exceeding 1.0 million square feet in Q1 2024, with significant contributions from Houston (5.1 million square feet), Savannah (3.6 million square feet), Chicago (2.8 million square feet), and Austin (2.4 million square feet). Cushman further notes that the construction pipeline has decreased by 10% since the end of 2023 and is down 40% year-over-year as developers pull back, particularly in speculative builds, due to slowing demand for space and rising interest rates. According to Cushman, this represents the lowest level of future construction activity in three years. The office sector in Q1 2024 showed mixed outcomes according to Jones Lang LaSalle Incorporated (“JLL”). Despite improvements in demand, JLL reports that the market still struggles with high negative net absorption, primarily driven by significant space reductions from major occupiers. JLL reports that the overall vacancy rate increased to 21.9%, reflecting ongoing challenges and that development activity has slowed considerably, with new office supply groundbreakings dropping to less than 300,000 square feet, the lowest recorded in nearly 40 years, which points to limited future deliveries. JLL notes that this slowdown, combined with robust inventory removals and conversions, suggests potential stabilization and a move towards market equilibrium in the upcoming years. Interest rates have been fluctuating due to ongoing concerns about inflation, with the future direction of Federal Reserve rate hikes remaining uncertain. The yield on the 10-year U.S. Treasury Note, which has risen steadily since the beginning of 2022, ended the first quarter of 2024 at 4.21%. Despite these macro-economic challenges, we believe that we are well positioned to navigate the current business environment. We collected 100% of all outstanding cash rents for the three months ended March 31, 2024. In the past, we have received rent modification requests from our tenants, and we may receive additional requests in the future. However, we are unable to quantify the outcomes of the negotiation of relief packages, the success of any tenant’s financial prospects or the amount of relief requests that we will ultimately receive or grant. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil and gas industries. Additionally, our properties are located across 27 states, which we believe mitigates our exposure to economic issues, including regulations or laws implemented by state and local governments, in any one geographic market or area. We believe we currently have adequate liquidity in the near term, and we believe the availability on our Credit Facility is sufficient to cover all near-term debt obligations and operating expenses and to continue our industrial growth strategy. We are in compliance with all of our debt covenants as of March 31, 2024. We amended our Credit Facility in 2019 to increase our borrowing capacity and extend its maturity date. In addition, on August 18, 2022, we added a new $150.0 million term loan component. Based on market observations and conversations we routinely have with lenders, we believe that credit continues to be available for well-capitalized borrowers. We continue to monitor our portfolio and intend to maintain a reasonably conservative liquidity position for the foreseeable future. Other Business Environment Considerations The geopolitical landscape remains fractured due to recent world events. Many domestic manufacturing businesses seek to limit supply chain disruptions by bringing their operations back to the U.S. The COVID-19 pandemic is largely behind us, but a level of work-from-home trends appear to be here to stay. Industrial demand will be further buoyed by government investment in infrastructure and advanced manufacturing operations. The Federal Reserve recently indicated it does not expect additional rate 25 Table of Contents increases, but the timing of an easing cycle remains unknown. These uncertain times create both risks and opportunities for us and our tenants, and we believe we are well-capitalized and positioned to take advantage. We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have four partially vacant buildings and no fully vacant buildings. Our available vacant space at March 31, 2024 represents 1.1% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $1.8 million. We continue to actively seek new tenants for these properties. We believe our lease expiration schedule for the remainder of 2024 is manageable, as it equates to 4.8% of our lease revenue at March 31, 2024. Property acquisitions since the beginning of 2020 have totaled $372.7 million and all but one transaction was industrial in nature, with a weighted average lease term of 13.6 years and a current weighted average lease term today of 10.7 years. Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our $125.0 million senior unsecured revolving credit facility (“Revolver”), with KeyBank National Association (“KeyBank”), which matures in August 2026, our $160.0 million term loan facility (“Term Loan A”), which matures in August 2027, our $60.0 million term loan facility (“Term Loan B”), which matures in February 2026, and our $150.0 million term loan facility (“Term Loan C”) which matures in February 2028. We refer to the Revolver, Term Loan A, Term Loan B and Term Loan C collectively herein as the Credit Facility. While lenders’ credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders to make mortgage loans to finance our real estate activities. Recent Developments Sale Activity During the three months ended March 31, 2024, we continued to execute our capital recycling program, whereby we sold non-core properties. 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 three months ended March 31, 2024, we sold three non-core properties, located in Columbus, Ohio; Draper, Utah; and Richardson, Texas, 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 Three Months Ended March 31, 2024 Aggregate Gain on Sale of Real Estate, net 357,179 $ 19,523 $ 898 $ 493 $ 283 On April 30, 2024, we sold our 29,257 square foot property in Egg Harbor, New Jersey for $2.6 million. We realized a $0.05 million loss on sale. Leasing Activity During and subsequent to the three months ended March 31, 2024, we executed three leases, which are summarized below (dollars in thousands): Aggregate Square Footage Weighted Average Remaining Lease Term Aggregate Annualized GAAP Fixed Lease Payments Aggregate Tenant Improvement Aggregate Leasing Commissions 740,948 6.4 years $ 3,030 $ 834 $ 341 Financing Activity During the three months ended March 31, 2024, we repaid two mortgages, collateralized by two properties, which are summarized in the table below (dollars in thousands): 26 Table of Contents Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid $ 17,674 5.05 % Equity Activities Common Stock ATM Programs On February 22, 2022, we entered into Amendment No. 1 to 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”), 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 Company’s Registration Statement on Form S-3 (File No. 333-236143) (the “2020 Registration Statement”), and future registration statements on Form S-3. 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. 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 $250.0 million of common stock. During the three months ended March 31, 2024, we did not sell any shares of common stock under the 2023 Common Stock Sales Agreement. On March 26, 2024, we entered into Amendment No. 1 to the 2023 Common Stock Sales Agreement (the “2024 Common Stock Sales Agreement”). The amendment permitted shares of common stock to be issued pursuant to the 2024 Common Stock Sales Agreement under the Company’s Registration Statement on Form S-3 (File No. 333-277877) (the “2024 Registration Statement”), and future registration statements on Form S-3. In connection with the 2024 Common Stock Sales Agreement, we filed a prospectus supplement dated March 26, 2024, to the prospectus dated March 21, 2024, with the SEC, for the offer and sale of an aggregate offering amount of $250.0 million of common stock. During the three months ended March 31, 2024, we did not sell any shares of common stock under the 2024 Common Stock Sales Agreement. Universal Shelf Registration Statements On November 23, 2022, we filed an automatic shelf registration statement on Form S-3 (File No. 333-268549) (the “2022 Registration Statement”). There was no limit on the aggregate amount of the securities that we could offer pursuant to the 2022 Registration Statement. On March 13, 2024, we filed the 2024 Registration Statement, which was declared effective on March 21, 2024. The 2024 Registration Statement allows us to issue up to $1.3 billion of securities and replaces the 2022 Registration Statement. Series F Preferred Stock 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 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 7,580 shares of our Series F Preferred Stock, raising $0.2 million in net proceeds, during the three months ended March 31, 2024. Non-controlling Interest in Operating Partnership As of March 31, 2024 and December 31, 2023, we owned approximately 99.2% and 99.2%, re spectively, of the outstanding operating partnership units in the Operating Partnership (“OP Units”). As of March 31, 2024 and December 31, 2023, there were 310,643 and 310,643 outstanding OP Units held by holders who do not control the Operating Partnership (“Non-controlling OP Unitholders”), respectively. 27 Table of Contents Diversity of Our Portfolio Gladstone Management Corporation, a Delaware corporation (our “Adviser”), seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the three months ended March 31, 2024, our largest tenant comprised only 4.3% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three months ended March 31, 2024 and 2023 (dollars in thousands): For the three months ended March 31, 2024 2023 Industry Classification Lease Revenue Percentage of Lease Revenue Lease Revenue Percentage of Lease Revenue Automotive $ 5,302 14.8 % $ 5,140 14.2 % Diversified/Conglomerate Services 4,627 13.0 4,529 12.4 Telecommunications 4,493 12.6 4,940 13.5 Buildings and Real Estate 2,534 7.1 2,304 6.3 Diversified/Conglomerate Manufacturing 2,464 6.9 2,636 7.2 Personal, Food & Miscellaneous Services 2,348 6.6 2,347 6.4 Banking 2,314 6.5 2,336 6.4 Healthcare 2,225 6.2 3,348 9.2 Personal & Non-Durable Consumer Products 1,916 5.4 1,882 5.1 Machinery 1,608 4.5 1,369 3.7 Beverage, Food & Tobacco 1,464 4.1 1,402 3.8 Chemicals, Plastics & Rubber 1,318 3.7 1,365 3.7 Containers, Packaging & Glass 1,156 3.2 983 2.7 Childcare 573 1.6 573 1.6 Information Technology 570 1.6 573 1.6 Electronics 287 0.8 272 0.7 Printing & Publishing 266 0.7 229 0.6 Education 133 0.4 203 0.6 Home & Office Furnishings 123 0.3 123 0.3 Total $ 35,721 100.0 % $ 36,554 100.0 % The tables below reflect the breakdown of total lease revenue by state for the three months ended March 31, 2024 and 2023 (dollars in thousands): State Lease Revenue for the three months ended March 31, 2024 Percentage of Lease Revenue Number of Leases for the three months ended March 31, 2024 Lease Revenue for the three months ended March 31, 2023 Percentage of Lease Revenue Number of Leases for the three months ended March 31, 2023 Texas $ 4,526 12.7 % 14 $ 4,781 13.1 % 13 Florida 4,254 11.9 9 4,117 11.3 9 Pennsylvania 3,736 10.5 10 3,736 10.2 10 Ohio 3,187 8.9 15 3,661 10.0 16 Georgia 2,956 8.3 11 2,924 8.0 10 North Carolina 2,332 6.5 10 2,302 6.3 10 Alabama 2,160 6.0 6 2,236 6.1 7 Colorado 1,869 5.2 4 1,870 5.1 4 Michigan 1,632 4.6 6 1,599 4.4 6 Indiana 1,188 3.3 11 1,044 2.9 10 All Other States 7,881 22.1 41 8,284 22.6 42 Total $ 35,721 100.0 % 137 $ 36,554 100.0 % 137 28 Table of Contents Our Adviser and Administrator Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser and Gladstone Administration, LLC, a Delaware limited liability company (our “Administrator”) are controlled by Mr. David Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr. Terry Lee Brubaker, our chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr. Arthur “Buzz” Cooper, our president, also serves as executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary, Michael LiCalsi (who also serves as our Administrator’s president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs. Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly-traded REIT that primarily invests in farmland. With the exception of Mr. Gary Gerson, our chief financial officer, Mr. Jay Beckhorn, our treasurer, and Mr. Cooper, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception of Messrs. Cooper and Gerson, all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone Land Corporation. Messrs. Cooper and Gerson do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private. Advisory and Administration Agreements We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and 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. 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. Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors’ and officers’ insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser annually, typically during the month of July. During its July 2023 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2024. 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 calculations of the other fees in the Amended Agreement was unchanged. 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. 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 29 Table of Contents 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, we amended and restated the Advisory Agreement by entering into the Seventh Amended Advisory Agreement, as approved unanimously by our Board of Directors, including specifically, our independent directors. The 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 ended 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 was unchanged. 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 months ended March 31, 2024 or 2023. 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 agreement after the Company has defaulted and applicable cure periods have expired. The agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the Advisory Agreement to include if the Adviser breaches any material provisions of the agreement, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds. Administration Agreement Under the terms of the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the appropriate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. Significant Accounting Policies and Estimates The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ 30 Table of Contents from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023, filed by us with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2024 (our “2023 Form 10-K”). There were no material changes to our critical accounting policies or estimates during the three months ended March 31, 2024. Results of Operations The weighted average yield on our total portfolio, which was 8.5% and 7.9% as of March 31, 2024 and 2023, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties. A comparison of our operating results for the three months ended March 31, 2024 and 2023 is below (dollars in thousands, except per share amounts) : For the three months ended March 31, 2024 2023 $ Change % Change Operating revenues Lease revenue $ 35,721 $ 36,554 $ (833) (2.3) % Total operating revenues $ 35,721 $ 36,554 $ (833) (2.3) % Operating expenses Depreciation and amortization $ 13,326 $ 14,704 $ (1,378) (9.4) % Property operating expenses 5,884 6,727 (843) (12.5) % Base management fee 1,535 1,605 (70) (4.4) % Incentive fee 1,171 — 1,171 100.0 % Administration fee 630 565 65 11.5 % General and administrative 1,047 1,063 (16) (1.5) % Impairment charge 493 — 493 100.0 % Total operating expense before incentive fee waiver $ 24,086 $ 24,664 $ (578) (2.3) % Incentive fee waiver (771) — (771) 100.0 % Total operating expenses $ 23,315 $ 24,664 $ (1,349) (5.5) % Other income (expense) Interest expense $ (9,497) $ (8,828) $ (669) 7.6 % Gain on sale of real estate, net 283 — 283 100.0 % Gain on debt extinguishment, net 300 — 300 100.0 % Other income 34 105 (71) (67.6) % Total other (expense), net $ (8,880) $ (8,723) $ (157) 1.8 % Net income $ 3,526 $ 3,167 $ 359 11.3 % Distributions attributable to Series E, F, and G preferred stock (3,112) (3,022) (90) 3.0 % Distributions attributable to senior common stock (105) (109) 4 (3.7) % Loss on extinguishment of Series F preferred stock (3) (5) 2 (40.0) % Gain on repurchase of Series G preferred stock — 3 (3) (100.0) % Net income available to common stockholders and Non-controlling OP Unitholders $ 306 $ 34 $ 272 800.0 % Net income available to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted $ 0.01 $ — $ 0.01 100.0 % FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 13,542 $ 14,738 $ (1,196) (8.1) % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1) $ 13,647 $ 14,847 $ (1,200) (8.1) % FFO per weighted average share of common stock and Non-controlling OP Units - basic (1) $ 0.34 $ 0.37 $ (0.03) (8.1) % FFO per weighted average share of common stock and Non-controlling OP Units - diluted (1) $ 0.34 $ 0.37 $ (0.03) (8.1) % (1) Refer to the “Funds from Operations” section below within the Management’s Discussion and Analysis section for the definition of FFO. 31 Table of Contents Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as of January 1, 2023, which have not been subsequently vacated or disposed of. Acquired and disposed of properties are properties which were acquired, disposed of or classified as held for sale at any point subsequent to December 31, 2022. Properties with vacancy are properties that were fully vacant or had greater than 5.0% vacancy, based on square footage, at any point subsequent to January 1, 2023. Operating Revenues For the three months ended March 31, (Dollars in Thousands) Lease Revenues 2024 2023 $ Change % Change Same Store Properties $ 30,771 $ 30,521 $ 250 0.8 % Acquired & Disposed Properties 1,440 2,650 (1,210) (45.7) % Properties with Vacancy 3,510 3,383 127 3.8 % $ 35,721 $ 36,554 $ (833) (2.3) % Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties increased for the three months ended March 31, 2024, due to an increase in rental rates from the leasing activity subsequent to the three months ended March 31, 2023. Lease revenues decreased for acquired and disposed of properties for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, primarily due to loss of lease revenue including variable lease payments from the 10 property sales subsequent to March 31, 2023, and partially offset by lease revenue from the five properties acquired subsequent to March 31, 2023. Lease revenues increased for our properties with vacancy for the three months ended March 31, 2024 due to an increase in rental revenue from partially leasing vacant space and variable lease payments due to an increase in property operating expenses. Operating Expenses Depreciation and amortization expense decreased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, due to the depreciation errors corrected, as outlined in Note 1 and Note 9, coupled with the reduced depreciation and amortization expense from the 10 property sales subsequent to March 31, 2023, partially offset by an increase in depreciation and amortization expense on the five properties acquired subsequent to March 31, 2023. For the three months ended March 31, (Dollars in Thousands) Property Operating Expenses 2024 2023 $ Change % Change Same Store Properties $ 3,933 $ 3,989 $ (56) (1.4) % Acquired & Disposed Properties 344 1,248 (904) (72.4) % Properties with Vacancy 1,607 1,490 117 7.9 % $ 5,884 $ 6,727 $ (843) (12.5) % Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The decrease in property operating expenses for same store properties for the three months ended March 31, 2024, from the comparable 2023 period, was a result of a decrease in franchise taxes, partially offset by general cost increases due to the inflationary environment during the three months ended March 31, 2024. The decrease in property operating expenses for acquired and disposed of properties for the three months ended March 31, 2024, from the comparable 2023 period, is a result of a decrease in property operating expenses from the 10 property sales subsequent to March 31, 2023, minimally offset by the property operating expense from the five properties acquired subsequent to March 31, 2023. The increase in property operating expenses for properties with vacancy for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, is a result of general cost increases due to the inflationary environment during the same period. The base management fee paid to the Adviser decreased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, due to a decrease in Gross Tangible Real Estate over the three months ended March 31, 2024 from property sales as compared to Gross Tangible Real Estate during the three months ended March 31, 2023. The calculation of the base management fee is described in detail above in “Advisory and Administration Agreements.” 32 Table of Contents The incentive fee paid to the Adviser increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, due to the payment of the incentive fee being contractually eliminated for the quarter ended March 31, 2023, as outlined in the Seventh Amended Advisory Agreement. We recorded an incentive fee, which was partially waived, during the three months ended March 31, 2024. The calculation of the incentive fee is described in detail above in “Advisory and Administration Agreements.” The administration fee paid to the Administrator increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, due to our Administrator incurring greater costs that are allocated to us. The calculation of the administration fee is described in detail above in “Advisory and Administration Agreements.” General and administrative expenses remained consistent for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. Other Income and Expenses Interest expense increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. This increase was primarily a result of increased interest costs on variable rate debt, as global interest rates have increased in reaction to growing inflation, coupled with costs associated with the maturity of several interest rate caps. We sold three non-core office properties during the three months ended March 31, 2024, and as a result, incurred a gain on sale of real estate, net, and a gain on debt extinguishment, net. There were no property sales during the three months ended March 31, 2023. Other income decreased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, due to nonrecurring income items that occurred in the three months ended March 31, 2023. Net Income Available to Common Stockholders and Non-controlling OP Unitholders Net income available to common stockholders and Non-controlling OP Unitholders increased for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, as revised, primarily due a decrease in depreciation and amortization from the 10 property sales subsequent to March 31, 2023 and gains on sale, net, and debt extinguishment, net. This was partially offset by depreciation and amortization from the five properties acquired subsequent to March 31, 2023, impairment charges in the current period, an increase in interest expense due to higher borrowing costs on variable rate debt due to global interest rate expansion, and the Incentive Fee in the current period, which was contractually eliminated in the prior period. Liquidity and Capital Resources Overview Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Credit Facility and issuing additional equity securities. Our available liquidity as of March 31, 2024 was $57.8 million, consisting of approximately $10.5 million in cash and cash equivalents and available borrowing capacity of $47.3 million under our Credit Facility. Our available borrowing capacity under the Credit Facility increased to $49.1 million as of May 6, 2024. Future Capital Needs We actively seek conservative investments that we expect are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial and office real property, make mortgage loans, or pay down outstanding borrowings under our Revolver. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, refinancing maturing debt and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. We also believe we will be able to refinance our mortgage debt as it matures. Additionally, to satisfy our short-term obligations, we may request credits to our management 33 Table of Contents fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs. Equity Capital During the three months ended March 31, 2024, we did not sell any common equity under either the 2023 Common Stock Sales Agreement or 2024 Common Stock Sales Agreement. We raised net proceeds of $0.2 million from sales of our Series F Preferred Stock during the three months ended March 31, 2024. As of May 6, 2024, we had the ability to raise up to $1.1 billion of additional equity capital through the sale and issuance of securities that are registered under the 2024 Registration Statement, in one or more future public offerings. We expect to continue to use our 2024 Common Stock Sales Agreement as a source of liquidity for the remainder of 2024. Debt Capital As of March 31, 2024, we had 39 mortgage notes payable in the aggregate principal amount of $278.0 million, collateralized by a total of 45 properties with a remaining weighted average maturity of 4.0 years. The weighted-average interest rate on the mortgage notes payable as of March 31, 2024 was 4.16%. We continue to see banks and other non-bank lenders willing to issue mortgages for properties comparable to those held in our portfolio on terms that are commercially reasonable. Consequently, we remain focused on obtaining mortgages through insurance companies, regional banks, non-bank lenders and, to a lesser extent, the commercial mortgage backed securities market. As of March 31, 2024, we had mortgage debt in the aggregate principal amount of $14.3 million payable during the remainder of 2024 and $27.1 million payable during 2025. The 2024 principal amount payable includes both amortizing principal payments and one balloon principal payment due during the remaining nine months of 2024. We anticipate being able to refinance our mortgages that come due during 2025 with a combination of new mortgage debt, availability under our Credit Facility, the issuance of additional equity securities under our 2024 Common Stock Sales Agreement, or the sale and issuance of other equity securities (including our Series F Preferred Stock) that are registered under the 2024 Registration Statement. Operating Activities Net cash provided by operating activities during the three months ended March 31, 2024, was $15.0 million, remained consistent with net cash provided by operating activities of $14.9 million for the three months ended March 31, 2023. The majority of cash from operating activities is generated from the lease revenues that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, Administration fees to our Administrator and other entity-level operating expenses. Investing Activities Net cash provided by investing activities during the three months ended March 31, 2024, was $18.5 million, which primarily consisted of proceeds from three property sales, offset by capital improvements performed at certain of our properties. Net cash provided by investing activities during the three months ended March 31, 2023, was $0.7 million, which primarily consisted of receipts from tenant escrow, partially offset by capital improvements performed at certain of our properties and deposits on future acquisitions. Financing Activities Net cash used in financing activities during the three months ended March 31, 2024, was $34.7 million, which primarily consisted of $19.8 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders, partially offset by the issuance of $0.2 million of equity and net borrowings on our credit facility. Net cash used in financing activities for the three months ended March 31, 2023, was $12.8 million, which primarily consisted of $5.0 million of mortgage debt repayments, and distributions paid to common, senior common and preferred shareholders, partially offset by the issuance of $4.6 million of common and preferred equity and net borrowings on our credit facility. 34 Table of Contents 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 the 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 A and 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 March 31, 2024, there was $446.0 million outstanding under our Credit Facility at a weighted average interest rate of approximately 6.80% and no outstanding letters of credit. As of May 6, 2024, the maximum additional amount we could draw under the Credit Facility was $49.1 million. We were in compliance with all covenants under the Credit Facility as of March 31, 2024. Contractual Obligations The following table reflects our material contractual obligations as of March 31, 2024 (dollars in thousands): Payments Due by Period Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Debt Obligations (1) $ 723,975 $ 31,242 $ 216,484 $ 416,041 $ 60,208 Interest on Debt Obligations (2) 139,284 41,443 72,020 22,465 3,356 Operating Lease Obligations (3) 6,026 457 918 940 3,711 Purchase Obligations (4) 7,977 5,844 2,133 — — $ 877,262 $ 78,986 $ 291,555 $ 439,446 $ 67,275 (1) Debt obligations represent borrowings under our Revolver, which represents $76.0 million of the debt obligation due in 2026, our Term Loan A, which represents $160.0 million of the debt obligation due in 2027, our Term Loan B, which represents $60.0 million of the debt obligation due in 2026, our Term Loan C, which represents $150.0 million of the debt obligation due in 2028 and mortgage notes payable that were outstanding as of March 31, 2024. This figure does not include $(0.03) million of premiums and (discounts), net and $4.6 million of deferred financing costs, net, which are reflected in mortgage notes payable, net and borrowings under Term Loan, net on the condensed consolidated balance sheets. (2) Interest on debt obligations includes estimated interest on borrowings under our Revolver and Term Loan and mortgage notes payable. The balance and interest rate on our Revolver, Term Loan A, Term Loan B and Term Loan C is variable; thus, the interest payment obligation calculated for purposes of this table was based upon rates and balances as of March 31, 2024. (3) Operating lease obligations represent the ground lease payments due on three of our properties. (4) Purchase obligations consist of tenant and capital improvements at seven of our properties. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of March 31, 2024. Funds from Operations The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relevant non-GAAP supplemental measure of operating performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the same basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment losses on property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. 35 Table of Contents FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income. FFO should not be considered an alternative to net income as an indication of our performance or to cash flows from operations as a measure of liquidity or ability to make distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. FFO available to common stockholders is FFO adjusted to subtract distributions made to holders of preferred stock and senior common stock. We believe that net income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders. Basic funds from operations per share (“Basic FFO per share”), and diluted funds from operations per share (“Diluted FFO per share”), is FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding and FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding on a diluted basis, respectively, during a period. We believe that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share (“EPS”), in evaluating net income available to common stockholders. In addition, because most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures when comparing us to other REITs. We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that Diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. 36 Table of Contents The following table provides a reconciliation of our FFO available to common stockholders for the three months ended March 31, 2024 and 2023, respectively, to the most directly comparable GAAP measure, net income available to common stockholders, and a computation of basic and diluted FFO per weighted average share of common stock: For the three months ended March 31, (Dollars in Thousands, Except for Per Share Amounts) 2024 2023 Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income $ 3,526 $ 3,167 Less: Distributions attributable to preferred and senior common stock (3,217) (3,131) Less: Loss on extinguishment of Series F preferred stock (3) (5) Add: Gain on repurchase of Series G preferred stock — 3 Net income available to common stockholders and Non-controlling OP Unitholders $ 306 $ 34 Adjustments: Add: Real estate depreciation and amortization $ 13,326 $ 14,704 Add: Impairment charge 493 — Less: Gain on sale of real estate, net (283) — Less: Gain on debt extinguishment, net (300) — FFO available to common stockholders and Non-controlling OP Unitholders - basic (1) $ 13,542 $ 14,738 Weighted average common shares outstanding - basic 40,003,481 39,922,359 Weighted average Non-controlling OP Units outstanding 310,643 391,468 Weighted average common shares and Non-controlling OP Units 40,314,124 40,313,827 Basic FFO per weighted average share of common stock and Non-controlling OP Unit (1) $ 0.34 $ 0.37 Calculation of diluted FFO per share of common stock and Non-controlling OP Unit Net income $ 3,526 $ 3,167 Less: Distributions attributable to preferred and senior common stock (3,217) (3,131) Less: Loss on extinguishment of Series F preferred stock (3) (5) Add: Gain on repurchase of Series G preferred stock — 3 Net income available to common stockholders and Non-controlling OP Unitholders $ 306 $ 34 Adjustments: Add: Real estate depreciation and amortization $ 13,326 $ 14,704 Add: Impairment charge 493 — Add: Income impact of assumed conversion of senior common stock 105 109 Less: Gain on sale of real estate, net (283) — Less: Gain on debt extinguishment, net (300) — FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions (1) $ 13,647 $ 14,847 Weighted average common shares outstanding - basic 40,003,481 39,922,359 Weighted average Non-controlling OP Units outstanding 310,643 391,468 Effect of convertible senior common stock 342,247 345,687 Weighted average common shares and Non-controlling OP Units outstanding - diluted 40,656,371 40,659,514 Diluted FFO per weighted average share of common stock and Non-controlling OP Unit (1) $ 0.34 $ 0.37 Distributions declared per share of common stock and Non-controlling OP Unit $ 0.3000 $ 0.3000 (1) These amounts were unchanged by the revisions described in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies” and Note 9, “Revision of Previously Issued Financial Statements.” 37 Table of Contents