GLADSTONE COMMERCIAL CORP 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary risk that we believe we are and will be exposed to is interest rate risk. Certain of our leases contain escalations based on market indices, and the interest rate on our Credit Facility is variable. Although we seek to mitigate this risk by structuring such provisions of our loans and leases to contain a minimum interest rate or escalation rate, as applicable, these features do not eliminate this risk. To that end, we have entered into derivative contracts to cap interest rates for our variable rate notes payable, and we have entered into interest rate swaps whereby we pay a fixed interest rate to our respective counterparty, and receive SOFR in return. For details regarding our rate cap agreements and our interest rate swap agreements, see Note 6 – Mortgage Notes Payable, Credit Facility, and Senior Unsecured Notes of the accompanying consolidated financial statements . To illustrate the potential impact of changes in interest rates on our net income for the year ended December 31, 2024, we have performed the following analysis, which assumes that our consolidated balance sheet remains constant and that no further actions beyond a minimum interest rate or escalation rate are taken to alter our existing interest rate sensitivity. The following table summarizes the annual impact of a 1%, 2% and 3% increase, and a 1%, 2% and 3% decrease in SOFR as of December 31, 2024. As of December 31, 2024, our effective average SOFR was 4.49%. The impact of these fluctuations is presented below (dollars in thousands). Interest Rate Change (Decrease) increase to Interest Expense Net increase (decrease) to Net Income 3% Decrease to SOFR $ (1,495) $ 1,495 2% Decrease to SOFR (997) 997 1% Decrease to SOFR (498) 498 1% Increase to SOFR 498 (498) 2% Increase to SOFR 186 (186) 3% Increase to SOFR 279 (279) As of December 31, 2024, the fair value of our mortgage debt outstanding was $253.1 million. Interest rate fluctuations may affect the fair value of our debt instruments. If interest rates on our debt instruments, using rates at December 31, 2024, had been one percentage point higher or lower, the fair value of those debt instruments on that date would have decreased or increased by $7.3 million and $7.6 million, respectively. The amount outstanding under the Credit Facility approximates fair value as of December 31, 2024. In the future, we may be exposed to additional effects of interest rate changes, primarily as a result of our Revolver, Term Loans (i.e. Term Loan A, Term Loan B, and Term Loan C), or long-term mortgage debt, which we use to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments, such as interest rate swaps and caps to mitigate the interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees and borrowers, all of which may affect our ability to refinance debt, if necessary. As of December 31, 2024, approximately $339.2 million of our debt bore interest at fixed rates, as shown in the future principal debt payment table below (dollars in thousands): 2025 2026 2027 2028 2029 Thereafter Total Fixed rate $ 12,654 $ 35,367 $ 95,406 $ 37,444 $ 109,851 $ 48,521 $ 339,243 Variable rate $ 7,260 $ 41,900 $ 160,000 $ 150,000 $ — $ — $ 359,160 $ 19,914 $ 77,267 $ 255,406 $ 187,444 $ 109,851 $ 48,521 $ 698,403 50 Table of Contents