UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Not Applicable

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.

The number of shares of the registrant’s Common Stock,common stock, $0.001 par value, outstanding as of October 31, 2017November 6, 2023 was 27,705,664.39,948,820.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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 office and industrial properties. On a selective basis, we may make long term industrial and commercial mortgage loans; however, we do not have any mortgage loans currently outstanding.office properties. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation ("Adviser"(the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company ("Administrator"(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 or the Operating Partnership.(the “Operating Partnership”).

All further references herein to “we,” “our,” “us” and “us”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"(“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, 2016,2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 15, 2017.22, 2023. The results of operations for the three and nine months ended September 30, 20172023 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

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 could materiallymay differ from those estimates.these estimates under different assumptions or conditions.

CriticalSignificant Accounting Policies

The preparation of our financial statements in accordance with GAAP we apply certain critical accounting policies which requirerequires management to make judgments that are subjective in nature and requires management to make certain estimates and assumptions. Application of ourthese 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, 2016.2022. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2017.2023.

2. Related-Party Transactions

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 vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip,Arthur “Buzz” Cooper, is analso executive managing directorvice 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.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 or the Advisory Agreement,(the “Advisory Agreement”), and an administration agreement with our Administrator or the Administration Agreement.(the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of September 30, 20172023 and December 31, 2016, $2.32022, $2.6 million and $2.1$3.4 million, respectively, were collectively due to our Adviser and Administrator.

On July 14, 2020, we amended and restated the July 2015 amendment,Advisory Agreement, which replaced the calculation of the annual base management fee equals 1.5% of our adjusted total stockholders’ equity, which is our total stockholders’ equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges) and adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee). The fee is calculated and accrued quarterly as 0.375% per quarter of such adjusted total stockholders’ equity figure. As a result of the July 2016 amendment, the definition of adjusted total stockholders' equity in theprevious 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 incentive fee (described below) includes total mezzanine equity. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is commonprior calendar quarter’s “Gross Tangible Real Estate,” defined in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. Prior to the 2015 amendment, the Advisory Agreement provided for an annual base management fee equal to 2.0%as the current gross value of our common stockholders’ equity, which was our total stockholders’ equity, lessproperty portfolio (meaning the recorded valueaggregate of each property’s original acquisition price plus the cost of any preferred stock and adjusted to excludesubsequent capital improvements thereon). The calculation of the effect of any unrealized gains, losses, or other items that did not affect realized net income (including impairment charges).fees in the Advisory Agreement was unchanged.

For the three and nine months ended September 30, 2017,2023, we recorded a base management fee of $1.3$1.6 million and $3.7$4.8 million, respectively. For the three and nine months ended September 30, 2016,2022, we recorded a base management fee of $1.1$1.6 million and $2.8$4.7 million, respectively.

Incentive Fee

As a result ofPursuant to the July 2015 amendment,Advisory Agreement, the calculation of the incentive fee was revised to rewardrewards 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, and which, as a result of the July 2016 amendment to the Advisory Agreement, now includes total mezzanine equity)fee). We refer to this as the new hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the new hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net (loss) income (loss)(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 (loss)(attributable) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.

Seventh Amended Advisory Agreement contractually eliminated the payment of the incentive fee prior tofor the quarters ended March 31, 2023 and June 30, 2023. The calculation of the other fees was unchanged.

On July 2015 amendment rewarded11, 2023, the Adviser in circumstances whereCompany entered into the Eighth Amended Advisory Agreement, as approved unanimously by our quarterly funds from operations, or FFO, before giving effect to anyBoard of Directors, including specifically, our independent directors. The Eighth Amended Advisory Agreement contractually eliminated the payment of the incentive fee or pre-incentive fee FFO, exceeded 1.75%, or 7.0% annualized, orfor the hurdle rate, of common stockholders’ equity. FFO, includedquarters ending September 30, 2023 and December 31, 2023. In addition, the Eighth Amended Advisory Agreement also clarified that for any realized capital gains and capital losses, less any distributions paid on preferred stock and Senior Common Stock, but FFO did not include any unrealized capital gains or losses (including impairment charges). The Adviser received 100.0% of the amount of the pre-incentive fee FFO that exceeded the hurdle rate, but was less than 2.1875% of our common stockholders’ equity. The Adviser also receivedfuture quarter whereby an incentive fee of 20.0%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 amount of our pre-incentive fee FFO that exceeded 2.1875% of common stockholders’ equity.other fees remains unchanged.

For the three and nine months ended September 30, 2017, we recorded an2023, the contractually eliminated incentive fee of $0.6would have been $0.9 million and $1.8$3.4 million, respectively. For the three and nine months ended September 30, 2016,2022, we recorded an incentive fee of $0.6$1.5 million and $1.8$4.2 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and nine months ended September 30, 2017 or 2016. Waivers are unconditional and cannot be recouped by the Adviser in the future.2022.

Capital Gain Fee

Under the Advisory Agreement, as amended in July 2015, we will pay to the Adviser a capital gains-basedgain-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 (which is calculated as(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, 20172023 or 2016.2022.

Termination Fee

The Advisory Agreement includes a termination fee clause whereby, in the event of our termination thereofof 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'sAdministrator’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, 2017,2023, we recorded an administration fee of $0.3$0.6 million and $1.0$1.7 million, respectively, and forrespectively. For the three and nine months ended September 30, 2016,2022, we recorded an administration fee of $0.3$0.5 million and $1.1$1.3 million, respectively.

Gladstone Securities, LLC or (“Gladstone Securities,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 Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

Mortgage Financing Arrangement Agreement

We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15% to a maximum of 1.0%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 partythird-party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1$0.03 million and $0.2$0.1 million during the three and nine months ended September 30, 2017, respectively,2023, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25%0.38% and 0.27%, respectively,0.29% of the mortgage principal secured. We paid financing fees to Gladstone Securities of $0.1 million and $0.2$0.3 million during the three and nine months ended September 30, 2016, respectively,2022, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.28%0.29% and 0.36%, respectively,0.32% of the mortgage principal secured. Our Board of Directors renewed the agreement for an additional year, through August 31, 2018,2024, at its July 20172023 meeting.

3. Loss perPer 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, 20172023 and 2016. 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.

We computed basic loss per share for the three and nine months ended September 30, 20172023 and 20162022 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, 20172023 and 2016,2022 reflects additional shares of common stock related to our convertible Seniorsenior common stock (the “Senior Common Stock (ifStock”), if the effect of conversion would be dilutive),dilutive, that would have been outstanding if such dilutive potential shares of common stock had been issued, as well as an adjustment to net income availableloss attributable to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).

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, 20172023 and December 31, 20162022, respectively, excluding real estate held for sale as of September 30, 2023 and December 31, 20162022 (dollars in thousands):

Real estate depreciation expense on building and tenant improvements was $6.9$8.9 million and $19.8$31.2 million for the three and nine months ended September 30, 2017, respectively,2023, respectively. Real estate depreciation expense on building and $6.1tenant improvements was $10.7 million and $17.9$30.7 million for the three and nine months ended September 30, 2016,2022, respectively.

We acquired fivethree properties during the nine months ended September 30, 2017,2023 and twoacquired 11 industrial properties during the nine months ended September 30, 2016, which2022. The acquisitions are summarized below (dollars in thousands):

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 20172023 and 20162022 as follows (dollars in thousands):

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 total revenuefive succeeding fiscal years and loss recognized on the two acquisitions treatedthereafter is as business combinations completed during the nine months endedfollows, excluding real estate held for sale as of September 30, 20162023 (dollars in thousands):

The following table reflects pro-forma consolidated statementsbelow sets forth the allocation of operations as if the business combinations completed in 2016, were completed as of January 1, 2015. The pro-forma earningslease revenue between fixed contractual payments and variable lease payments for the three and nine months ended September 30, 2016 were adjusted to assume that the acquisition-related costs were incurred as of the beginning of the comparative period (dollars in thousands, except per share amounts):

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, 20172023 and December 31, 2016,2022, respectively, excluding real estate held for sale as of September 30, 2023 and December 31, 20162022 (dollars in thousands):