UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Not Applicable

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No  ☐

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 growth company” in Rule 12b-2 of the Exchange Act.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of November 1, 20217, 2022 was 37,268,416.39,607,009.

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

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):

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. 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.

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, 2020,2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 16, 2021.15, 2022. The results of operations for the three and nine months ended September 30, 20212022 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

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, including the impact of extraordinary events such as the novel coronavirus (“COVID-19”) pandemic, 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.

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 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, 2020.2021. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2021.2022.

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. NaNTwo 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 thealso 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, 20212022 and December 31, 2020, $3.22021, $3.7 million and $3.0$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 20212022 meeting, our Board of Directors reviewed and renewed each of the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2022.2023.

On July 14, 2020, we amended and restated the Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between us and the Adviser (the “Sixth Amended 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 will beis 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 Sixth Amended 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 remainremains unchanged. The revised

For the three and nine months ended September 30, 2022, we recorded a base management fee calculation began with the fee calculations for the quarter ended September 30, 2020.

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 4four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP

For the three and nine months ended September 30, 2022, we recorded an incentive fee of $1.5 million and $4.2 million, respectively. For the three and nine months ended September 30, 2021, we recorded an incentive fee of $1.3 million and $3.5 million, respectively, partially offset by credits related to non-contractual, unconditional, voluntary and irrevocable waivers issued by the AdviserAdvisor of $0.00 million$0 and $0.02 million, respectively, resulting in a net incentive fee for the three and nine months ended September 30, 2021 of $1.3 million and $3.5 million, respectively. For the three and nine months ended September 30, 2020, we recorded an incentive fee of $1.1 million and $3.3 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and nine months ended September 30, 2020.2022.

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, 20212022 or 2020.2021.

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.

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, 2021,2022, we recorded an administration fee of $0.4$0.5 million and $1.0$1.3 million, respectively. For the three and nine months ended September 30, 2020,2021, we recorded an administration fee of $0.4 million and $1.2$1.0 million, respectively.

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.

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 did not paypaid financing fees to Gladstone Securities of $0.1 million and $0.3 million during the three and nine months ended September 30, 2021, but we2022, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.29% and 0.32%, respectively, of the mortgage principal secured. We paid financing fees to Gladstone Securities of $14,000 during the nine months ended September 30, 2021, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% of the mortgage principal secured. We did not pay financing fees to Gladstone Securities during the three months ended September 30, 2020, but we paid financing fees to Gladstone Securities of $89,637 during the nine months ended September 30, 2020, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% of the mortgage principal secured. Our Board of Directors renewed the agreement for an additional year, through August 31, 2022,2023, at its July 20212022 meeting.

On February 20, 2020 we entered into a dealer manager agreement (the “Dealer Manager Agreement”), whereby Gladstone Securities will act as the exclusive dealer manager in connection with our offering (the “Offering”) of up to (i) 20,000,000 shares of 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 a registration statement on Form S-3 (File No. 333-236143), as the same may be amended and/or supplemented (the “Registration Statement”), under the Securities Act of 1933, as amended, and will be offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020 relating to the Registration Statement (the “Prospectus”).

Under the Dealer Manager Agreement, Gladstone Securities, as dealer manager, will provide certain sales, promotional and marketing services to us in connection with the Offering, and we will pay Gladstone Securities (i) selling commissions of 6.0% of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Selling Commissions”), and (ii) a dealer manager fee of 3.0% of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Dealer Manager Fee”). No Selling Commissions or Dealer Manager Fee shall be paid with respect to shares sold pursuant to the DRIP. Gladstone Securities may, in its sole discretion, reallowre-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 $0.4 million to Gladstone Securities during the three and nine months ended September 30, 2022, respectively, in connection with the Offering. We paid fees of $0.4 million and $0.5 million to Gladstone Securities during the three and nine months ended September 30, 2021, respectively, in connection with the Offering.

3. (Loss) Earnings (Loss) Per Share of Common Stock

The following tables set forth the computation of basic and diluted (loss) earnings (loss) per share of common stock for the three and nine months ended September 30, 20212022 and 2020.2021. The operating partnership units in the Operating Partnership (“OP UnitsUnits”) held by holders who do not control the Operating Partnership (“Non-controlling OP UnitholdersUnitholders”) (which may be redeemed for shares of common stock) have been excluded from the diluted (loss) earnings (loss) per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of (loss) earnings (loss) would also be added back to net income (loss). income. Net (loss) income (loss) figures are presented net of such non-controlling interests in the (loss) earnings (loss) per share calculation.

We computed basic (loss) earnings (loss) per share for the three and nine months ended September 30, 20212022 and 20202021 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings (loss) per share for the three and nine months ended September 30, 20212022 and 20202021 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) income (loss) attributable(attributable) available 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

The following table sets forth the components of our investments in real estate as of September 30, 20212022 and December 31, 2020,2021, respectively, excluding real estate held for sale as of September 30, 2021 and December 31, 2020, respectively2022 (dollars in thousands):

Real estate depreciation expense on building and tenant improvements was $11.0 million and $31.1 million for the three and nine months ended September 30, 2022, respectively. Real estate depreciation expense on building and tenant improvements was $9.8 million and $30.0 million for the three and nine months ended September 30, 2021, respectively. Real estate depreciation expense on building and tenant improvements was $9.0 million and $27.2 million for the three and nine months ended September 30, 2020, respectively.

We acquired 811 industrial properties during the nine months ended September 30, 2021,2022, and 6eight industrial properties during the nine months ended September 30, 2020.2021. 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, 20212022 and 2020,2021, respectively, 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, 20212022 and each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of September 30, 2022 (dollars in thousands):

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.

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, 20212022 and 2020,2021, respectively (dollars in thousands):

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, 20212022 and December 31, 2020,2021, respectively, excluding real estate held for sale as of September 30, 2021 and December 31, 2020, respectively2022 (dollars in thousands):

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.7 million and $14.5 million for the three and nine months ended September 30, 2022, respectively, and $5.0 million and $15.7 million for the three and nine months ended September 30, 2021, respectively, and $4.8 million and $14.9 million for the three and nine months ended September 30, 2020, 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 $0.2 million and $0.6 million for the three and nine months ended September 30, 2021,2022, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2020,2021, 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 $1.5 million and $3.1 million for the three and nine months ended September 30, 2022, respectively, and $0.9 million and $3.3 million for the three and nine months ended September 30, 2021, respectively, and $0.7 million and $2.1 million for the three and nine months ended September 30, 2020, 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, 20212022 and 2020,2021, respectively, were as follows: