##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 001-33097
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND(State or other jurisdiction of 
incorporation or organization)
    
    02-0681276(I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2011
 TABLE OF CONTENTS
  PART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
    
    
    3Consolidated Statements of Operations for the three months ended
March 31, 2011 and 2010
    
    
    4Consolidated Statements of Cash Flows for the three months ended
March 31, 2011 and 2010
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Removed and Reserved
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    38EX-12EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Gladstone Commercial Corporation
 
 Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Amounts)

(Unaudited)
 March 31, 2011
    
    
    December 31, 2010ASSETSReal estate, at cost
    
    $
    397,873
    
    
    $
    401,017Less: accumulated depreciation
    
    
    46,049
    
    
    
    43,659Total real estate, net
    
    
    351,824
    
    
    
    357,358Lease intangibles, net
    
    
    29,431
    
    
    
    26,747Cash and cash equivalents
    
    
    14,323
    
    
    
    7,062Restricted cash
    
    
    2,733
    
    
    
    2,288Funds held in escrow
    
    
    2,899
    
    
    
    2,621Deferred rent receivable
    
    
    10,655
    
    
    
    10,373Deferred financing costs, net
    
    
    3,105
    
    
    
    3,326Other assets
    
    
    1,178
    
    
    
    834TOTAL ASSETS
    
    $
    416,148
    
    
    $
    410,609LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    260,032
    
    
    $
    260,869Borrowings under line of credit
    
    
    20,900
    
    
    
    27,000Deferred rent liability
    
    
    3,025
    
    
    
    2,276Asset retirement obligation liability
    
    
    3,101
    
    
    
    3,063Accounts payable and accrued expenses
    
    
    2,070
    
    
    
    2,683Due to Adviser (1)
    
    
    952
    
    
    
    965Other liabilities
    
    
    2,646
    
    
    
    2,378Total Liabilities
    
    
    292,726
    
    
    
    299,234STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation
preference; 2,300,000 shares authorized and 2,150,000 shares issued and
outstanding at March 31, 2011 and December
31, 2010, respectively
    
    
    2
    
    
    
    2Senior common stock, $0.001 par value; 7,500,000 shares
authorized and 59,057 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value, 40,200,000 shares authorized and
9,571,379 and 8,724,613 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively
    
    
    10
    
    
    
    9Additional paid in capital
    
    
    188,819
    
    
    
    174,261Notes receivable  employees
    
    
    (432
    )
    
    
    (963
    )Distributions in excess of accumulated earnings
    
    
    (64,977
    )
    
    
    (61,934
    )Total Stockholders Equity
    
    
    123,422
    
    
    
    111,375TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    416,148
    
    
    $
    410,609
 
 (1)
    
    Refer to Note 2 Related-Party Transactions  3




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##### Table of Contents



Gladstone Commercial Corporation
 
 Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Data)

(Unaudited)
 For the three months ended March 31,2011
    
    
    2010Operating revenuesRental income
    
    $
    10,435
    
    
    $
    10,415Interest income from mortgage note receivable
    
    
    
    
    
    
    188Tenant recovery revenue
    
    
    84
    
    
    
    82Total operating revenues
    
    
    10,519
    
    
    
    10,685Operating expensesDepreciation and amortization
    
    
    3,370
    
    
    
    3,322Property operating expenses
    
    
    297
    
    
    
    244Due diligence expense
    
    
    (138
    )
    
    
    22Base management fee (1)
    
    
    352
    
    
    
    313Incentive fee (1)
    
    
    832
    
    
    
    846Administration fee (1)
    
    
    256
    
    
    
    232General and administrative
    
    
    454
    
    
    
    381Total operating expenses before credits from Adviser
    
    
    5,423
    
    
    
    5,360Credit to incentive fee
    
    
    (486
    )
    
    
    Total operating expenses
    
    
    4,937
    
    
    
    5,360Other income (expense)Interest income  employee loans
    
    
    10
    
    
    
    43Other income
    
    
    44
    
    
    
    3Interest expense
    
    
    (4,156
    )
    
    
    (4,285
    )Total other expense
    
    
    (4,102
    )
    
    
    (4,239
    )Net income
    
    
    1,480
    
    
    
    1,086Distributions attributable to preferred stock
    
    
    (1,023
    )
    
    
    (1,023
    )Distributions attributable to senior common stock
    
    
    (15
    )
    
    
    Net income available to common stockholders
    
    $
    442
    
    
    $
    63Earnings per weighted average share of common stockBasic
    
    $
    0.05
    
    
    $
    0.01Diluted
    
    $
    0.05
    
    
    $
    0.01Weighted average shares of common stock outstandingBasic
    
    
    9,258
    
    
    
    8,559Diluted
    
    
    9,310
    
    
    
    8,559Earnings per weighted average share of senior common stock
    
    $
    0.25
    
    
    $
    0.00Weighted average shares of senior common stock outstanding  basic
    
    
    59
    
    
    
    0
 
 (1)
    
    Refer to Note 2 Related-Party Transactions  4




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##### Table of Contents



Gladstone Commercial Corporation
 
 Consolidated Statements of Cash Flows
(Dollars in Thousands)

(Unaudited)
 For the three months ended March 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    1,480
    
    
    $
    1,086Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,370
    
    
    
    3,322Amortization of deferred financing costs
    
    
    231
    
    
    
    272Amortization of deferred rent asset and liability, net
    
    
    (176
    )
    
    
    (180
    )Amortization of discount on assumed debt
    
    
    33
    
    
    
    Asset retirement obligation expense
    
    
    38
    
    
    
    37Increase in other assets
    
    
    (44
    )
    
    
    (430
    )Increase in deferred liability
    
    
    988
    
    
    
    Increase in deferred rent receivable
    
    
    (344
    )
    
    
    (447
    )Decrease in accounts payable, accrued expenses, and amount due Adviser
    
    
    (626
    )
    
    
    (287
    )(Decrease) increase in other liabilities
    
    
    (209
    )
    
    
    216Net cash provided by operating activities
    
    
    4,741
    
    
    
    3,589Cash flows from investing activities:Real estate investments
    
    
    (521
    )
    
    
    (342
    )Leasing commissions paid
    
    
    
    
    
    
    (4
    )Receipts from lenders for reserves held in escrow
    
    
    187
    
    
    
    404Payments to lenders for reserves held in escrow
    
    
    (465
    )
    
    
    (482
    )Increase in restricted cash
    
    
    (445
    )
    
    
    (324
    )Deposits on future acquisitions
    
    
    (300
    )
    
    
    Deposits refunded
    
    
    
    
    
    
    250Net cash used in investing activities
    
    
    (1,544
    )
    
    
    (498
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    15,543
    
    
    
    Offering costs
    
    
    (984
    )
    
    
    Principal repayments on mortgage notes payable
    
    
    (837
    )
    
    
    (644
    )Principal repayments on employee notes receivable
    
    
    531
    
    
    
    43Borrowings from line of credit
    
    
    19,200
    
    
    
    4,200Repayments on line of credit
    
    
    (25,300
    )
    
    
    (2,500
    )Receipts from tenants for reserves
    
    
    526
    
    
    
    525Payments to tenants from reserves
    
    
    (30
    )
    
    
    (202
    )Decrease in security deposits
    
    
    (51
    )
    
    
    Payments for deferred financing costs
    
    
    (11
    )
    
    
    (50
    )Distributions paid for common, senior common and preferred
    
    
    (4,523
    )
    
    
    (4,232
    )Net cash provided by (used in) financing activities
    
    
    4,064
    
    
    
    (2,860
    )Net increase in cash and cash equivalents
    
    
    7,261
    
    
    
    231Cash and cash equivalents, beginning of period
    
    
    7,062
    
    
    
    3,096Cash and cash equivalents, end of period
    
    $
    14,323
    
    
    $
    3,327NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONForfeiture of common stock in satisfaction of employee note receivable
    
    $
    
    
    
    $
    244
  5




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##### Table of Contents



Gladstone Commercial Corporation
 
 Notes to Consolidated Financial Statements
 (Dollars in Thousands, Except per Share Data or Unless Otherwise Indicated)
 1. Organization and Significant Accounting Policies
  Subsidiaries
     Interim Financial Information
  Out of Period Adjustment
  6




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Use of Estimates
  Reclassifications
  Investments in Real Estate
     7




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Impairment
   Cash and Cash Equivalents
  8




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##### Table of Contents



Restricted Cash
  Funds Held in Escrow
  Deferred Financing Costs
  Obligation Under Capital Lease
  Revenue Recognition
  9




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##### Table of Contents



Income Taxes
   Asset Retirement Obligations
  Stock Issuance Costs
  2. Related-Party Transactions
 10




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##### Table of Contents



Advisory Agreement
    Administration Agreement
  Dealer Manager Agreement
 Stockholders
Equity
 11




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##### Table of Contents



3. Earnings per Share of Common Stock
  For the three months ended March 31,2011
    
    
    2010Calculation of basic earnings per share of common stock:Net income available to common stockholders
    
    $
    442
    
    
    $
    63Denominator for basic weighted average shares of common stock
    
    
    9,258
    
    
    
    8,559Basic earnings per share of common stock
    
    $
    0.05
    
    
    $
    0.01Calculation of diluted earnings per share of comon stock:Net income available to common stockholders
    
    $
    442
    
    
    $
    63Add: Income impact of assumed conversion of senior common stock
    
    
    15
    
    
    
    Net income available to common stockholders plus assumed conversions
    
    $
    457
    
    
    $
    63Denominator for basic weighted average shares of common stock
    
    
    9,258
    
    
    
    8,559Effect of convertible senior common stock
    
    
    52
    
    
    
    Denominator for diluted weighted average shares of common stock
    
    
    9,310
    
    
    
    8,559Diluted earnings per share of common stock
    
    $
    0.05
    
    
    $
    0.01
 4. Real Estate and Intangible Assets
 Real Estate
 Organization
and Significant Accounting Policies  Out of Period Adjustment,
 12




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##### Table of Contents



March 31, 2011
    
    
    December 31, 2010Real estate:Land
    
    $
    55,284
    (1)
    
    $
    55,158
    (1)Building and improvements
    
    
    331,865
    
    
    
    335,576Tenant improvements
    
    
    10,724
    
    
    
    10,283Accumulated depreciation
    
    
    (46,049
    )
    
    
    (43,659
    )Real estate, net
    
    $
    351,824
    
    
    $
    357,358
 
 (1)
    
    Includes land held under a capital lease carried at $1,100.  TenantYear
    
    Lease PaymentsNine months ending December 31, 2011
    
    $
    29,7302012
    
    
    39,9942013
    
    
    35,5972014
    
    
    31,4982015
    
    
    27,4322016
    
    
    22,941Thereafter
    
    
    152,811
   Intangible Assets
 Organization and Significant Accounting
Policies  Out of Period Adjustment,
 13




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##### Table of Contents



March 31, 2011
    
    
    December 31, 2010Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    19,969
    
    
    $
    (8,811
    )
    
    $
    17,011
    
    
    $
    (8,362
    )Leasing costs
    
    
    10,995
    
    
    
    (4,925
    )
    
    
    10,764
    
    
    
    (4,685
    )Customer
relationships
    
    
    18,111
    
    
    
    (5,908
    )
    
    
    17,636
    
    
    
    (5,617
    )$
    49,075
    
    
    $
    (19,644
    )
    
    $
    45,411
    
    
    $
    (18,664
    )
  EstimatedAmortizationYear
    
    ExpenseNine months ending December 31, 2011
    
    $
    4,2702012
    
    
    5,0672013
    
    
    2,8922014
    
    
    2,6412015
    
    
    2,2622016
    
    
    1,708Thereafter
    
    
    10,591
 5. Mortgage Notes Payable and Line of Credit
  14




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##### Table of Contents



Date of
    
    
    Principal
    
    
    
    
    
    Principal Balance OutstandingIssuance/
    
    
    Maturity
    
    
    Stated Interest Rate
    
    
    
    
    
    
    December 31,Assumption
    
    
    Date
    
    
    at March 31, 2011(1)
    
    
    March 31, 2011
    
    
    2010Fixed-Rate Mortgage Notes Payable:09/15/08
    
    
    
    10/01/11
    (2)
    
    
    4.58
    %
    
    $
    48,015
    
    
    $
    48,01502/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    8,976
    
    
    
    9,02202/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    18,640
    
    
    
    18,74008/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    20,684
    
    
    
    20,77109/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,160
    
    
    
    12,20912/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    18,656
    
    
    
    18,72809/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,273
    
    
    
    4,29203/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000
    
    
    
    17,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    13,640
    
    
    
    13,71908/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,128
    
    
    
    6,16311/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    13,905
    
    
    
    13,95412/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,256
    
    
    
    21,33002/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775
    
    
    
    13,77506/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240
    
    
    
    14,24010/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,423
    
    
    
    15,47412/15/10
    
    
    
    12/10/26
    
    
    
    6.63
    %
    
    
    10,699
    
    
    
    10,79503/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    
    2,562
    
    
    
    2,642Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    260,032
    
    
    $
    260,869Variable-Rate Line of Credit:
    
    
    12/28/10
    
    
    
    12/27/13
    
    
    LIBOR +3.00%
    
    $
    20,900
    
    
    $
    27,000Total Mortgage Notes Payable and Line of Credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    280,932
    
    
    $
    287,869
 
 (1)
    
    The weighted average interest rate on all debt outstanding at March 31, 2011 was approximately 5.47%.(2)
    
    This note has three annual extension options, which gives the Company the ability to extend the term
of the note until October 1, 2013. The first of these options was exercised on September 30, 2010. $2.8 million of this
note relates to one of the Companys vacant buildings, and this portion is due by May 31, 2011. Mortgage Notes Payable
    15




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##### Table of Contents



Scheduled principalYear
    
    paymentsNine months ending December 31, 2011
    
    $
    50,619
    (1)2012
    
    
    3,7922013
    
    
    12,6172014
    
    
    21,2512015
    
    
    55,0822016
    
    
    48,073Thereafter
    
    
    68,598$
    260,032
 
 (1)
    
    The $48.0 million mortgage note issued in
September 2008 was extended on September 30, 2010 for one
year. The Company expects to exercise additional options to
extend the maturity date until October 2013. Line of Credit
    16




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##### Table of Contents



6. Stockholders Equity
  Distributions inCapital in
    
    
    Notes
    
    
    Excess of
    
    
    TotalPreferred
    
    
    Senior Common
    
    
    Common
    
    
    Excess of
    
    
    Receivable
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Stock
    
    
    Par Value
    
    
    from Employees
    
    
    Earnings
    
    
    EquityBalance at December 31, 2010
    
    $
    2
    
    
    $
    
    
    
    $
    9
    
    
    $
    174,261
    
    
    $
    (963
    )
    
    $
    (61,934
    )
    
    $
    111,375Issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    14,558
    
    
    
    
    
    
    
    
    
    
    
    14,559Repayment of principal on
notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    531Distributions declared to
common, senior common and
preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,523
    )
    
    
    (4,523
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,480
    
    
    
    1,480Balance at March 31, 2011
    
    $
    2
    
    
    $
    
    
    
    $
    10
    
    
    $
    188,819
    
    
    $
    (432
    )
    
    $
    (64,977
    )
    
    $
    123,422
  Number of
    
    
    Strike Price
    
    
    Amount of Promissory
    
    
    Outstanding Balance of
    
    
    Outstanding Balance ofOptions
    
    
    of Options
    
    
    Note Issued to
    
    
    Employee Loans at
    
    
    Employee Loans at
    
    
    Maturity Date
    
    
    Interest Rate onDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Employees
    
    
    March 31, 2011
    
    
    December 31, 2010
    
    
    of Note
    
    
    NoteSep 2004
    
    
    25
    
    
    $
    15.00
    
    
    $
    375
    
    
    $
    20
    
    
    $
    20
    
    
    Sep 2013
    
    
    5.00
    %Apr 2006
    
    
    12
    
    
    
    16.10
    
    
    
    193
    
    
    
    5
    
    
    
    5
    
    
    Apr 2015
    
    
    7.77
    %May 2006
    
    
    50
    
    
    
    16.85
    
    
    
    843
    
    
    
    
    
    
    
    531
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2
    
    
    
    16.10
    
    
    
    32
    
    
    
    32
    
    
    
    32
    
    
    May 2016
    
    
    7.87
    %Nov 2006
    
    
    25
    
    
    
    15.00
    
    
    
    375
    
    
    
    375
    
    
    
    375
    
    
    Nov 2015
    
    
    8.15
    %114
    
    
    
    
    
    
    $
    1,818
    
    
    $
    432
    
    
    $
    963
   17




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##### Table of Contents



7. Subsequent Events
   18




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##### Table of Contents



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, or 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. 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, or Report.
 All references to we, our, us and the Company in this Report mean Gladstone Commercial
Corporation and its consolidated subsidiaries, except where it is made clear that the term means
only Gladstone Commercial Corporation.
 OVERVIEW
 General
  Business Environment
   19




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##### Table of Contents



Recent Developments
 Investment Activities
  Leasing Activities
  Equity Activities
  Diversity of Our Portfolio
 20




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##### Table of Contents



For the three months ended March 31, 2011
    
    
    For the three months ended March 31, 2010(Dollars in Thousands)
    
    
    (Dollars in Thousands)Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeHealthcare, Education & Childcare
    
    $
    1,574
    
    
    
    15.1
    %
    
    $
    1,536
    
    
    
    14.8
    %Electronics
    
    
    1,543
    
    
    
    14.8
    
    
    
    1,541
    
    
    
    14.8Telecommunications
    
    
    1,361
    
    
    
    13.2
    
    
    
    1,362
    
    
    
    13.1Diversified/Conglomerate Manufacturing
    
    
    916
    
    
    
    8.8
    
    
    
    916
    
    
    
    8.8Chemicals, Plastics & Rubber
    
    
    783
    
    
    
    7.5
    
    
    
    783
    
    
    
    7.5Containers, Packaging & Glass
    
    
    583
    
    
    
    5.6
    
    
    
    583
    
    
    
    5.6Machinery
    
    
    563
    
    
    
    5.4
    
    
    
    597
    
    
    
    5.7Beverage, Food & Tobacco
    
    
    547
    
    
    
    5.1
    
    
    
    547
    
    
    
    5.2Printing & Publishing
    
    
    533
    
    
    
    5.1
    
    
    
    550
    
    
    
    5.3Personal & Non-Durable Consumer Products
    
    
    543
    
    
    
    5.1
    
    
    
    339
    
    
    
    3.2Buildings and Real Estate
    
    
    526
    
    
    
    5.1
    
    
    
    506
    
    
    
    4.9Oil & Gas
    
    
    318
    
    
    
    3.0
    
    
    
    329
    
    
    
    3.2Automobile
    
    
    292
    
    
    
    2.8
    
    
    
    292
    
    
    
    2.8Personal, Food & Miscellaneous Services
    
    
    144
    
    
    
    1.4
    
    
    
    144
    
    
    
    1.4Home & Office Furnishings
    
    
    132
    
    
    
    1.3
    
    
    
    132
    
    
    
    1.3Diversified/Conglomerate Services
    
    
    77
    
    
    
    0.7
    
    
    
    77
    
    
    
    0.7Insurance
    
    
    
    
    
    
    0.0
    
    
    
    181
    
    
    
    1.7$
    10,435
    
    
    
    100.0
    %
    
    $
    10,415
    
    
    
    100.0
    %
 Our Adviser and Administrator
   Advisory and Administration Agreements
  21




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##### Table of Contents



Management Services and Fees under the Advisory Agreement
   
    
    no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized);
    
    100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
 22




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##### Table of Contents



Quarterly Incentive Fee Based on FFO
 
 
   Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
   23




---



##### Table of Contents




    
    The amount of purchase price allocated to the various tangible and intangible assets on
our balance sheet;
    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus, depending on the amounts allocated between
land and other depreciable assets, changes in the purchase price allocation among our
assets could have a material impact on our FFO, a metric which is used by many REIT
investors to evaluate our operating performance; and
    
    The period of time over which tangible and intangible assets are depreciated varies
greatly, and thus, changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years. Also, we
depreciate our buildings over 39 years, but do not depreciate our land. These differences
in timing could have a material impact on our results of operations.
 Asset Impairment Evaluation
  Overview Business Environment
 24




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##### Table of Contents



Results of Operations
  A comparison of our operating results for the three months ended March 31, 2011 and 2010 is below
 For the three months ended March 31,2011
    
    
    2010
    
    
    $ Change
    
    
    % Change(Dollars in Thousands)Operating revenuesRental income
    
    $
    10,435
    
    
    $
    10,415
    
    
    $
    20
    
    
    
    0
    %Interest income from mortgage note receivable
    
    
    
    
    
    
    188
    
    
    
    (188
    )
    
    
    -100
    %Tenant recovery revenue
    
    
    84
    
    
    
    82
    
    
    
    2
    
    
    
    2
    %Total operating revenues
    
    
    10,519
    
    
    
    10,685
    
    
    
    (166
    )
    
    
    -2
    %Operating expensesDepreciation and amortization
    
    
    3,370
    
    
    
    3,322
    
    
    
    48
    
    
    
    1
    %Property operating expenses
    
    
    297
    
    
    
    244
    
    
    
    53
    
    
    
    22
    %Due diligence expense
    
    
    (138
    )
    
    
    22
    
    
    
    (160
    )
    
    
    -727
    %Base management fee
    
    
    352
    
    
    
    313
    
    
    
    39
    
    
    
    12
    %Incentive fee
    
    
    832
    
    
    
    846
    
    
    
    (14
    )
    
    
    -2
    %Administration fee
    
    
    256
    
    
    
    232
    
    
    
    24
    
    
    
    10
    %General and administrative
    
    
    454
    
    
    
    381
    
    
    
    73
    
    
    
    19
    %Total operating expenses before credit from Adviser
    
    
    5,423
    
    
    
    5,360
    
    
    
    63
    
    
    
    1
    %Credit to incentive fee
    
    
    (486
    )
    
    
    
    
    
    
    (486
    )
    
    
    100
    %Total operating expenses
    
    
    4,937
    
    
    
    5,360
    
    
    
    (423
    )
    
    
    -8
    %Other income (expense)Interest income  employee loans
    
    
    10
    
    
    
    43
    
    
    
    (33
    )
    
    
    -77
    %Other income
    
    
    44
    
    
    
    3
    
    
    
    41
    
    
    
    1367
    %Interest expense
    
    
    (4,156
    )
    
    
    (4,285
    )
    
    
    129
    
    
    
    -3
    %Total other expense
    
    
    (4,102
    )
    
    
    (4,239
    )
    
    
    137
    
    
    
    -3
    %Net income
    
    
    1,480
    
    
    
    1,086
    
    
    
    394
    
    
    
    36
    %Distributions attributable to preferred stock
    
    
    (1,023
    )
    
    
    (1,023
    )
    
    
    
    
    
    
    0
    %Distributions attributable to senior common stock
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    442
    
    
    $
    63
    
    
    $
    379
    
    
    
    602
    %
 25




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##### Table of Contents



Operating Revenues
    Operating Expenses
    Advisory and
Administration Agreements.
 Advisory and Administration Agreements.
 Advisory and Administration Agreements.
  26




---



##### Table of Contents



Other Income and Expense
    Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Overview
 Recent Developments
 Future Capital Needs
   27




---



##### Table of Contents



Equity Capital
 Overview  Recent
Developments
  Debt
  Overview  Business Environment
  Operating Activities
  Investing Activities
  28




---



##### Table of Contents



Financing Activities
  Line of Credit
    29




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##### Table of Contents



Contractual Obligations
  Payments Due by Period (Dollars in Thousands)Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    
    280,932
    
    
    $
    51,540
    
    
    $
    37,450
    
    
    $
    82,540
    
    
    $
    109,402Interest on Debt Obligations (2)
    
    
    68,393
    
    
    
    14,542
    
    
    
    25,933
    
    
    
    19,707
    
    
    
    8,211Capital Lease Obligations (3)
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    Operating Lease Obligations (4)
    
    
    1,564
    
    
    
    153
    
    
    
    305
    
    
    
    305
    
    
    
    801Total
    
    $
    351,189
    
    
    $
    66,235
    
    
    $
    63,988
    
    
    $
    102,552
    
    
    $
    118,414
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, which represents $20,900 of the debt obligation due in 2013,
and mortgage notes payable that were outstanding as of March 31, 2011. The $48,015 mortgage note issued in September 2008 matures in October 2011,
and we expect to exercise each of our options to extend the maturity date until October 2013. $2,800 of this note relates to one of our vacant buildings,
and this portion is due by May 31, 2011.(2)
    
    Interest on debt obligations includes estimated interest on our borrowings under our line of credit. The balance and interest rate on our line of credit is variable;
thus, the amount of interest calculated for purposes of this table was based upon rates and balances as of March 31, 2011.(3)
    
    Capital lease obligations represent the obligation to purchase the land held under the ground lease on our property located in Fridley, Minnesota.(4)
    
    Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property, which expires in June 2021. Off-Balance Sheet Arrangements
  30




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##### Table of Contents



Funds from Operations
     31




---



##### Table of Contents



For the three months ended March 31,2011
    
    
    2010(Dollars in Thousands, Except Per Share Data)Net income
    
    $
    1,480
    
    
    $
    1,086Less: Distributions attributable to preferred and senior
common stock
    
    
    (1,038
    )
    
    
    (1,023
    )Net income available to common stockholders
    
    
    442
    
    
    
    63Add: Real estate depreciation and amortization
    
    
    3,370
    
    
    
    3,322FFO available to common stockholders
    
    $
    3,812
    
    
    $
    3,385Weighted average shares outstanding  basic
    
    
    9,258
    
    
    
    8,559Weighted average shares outstanding  diluted
    
    
    9,310
    
    
    
    8,559Basic net income per weighted average share of common stock
    
    $
    0.05
    
    
    $
    0.01Diluted net income per weighted average share of common stock
    
    $
    0.05
    
    
    $
    0.01Basic FFO per weighted average share of common stock
    
    $
    0.41
    
    
    $
    0.40Diluted FFO per weighted average share of common stock
    
    $
    0.41
    
    
    $
    0.40Distributions declared per share of common stock
    
    $
    0.375
    
    
    $
    0.375Percentage of FFO paid per share of common stock
    
    
    91
    %
    
    
    95
    %
 32




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    (Amounts in Thousands)Increase to Rental
    
    
    Increase to
    
    
    Net Decrease to NetInterest Rate Change
    
    Income
    
    
    Interest Expense
    
    
    Income1% Increase to LIBOR
    
    $
    
    
    
    $
    54
    
    
    $
    (54
    )2% Increase to LIBOR
    
    
    
    
    
    
    108
    
    
    
    (108
    )3% Increase to LIBOR
    
    
    
    
    
    
    162
    
    
    
    (162
    )
    33




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##### Table of Contents



Item 4. Controls and Procedures
     34




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Removed and Reserved
 
 Item 5. Other Information
  35




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##### Table of Contents



Item 6. Exhibits
 Exhibit Index
 Exhibit Number
    
    Exhibit Description3.1
    
    Articles of Amendment and Restatement to Articles of
Incorporation, incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-11 (File No.
333-106024), filed June 11, 2003.3.1.1
    
    Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.75% Series A Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.3
of Form 8-A12G (File No. 000-50363), filed January 19,
2006.3.1.2
    
    Articles of Amendment to Articles Supplementary
Establishing and Fixing the Rights and Preferences of 7.75%
Series A Cumulative Redeemable Preferred Stock,
incorporated by reference to Exhibit 99.1 of Form 8-K,
filed on April 13, 2006.3.1.3
    
    Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.5% Series B Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.4
of Form 8-A12B (File No. 000-50363), filed October 19,
2006.3.1.4
    
    Articles of Amendment to Articles of Amendment and
Restatement to Articles of Incorporation, incorporated by
reference to Exhibit 3.1.1 to the Quarterly Report on Form
10-Q, filed July 30, 2009.3.1.5
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed March
19, 2010.3.1.6
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K, filed
September 9, 2010.3.1.7
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.2 of the Current Report on Form 8-K, filed
September 9, 2010.3.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024),
filed June 11, 2003.3.2.1
    
    First Amendment to Bylaws, incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed July
10, 2007.4.1
    
    Form of Certificate for Common Stock of Gladstone
Commercial Corporation, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-106024), filed August 8, 2003.4.2
    
    Form of Certificate for 7.75% Series A Cumulative
Redeemable Preferred Stock of Gladstone Commercial
Corporation, incorporated by reference to Exhibit 4.1 of
Form 8-A12G (File No. 000-50363), filed January 19, 2006.4.3
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A12B
(File No. 001-33097), filed October 19, 2006.10.1
    
    Dealer Manager Agreement dated March 25, 2011 by and
between Gladstone Commercial Corporation and Gladstone
Securities, LLC incorporated by reference to Exhibit 1.1 of
Form 8-K filed on March 28, 2011.
 36




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##### Table of Contents



Exhibit Number
    
    Exhibit Description11
    
    Computation of Per Share Earnings from Operations (included
in the notes to the unaudited financial statements
contained in this Report.12
    
    Statements re: computation of ratios (filed herewith).31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).31.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).32.1
    
    Certification of Chief Executive Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).32.2
    
    Certification of Chief Financial Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).
 37




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##### Table of Contents



Gladstone Commercial CorporationDate: May 2, 2011
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 38