##### 



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 QUARTER ENDED JUNE
30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
  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    (703) 287-5800
 þ o
 þ o




---



##### 



GLADSTONE
COMMERCIAL CORPORATION
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004Notes to Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    38PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    39Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    39Item 3.
    
    Defaults Upon Senior Securities
    
    
    39Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    39Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    39SIGNATURES
    
    
    41
 2




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2005
    
    December 31, 2004ASSETSReal estate, net
    
    $
    94,245,941
    
    
    $
    60,466,330Mortgage note receivable
    
    
    21,064,861
    
    
    
    11,107,717Cash and cash equivalents
    
    
    216,434
    
    
    
    29,153,987Funds held in escrow
    
    
    1,284,350
    
    
    
    1,060,977Interest receivable  mortgage note
    
    
    67,619
    
    
    
    64,795Interest receivable  employees
    
    
    5,236
    
    
    
    4,792Deferred rent receivable
    
    
    4,293,573
    
    
    
    210,846Deferred financing costs
    
    
    990,340
    
    
    
    Prepaid expenses
    
    
    101,677
    
    
    
    170,685Deposits on real estate
    
    
    550,000
    
    
    
    50,000Other assets
    
    
    5,304
    
    
    
    64,819Lease intangibles, net of accumulated amortization of
$457,151 and $194,047, respectively
    
    
    5,362,850
    
    
    
    3,230,146TOTAL ASSETS
    
    $
    128,188,185
    
    
    $
    105,585,094LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDue to Adviser
    
    $
    124,171
    
    
    $
    129,231Accounts payable and accrued expenses
    
    
    280,920
    
    
    
    168,389Dividends payable
    
    
    
    
    
    
    920,040Mortgage note payable
    
    
    3,137,529
    
    
    
    Borrowings under line of credit
    
    
    22,010,000
    
    
    
    Rent received in advance, security deposits and
funds held in escrow
    
    
    1,462,886
    
    
    
    1,674,741Total Liabilities
    
    
    27,015,506
    
    
    
    2,892,401STOCKHOLDERS EQUITYCommon stock, $0.001 par value, 20,000,000 shares
authorized and 7,672,000 and 7,667,000 shares issued
and outstanding, respectively
    
    
    7,672
    
    
    
    7,667Additional paid in capital
    
    
    105,502,544
    
    
    
    105,427,549Notes receivable  employees
    
    
    (433,789
    )
    
    
    (375,000
    )Distributions in excess of accumulated earnings
    
    
    (3,903,748
    )
    
    
    (2,367,523
    )Total Stockholders Equity
    
    
    101,172,679
    
    
    
    102,692,693TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    128,188,185
    
    
    $
    105,585,094
  3




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004OPERATING REVENUESRental income
    
    $
    2,235,241
    
    
    $
    403,690
    
    
    $
    4,082,248
    
    
    $
    601,463Interest income from mortgage note receivable
    
    
    501,645
    
    
    
    278,980
    
    
    
    797,228
    
    
    
    412,400Tenant recovery revenue
    
    
    39,557
    
    
    
    
    
    
    
    41,600
    
    
    
    Total operating revenues
    
    
    2,776,443
    
    
    
    682,670
    
    
    
    4,921,076
    
    
    
    1,013,863OPERATING EXPENSESDepreciation and amortization
    
    
    696,976
    
    
    
    126,772
    
    
    
    1,234,731
    
    
    
    206,101Management advisory fee
    
    
    483,794
    
    
    
    280,122
    
    
    
    955,655
    
    
    
    509,538Professional fees
    
    
    16,759
    
    
    
    66,973
    
    
    
    348,003
    
    
    
    275,430Taxes and licenses
    
    
    25,441
    
    
    
    2,250
    
    
    
    153,714
    
    
    
    12,570Insurance
    
    
    67,021
    
    
    
    64,488
    
    
    
    137,404
    
    
    
    128,975Interest
    
    
    254,803
    
    
    
    
    
    
    
    291,022
    
    
    
    General and administrative
    
    
    97,836
    
    
    
    172,313
    
    
    
    230,664
    
    
    
    277,263Total operating expenses
    
    
    1,642,630
    
    
    
    712,918
    
    
    
    3,351,193
    
    
    
    1,409,877Income (loss) from operations
    
    
    1,133,813
    
    
    
    (30,248
    )
    
    
    1,569,883
    
    
    
    (396,014
    )Interest income from temporary investments
    
    
    13,192
    
    
    
    162,523
    
    
    
    107,713
    
    
    
    334,985Interest income  employee loans
    
    
    5,236
    
    
    
    
    
    
    
    9,921
    
    
    
    Loss on foreign currency translation
    
    
    (2,710
    )
    
    
    
    
    
    
    (2,802
    )
    
    
    Other income
    
    
    15,718
    
    
    
    162,523
    
    
    
    114,832
    
    
    
    334,985NET INCOME (LOSS)
    
    $
    1,149,531
    
    
    $
    132,275
    
    
    $
    1,684,715
    
    
    $
    (61,029
    )Earnings (loss) per weighted average common shareBasic
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Diluted
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Weighted average shares outstandingBasic
    
    
    7,669,802
    
    
    
    7,642,000
    
    
    
    7,668,409
    
    
    
    7,642,000Diluted
    
    
    7,692,639
    
    
    
    7,695,134
    
    
    
    7,715,100
    
    
    
    7,764,732
  4




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the
    
    For thesix months ended
    
    six months endedJune 30, 2005
    
    June 30, 2004Cash flows from operating activities:Net income (loss)
    
    $
    1,684,715
    
    
    $
    (61,029
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,234,731
    
    
    
    206,101Changes in assets and liabilities:Amortization of deferred financing costs
    
    
    74,836
    
    
    
    Amortization of deferred rent asset
    
    
    93,385
    
    
    
    Increase in mortgage interest receivable
    
    
    (2,824
    )
    
    
    (61,950
    )Increase in employee interest receivable
    
    
    (444
    )
    
    
    Decrease in prepaid expenses
    
    
    69,008
    
    
    
    122,500Decrease (increase) in other assets
    
    
    59,515
    
    
    
    (25,000
    )Increase in deferred rent receivable
    
    
    (206,246
    )
    
    
    (41,535
    )Increase in accounts payable and accrued expenses
    
    
    112,530
    
    
    
    55,814Decrease in due to Adviser
    
    
    (5,060
    )
    
    
    (131,085
    )(Decrease) increase in rent received in advance and security deposits
    
    
    (435,228
    )
    
    
    293,592Net cash provided by operating activities
    
    
    2,678,918
    
    
    
    357,408Cash flows from investing activities:Acquisition of real estate
    
    
    (41,116,911
    )
    
    
    (22,265,178
    )Issuance of mortgage note receivable
    
    
    (10,000,000
    )
    
    
    (11,170,000
    )Deposit on future acquisition
    
    
    (550,000
    )
    
    
    Principal repayments on mortgage note receivable
    
    
    42,856
    
    
    
    19,213Net cash used in investing activities
    
    
    (51,624,055
    )
    
    
    (33,415,965
    )Cash flows from financing activities:Offering costs
    
    
    
    
    
    
    (7,730
    )Proceeds from borrowings under mortgage note payable
    
    
    3,150,000
    
    
    
    Principal repayments on mortgage note payable
    
    
    (12,471
    )
    
    
    Borrowings from line of credit
    
    
    22,010,000
    
    
    
    Principal repayments on employee loans
    
    
    16,211
    
    
    
    Payments for deferred financing costs
    
    
    (1,015,176
    )
    
    
    Dividends paid
    
    
    (4,140,980
    )
    
    
    (993,460
    )Net cash provided by (used in) financing activities
    
    
    20,007,584
    
    
    
    (1,001,190
    )Net decrease in cash and cash equivalents
    
    
    (28,937,553
    )
    
    
    (34,059,747
    )Cash and cash equivalents, beginning of period
    
    
    29,153,987
    
    
    
    99,075,765Cash and cash equivalents, end of period
    
    $
    216,434
    
    
    $
    65,016,018NON-CASH FINANCING ACTIVITIESCash paid during period for interest
    
    $
    128,878
    
    
    $
    Notes receivable issued in exchange for common stock associated with
the exercise of employee stock options
    
    $
    75,000
    
    
    $
    
  5




---



##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
    Interim financial information
  Investments in real estate
  6




---



##### 



Business Combinations
      7




---



##### 



June 30, 2005
    
    December 31, 2004In-place leases
    
    $
    3,375,600
    
    
    $
    1,929,800Leasing costs
    
    
    2,444,401
    
    
    
    1,494,393Accumulated amortization
    
    
    (457,151
    )
    
    
    (194,047
    )$
    5,362,850
    
    
    $
    3,230,146
 Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  8




---



##### 



Deferred financing costs
  Revenue recognition
   Stock based compensation
   9




---



##### 



For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Net income (loss), as reported
    
    $
    1,149,531
    
    
    $
    132,275
    
    
    $
    1,684,715
    
    
    $
    (61,029
    )Less: Stock-based compensation expense
determined using the fair value
based method
    
    
    (43,971
    )
    
    
    (217,587
    )
    
    
    (93,659
    )
    
    
    (411,430
    )Net income (loss), pro-forma
    
    $
    1,105,560
    
    
    $
    (85,312
    )
    
    $
    1,591,056
    
    
    $
    (472,459
    )Basic, as reported
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Basic, pro-forma
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.21
    
    
    $
    (0.06
    )Diluted, as reported
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Diluted, pro-forma
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.21
    
    
    $
    (0.06
    )
  Income taxes
   Segment information
  10




---



##### 



Foreign Currency Transactions
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
   11




---



##### 



For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Allocated payroll and
benefits
    
    $
    334,563
    
    
    $
    215,414
    
    
    $
    681,877
    
    
    $
    381,252Allocated overhead expenses
    
    $
    149,231
    
    
    $
    64,708
    
    
    $
    273,778
    
    
    $
    128,286Total management advisory
fee
    
    $
    483,794
    
    
    $
    280,122
    
    
    $
    955,655
    
    
    $
    509,538
 3. Stock Options
   Number of
    
    Strike Price of
    
    Amount ofOptions
    
    Options
    
    Promissory
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    Exercised
    
    Note
    
    Term of Note
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    9 years
    
    
    5.0
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    9 years
    
    
    6.0
    %
  12




---



##### 



4. Earnings Per Common Share
  For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Net income (loss)
    
    $
    1,149,531
    
    
    $
    132,275
    
    
    $
    1,684,715
    
    
    $
    (61,029
    )Denominator for basic weighted average shares
    
    
    7,669,802
    
    
    
    7,642,000
    
    
    
    7,668,409
    
    
    
    7,642,000Dilutive effect of stock options (a)
    
    
    22,837
    
    
    
    53,134
    
    
    
    46,691
    
    
    
    Denominator for diluted weighted average shares
    
    
    7,692,639
    
    
    
    7,695,134
    
    
    
    7,715,100
    
    
    
    7,642,000Basic earnings (loss) per common share
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Diluted earnings (loss) per common share
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )
 
 (a)
    
    The incremental shares related to stock options for the six months ended June 30, 2004
have an anti-dilutive effect and as a result are not included in the calculation. 5. Real Estate
  Square FootageDate Acquired
    
    Location
    
    (unaudited)
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    5,124,392Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    3,532,852Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,460,518Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    9,114,725Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    5,073,297Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,513,848Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,913,860Sep-04
    
    Austin, Texas
    
    
    51,993
    
    
    Flexible Office
    
    
    7,201,602Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    913,513Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    6,079,581Oct-04
    
    Granby, Quebec
    
    
    99,981
    
    
    Commercial and Manufacturing
    
    
    2,994,265Oct-04
    
    Montreal, Quebec
    
    
    42,490
    
    
    Commercial and Manufacturing
    
    
    1,833,016Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    8,273,734Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,769,481Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,723,157May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    11,187,434May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,177,894Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,358,772$
    94,245,941
  June 30, 2005
    
    December 31, 2004Real estate:Land
    
    $
    11,547,000
    
    
    $
    7,669,000Building
    
    
    82,195,997
    
    
    
    52,641,933Tenant improvements
    
    
    2,259,695
    
    
    
    940,522Accumulated depreciation
    
    
    (1,756,751
    )
    
    
    (785,125
    )Real estate, net
    
    $
    94,245,941
    
    
    $
    60,466,330
 13




---



##### 



14




---



##### 



Tenant
    
    Lease
    
    Deferred
    
    Total PurchaseLand
    
    Building
    
    Improvements
    
    Intangibles
    
    Rent Asset
    
    PriceSan Antonio, Texas
    
    $
    843,000
    
    
    $
    6,817,984
    
    
    $
    718,439
    
    
    $
    664,218
    
    
    
    
    
    
    $
    9,043,641Columbus, Ohio
    
    
    410,000
    
    
    
    2,379,947
    
    
    
    5,161
    
    
    
    243,063
    
    
    
    395,000
    
    
    
    3,433,171Big Flats, New York
    
    
    275,000
    
    
    
    6,489,630
    
    
    
    
    
    
    
    337,589
    
    
    
    
    
    
    
    7,102,219Wichita Kansas
    
    
    1,525,000
    
    
    
    9,586,889
    
    
    
    119,182
    
    
    
    606,701
    
    
    
    1,587,822
    
    
    
    13,425,594Arlington, Texas
    
    
    300,000
    
    
    
    2,858,509
    
    
    
    32,254
    
    
    
    151,496
    
    
    
    1,987,044
    
    
    
    5,329,303Dayton, Ohio
    
    
    525,000
    
    
    
    1,389,635
    
    
    
    444,137
    
    
    
    392,741
    
    
    
    
    
    
    
    2,751,513$
    3,878,000
    
    
    $
    29,522,594
    
    
    $
    1,319,173
    
    
    $
    2,395,808
    
    
    $
    3,969,866
    
    
    $
    41,085,441
  Year
    
    Rental Payments2005
    
    $
    5,107,9312006
    
    
    10,281,9922007
    
    
    10,412,5362008
    
    
    10,590,7542009
    
    
    9,592,403Thereafter
    
    
    60,263,605
   Location
    
    Real Estate TaxesRaleigh, North Carolina
    
    $
    45,743Canton, Ohio
    
    
    6,374Sterling Heights, Michigan
    
    
    115,998Akron, Ohio
    
    
    81,933Charlotte, North Carolina
    
    
    56,438Canton, North Carolina
    
    
    47,877Snyder Township, Pennsylvania
    
    
    99,222Lexington, North Carolina
    
    
    21,102Austin, Texas
    
    
    167,499Norfolk, Virginia
    
    
    11,411Mt. Pocono, Pennsylvania
    
    
    115,232Granby, Quebec
    
    
    36,178Montreal, Quebec
    
    
    77,605San Antonio, Texas
    
    
    159,551Columbus, Ohio
    
    
    37,610Big Flats, New York
    
    
    24,594McLean, Virginia
    
    
    74,563Wichita, Kansas
    
    
    5,222Arlington, Texas
    
    
    63,520Dayton, Ohio
    
    
    49,156$
    1,296,828
 15




---



##### 



6. Mortgage Note Receivable
   7. Dividends Declared per Share
  Record Date
    
    Payment Date
    
    Dividend per ShareJanuary 17, 2005
    
    January 31, 2005
    
    $
    0.06February 14, 2005
    
    February 25, 2005
    
    $
    0.06March 16, 2005
    
    March 30, 2005
    
    $
    0.06April 15, 2005
    
    April 29, 2005
    
    $
    0.08May 13, 2005
    
    May 27, 2005
    
    $
    0.08June 16, 2005
    
    June 30, 2005
    
    $
    0.08July 21, 2005
    
    July 29, 2005
    
    $
    0.08August 23, 2005
    
    August 31, 2005
    
    $
    0.08September 22, 2005
    
    September 30, 2005
    
    $
    0.08
 16




---



##### 



8. Segment Information
  As of and for the Three Months Ended June 30, 2005
    
    As of and for the Six Months Ended June 30, 2005Real Estate
    
    Real Estate
    
    
    
    
    
    
    
    
    
    Real Estate
    
    Real EstateLeasing
    
    Lending
    
    Other
    
    Total
    
    Leasing
    
    Lending
    
    Other
    
    TotalRevenue
    
    $
    2,274,798
    
    
    $
    501,645
    
    
    $
    
    
    
    $
    2,776,443
    
    
    $
    4,123,848
    
    
    $
    797,228
    
    
    $
    
    
    
    $
    4,921,076Expenses
    
    
    722,417
    
    
    
    
    
    
    
    920,213
    
    
    
    1,642,630
    
    

    
    1,388,445
    
    
    
    
    
    
    
    1,962,748
    
    
    
    3,351,193Income (loss) from operations
    
    
    1,552,381
    
    
    
    501,645
    
    
    
    (920,213
    )
    
    
    1,133,813
    
    
    
    2,735,403
    
    
    
    797,228
    
    
    
    (1,962,748
    )
    
    
    1,569,883Other income (loss)
    
    
    (2,710
    )
    
    
    
    
    
    
    18,428
    
    
    
    15,718
    
    
    
    (2,802
    )
    
    
    
    
    
    
    117,634
    
    
    
    114,832Net income (loss)
    
    $
    1,549,671
    
    
    $
    501,645
    
    
    $
    (901,785
    )
    
    $
    1,149,531
    
    
    $
    2,732,601
    
    
    $
    797,228
    
    
    $
    (1,845,114
    )
    
    $
    1,684,715Total Assets
    
    $
    104,452,364
    
    
    $
    21,132,480
    
    
    $
    2,603,341
    
    
    $
    128,188,185
    
    
    $
    104,452,364
    
    
    $
    21,132,480
    
    
    $
    2,603,341
    
    
    $
    128,188,185
 As of and for the Three Months Ended June 30, 2004
    
    As of and for the Six Months Ended June 30, 2004Real Estate
    
    Real Estate
    
    
    
    
    
    
    
    
    
    Real Estate
    
    Real EstateLeasing
    
    Lending
    
    Other
    
    Total
    
    Leasing
    
    Lending
    
    Other
    
    TotalRevenue
    
    $
    403,690
    
    
    $
    278,980
    
    
    $
    
    
    
    $
    682,670
    
    
    $
    601,463
    
    
    $
    412,400
    
    
    $
    
    
    
    $
    1,013,863Expenses
    
    
    126,772
    
    
    
    
    
    
    
    586,146
    
    
    
    712,918
    
    
    
    206,101
    
    
    
    
    
    
    
    1,203,776
    

    
    
    1,409,877Income (loss) from operations
    
    
    276,918
    
    
    
    278,980
    
    
    
    (586,146
    )
    
    
    (30,248
    )
    
    
    395,362
    
    
    
    412,400
    
    
    
    (1,203,776
    )
    
    
    (396,014
    )Other income
    
    
    
    
    
    
    
    
    
    
    162,523
    
    
    
    162,523
    
    
    
    
    
    
    
    
    
    
    
    334,985
    
    
    
    334,985Net income (loss)
    
    $
    276,918
    
    
    $
    278,980
    
    
    $
    (423,623
    )
    
    $
    132,275
    
    
    $
    395,362
    
    
    $
    412,400
    
    
    $
    (868,791
    )
    
    $
    (61,029
    )Total Assets
    
    $
    27,894,784
    
    
    $
    11,399,971
    
    
    $
    65,109,950
    
    
    $
    104,404,705
    
    
    $
    27,894,784
    
    
    $
    11,399,971
    
    
    $
    65,109,950
    
    
    $
    104,404,705
 9. Line of Credit
   17




---



##### 



10. Mortgage Note Payable
  11. Subsequent Events
     18




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following analysis of our financial condition and results of operations should be
read in conjunction with our financial statements and the notes thereto contained elsewhere in this
Form 10-Q.
 Forward-Looking Statements
 Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements made with respect to possible or
assumed future results of our business, financial condition, liquidity, results of operations,
plans and objectives. When we use the words believe, expect, anticipate, estimate or
similar expressions, we intend to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements. Statements regarding the following subjects are
forward-looking by their nature:
 
    
    our business strategy;
    
    pending transactions;
    
    our projected operating results;
    
    our ability to obtain future financing arrangements;
    
    estimates relating to our future distributions;
    
    our understanding of our competition;
    
    market trends;
    
    estimates of our future operating expenses, including payments to our Adviser under the
terms of our advisory agreement;
    
    projected capital expenditures; and
    
    use of the proceeds of our credit facilities, mortgage notes payable, and other future
capital resources, if any.
 These statements involve known and unknown risks, uncertainties and other factors that may
cause results, levels of activity, growth, performance, tax consequences or achievements to be
materially different from any future results, levels of activity, growth, performance, tax
consequences or achievements expressed or implied by such forward-looking statements.
 The forward-looking statements are based on our beliefs, assumptions and expectations of our
future performance, taking into account all information currently available to us. Although we
believe that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common stock, along with the following factors that could cause actual results to vary from our
forward-looking statements:
 
    
    the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer;
    
    general volatility of the capital markets and the market price of our common stock;
    
    risks associated with negotiation and consummation of pending and future transactions;
    

    changes in our business strategy;
    
    availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital;
    
    availability of qualified personnel;
    
    changes in our industry, interest rates or the general economy; and
    
    the degree and nature of our competition.
 We are under no duty to update any of the forward-looking statements after the date of this
report to conform such statements to actual results.
 19




---



##### 



Overview
    Recent Events
   20




---



##### 



21




---



##### 



Expenses
  22




---



##### 



23




---



##### 



Critical Accounting Policies
  Revenue Recognition
  Investment Accounting
  Purchase Price Allocation
  24




---



##### 



Risk Rating
  First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)>10
    
    Baa2
    
    BBB
    
    Probability of default during the
next ten years is 4% and the
expected loss is 1% or less10
    
    Baa3
    
    BBB-
    
    Probability of default during the
next ten years is 5% and the
expected loss is 1% to 2%
 25




---



##### 



First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)9
    
    Ba1
    
    BB+
    
    Probability of default during the
next ten years is 10% and the
expected loss is 2% to 3%8
    
    Ba2
    
    BB
    
    Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5%5
    
    B2
    
    B
    
    Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3%2
    
    Caa2
    
    CCC
    
    Probability of default during the
next ten years is 35% and the
expected loss is 13.3% to 16.7%1
    
    Caa3
    
    CC
    
    Probability of default during the
next ten years is 65% and the
expected loss is 16.7% to 20%0
    
    N/a
    
    D
    
    Probability of default during the
next ten years is 85%, or there is a
payment default, and the expected
loss is greater than 20%
 
 (a)
    
    the default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term.   Rating
    

6/30/2005
    

12/31/2004Average
    
    
    8.5
    
    
    
    7.8Weighted Average
    
    
    8.5
    
    
    
    7.6Highest
    
    
    10.0
    
    
    
    10.0Lowest
    
    
    6.0
    
    
    
    6.0
 26




---



##### 



Investments in Real Estate
     Provision for Loan Losses
  Accounting for Derivative Financial Investments and Hedging Activities
   27




---



##### 



Income Taxes
  Stock Based Compensation
 Accounting for Stock
Issued to Employees, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25.
 Results of Operations
  For the three months ended
    
    For the six months endedJune 30,
    
    June 30,
    
    
    
    
    
    
    
    
    
    June 30,
    
    June 30,2005
    
    2004
    
    $ Change
    
    % Change
    
    2005
    
    2004
    
    $ Change
    
    % ChangeOPERATING REVENUESRental income
    
    $
    2,235,241
    
    
    $
    403,690
    
    
    $
    1,831,551
    
    
    
    454
    %
    
    $
    4,082,248
    
    
    $
    601,463
    
    
    $
    3,480,785
    
    
    
    579
    %Interest income from mortgage note receivable
    
    
    501,645
    
    
    
    278,980
    
    
    
    222,665
    
    
    
    80
    %
    
    
    797,228
    
    
    
    412,400
    
    
    
    384,828
    
    
    
    93
    %Tenant recovery revenue
    
    
    39,557
    
    
    
    
    
    
    
    39,557
    
    
    
    100
    %
    
    
    41,600
    
    
    
    
    
    
    
    41,600
    
    
    
    100
    %Total operating revenues
    
    
    2,776,443
    
    
    
    682,670
    
    
    
    2,093,773
    
    
    
    307
    %
    
    
    4,921,076
    
    
    
    1,013,863
    
    
    
    3,907,213
    
    
    
    385
    %OPERATING EXPENSESDepreciation and amortization
    
    
    696,976
    
    
    
    126,772
    
    
    
    570,204
    
    
    
    450
    %
    
    
    1,234,731
    
    
    
    206,101
    
    
    
    1,028,630
    
    
    
    499
    %Management advisory fee
    
    
    483,794
    
    
    
    280,122
    
    
    
    203,672
    
    
    
    73
    %
    
    
    955,655
    
    
    
    509,538
    
    
    
    446,117
    
    
    
    88
    %Professional fees
    
    
    16,759
    
    
    
    66,973
    
    
    
    (50,214
    )
    
    
    -75
    %
    
    
    348,003
    
    
    
    275,430
    
    
    
    72,573
    
    
    
    26
    %Taxes and licenses
    
    
    25,441
    
    
    
    2,250
    
    
    
    23,191
    
    
    
    1031
    %
    
    
    153,714
    
    
    
    12,570
    
    
    
    141,144
    
    
    
    1123
    %Insurance
    
    
    67,021
    
    
    
    64,488
    
    
    
    2,533
    
    
    
    4
    %
    
    
    137,404
    
    
    
    128,975
    
    
    
    8,429
    
    
    
    7
    %Interest
    
    
    254,803
    
    
    
    
    
    
    
    254,803
    
    
    
    100
    %
    
    
    291,022
    
    
    
    
    
    
    
    291,022
    
    
    
    100
    %General and administrative
    
    
    97,836
    
    
    
    172,313
    
    
    
    (74,477
    )
    
    
    -43
    %
    
    
    230,664
    
    
    
    277,263
    
    
    
    (46,599
    )
    
    
    -17
    %Total operating expenses
    
    
    1,642,630
    
    
    
    712,918
    
    
    
    929,712
    
    
    
    130
    %
    
    
    3,351,193
    
    
    
    1,409,877
    
    
    
    1,941,316
    
    
    
    138
    %Income (loss) from operations
    
    
    1,133,813
    
    
    
    (30,248
    )
    
    
    1,164,061
    
    
    
    N/M
    (1)
    
    
    1,569,883
    
    
    
    (396,014
    )
    
    
    1,965,897
    
    
    
    N/M
    (1)Interest income from temporary investments
    
    
    13,192
    
    
    
    162,523
    
    
    
    (149,331
    )
    
    
    -92
    %
    
    
    107,713
    
    
    
    334,985
    
    
    
    (227,272
    )
    
    
    -68
    %Interest income  employee loans
    
    
    5,236
    
    
    
    
    
    
    
    5,236
    
    
    
    100
    %
    
    
    9,921
    
    
    
    
    
    
    
    9,921
    
    
    
    100
    %Loss on foreign currency translation
    
    
    (2,710
    )
    
    
    
    
    
    
    (2,710
    )
    
    
    100
    %
    
    
    (2,802
    )
    
    
    
    
    
    
    (2,802
    )
    
    
    100
    %Other income
    
    
    15,718
    
    
    
    162,523
    
    
    
    (146,805
    )
    
    
    -90
    %
    
    
    114,832
    
    
    
    334,985
    
    
    
    (220,153
    )
    
    
    -66
    %NET INCOME (LOSS)
    
    $
    1,149,531
    
    
    $
    132,275
    
    
    $
    1,017,256
    
    
    
    769
    %
    
    $
    1,684,715
    
    
    $
    (61,029
    )
    
    $
    1,745,744
    
    
    
    N/M
    (1)
 
 (1)
    
    Percentage change period over period is not meaningful because of the loss in 2004. 28




---



##### 



Comparison of the three months ended June 30, 2005 to the three months ended June 30, 2004
 Revenues
    Expenses
       29




---



##### 



Interest Income
   Foreign Currency Loss
  Net Income
  Comparison of the six months ended June 30, 2005 to the six months ended June 30, 2004
 Revenues
   30




---



##### 



Expenses
         31




---



##### 



Interest Income
   Foreign Currency Loss
  Net Income
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
   32




---



##### 



Investing Activities
   Financing Activities
   Future Capital Needs
   33




---



##### 



Line of Credit
   Mortgage Notes Payable
   34




---



##### 



Contractual Obligations
  Payments Due by PeriodMore than 5Contractual Obligations
    
    Total
    
    Less than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    YearsLong-Term Debt Obligations
    
    
    3,150,000
    
    
    
    51,055
    
    
    
    111,923
    
    
    
    127,744
    
    
    
    2,859,278Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations(2)
    
    
    36,100,000
    
    
    
    36,100,000
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    39,250,000
    
    
    $
    36,151,055
    
    
    $
    111,923
    
    
    $
    127,744
    
    
    $
    2,859,278
 
 (1)
    
    This does not include the portion of the operating lease on office space that is allocated to us by our Adviser
in connection with our advisory agreement.(2)
    
    The purchase obligations reflected in the above table represents commitments outstanding at June 30, 2005 to purchase
real estate, $33.0 million of which were subsequently closed in July of 2005. Funds from Operations
    35




---



##### 



For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Net income (loss)
    
    $
    1,149,531
    
    
    $
    132,275
    
    
    $
    1,684,715
    
    
    $
    (61,029
    )Real estate depreciation and amortization
    
    
    696,976
    
    
    
    126,772
    
    
    
    1,234,731
    
    
    
    206,101Funds from operations
    
    
    1,846,507
    
    
    
    259,047
    
    
    
    2,919,446
    
    
    
    145,072Weighted average shares outstanding  diluted
    
    
    7,692,639
    
    
    
    7,695,134
    
    
    
    7,715,100
    
    
    
    7,764,732Diluted net income (loss) per weighted
average common share
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    (0.01
    )Diluted funds from operations per weighted
average common share
    
    $
    0.24
    
    
    $
    0.03
    
    
    $
    0.38
    
    
    $
    0.02
 36




---



##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
        37




---



##### 



Item 4. Controls and Procedures
     38




---



##### 



PART
II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  
    
    The election of two Class I directors to hold office until the 2008 Annual Meeting of
Stockholders.
 Nominee
    
    Shares Voted For
    
    Authority WithheldMichela English
    
    
    7,366,497
    
    
    
    11,249Anthony Parker
    
    
    7,366,112
    
    
    
    11,634
 Item 5. Other Information
  Item 6. Exhibits
  Exhibit
    
    Description of Document3.1
    
    Amended and Restated 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, 2003.3.2
    
    Bylaws, incorporated by reference to
Exhibit 3.2 to the Registration Statement
on Form S-11 (File No. 333-106024), filed
June 11, 2003.10.2
    
    First Amendment to Credit Agreement and
Waiver by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust
Company and certain other parties, dated
as of April 21, 2005, incorporated by
reference to Exhibit 10.2 of the
Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2005,
filed on May 4, 2005.10.3
    
    Second Amendment to Credit Agreement and
Loan Documents by and among Gladstone
Commercial Corporation, Gladstone
Commercial Limited Partnership, Branch
Banking and Trust Company, and certain
other parties, dated as of July 6, 2005.11
    
    Computation of Per Share Increase in
Stockholders Equity from Operations
(included in the notes to the unaudited
financial statements contained in this

report).
 39




---



##### 



Exhibit
    
    Description of Document31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference. 40




---



##### 



Gladstone Commercial CorporationDate: August 2, 2005
    
    By:
    
    /s/ Harry BrillHarry BrillChief Financial Officer and Treasurer
 41




---



##### 



Exhibit
    
    Description of Document3.1
    
    Amended and Restated Articles of
Incorporation, incorporated by reference
to Exhibit 3.1 to the
Statement on Form S-11 (File No.
333-106024), filed June 11, 2003.3.2
    
    Bylaws, incorporated by reference to
Exhibit 3.2 to the Statement
on Form S-11 (File No. 333-106024), filed
June 11, 2003.10.2
    
    First Amendment to Credit Agreement and
Waiver by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust
Company and certain other parties, dated
as of April 21, 2005, incorporated by
reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2005,
filed on May 4, 2005.10.3
    
    Second Amendment to Credit Agreement and
Loan Documents by and among Gladstone
Commercial Corporation, Gladstone
Commercial Limited Partnership, Branch
Banking and Trust Company, and certain
other parties, dated as of July 6, 2005.11
    
    Computation of Per Share Increase in
Stockholders Equity from Operations
(included in the notes to the unaudited
financial statements contained in this
report).31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer
pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference. 42