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, 2009
 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
 (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(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2009
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three months ended
    
    
    4March 31, 2009 and 2008Consolidated Statements of Cash Flows for the three months ended
    
    
    5March 31, 2009 and 2008Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    20Item 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.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    37
 2




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31, 2009
    
    
    December 31, 2008ASSETSReal estate, at cost
    
    $
    390,616,450
    
    
    $
    390,562,138Less: accumulated depreciation
    
    
    27,127,861
    
    
    
    24,757,576Total real estate, net
    
    
    363,488,589
    
    
    
    365,804,562Lease intangibles, net
    
    
    30,590,024
    
    
    
    31,533,843Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    2,473,850
    
    
    
    4,503,578Restricted cash
    
    
    3,780,463
    
    
    
    2,677,561Funds held in escrow
    
    
    2,349,456
    
    
    
    2,150,919Deferred rent receivable
    
    
    7,728,226
    
    
    
    7,228,811Deferred financing costs, net
    
    
    4,061,813
    
    
    
    4,383,446Due from adviser (Refer to Note 2)
    
    
    
    
    
    
    108,898Prepaid expenses and other assets
    
    
    524,385
    
    
    
    707,167TOTAL ASSETS
    
    $
    424,996,806
    
    
    $
    429,098,785LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    254,520,292
    
    
    $
    255,111,173Short-term loan and borrowings under line of credit
    
    
    30,300,000
    
    
    
    31,500,000Deferred rent liability
    
    
    2,951,081
    
    
    
    3,147,472Asset retirement obligation liability
    
    
    2,225,559
    
    
    
    2,190,192Accounts payable and accrued expenses
    
    
    1,528,245
    
    
    
    2,673,787Due to adviser (Refer to Note 2)
    
    
    1,149,672
    
    
    
    Obligation under capital lease
    
    
    238,455
    
    
    
    235,378Rent received in advance, security deposits and funds held in escrow
    
    
    4,727,667
    
    
    
    3,745,523Total Liabilities
    
    
    297,640,971
    
    
    
    298,603,525STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;
2,300,000 shares authorized and 2,150,000 shares issued and outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264
shares issued and outstanding
    
    
    8,563
    
    
    
    8,563Additional paid in capital
    
    
    170,622,581
    
    
    
    170,622,581Notes receivable  employees
    
    
    (2,590,215
    )
    
    
    (2,595,886
    )Distributions in excess of accumulated earnings
    
    
    (40,687,244
    )
    
    
    (37,542,148
    )Total Stockholders Equity
    
    
    127,355,835
    
    
    
    130,495,260TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    424,996,806
    
    
    $
    429,098,785
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended March 31,2009
    
    
    2008Operating revenuesRental income
    
    $
    10,414,120
    
    
    $
    9,189,465Interest income from mortgage notes receivable
    
    
    187,500
    
    
    
    238,297Tenant recovery revenue
    
    
    82,434
    
    
    
    85,719Total operating revenues
    
    
    10,684,054
    
    
    
    9,513,481Operating expensesDepreciation and amortization
    
    
    3,314,100
    
    
    
    2,987,760Property operating expenses
    
    
    237,156
    
    
    
    239,483Due diligence expense
    
    
    9,547
    
    
    
    2,085Base management fee (Refer to Note 2)
    
    
    372,648
    
    
    
    431,868Incentive fee (Refer to Note 2)
    
    
    786,289
    
    
    
    704,667Administration fee (Refer to Note 2)
    
    
    224,354
    
    
    
    212,196Professional fees
    
    
    235,198
    
    
    
    97,662Insurance
    
    
    48,678
    
    
    
    41,797Directors fees
    
    
    49,702
    
    
    
    54,250Stockholder related expenses
    
    
    83,647
    
    
    
    126,423Asset retirement obligation expense
    
    
    35,367
    
    
    
    30,468General and administrative
    
    
    11,487
    
    
    
    14,631Total operating expenses before credit from Adviser
    
    
    5,408,173
    
    
    
    4,943,290Credit to incentive fee
    
    
    (235,081
    )
    
    
    (562,355
    )Total operating expenses
    
    
    5,173,092
    
    
    
    4,380,935Other income (expense)Interest income from temporary investments
    
    
    17,281
    
    
    
    9,548Interest income  employee loans
    
    
    48,886
    
    
    
    52,144Other income
    
    
    
    
    
    
    9,296Interest expense
    
    
    (4,487,560
    )
    
    
    (3,753,604
    )Total other expense
    
    
    (4,421,393
    )
    
    
    (3,682,616
    )Income from continuing operations
    
    
    1,089,569
    
    
    
    1,449,930Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (33,228
    )Total discontinued operations
    
    
    
    
    
    
    (33,228
    )Net income
    
    
    1,089,569
    
    
    
    1,416,702Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    $
    66,132
    
    
    $
    393,265Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.01
    
    
    $
    0.05Discontinued operations
    
    
    0.00
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.01
    
    
    $
    0.05Weighted average shares outstanding- basic & diluted
    
    
    8,563,264
    
    
    
    8,565,264
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the three months ended March 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    1,089,569
    
    
    $
    1,416,702Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,314,100
    
    
    
    2,987,760Amortization of deferred financing costs
    
    
    375,194
    
    
    
    249,323Amortization of deferred rent asset and liability
    
    
    (133,017
    )
    
    
    (133,017
    )Accretion of obligation under capital lease
    
    
    3,077
    
    
    
    Asset retirement obligation expense
    
    
    35,367
    
    
    
    30,468Increase in prepaid expenses and other assets
    
    
    (17,218
    )
    
    
    (76,011
    )Increase in deferred rent receivable
    
    
    (562,789
    )
    
    
    (543,943
    )Increase (decrease) in accounts payable, accrued expenses, and amount due adviser
    
    
    113,028
    
    
    
    (81,710
    )(Decrease) increase in rent received in advance
    
    
    (120,758
    )
    
    
    101,518Net cash provided by operating activities
    
    
    4,096,553
    
    
    
    3,951,090Cash flows from investing activities:Real estate investments
    
    
    (54,308
    )
    
    
    (33,167,003
    )Increase in funds held in escrow related to acquisition
    
    
    
    
    
    
    (762,123
    )Receipts from lenders for reserves held in escrow
    
    
    272,818
    
    
    
    215,325Payments to lenders for reserves held in escrow
    
    
    (471,355
    )
    
    
    (352,180
    )Increase in restricted cash
    
    
    (1,102,902
    )
    
    
    (494,998
    )Deposits on future acquisitions
    
    
    
    
    
    
    (1,300,000
    )Deposits refunded or applied against real estate investments
    
    
    200,000
    
    
    
    1,400,000Net cash used in investing activities
    
    
    (1,155,747
    )
    
    
    (34,460,979
    )Cash flows from financing activities:Principal repayments on mortgage notes payable
    
    
    (590,881
    )
    
    
    (384,421
    )Principal repayments on employee notes receivable
    
    
    5,671
    
    
    
    132Borrowings from line of credit
    
    
    28,000,000
    
    
    
    36,150,000Repayments on line of credit
    
    
    (9,200,000
    )
    
    
    (1,500,000
    )Repayment of short-term loan
    
    
    (20,000,000
    )
    
    
    Receipts from tenants for reserves
    
    
    1,471,309
    
    
    
    573,189Payments to tenants from reserves
    
    
    (378,940
    )
    
    
    (435,102
    )Increase in security deposits
    
    
    10,533
    
    
    
    356,910Payments for deferred financing costs
    
    
    (53,561
    )
    
    
    (35,934
    )Distributions paid for common and preferred
    
    
    (4,234,665
    )
    
    
    (4,235,409
    )Net cash (used in) provided by financing activities
    
    
    (4,970,534
    )
    
    
    30,489,365Net decrease in cash and cash equivalents
    
    
    (2,029,728
    )
    
    
    (20,524
    )Cash and cash equivalents, beginning of period
    
    
    4,503,578
    
    
    
    1,356,408Cash and cash equivalents, end of period
    
    $
    2,473,850
    
    
    $
    1,335,884NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    
    
    
    $
    259,435
  5




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##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      6




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##### 



Interim Financial Information
  Investments in Real Estate
      7




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##### 



Impairment
 Investments in Real Estate
   Provision for Loan Losses
  8




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##### 



Cash and Cash Equivalents
  Restricted Cash
  Funds Held in Escrow
  Deferred Financing Costs
  Prepaid Expenses and Other Assets
  Obligation Under Capital Lease
  Revenue Recognition
  9




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##### 



Income Taxes
   Segment Information
  10




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##### 



Asset Retirement Obligations
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
   11




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##### 



12




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##### 



Use of Estimates
  Reclassifications
  2. Management Advisory Fee
  Advisory Agreement
   Administration Agreement
  13




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##### 



3. Earnings per Common Share
  For the three months ended March 31,2009
    
    
    2008Net income available to common stockholders
    
    $
    66,132
    
    
    $
    393,265Denominator for basic & diluted weighted
average shares
    
    
    8,563,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.01
    
    
    $
    0.05
 4. Real Estate and Intangible Assets
 Real Estate
  March 31, 2009
    
    
    December 31, 2008Real estate:Land
    
    $
    55,226,042
    (1)
    
    $
    55,226,042
    (1)Building
    
    
    325,569,702
    
    
    
    325,515,390Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated
depreciation
    
    
    (27,127,861
    )
    
    
    (24,757,576
    )Real estate, net
    
    $
    363,488,589
    
    
    $
    365,804,562
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.  TenantLease PaymentsNine months ended December 31, 2009
    
    $
    29,277,7712010
    
    
    38,980,2172011
    
    
    38,516,1592012
    
    
    38,222,1962013
    
    
    32,860,9162014
    
    
    28,616,336Thereafter
    
    $
    155,896,518
  14




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##### 



Intangible Assets
  March 31, 2009
    
    
    December 31, 2008Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,981,245
    
    
    $
    (5,500,484
    )
    
    $
    15,981,245
    
    
    $
    (5,079,343
    )Leasing costs
    
    
    9,662,731
    
    
    
    (3,207,038
    )
    
    
    9,662,731
    
    
    
    (2,987,360
    )Customer relationships
    
    
    17,136,501
    
    
    
    (3,482,931
    )
    
    
    17,136,501
    
    
    
    (3,179,931
    )$
    42,780,477
    
    
    $
    (12,190,453
    )
    
    $
    42,780,477
    
    
    $
    (11,246,634
    )
  EstimatedYear
    
    Amortization ExpenseNine months ended December 31, 2009
    
    $
    3,785,2292010
    
    
    4,953,0982011
    
    
    4,611,5792012
    
    
    4,114,0162013
    
    
    2,275,6242014
    
    
    2,024,705Thereafter
    
    $
    8,825,773
 5. Discontinued Operations
  6. Mortgage Note Receivable
   15




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##### 



7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  Date of Issuance/
    
    
    Principal Maturity
    
    
    Stated Interest Rate at
    
    
    Principal Balance OutstandingAssumption
    
    
    Date
    
    
    March 31, 2009 (1)
    
    
    March 31, 2009
    
    
    December 31, 2008Fixed-Rate Mortgage Notes Payable:03/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    $
    2,932,536
    
    
    $
    2,948,75308/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    21,320,841
    
    
    
    21,399,64409/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,516,513
    
    
    
    12,560,67312/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    19,176,398
    
    
    
    19,241,11702/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    9,304,677
    
    
    
    9,344,90802/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    19,381,908
    
    
    
    19,472,74003/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    14,212,167
    
    
    
    14,281,61611/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    14,264,091
    
    
    
    14,309,00012/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,797,129
    
    
    
    21,846,00002/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,00006/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,00009/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,409,558
    
    
    
    4,426,39310/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,783,269
    
    
    
    15,828,61208/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,391,205
    
    
    
    6,421,71709/15/08
    
    
    
    10/01/10
    (2)
    
    
    6.85
    %
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,520,292
    
    
    
    255,111,173Variable-Rate Line of Credit:
    
    
    12/29/06
    
    
    
    12/29/09
    (3)
    
    LIBOR + 1.9%
    
    
    30,300,000
    
    
    
    11,500,000Variable-Rate Short-Term Loan:
    
    
    12/21/07
    
    
    
    06/20/09
    (4)
    
    LIBOR + 2.75%
    
    
    
    
    
    
    20,000,000Total Mortgage Notes Payable, Line of Credit and Short-Term Loan
    
    
    
    
    
    
    
    
    
    $
    284,820,292
    
    
    $
    286,611,173
 
 (1)
    
    The weighted average interest rate on all debt outstanding at March 31, 2009 was approximately 5.66%.(2)
    
    This note has three annual extension options, which extends the term of the note until October 1, 2013.(3)
    
    The line of credit may be extended for a one-year period at the Companys option, subject to certain conditions.(4)
    
    The short-term loan was repaid in full on March 31, 2009. Mortgage Notes Payable
   16




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##### 



Scheduled principalpaymentsNine months ended December 31, 2009
    
    $
    1,863,0942010
    
    
    50,533,4862011
    
    
    2,799,6012012
    
    
    3,087,8242013
    
    
    11,828,3752014
    
    
    20,367,143Thereafter
    
    
    164,040,769$
    254,520,292
 Line of Credit
   17




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##### 



Short-Term Loan
  8. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December 31,
2008
    
    $
    8,563
    
    
    $
    2,150
    
    
    $
    170,622,581
    
    
    $
    (2,595,886
    )
    
    $
    (37,542,148
    )
    
    $
    130,495,260Repayment of principal
on notes receivable 
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,671
    
    
    
    
    
    
    
    5,671Distributions declared
to common and preferred
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,234,665
    )
    
    
    (4,234,665
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,089,569
    
    
    
    1,089,569Balance at March 31, 2009
    
    $
    8,563
    
    
    $
    2,150
    
    
    $
    170,622,581
    
    
    $
    (2,590,215
    )
    
    $
    (40,687,244
    )
    
    $
    127,355,835
   OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    BalanceOptions
    
    
    Options
    
    
    Promissory Note
    
    
    of Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 3/31/09
    
    
    Term of Note
    
    

on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    360,501
    
    
    9 years
    
    
    5.00
    %Apr-06
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,500
    
    
    
    16.01
    
    
    
    40,000
    
    
    
    38,120
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    10 years
    
    
    7.87
    %Oct-06
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    193,200
    
    
    9 years
    
    
    8.17
    %Nov-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    245,000
    
    
    10 years
    
    
    8.12
    %172,922
    
    
    
    
    
    
    $
    2,736,594
    
    
    $
    2,590,215
 18




---



##### 



9. Segment Information
   As of and for the three months ended March 31, 2009Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,496,554
    
    
    $
    187,500
    
    
    $
    
    
    
    $
    10,684,054Operating expenses
    
    
    (3,596,170
    )
    
    
    
    
    
    
    (1,576,922
    )
    
    
    (5,173,092
    )Other expense
    
    
    (4,082,638
    )
    
    
    
    
    
    
    (338,755
    )      (1)
    
    
    (4,421,393
    )Net income
    
    $
    2,817,746
    
    
    $
    187,500
    
    
    $
    (1,915,677
    )
    
    $
    1,089,569Total Assets
    
    $
    404,272,994
    
    
    $
    10,064,583
    
    
    $
    10,659,229
    
    
    $
    424,996,806
 As of and for the three months ended March 31, 2008Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    9,275,184
    
    
    $
    238,297
    
    
    $
    
    
    
    $
    9,513,481Operating expenses
    
    
    (3,259,796
    )
    
    
    
    
    
    
    (1,121,139
    )
    
    
    (4,380,935
    )Other expense
    
    
    (3,080,407
    )
    
    
    
    
    
    
    (602,209
    )      (1)
    
    
    (3,682,616
    )Discontinued operations
    
    
    (33,228
    )
    
    
    
    
    
    
    
    
    
    
    (33,228
    )Net income
    
    $
    2,901,753
    
    
    $
    238,297
    
    
    $
    (1,723,348
    )
    
    $
    1,416,702Total Assets
    
    $
    391,919,723
    
    
    $
    10,078,528
    
    
    $
    9,184,827
    
    
    $
    411,183,078
 
 (1)
    
    Other expense includes interest expense on the Companys line of credit of $404,922 and
$673,197 for the three months ended March 31, 2009 and 2008, respectively. It is not practicable
to allocate the interest from the line of credit to either operating segment, thus it is included
in the other column. 10. Subsequent Events
  19




---



##### 



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. 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 actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance
or achievements 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 Form 10-Q .
 OVERVIEW
 General
  Business Environment
   20




---



##### 



Recent Events
 Financing Activities:
 Industry Classifications
  21




---



##### 



March 31, 2009
    
    
    March 31, 2008Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeAutomobile
    
    $
    291,663
    
    
    
    2.8
    %
    
    $
    291,663
    
    
    
    3.2
    %Beverage, Food & Tobacco
    
    
    547,180
    
    
    
    5.3
    %
    
    
    444,350
    
    
    
    4.8
    %Buildings and Real Estate
    
    
    506,417
    
    
    
    4.9
    %
    
    
    500,341
    
    
    
    5.4
    %Chemicals, Plastics & Rubber
    
    
    802,204
    
    
    
    7.7
    %
    
    
    463,305
    
    
    
    5.0
    %Containers, Packaging & Glass
    
    
    582,503
    
    
    
    5.6
    %
    
    
    558,278
    
    
    
    6.1
    %Diversified/Conglomerate Manufacturing
    
    
    916,172
    
    
    
    8.8
    %
    
    
    726,779
    
    
    
    7.9
    %Diversified/Conglomerate Services
    
    
    77,026
    
    
    
    0.7
    %
    
    
    77,026
    
    
    
    0.8
    %Electronics
    
    
    1,541,447
    
    
    
    14.8
    %
    
    
    1,541,447
    
    
    
    16.8
    %Healthcare, Education & Childcare
    
    
    1,536,353
    
    
    
    14.8
    %
    
    
    1,109,955
    
    
    
    12.1
    %Home & Office Furnishings
    
    
    132,436
    
    
    
    1.3
    %
    
    
    132,436
    
    
    
    1.4
    %Insurance
    
    
    180,717
    
    
    
    1.7
    %
    
    
    180,717
    
    
    
    2.0
    %Machinery
    
    
    597,151
    
    
    
    5.7
    %
    
    
    450,299
    
    
    
    4.9
    %Oil & Gas
    
    
    288,111
    
    
    
    2.8
    %
    
    
    288,111
    
    
    
    3.1
    %Personal & Non-Durable Consumer
Products
    
    
    338,680
    
    
    
    3.3
    %
    
    
    339,019
    
    
    
    3.7
    %Personal, Food & Miscellaneous Services
    
    
    143,752
    
    
    
    1.4
    %
    
    
    143,752
    
    
    
    1.6
    %Printing & Publishing
    
    
    570,720
    
    
    
    5.5
    %
    
    
    580,395
    
    
    
    6.3
    %Telecommunications
    
    
    1,361,588
    
    
    
    12.9
    %
    
    
    1,361,592
    
    
    
    14.9
    %$
    10,414,120
    
    
    
    100.0
    %
    
    $
    9,189,465
    
    
    
    100.0
    %
 Our Adviser and Administrator
   Advisory and Administration Agreements
    22




---



##### 



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).
 Quarterly Incentive Fee Based on FFO
 Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
 
 Percentage of pre-incentive fee FFO allocated to incentive fee
  Administration Agreement
  23




---



##### 



Critical Accounting Policies
  Allocation of Purchase Price
    
    
    The amount of acquisition costs 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 changes in the purchase price allocation
among our assets could have a material impact on our FFO, which is used by investors of
REITs to evaluate our operating performance; and
 24




---



##### 




    
    The period of time that tangible and intangible assets are depreciated over 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, we depreciate our
buildings over 39 years, and land is not depreciated. These differences in timing could
have a material impact on our results of operations.
 Asset Impairment Evaluation
  Business Environment
 Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  Results of Operations
  25




---



##### 



A comparison of our operating results for the three months ended March 31, 2009 and 2008 is below
 For the three months ended March 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,414,120
    
    
    $
    9,189,465
    
    
    $
    1,224,655
    
    
    
    13
    %Interest income from mortgage notes receivable
    
    
    187,500
    
    
    
    238,297
    
    
    
    (50,797
    )
    
    
    -21
    %Tenant recovery revenue
    
    
    82,434
    
    
    
    85,719
    
    
    
    (3,285
    )
    
    
    -4
    %Total operating revenues
    
    
    10,684,054
    
    
    
    9,513,481
    
    
    
    1,170,573
    
    
    
    12
    %Operating expensesDepreciation and amortization
    
    
    3,314,100
    
    
    
    2,987,760
    
    
    
    326,340
    
    
    
    11
    %Property operating expenses
    
    
    237,156
    
    
    
    239,483
    
    
    
    (2,327
    )
    
    
    -1
    %Due diligence expense
    
    
    9,547
    
    
    
    2,085
    
    
    
    7,462
    
    
    
    358
    %Base management fee
    
    
    372,648
    
    
    
    431,868
    
    
    
    (59,220
    )
    
    
    -14
    %Incentive fee
    
    
    786,289
    
    
    
    704,667
    
    
    
    81,622
    
    
    
    12
    %Administration fee
    
    
    224,354
    
    
    
    212,196
    
    
    
    12,158
    
    
    
    6
    %Professional fees
    
    
    235,198
    
    
    
    97,662
    
    
    
    137,536
    
    
    
    141
    %Insurance
    
    
    48,678
    
    
    
    41,797
    
    
    
    6,881
    
    
    
    16
    %Directors fees
    
    
    49,702
    
    
    
    54,250
    
    
    
    (4,548
    )
    
    
    -8
    %Stockholder related expense
    
    
    83,647
    
    
    
    126,423
    
    
    
    (42,776
    )
    
    
    -34
    %Asset retirement obligation expense
    
    
    35,367
    
    
    
    30,468
    
    
    
    4,899
    
    
    
    16
    %General and administrative
    
    
    11,487
    
    
    
    14,631
    
    
    
    (3,144
    )
    
    
    -21
    %Total operating expenses before credit from Adviser
    
    
    5,408,173
    
    
    
    4,943,290
    
    
    
    464,883
    
    
    
    9
    %Credit to incentive fee
    
    
    (235,081
    )
    
    
    (562,355
    )
    
    
    327,274
    
    
    
    -58
    %Total operating expenses
    
    
    5,173,092
    
    
    
    4,380,935
    
    
    
    792,157
    
    
    
    18
    %Other income (expense)Interest income from temporary investments
    
    
    17,281
    
    
    
    9,548
    
    
    
    7,733
    
    
    
    81
    %Interest income  employee loans
    
    
    48,886
    
    
    
    52,144
    
    
    
    (3,258
    )
    
    
    -6
    %Other income
    
    
    
    
    
    
    9,296
    
    
    
    (9,296
    )
    
    
    -100
    %Interest expense
    
    
    (4,487,560
    )
    
    
    (3,753,604
    )
    
    
    (733,956
    )
    
    
    20
    %Total other expense
    
    
    (4,421,393
    )
    
    
    (3,682,616
    )
    
    
    (738,777
    )
    
    
    20
    %Income from continuing operations
    
    
    1,089,569
    
    
    
    1,449,930
    
    
    
    (360,361
    )
    
    
    -25
    %Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (33,228
    )
    
    
    33,228
    
    
    
    -100
    %Total discontinued operations
    
    
    
    
    
    
    (33,228
    )
    
    
    33,228
    
    
    
    -100
    %Net income
    
    
    1,089,569
    
    
    
    1,416,702
    
    
    
    (327,133
    )
    
    
    -23
    %Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    66,132
    
    
    $
    393,265
    
    
    $
    (327,133
    )
    
    
    -83
    %
 26




---



##### 



Operating Revenues
    Operating Expenses
    Advisory and Administration Agreements.
 Advisory and Administration Agreements.
 Advisory and
Administration Agreements.
  27




---



##### 



Other Income and Expense
     Discontinued Operations
  Net Income Available to Common Stockholders
  28




---



##### 



Liquidity and Capital Resources
 Future Capital Needs
  Business Environment
  Operating Activities
  Investing Activities
  29




---



##### 



Financing Activities
  Mortgage Notes Payable
  Line of Credit
  Short-Term Loan
  30




---



##### 



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    $
    284,820,292
    
    
    $
    32,809,282
    
    
    $
    53,436,098
    
    
    $
    15,017,195
    
    
    $
    183,557,717Interest on Debt Obligations (2)
    
    
    90,266,237
    
    
    
    16,471,682
    
    
    
    25,894,344
    
    
    
    23,011,778
    
    
    
    24,888,433Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Operating Lease Obligations (4)
    
    
    1,646,400
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    974,400Total
    
    $
    377,032,929
    
    
    $
    49,415,364
    
    
    $
    79,599,242
    
    
    $
    38,297,773
    
    
    $
    209,720,550
 
 (1)
    
    Debt obligations represent borrowings under our line of credit and mortgage notes payable that were outstanding as of March 31, 2009.
The line of credit matures in December 2009, and we expect to exercise our option to extend for an additional year.
The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise our options to extend through October 2013.(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, 2009.(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. The lease expires in June 2021. Off-Balance Sheet Arrangements
  Funds from Operations
     31




---



##### 



For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2009
    
    
    March 31, 2008Net income
    
    $
    1,089,569
    
    
    $
    1,416,702Less: Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    
    66,132
    
    
    
    393,265Add: Real estate depreciation and amortization
    
    
    3,314,100
    
    
    
    2,987,760FFO available to common stockholders
    
    $
    3,380,232
    
    
    $
    3,381,025Weighted average shares outstanding  basic &
diluted
    
    
    8,563,264
    
    
    
    8,565,264Basic & diluted net income per weighted average
common share
    
    $
    0.01
    
    
    $
    0.05Basic & diluted FFO per weighted average common
share
    
    $
    0.39
    
    
    $
    0.39Distributions declared per common share
    
    $
    0.375
    
    
    $
    0.375Percentage of FFO paid per common share
    
    
    95
    %
    
    
    95
    %
 32




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    For the three months ended March 31,2009
    
    
    20081% increase in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    23,606Interest expense
    
    
    78,250
    
    
    
    149,266Net decrease
    
    $
    (78,250
    )
    
    $
    (125,660
    )Net income available to common
stockholders (as reported)
    
    $
    66,132
    
    
    $
    393,265Net decrease as percentage of
Net income available to common
stockholders (as reported)
    
    
    -118.3
    %
    
    
    -32.0
    %1% decrease in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    (28,498
    )Interest expense
    
    $
    (78,250
    )
    
    $
    (149,266
    )Net increase
    
    $
    78,250
    
    
    $
    120,768Net income available to common stockholders
    
    $
    66,132
    
    
    $
    393,265Net increase as percentage of
Net income available to common stockholders
    
    
    118.3
    %
    
    
    30.7
    %
  33




---



##### 



Item 4. Controls and Procedures
     34




---



##### 



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. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  35




---



##### 



Item 6. Exhibits
 Exhibit Index
 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 September 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
September 11, 2003.3.2.1
    
    First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363), filed
July 10, 2007.4.1
    
    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-A (File
No. 000-50363), filed January 19, 2006.4.2
    
    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-A (File
No. 000-50363), filed October 19, 2006.4.3
    
    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-A (File No. 000-50363),
filed January 19, 2006.4.4
    
    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-A (File No. 000-50363),
filed October 19, 2006.11
    
    Computation of Per Share Earnings from Operations (included in the
notes to the unaudited consolidated 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.
 36




---



##### 



Gladstone Commercial CorporationDate: May 4, 2009
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 37