##### 



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, 2007
 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
    
    02-0681276(State or other jurisdiction of incorporation or organization)
    
    (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 þ o
 o þ




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##### 



PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosure 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




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31, 2007
    
    
    December 31, 2006ASSETSReal estate, net of accumulated depreciation of
$10,189,209 and $8,595,419, respectively
    
    $
    272,001,341
    
    
    $
    235,118,123Lease intangibles, net of accumulated amortization of
$4,999,702 and $4,175,685, respectively
    
    
    25,958,470
    
    
    
    23,416,696Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    7,086,594
    
    
    
    36,005,686Restricted cash
    
    
    1,354,961
    
    
    
    1,225,162Funds held in escrow
    
    
    1,633,184
    
    
    
    1,635,819Interest receivable  mortgage note
    
    
    86,111
    
    
    
    Interest receivable  employees
    
    
    60,422
    
    
    
    43,716Deferred rent receivable
    
    
    3,914,132
    
    
    
    3,607,279Deferred financing costs, net of accumulated amortization of
$1,631,759 and $1,467,297, respectively
    
    
    3,927,288
    
    
    
    3,713,004Prepaid expenses
    
    
    337,777
    
    
    
    521,290Deposits on real estate
    
    
    450,000
    
    
    
    300,000Accounts receivable
    
    
    379,055
    
    
    
    179,247TOTAL ASSETS
    
    $
    327,189,335
    
    
    $
    315,766,022LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    168,074,478
    
    
    $
    154,494,438Deferred rent liability
    
    
    4,522,208
    
    
    
    4,718,599Asset retirement obligation liability
    
    
    1,723,437
    
    
    
    1,631,294Accounts payable and accrued expenses
    
    
    457,332
    
    
    
    673,410Due to adviser
    
    
    689,062
    
    
    
    183,042Rent received in advance, security deposits and funds held in escrow
    
    
    2,050,220
    
    
    
    1,841,063Total Liabilities
    
    
    177,516,737
    
    
    
    163,541,846STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding, respectively
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 17,700,000 shares authorized and
8,565,264 shares issued and outstanding, respectively
    
    
    8,565
    
    
    
    8,565Additional paid in capital
    
    
    170,640,979
    
    
    
    170,640,979Notes receivable  employees
    
    
    (3,176,310
    )
    
    
    (3,201,322
    )Distributions in excess of accumulated earnings
    
    
    (17,802,786
    )
    
    
    (15,226,196
    )Total Stockholders Equity
    
    
    149,672,598
    
    
    
    152,224,176TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    327,189,335
    
    
    $
    315,766,022
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended March 31,2007
    
    
    2006Operating revenuesRental income
    
    $
    7,078,036
    
    
    $
    4,867,075Interest income from mortgage notes receivable
    
    
    250,000
    
    
    
    552,913Tenant recovery revenue
    
    
    55,735
    
    
    
    5,623Total operating revenues
    
    
    7,383,771
    
    
    
    5,425,611Operating expensesDepreciation and amortization
    
    
    2,417,812
    
    
    
    1,799,201Base management fee (refer to Note 2)
    
    
    482,044
    
    
    
    652,742Administration fee (refer to Note 2)
    
    
    207,018
    
    
    
    Incentive fee (refer to Note 2)
    
    
    585,768
    
    
    
    Professional fees
    
    
    149,431
    
    
    
    198,459Taxes and licenses
    
    
    15,007
    
    
    
    50,894Insurance
    
    
    146,252
    
    
    
    82,998General and administrative
    
    
    111,902
    
    
    
    47,817Directors fees
    
    
    54,250
    
    
    
    33,500Stockholder related expenses
    
    
    99,617
    
    
    
    64,469Asset retirement obligation expense
    
    
    28,160
    
    
    
    46,702Stock option compensation expense
    
    
    
    
    
    
    46,216Total operating expenses before credit from Adviser
    
    
    4,297,261
    
    
    
    3,022,998Credit to incentive fee (Refer to Note 2)
    
    
    (585,768
    )
    
    
    Total expenses net of credit to incentive fee
    
    
    3,711,493
    
    
    
    3,022,998Other income (expense)Interest income from temporary investments
    
    
    229,016
    
    
    
    7,373Interest income  employee loans
    
    
    60,422
    
    
    
    5,548Other income
    
    
    8,414
    
    
    
    Interest expense
    
    
    (2,514,461
    )
    
    
    (1,618,571
    )Total other expense
    
    
    (2,216,609
    )
    
    
    (1,605,650
    )Income from continuing operations
    
    
    1,455,669
    
    
    
    796,963Discontinued operations(Loss) income from discontinued operations
    
    
    (4,001
    )
    
    
    38,038Net realized income (loss) from foreign currency transactions
    
    
    7
    
    
    
    (816
    )Net unrealized gain from foreign currency transactions
    
    
    
    
    
    
    12,615Taxes on sale of real estate
    
    
    78,667
    
    
    
    Total discontinued operations
    
    
    74,673
    
    
    
    49,837Net income
    
    
    1,530,342
    
    
    
    846,800Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (344,444
    )Net income available to common stockholders
    
    $
    506,905
    
    
    $
    502,356Earnings per weighted average common share  basicIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.05
    
    
    $
    0.06Discontinued operations
    
    
    0.01
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.06
    
    
    $
    0.07Earnings per weighted average common share  dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.05
    
    
    $
    0.06Discontinued operations
    
    
    0.01
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.06
    
    
    $
    0.06Weighted average shares outstandingBasic
    
    
    8,565,264
    
    
    
    7,672,000Diluted
    
    
    8,565,264
    
    
    
    7,821,658
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the three months ended March 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    1,530,342
    
    
    $
    846,800Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    2,417,812
    
    
    
    1,834,740Amortization of deferred financing costs, including discontinued operations
    
    
    164,462
    
    
    
    121,871Amortization of deferred rent asset
    
    
    63,374
    
    
    
    63,374Amortization of deferred rent liability
    
    
    (196,391
    )
    
    
    (80,290
    )Asset retirement obligation expense, including discontinued operations
    
    
    28,160
    
    
    
    55,143Increase in deferred rent receivable
    
    
    (370,227
    )
    
    
    (224,386
    )Stock compensation
    
    
    
    
    
    
    46,216Increase in mortgage notes payable due to change in value of foreign currency
    
    
    
    
    
    
    (12,615
    )(Increase) decrease in mortgage interest receivable
    
    
    (86,111
    )
    
    
    163Increase in employee interest receivable
    
    
    (16,706
    )
    
    
    (5,548
    )Increase in prepaid expenses and other assets
    
    
    (16,295
    )
    
    
    (126,847
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    289,942
    
    
    
    282,551Increase in rent received in advance
    
    
    79,357
    
    
    
    204,757Net cash provided by operating activities
    
    
    3,887,719
    
    
    
    3,005,929Cash flows from investing activities:Real estate investments
    
    
    (41,778,821
    )
    
    
    (18,302,939
    )Principal repayments on mortgage notes receivable
    
    
    
    
    
    
    25,360Net payments to lenders for reserves held in escrow
    
    
    (214,107
    )
    
    
    (1,251,385
    )(Increase) decrease in restricted cash
    
    
    (129,799
    )
    
    
    38,695Deposits on future acquisitions
    
    
    (610,000
    )
    
    
    (350,000
    )Deposits applied against real estate investments
    
    
    460,000
    
    
    
    750,000Net cash used in investing activities
    
    
    (42,272,727
    )
    
    
    (19,090,269
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    25,000,000Offering costs
    
    
    
    
    
    
    (1,302,006
    )Borrowings under mortgage notes payable
    
    
    13,775,000
    
    
    
    17,000,000Principal repayments on mortgage notes payable
    
    
    (194,961
    )
    
    
    (117,486
    )Borrowings from line of credit
    
    
    
    
    
    
    35,200,000Repayments on line of credit
    
    
    
    
    
    
    (56,500,000
    )Increase in reserves from tenants
    
    
    346,542
    
    
    
    523,636Principal repayments on employee loans
    
    
    25,012
    
    
    
    Payments for deferred financing costs
    
    
    (378,745
    )
    
    
    (1,073,561
    )Dividends paid for common and preferred
    
    
    (4,106,932
    )
    
    
    (3,106,364
    )Net cash provided by financing activities
    
    
    9,465,916
    
    
    
    15,624,219Net decrease in cash and cash equivalents
    
    
    (28,919,092
    )
    
    
    (460,121
    )Cash and cash equivalents, beginning of period
    
    
    36,005,686
    
    
    
    1,740,159Cash and cash equivalents, end of period
    
    $
    7,086,594
    
    
    $
    1,280,038NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    92,143
    
    
    $
    1,373,820NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    
    
    
    $
    30,129,654
  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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##### 



March 31, 2007
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    11,317,645
    
    
    $
    (2,269,738
    )
    
    $
    10,738,319
    
    
    $
    (1,907,668
    )Leasing costs
    
    
    6,688,334
    
    
    
    (1,481,987
    )
    
    
    5,891,099
    
    
    
    (1,267,829
    )Customer relationships
    
    
    12,952,193
    
    
    
    (1,247,977
    )
    
    
    10,962,963
    
    
    
    (1,000,188
    )$
    30,958,172
    
    
    $
    (4,999,702
    )
    
    $
    27,592,381
    
    
    $
    (4,175,685
    )
  Estimated AmortizationYear
    
    Expense2007
    
    $
    3,422,1062008
    
    
    3,422,1062009
    
    
    3,294,4662010
    
    
    3,126,1692011
    
    
    2,655,799
 Impairment
 Investments in Real Estate
  8




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##### 



Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  Deferred financing costs
  Revenue recognition
  9




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##### 



Income taxes
    10




---



##### 



Segment information
  Foreign Currency Transactions
  Asset retirement obligations
  11




---



##### 



Real estate held for sale and discontinued operations
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
  Amended Advisory Agreement
  12




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##### 



Administration Agreement
  Initial Advisory Agreement
   3. Stock Options
   13




---



##### 



OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 3/31/07
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    374,155
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    $
    57,796
    
    
    9 years
    
    
    6.00
    %Apr-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    375,000
    
    
    5 years
    
    
    7.77
    %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
    
    
    $
    39,405
    
    
    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
    
    
    $
    16.68
    
    
    $
    33,360
    
    
    $
    33,360
    
    
    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
    
    
    $
    350,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    375,000
    
    
    10 years
    
    
    8.12
    %204,922
    
    
    
    
    
    
    $
    3,219,954
    
    
    $
    3,176,310
  4. Earnings per Common Share
  For the three months ended March 31,2007
    
    
    2006Net income available to common stockholders
    
    $
    506,905
    
    
    $
    502,356Denominator for basic weighted average shares
    
    
    8,565,264
    
    
    
    7,672,000Dilutive effect of stock options
    
    
    
    
    
    
    149,658Denominator for diluted weighted average shares
    
    
    8,565,264
    
    
    
    7,821,658Basic earnings per common share
    
    $
    0.06
    
    
    $
    0.07Diluted earnings per common share
    
    $
    0.06
    
    
    $
    0.06
 14




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##### 



5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,760,671Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,989,983Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,238,111Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,616,887Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,846,695Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,229,466Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,819,024Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,931,126Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    900,003Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,813,769Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,829,028Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,661,847Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,435,011May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,774,768May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,929,026Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,372,679Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,687,996Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,560,265Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    14,881,734Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,997,774Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,138,635Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,138,635Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,138,636Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    6,924,169Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,595,406Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,320,461Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,921,309Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    3,004,987Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,156,184Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    14,113,153Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    27,001,551May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,991,416Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,400,232Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,612,859Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,237,940Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,560,285Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,560,285Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,560,286Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    7,003,126Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    7,104,290Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    14,023,672Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,217,961Total real estate, net
    
    
    5,175,699
    
    
    
    
    $
    272,001,341
  March 31, 2007
    
    
    December 31, 2006Real estate:Land
    
    $
    39,729,393
    
    
    $
    33,764,113Building
    
    
    236,083,427
    
    
    
    204,115,481Tenant improvements
    
    
    6,377,730
    
    
    
    5,833,948Accumulated depreciation
    
    
    (10,189,209
    )
    
    
    (8,595,419
    )Real estate, net
    
    $
    272,001,341
    
    
    $
    235,118,123
  15




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    PriceMason, Ohio
    
    $
    797,274
    
    
    $
    5,957,217
    
    
    $
    296,277
    
    
    $
    
    
    
    $
    144,703
    
    
    $
    683,471
    
    
    $
    7,878,942Raleigh, North Carolina
    
    
    1,605,551
    
    
    
    5,462,017
    
    
    
    48,767
    
    
    
    142,209
    
    
    
    64,110
    
    
    
    478,083
    
    
    
    7,800,737Tulsa, Oklahoma
    
    
    
    
    
    
    13,858,300
    
    
    
    198,738
    
    
    
    437,117
    
    
    
    587,605
    
    
    
    723,168
    
    
    
    15,804,928Hialeah, Florida
    
    
    3,562,455
    
    
    
    6,613,758
    
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    104,508
    
    
    
    10,281,538$
    5,965,280
    
    
    $
    31,891,292
    
    
    $
    543,782
    
    
    $
    579,326
    
    
    $
    797,235
    
    
    $
    1,989,230
    
    
    $
    41,766,145
   Year
    
    Lease Payments2007
    
    
    22,153,1342008
    
    
    28,849,6242009
    
    
    28,235,1192010
    
    
    27,125,2132011
    
    
    25,014,549Thereafter
    
    
    106,135,747
 16




---



##### 



6. Discontinued Operations
   For the three months ended March 31,2007
    
    
    2006Operating revenue
    
    $
    
    
    
    $
    154,410Operating expense
    
    
    (4,001
    )
    
    
    (13,090
    )Taxes & licenses
    
    
    78,667
    
    
    
    (3,365
    )Interest expense
    
    
    
    
    
    
    (64,376
    )Depreciation expense
    
    
    
    
    
    
    (35,541
    )Realized and unrealized losses
on foregin currency
transactions
    
    
    7
    
    
    
    11,799Income from discontinued
operations
    
    $
    74,673
    
    
    $
    49,837
 7. Mortgage Note Receivable
  17




---



##### 



8. Mortgage Notes Payable
  Date of Issuance
    
    Principal
    
    
    
    
    
    
    Principal Balance Outstandingof Note
    
    Maturity Date
    
    
    Interest Rate
    
    
    March 31, 2007
    
    
    December 31, 20063/16/2005
    
    
    4/1/2030
    
    
    
    6.3300 %
    
    
    $
    3,045,636
    
    
    $
    3,060,0938/25/2005
    
    
    9/1/2015
    
    
    
    5.3310 %
    
    
    
    21,757,000
    
    
    
    21,757,0009/12/2005
    
    
    9/1/2015
    
    
    
    5.2100 %
    
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    12/8/2015
    
    
    
    5.7107 %
    
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    12/1/2013
    
    
    
    5.9100 %
    
    
    
    9,583,875
    
    
    
    9,620,0502/21/2006
    
    
    6/30/2014
    
    
    
    5.2000 %
    
    
    
    20,022,086
    
    
    
    20,104,7163/29/2006
    
    
    4/1/2016
    
    
    
    5.9200 %
    
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    5/5/2016
    
    
    
    6.5800 %
    
    
    
    14,691,881
    
    
    
    14,753,57911/22/2006
    
    
    12/1/2016
    
    
    
    5.7600 %
    
    
    
    14,309,000
    
    
    
    14,309,00012/22/2006
    
    
    1/1/2017
    
    
    
    5.7900 %
    
    
    
    21,846,000
    
    
    
    21,846,0002/8/2007
    
    
    3/1/2017
    
    
    
    6.0000 %
    
    
    
    13,775,000
    
    
    
    $
    168,074,478
    
    
    $
    154,494,438
   Scheduled principalYear
    
    payments2007
    
    $
    673,2522008
    
    
    1,371,5582009
    
    
    2,017,7302010
    
    
    2,137,2202011
    
    
    2,407,409Thereafter
    
    
    159,467,309$
    168,074,478
  18




---



##### 



9. 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, 2006
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (3,201,322
    )
    
    $
    (15,226,196
    )
    
    $
    152,224,176Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,012
    
    
    
    
    
    
    
    25,012Distributions Declared to
Common and Preferred Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,106,932
    )
    
    
    (4,106,932
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,530,342
    
    
    
    1,530,342Balance at March 31, 2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (3,176,310
    )
    
    $
    (17,802,786
    )
    
    $
    149,672,598
  19




---



##### 



10. Segment Information
  As of and for the three months ended March 31, 2007Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    7,133,771
    
    
    $
    250,000
    
    
    $
    
    
    
    $
    7,383,771Operating expenses
    
    
    (2,460,979
    )
    
    
    
    
    
    
    (1,250,514
    )
    
    
    (3,711,493
    )Other loss
    
    
    
    
    
    
    
    
    
    
    (2,216,609
    )
    
    
    (2,216,609
    )Discontinued operations
    
    
    74,673
    
    
    
    
    
    
    
    
    
    
    
    74,673Net income (loss)
    
    $
    4,747,465
    
    
    $
    250,000
    
    
    $
    (3,467,123
    )
    
    $
    1,530,342Total Assets
    
    $
    304,124,119
    
    
    $
    10,000,000
    
    
    $
    13,065,216
    
    
    $
    327,189,335
 As of and for the three months ended March 31, 2006Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    4,872,698
    
    
    $
    552,913
    
    
    $
    
    
    
    $
    5,425,611Operating expenses
    
    
    (1,896,797
    )
    
    
    
    
    
    
    (1,126,201
    )
    
    
    (3,022,998
    )Other loss
    
    
    
    
    
    
    
    
    
    
    (1,605,650
    )
    
    
    (1,605,650
    )Discontinued operations
    
    
    49,837
    
    
    
    
    
    
    
    
    
    
    
    49,837Net income (loss)
    
    $
    3,025,738
    
    
    $
    552,913
    
    
    $
    (2,731,851
    )
    
    $
    846,800Total Assets
    
    $
    232,323,606
    
    
    $
    21,071,041
    
    
    $
    6,412,452
    
    
    $
    259,807,099
  11. Line of Credit
  20




---



##### 



12. Pro Forma Financial Information (unaudited)
  For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2007
    
    
    March 31, 2006Operating Data:Total operating revenue
    
    $
    7,927,719
    
    
    $
    6,402,312Total operating expenses
    
    
    (3,899,167
    )
    
    
    (3,323,383
    )Other expense
    
    
    (2,178,856
    )
    
    
    (1,605,649
    )Net income
    
    $
    1,849,696
    
    
    $
    1,473,280Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (344,444
    )Net income available to common stockholders
    
    $
    826,259
    
    
    $
    1,128,836Share and Per Share Data:Basic net income
    
    $
    0.10
    
    
    $
    0.15Diluted net income
    
    $
    0.10
    
    
    $
    0.14Weighted average shares outstanding-basic
    
    
    8,565,264
    
    
    
    7,672,000Weighted average shares outstanding-diluted
    
    
    8,565,264
    
    
    
    7,821,658
  13. Subsequent Events
  21




---



##### 



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. Such factors include,
among others: (1) general volatility of the capital markets and the market price of our securities;
(2) risks associated with negotiation and consummation of pending and future transactions; (3) the
loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker,
or George Stelljes III; (4) changes in our business strategy; (5) 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; (6) changes in our industry, interest
rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (7)
those factors listed under the caption Risk Factors of the Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on February 27, 2007. 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
 Our Investment Strategy
  22




---



##### 



Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
    Investment Advisory and Administration Agreements
   23




---



##### 



Management services and fees under the Initial Advisory Agreement
   Management services and fees under the Amended Advisory Agreement
   24




---



##### 



Administration Agreement
  Critical Accounting Policies
  Recently Issued Accounting Pronouncements
  25




---



##### 



Results of Operations
  A comparison of our operating results for the three months ended March 31, 2007 and 2006 is below
 For the three months ended March 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    7,078,036
    
    
    $
    4,867,075
    
    
    $
    2,210,961
    
    
    
    45
    %Interest income from mortgage notes receivable
    
    
    250,000
    
    
    
    552,913
    
    
    
    (302,913
    )
    
    
    -55
    %Tenant recovery revenue
    
    
    55,735
    
    
    
    5,623
    
    
    
    50,112
    
    
    
    891
    %Total operating revenues
    
    
    7,383,771
    
    
    
    5,425,611
    
    
    
    1,958,160
    
    
    
    36
    %Operating expensesDepreciation and amortization
    
    
    2,417,812
    
    
    
    1,799,201
    
    
    
    618,611
    
    
    
    34
    %Base management fee
    
    
    482,044
    
    
    
    652,742
    
    
    
    (170,698
    )
    
    
    -26
    %Administration fee
    
    
    207,018
    
    
    
    
    
    
    
    207,018
    
    
    
    100
    %Incentive fee
    
    
    585,768
    
    
    
    
    
    
    
    585,768
    
    
    
    100
    %Professional fees
    
    
    149,431
    
    
    
    198,459
    
    
    
    (49,028
    )
    
    
    -25
    %Taxes and licenses
    
    
    15,007
    
    
    
    50,894
    
    
    
    (35,887
    )
    
    
    -71
    %Insurance
    
    
    146,252
    
    
    
    82,998
    
    
    
    63,254
    
    
    
    76
    %General and administrative
    
    
    111,902
    
    
    
    47,817
    
    
    
    64,085
    
    
    
    134
    %Directors fees
    
    
    54,250
    
    
    
    33,500
    
    
    
    20,750
    
    
    
    62
    %Stockholder related expense
    
    
    99,617
    
    
    
    64,469
    
    
    
    35,148
    
    
    
    55
    %Asset retirement obligation expense
    
    
    28,160
    
    
    
    46,702
    
    
    
    (18,542
    )
    
    
    -40
    %Stock option compensation expense
    
    
    
    
    
    
    46,216
    
    
    
    (46,216
    )
    
    
    -100
    %Total operating expenses before credit from Adviser
    
    
    4,297,261
    
    
    
    3,022,998
    
    
    
    1,274,263
    
    
    
    42
    %Credit to incentive fee
    
    
    (585,768
    )
    
    
    
    
    
    
    (585,768
    )
    
    
    100
    %Total expenses net of credit to incentive fee
    
    
    3,711,493
    
    
    
    3,022,998
    
    
    
    688,495
    
    
    
    23
    %Other income (expense)Interest income from temporary investments
    
    
    229,016
    
    
    
    7,373
    
    
    
    221,643
    
    
    
    3006
    %Interest income  employee loans
    
    
    60,422
    
    
    
    5,548
    
    
    
    54,874
    
    
    
    989
    %Other income
    
    
    8,414
    
    
    
    
    
    
    
    8,414
    
    
    
    100
    %Interest expense
    
    
    (2,514,461
    )
    
    
    (1,618,571
    )
    
    
    (895,890
    )
    
    
    55
    %Total other expense
    
    
    (2,216,609
    )
    
    
    (1,605,650
    )
    
    
    (610,959
    )
    
    
    38
    %Income from continuing operations
    
    
    1,455,669
    
    
    
    796,963
    
    
    
    658,706
    
    
    
    83
    %Discontinued operationsIncome from discontinued operations
    
    
    (4,001
    )
    
    
    38,038
    
    
    
    (42,039
    )
    
    
    -111
    %Net realized loss from foreign currency transactions
    
    
    7
    
    
    
    (816
    )
    
    
    823
    
    
    
    -101
    %Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    12,615
    
    
    
    (12,615
    )
    
    
    -100
    %Taxes on sale of real estate
    
    
    78,667
    
    
    
    
    
    
    
    78,667
    
    
    
    100
    %Total discontinued operations
    
    
    74,673
    
    
    
    49,837
    
    
    
    24,836
    
    
    
    50
    %Net income
    
    
    1,530,342
    
    
    
    846,800
    
    
    
    683,542
    
    
    
    81
    %Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (344,444
    )
    
    
    (678,993
    )
    
    
    197
    %Net income available to common stockholders
    
    $
    506,905
    
    
    $
    502,356
    
    
    $
    4,549
    
    
    
    1
    %
 Operating Revenues
   26




---



##### 



Operating Expenses
  Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
     27




---



##### 



Other Income and Expenses
     28




---



##### 



Discontinued Operations
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
  Financing Activities
  29




---



##### 



Future Capital Needs
   Line of Credit
  Mortgage Note Payable
  30




---



##### 



Contractual Obligations
  Payments Due by Period
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-Term Debt Obligations (1)
    
    $
    168,074,478
    
    
    $
    1,002,691
    
    
    $
    3,608,690
    
    
    $
    4,638,366
    
    
    $
    158,824,731Interest on Long-Term Debt Obligations (2)
    
    
    82,744,552
    
    
    
    9,752,821
    
    
    
    19,202,042
    
    
    
    18,744,999
    
    
    
    35,044,690Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations (4)
    
    
    12,900,000
    
    
    
    12,900,000
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    263,719,030
    
    
    $
    23,655,512
    
    
    $
    22,810,732
    
    
    $
    23,383,365
    
    
    $
    193,869,421
 
 (1)
    
    Long-term debt obligations represent both borrowings under our line of credit and mortgage
notes payble that were outstanding as of March 31, 2007. The line of credit matures in December
of 2009.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our
line of credit. The balance and interest rate on our line of credit is variable and, thus, the
amount of interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is allocated to
us by our Adviser in connection with the Administration agreement.(4)
    
    The purchase obligations reflected in the above table represents commitments outstanding
at March 31, 2007 to purchase real estate. Funds from Operations
     31




---



##### 



For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2007
    
    
    March 31, 2006Net income
    
    $
    1,530,342
    
    
    $
    846,800Less: Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (344,444
    )Net income available to common stockholders
    
    $
    506,905
    
    
    $
    502,356Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    2,417,812
    
    
    
    1,834,740FFO available to common stockholders
    
    $
    2,924,717
    
    
    $
    2,337,096Weighted average shares outstanding  basic
    
    
    8,565,264
    
    
    
    7,672,000Weighted average shares outstanding  diluted
    
    
    8,565,264
    
    
    
    7,821,658Basic net income per weighted average common share
    
    $
    0.06
    
    
    $
    0.07Diluted net income per weighted average common share
    
    $
    0.06
    
    
    $
    0.06Basic FFO per weighted average common share
    
    $
    0.34
    
    
    $
    0.30Diluted FFO per weighted average common share
    
    $
    0.34
    
    
    $
    0.30
 32




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
       33




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Item 4. Controls and Procedures
     34




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PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Our Adviser is not obligated to provide a waiver of the incentive fee, which could negatively impact our earnings
and our ability to maintain our current level of, or increase,
distributions to our stockholders.
  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




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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, 2003.3.3
    
    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, 2006.3.4
    
    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, 2006.4.1
    
    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, 2006.4.2
    
    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 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




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Gladstone Commercial CorporationDate: May 1, 2007
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 37