GLADSTONE COMMERCIAL CORP

Previous wording

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 (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2023. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

Current wording

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 (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled “Forward-Looking Statements” and “Risk Factors” in this report and/or in our Annual Report on Form 10-K for the year ended December 31, 2023. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

Previous wording

•we owned 136 properties totaling 16.8 million square feet of rentable space, located in 27 states;

Current wording

•we owned 135 properties totaling 16.8 million square feet of rentable space, located in 27 states;

Previous wording

•the weighted average remaining term of our mortgage debt was 3.7 years and the weighted average interest rate was 4.24%; and

Current wording

•the weighted average remaining term of our mortgage debt was 3.7 years and the weighted average interest rate was 4.31%; and

Previous wording

•the average remaining lease term of the portfolio was 7.1 years.

Current wording

•the average remaining lease term of the portfolio was 6.9 years.

Previous wording

The commercial real estate sector continued to face uncertainty in the first half of 2024 with more recent signs of decreased volatility. Although the Federal Reserve hinted at potential rate cuts at the end of 2023, higher than expected CPI data (as reported by the U.S. Bureau of Labor Statistics for all urban consumers) in the first quarter of 2024 followed by more progress towards the Federal Reserve’s 2% inflation rate target in the second quarter has resulted in a steady federal funds rate. The Federal Reserve in June voted to keep the federal funds rate unchanged at 5.25% - 5.50%. This prolonged higher interest rate environment has slowed the mortgage market and consequently dampened acquisition activity. As a result, real estate transaction volumes have remained low, with tightened credit standards and rising capital costs preventing many investors from entering the market.

Current wording

The commercial real estate sector faced uncertainty in the first half of 2024 followed by some normalization in the third quarter of 2024. Although the Federal Reserve hinted at potential interest rate cuts at the end of 2023, higher than expected consumer price index data (as reported by the U.S. Bureau of Labor Statistics for all urban consumers) delayed interest rate cuts until September 2024 when the Federal Reserve voted to lower the federal funds rate to 4.75% - 5.00%. The lower federal funds rate was countered by a less positive than expected federal jobs report, causing treasury rates to increase since early October. The prolonged period of interest rate volatility and higher interest rates slowed the mortgage market and consequently dampened acquisition activity. As a result, real estate transaction volumes have remained low, with tightened credit standards and rising capital costs preventing many investors from entering the market.

Previous wording

Despite capital markets volatility, the industrial sector continues to demonstrate strong fundamentals, consistently outperforming other real estate categories. Cushman & Wakefield plc (“Cushman”) reported healthy activity in the second quarter of 2024, with overall U.S. industrial net absorption more than doubling to 46.3 million square feet. Also, according to Cushman, new leasing activity measured 137.2 million square feet, which was down 2.8% compared to the first quarter of 2024 but 11.2% higher than the 10-year pre-pandemic average of 126.9 million square feet. Through June 2024, the U.S. recorded just over 278.0 million square feet of new transactions, with the market being on pace to surpass 500.0 million square feet for the 10th straight year. Year-over-year, Cushman reports that industrial asking rents increased by 3.7% in the second quarter of 2024. While this is the lowest growth rate since 2020, it is still above historical averages and rent growth in other asset classes. For comparison, industrial rent growth in 2022 and 2023 was 20.0% and 10.0%, respectively. Notably, Cushman reports that six markets recorded absorption gains exceeding 3.0 million square feet in the second quarter of 2024, with significant contributions from Dallas-Fort Worth (13.8 million square feet), Phoenix (7.4 million square feet), and Houston (4.3 million square feet).

Current wording

Despite capital markets volatility, the industrial sector continues to demonstrate strong fundamentals, consistently outperforming other real estate categories. Cushman & Wakefield plc (“Cushman”) reported healthy industrial activity in the third quarter of 2024, with overall U.S. industrial net absorption of 29.4 million square feet, down from 46.3 million in the second quarter. Also, according to Cushman, new leasing activity measured 139.6 million square feet, which was up 1.8% compared to the second quarter of 2024 and 8.0% higher than the 10-year pre-pandemic average. Through September 2024, the U.S. recorded 433.6 million square feet of new transactions, with the market on pace to surpass 500.0 million square feet for the 10th straight year. Year-over-year, Cushman reports that industrial asking rents increased by 4.3% in the third quarter of 2024. Notably, Cushman reports that seven markets recorded absorption gains exceeding 3.0 million square feet in the third quarter of 2024, with significant contributions from Dallas-Fort Worth (10.5 million square feet), Savannah (6.6 million square feet), and Houston (6.2 million square feet).

Previous wording

Interest rates have been fluctuating due to ongoing concerns about inflation, with the future direction of Federal Reserve rate hikes remaining uncertain. The yield on the 10-year U.S. Treasury Note, which has risen steadily since the beginning of 2022, ended the second quarter of 2024 at 4.36%.

Current wording

Interest rates have fluctuated due to ongoing concerns about inflation, with the future direction of the Federal Reserve’s rate changes remaining uncertain. The yield on the 10-year U.S. Treasury Note, which declined slightly in the third quarter of 2024, ended the quarter at 3.81%. In addition to inflation and interest rates, we remain cognizant of the U.S. November elections and developments around the globe, including in the Middle East and Ukraine, all of which will impact the macroeconomy.

Previous wording

Despite these macro-economic challenges, we believe that we are well positioned to navigate the current business environment.

Current wording

Despite these uncertainties, we believe that we are well positioned to navigate the current business environment.

Previous wording

We collected 100% of all outstanding cash rents for the six months ended June 30, 2024. In the past, we have received rent modification requests from our tenants, and we may receive additional requests in the future. However, we are unable to quantify the outcomes of the negotiation of relief packages, the success of any tenant’s financial prospects or the amount of relief requests that we will ultimately receive or grant. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil and gas industries. Additionally, our properties are located across 27 states, which we believe mitigates our exposure to regional economic issues, including regulations or laws implemented by state and local governments, in any one geographic market or area.

Current wording

We collected 100% of all outstanding cash rents for the nine months ended September 30, 2024. We believe that we have a diverse tenant base, and specifically, we do not have significant exposure to tenants in the retail, hospitality, airlines, and oil and gas industries. Additionally, our properties are located across 27 states, which we believe mitigates our exposure to regional economic and weather-related issues, including regulations or laws implemented by state and local governments, in any one geographic market or area. In the past, we have received rent modification requests from certain of our tenants, and we may receive additional requests in the future.

Previous wording

The geopolitical landscape remains fractured due to recent world events. Many domestic manufacturing businesses seek to limit supply chain disruptions by bringing their operations back to the U.S. The COVID-19 pandemic is largely behind us, but a level of work-from-home trends appear to be here to stay. Industrial demand will be further buoyed by government investment in infrastructure and advanced manufacturing operations. The Federal Reserve recently indicated it does not expect additional rate increases and has indicated possible interest rate cuts, but the timing of those cuts has not been solidified. These uncertain times create both risks and opportunities for us and our tenants, and we believe we are well-capitalized and positioned to take advantage.

Current wording

The geopolitical landscape remains fractured due to recent world events. Many domestic manufacturing businesses seek to limit supply chain disruptions by bringing their operations back to the U.S. The COVID-19 pandemic is behind us, but a level of work-from-home trends appear to be here to stay, which may affect demand for commercial real estate. We expect that industrial demand will be further buoyed by government investment in infrastructure and advanced manufacturing operations. The Federal Reserve recently indicated it does not expect additional rate increases and has indicated possible interest rate cuts, but the timing of those cuts is unknown. These uncertain times create both risks and opportunities for us and our tenants, and we believe we are well-capitalized and positioned to take advantage. The environmental landscape remains unpredictable due to the increase in intensity of weather patterns, including hurricanes. We continue to monitor our properties and have not seen any significant impact to our properties in Florida, Georgia, North Carolina, South Carolina, and Tennessee from the recent hurricane season.

Previous wording

We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have four partially vacant buildings and one fully vacant building. Our available vacant space at June 30, 2024 represents 1.5% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $1.6 million. We continue to actively seek new tenants for these properties.

Current wording

We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have five partially vacant buildings and one fully vacant building. Our available vacant space at September 30, 2024 represents 1.5% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately $1.8 million. We continue to actively seek new tenants for these properties.

Previous wording

We believe our lease expiration schedule for the remainder of 2024 is manageable, as it equates to 2.1% of our lease revenue at June 30, 2024. Property acquisitions since the beginning of 2020 have totaled $384.3 million and all but one transaction was industrial in nature, with a weighted average lease term of 14.0 years and a current weighted average lease term today of 10.9 years.

Current wording

We believe our lease expiration schedule for the remainder of 2024 is manageable, as it equates to 1.8% of our lease revenue at September 30, 2024. Property acquisitions since the beginning of 2020 have totaled $394.3 million and all but one transaction was industrial in nature, with a weighted average lease term of 14.0 years and a current weighted average lease term today of 10.8 years.

Previous wording

During the six months ended June 30, 2024, we continued to execute our capital recycling program, whereby we sold non-core properties. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available, and use the sales proceeds to acquire properties in our target, secondary growth markets or pay down outstanding debt. During the six months ended June 30, 2024, we sold four non-core properties, located in Columbus, Ohio; Draper, Utah; Richardson, Texas; and Egg Harbor, New Jersey, which are summarized in the table below (dollars in thousands):

Current wording

During the nine months ended September 30, 2024, we continued to execute our capital recycling program, whereby we sold non-core properties. We expect to continue to execute our capital recycling program and sell non-core properties as reasonable disposition opportunities become available, and use the sales proceeds to acquire properties in our target, secondary growth markets or pay down outstanding debt. During the nine months ended September 30, 2024, we sold six non-core properties, located in Columbus, Ohio; Draper, Utah; Richardson, Texas; Egg Harbor, New Jersey; Cumming, Georgia; and Lawrenceville, Georgia, which are summarized in the table below (dollars in thousands):

Previous wording

During the six months ended June 30, 2024, we acquired five industrial properties located in Warfordsburg, Pennsylvania, which are summarized below (dollars in thousands):

Current wording

During the nine months ended September 30, 2024, we acquired six industrial properties located in Warfordsburg, Pennsylvania and Midland, Texas, which are summarized below (dollars in thousands):

Previous wording

During and subsequent to the six months ended June 30, 2024, we executed seven leases, which are summarized below (dollars in thousands):

Current wording

During and subsequent to the nine months ended September 30, 2024, we executed ten leases, which are summarized below (dollars in thousands):

Previous wording

During the six months ended June 30, 2024, we had two lease terminations, which are summarized below (dollars in thousands):

Current wording

During the nine months ended September 30, 2024, we had three lease terminations, which are summarized below (dollars in thousands):

Previous wording

During the six months ended June 30, 2024, we repaid two mortgages, collateralized by two properties, which are summarized in the table below (dollars in thousands):

Current wording

During the nine months ended September 30, 2024, we repaid two mortgages, collateralized by two properties, which are summarized in the table below (dollars in thousands):

Previous wording

During the six months ended June 30, 2024, we extended the maturity date of one mortgage, collateralized by one property, which is summarized in the table below (dollars in thousands):

Current wording

During the nine months ended September 30, 2024, we extended the maturity date of one mortgage, collateralized by one property, which is summarized in the table below (dollars in thousands):

Previous wording

On March 3, 2023, we entered into an At-the-Market Equity Offering Sales Agreement (the “2023 Common Stock Sales Agreement”), with BofA Securities, Inc. (“BofA”), Goldman Sachs, Baird, KeyBanc Capital Markets Inc. (“KeyBanc”), and Fifth Third (collectively the “Common Stock Sales Agents”). In connection with the 2023 Common Stock Sales Agreement, we filed prospectus supplements with the SEC dated March 3, 2023 and March 7, 2023, to the prospectus dated November 23, 2022, for the offer and sale of an aggregate offering amount of $250.0 million of common stock. During the six months ended June 30, 2024, we did not sell any shares of common stock under the 2023 Common Stock Sales Agreement.

Current wording

On March 3, 2023, we entered into an At-the-Market Equity Offering Sales Agreement (the “2023 Common Stock Sales Agreement”), with BofA Securities, Inc. (“BofA”), Goldman Sachs, Baird, KeyBanc Capital Markets Inc. (“KeyBanc”), and Fifth Third (collectively the “Common Stock Sales Agents”). In connection with the 2023 Common Stock Sales Agreement, we filed prospectus supplements with the SEC dated March 3, 2023 and March 7, 2023, to the prospectus dated November 23, 2022, for the offer and sale of an aggregate offering amount of $250.0 million of common stock. During the nine months ended September 30, 2024, we did not sell any shares of common stock under the 2023 Common Stock Sales Agreement.

Previous wording

On March 26, 2024, we entered into Amendment No. 1 to the 2023 Common Stock Sales Agreement (the “2024 Common Stock Sales Agreement”). The amendment permitted shares of common stock to be issued pursuant to the 2024 Common Stock Sales Agreement under the Company’s Registration Statement on Form S-3 (File No. 333-277877) (the “2024 Registration Statement”), and future registration statements on Form S-3. In connection with the 2024 Common Stock Sales Agreement, we filed a prospectus supplement with the SEC dated March 26, 2024, to the prospectus dated March 21, 2024, for the offer and sale of an aggregate offering amount of $250.0 million of common stock. During the six months ended June 30, 2024, we sold 756,214 shares of common stock, raising approximately $10.6 million in net proceeds under the 2024 Common Stock Sales Agreement.

Current wording

On March 26, 2024, we entered into Amendment No. 1 to the 2023 Common Stock Sales Agreement (the “2024 Common Stock Sales Agreement”). The amendment permitted shares of common stock to be issued pursuant to the 2024 Common Stock Sales Agreement under the Company’s Registration Statement on Form S-3 (File No. 333-277877) (the “2024 Registration Statement”), and future registration statements on Form S-3. In connection with the 2024 Common Stock Sales Agreement, we filed a prospectus supplement with the SEC dated March 26, 2024, to the prospectus dated March 21, 2024, for the offer and sale of an aggregate offering amount of $250.0 million of common stock. During the nine months ended September 30, 2024, we sold 3,450,500 shares of common stock, raising approximately $49.5 million in net proceeds under the 2024 Common Stock Sales Agreement.

Previous wording

On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of our authorized and unissued shares of common stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. We sold 25,780 shares of our Series F Preferred Stock, raising $0.6 million in net proceeds, during the six months ended June 30, 2024.

Current wording

On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the 6.00% Series F Cumulative Redeemable Preferred Stock, par value $0.001 per share, (the “Series F Preferred Stock”) and (ii) reclassifying and designating 26,000,000 shares of our authorized and unissued shares of common stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. We sold 30,180 shares of our Series F Preferred Stock, raising $0.7 million in net proceeds, during the nine months ended September 30, 2024.

Previous wording

As of June 30, 2024 and December 31, 2023, we owned approximately 99.9% and 99.2%, respectively, of the outstanding operating partnership units in the Operating Partnership (“OP Units”). During thesix months ended June 30, 2024, we redeemed 271,169 OP Units for an equivalent amount of common stock.

Current wording

Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”). As of September 30, 2024 and December 31, 2023, we owned approximately 99.9% and 99.2%, respectively, of the outstanding operating partnership units in the Operating Partnership (“OP Units”). During thenine months ended September 30, 2024, we redeemed 271,169 OP Units for an equivalent amount of common stock.

Previous wording

Gladstone Management Corporation, a Delaware corporation (our “Adviser”), seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the six months ended June 30, 2024, our largest tenant comprised only 4.4% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

Gladstone Management Corporation, a Delaware corporation (our “Adviser”), seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the nine months ended September 30, 2024, our largest tenant comprised only 4.3% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

Previous wording

The tables below reflect the breakdown of total lease revenue by state for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

The tables below reflect the breakdown of total lease revenue by state for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

Previous wording

Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser and Gladstone Administration, LLC, a Delaware limited liability company (our “Administrator”) are controlled by Mr. David Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr. Terry Lee Brubaker, our chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr. Arthur “Buzz” Cooper, our president, also serves as executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary, Michael LiCalsi (who also serves as our Administrator’s president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs.

Current wording

Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser and Gladstone Administration, LLC, a Delaware limited liability company (our “Administrator”) are controlled by Mr. David Gladstone, who is also our chairman and chief executive officer. Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr. Terry Lee Brubaker, our chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr. Arthur “Buzz” Cooper, our president, also serves as executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary, Mr. Michael LiCalsi (who also serves as our Administrator’s president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs.

Previous wording

Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors’ and officers’ insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser annually, typically during the month of July. During its July 2024 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2025.

Current wording

Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors’ and officers’ insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our board of directors (“Board of Directors”). Our Board of Directors reviews and considers renewing the agreement with our Adviser annually, typically during the month of July. During its July 2024 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, through August 31, 2025.

Previous wording

On July 11, 2023, the Company entered into the Eighth Amended Advisory Agreement, as approved unanimously by our Board of Directors, including specifically, our independent directors. The Eighth Amended Advisory Agreement contractually eliminated the payment of the incentive fee for the quarters ended September 30, 2023 and December 31, 2023. In addition, the Eighth Amended Advisory Agreement also clarified that for any future quarter whereby an incentive fee would exceed by greater than 15% the average quarterly incentive fee paid, the measurement would be versus the last four quarters where an incentive fee was actually paid. The calculation of the other fees was unchanged.

Current wording

On July 11, 2023, we amended and restated the Advisory Agreement by entering into the Eighth Amended Advisory Agreement, as approved unanimously by our Board of Directors, including specifically, our independent directors. The Eighth Amended Advisory Agreement contractually eliminated the payment of the incentive fee for the quarters ended September 30, 2023 and December 31, 2023. In addition, the Eighth Amended Advisory Agreement also clarified that for any future quarter whereby an incentive fee would exceed by greater than 15% the average quarterly incentive fee paid, the measurement would be versus the last four quarters where an incentive fee was actually paid. The calculation of the other fees was unchanged.

Previous wording

Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and six months ended June 30, 2024 or 2023.

Current wording

Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2024 or 2023.

Previous wording

The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023, filed by us with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2024 (our “2023 Form 10-K”). There were no material changes to our critical accounting policies or estimates during the six months ended June 30, 2024.

Current wording

The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023, filed by us with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2024 (our “2023 Form 10-K”). There were no material changes to our critical accounting policies or estimates during the nine months ended September 30, 2024.

Previous wording

The weighted average yield on our total portfolio, which was 8.6% and 7.9% as of June 30, 2024 and 2023, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties.

Current wording

The weighted average yield on our total portfolio, which was 8.5% and 8.0% as of September 30, 2024 and 2023, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties.

Previous wording

A comparison of our operating results for the three and six months ended June 30, 2024 and 2023 is below (dollars in thousands, except per share amounts):

Current wording

A comparison of our operating results for the three and nine months ended September 30, 2024 and 2023 is below (dollars in thousands, except per share amounts):

Previous wording

For the purposes of the following discussion, same store properties are properties we owned as of January 1, 2023, which have not been subsequently vacated or disposed of. Acquired and disposed of properties are properties which were acquired, disposed of or classified as held for sale at any point subsequent to December 31, 2022. Properties with vacancy are properties that were fully vacant or had greater than 5.0% vacancy, based on square footage, at any point subsequent to January 1, 2023.

Current wording

For the purposes of the following discussion, “same store properties” are properties we owned as of January 1, 2023, which have not been subsequently vacated or disposed of. “Acquired & disposed properties” are properties which were acquired, disposed of or classified as held for sale at any point subsequent to December 31, 2022. “Properties with vacancy” are properties that were fully vacant or had greater than 5.0% vacancy, based on square footage, at any point subsequent to January 1, 2023.

Previous wording

Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties decreased for the three and six months ended June 30, 2024, due to accelerated rent attributable to a lease termination during the three and six months ended June 30, 2023. Lease revenues increased for acquired and disposed of properties for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, primarily due to accelerated rent attributable to a lease termination on a property that was sold during the current period. Lease revenues decreased for acquired and disposed of properties for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to loss of variable lease payments from the nine property sales subsequent to June 30, 2023, partially offset by lease revenue from the nine properties acquired subsequent to June 30, 2023 and accelerated rent attributable to a lease termination on a property that was sold during the current period. Lease revenues increased for our properties with vacancy for the three and six months ended June 30, 2024 due to an increase in rental revenue from partially leasing vacant space and variable lease payments due to an increase in property operating expenses.

Current wording

Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties increased for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, due to a settlement received at one of our properties related to deferred maintenance. Lease revenues from same store properties increased for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, due to a settlement received at one of our properties related to deferred maintenance, partially offset by accelerated rent attributable to a lease termination during the nine months ended September 30, 2023. Lease revenues decreased for acquired and disposed of properties for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily due to the loss of variable lease payments from the eight property sales subsequent to September 30, 2023, minimally offset by lease revenue from the eight properties acquired subsequent to September 30, 2023. Lease revenues decreased for acquired and disposed of properties for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to the loss of variable lease payments from the eight property sales subsequent to September 30, 2023, minimally offset by lease revenue from the eight properties acquired subsequent to September 30, 2023 and accelerated rent attributable to a lease termination on a property that was sold during the nine months ended September 30, 2024. Lease revenues decreased for our properties with vacancy for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, mainly due to a loss of rental revenue from increased vacancy, partially offset by an increase in variable lease payments. Lease revenues increased for our properties with vacancy for the nine months ended September 30, 2024 from the comparable 2023 period, due to an increase in variable lease payments.

Previous wording

Depreciation and amortization expense decreased for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, due to the reduced depreciation and amortization expense from the nine property sales subsequent to June 30, 2023, partially offset by an increase in depreciation and amortization expense on the nine properties acquired subsequent to June 30, 2023.

Current wording

Depreciation and amortization expense increased for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, due to an increase in depreciation and amortization expense on the eight properties acquired subsequent to September 30, 2023. Depreciation and amortization expense decreased for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, due to the reduced depreciation and amortization expense from the eight property sales subsequent to September 30, 2023.

Previous wording

Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The increase in property operating expenses for same store properties for the three and six months ended June 30, 2024, from the comparable 2023 period, was a result of general cost increases due to the inflationary environment during the three and six months ended June 30, 2024. The decrease in property operating expenses for acquired and disposed of properties for the three and six months ended June 30, 2024, from the comparable 2023 period, is a result of a decrease in property operating expenses from the nine property sales subsequent to June 30, 2023, minimally offset by the property operating expense from the nine properties acquired subsequent to June 30, 2023. The decrease in property operating expenses for properties with vacancy for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, is a result of a reduction in real estate taxes due to successful appeals.

Current wording

Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The increase in property operating expenses for same store properties for the three and nine months ended September 30, 2024, from the comparable 2023 period, was a result of general cost increases due to the inflationary environment during the three and nine months ended September 30, 2024. The decrease in property operating expenses for acquired and disposed of properties for the three and nine months ended September 30, 2024, from the comparable 2023 period, is a result of a decrease in property operating expenses from the eight property sales subsequent to September 30, 2023, minimally offset by the property operating expense from the eight properties acquired subsequent to September 30, 2023. The increase in property operating expenses for properties with vacancy for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, is a result of increased repair expense. The decrease in property operating expenses for properties with vacancy for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, is a result of a lower reduction in real estate taxes due to successful appeals as compared to the prior period.

Previous wording

The base management fee paid to the Adviser decreased for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, due to a decrease in Gross Tangible Real Estate over the three and six months ended June 30, 2024 from property sales as compared to Gross Tangible Real Estate during the three and six months ended June 30, 2023. The calculation of the base management fee is described in detail above in subheading “Advisory and Administration Agreements.”

Current wording

The base management fee paid to the Adviser decreased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, due to a decrease in Gross Tangible Real Estate over the three and nine months ended September 30, 2024 from property sales as compared to Gross Tangible Real Estate during the three and nine months ended September 30, 2023. The calculation of the base management fee is described in detail above in subheading “Advisory and Administration Agreements.”

Previous wording

The incentive fee paid to the Adviser increased for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, due to the payment of the incentive fee being contractually eliminated for the quarters ended March 31, 2023 and June 30, 2023, as outlined in the Seventh Amended Advisory Agreement and Eighth Amended Advisory Agreement. We recorded an incentive fee, which was partially waived, during the three and six months ended June 30, 2024. The calculation of the incentive fee is described in detail above in subheading “Advisory and Administration Agreements.”

Current wording

The incentive fee paid to the Adviser increased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, due to the payment of the incentive fee being contractually eliminated for the quarters ended March 31, 2023 through September 30, 2023, as outlined in the Seventh Amended Advisory Agreement and Eighth Amended Advisory Agreement. We recorded an incentive fee, which was partially waived, during the three and nine months ended September 30, 2024. The calculation of the incentive fee is described in detail above in subheading “Advisory and Administration Agreements.”

Previous wording

The administration fee paid to the Administrator increased for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, due to our Administrator incurring greater costs that are allocated to us. The calculation of the administration fee is described in detail above in subheading“Advisory and Administration Agreements.”

Current wording

The administration fee paid to the Administrator increased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, due to our Administrator incurring greater costs that are allocated to us. The calculation of the administration fee is described in detail above in subheading“Advisory and Administration Agreements.”

Previous wording

General and administrative expenses remained consistent for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023.

Current wording

General and administrative expenses decreased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023 mainly due to a reduction in legal fee expenses.

Previous wording

Interest expense increased for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023. This increase was primarily a result of increased interest costs on variable rate debt, as global interest rates have increased in reaction to growing inflation, coupled with costs associated with the maturity of several interest rate caps.

Current wording

Interest expense decreased for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. This decrease was primarily a result of costs associated with the maturity of several interest rate caps in the previous period. Interest expense increased for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. This increase was primarily a result of increased interest costs on variable rate debt, as global interest rates increased through most of the period in reaction to growing inflation, partially offset with costs associated with the maturity of several interest rate caps in the prior period.