Gladstone Commercial Announces Third Quarter 2007 Results

Gladstone Commercial Corp. (NASDAQ:GOOD) (the "Company”) today reported financial results for the quarter ended September 30, 2007. A description of FFO, a relative non–GAAP ("Generally Accepted Accounting Principles in the United States”) financial measure, is located at the end of this news release. All per share references are fully diluted weighted average common shares, unless otherwise noted. Net income available to common stockholders for the quarter ended September 30, 2007 was $567,022, or $0.07 per share, compared to $1,293,044, or $0.16 per share, for the same period one year ago, a decrease of 56%. Net income available to common stockholders for the nine months ended September 30, 2007 was $1,606,803, or $0.19 per share, compared to $2,163,784, or $0.27 per share, for the same period one year ago, a decrease of 26%. Net income results when compared to the same period last year were affected by increased expenses attributable to the acquisition of nine properties since September 30, 2006, interest expense associated with leveraging the Company’s properties, dividends paid on the Company’s preferred stock and the gain on the sale of the two Canadian properties in July 2006, partially offset by increased revenues related to the acquisition of the nine properties. FFO for the quarter ended September 30, 2007 was approximately $3.2 million, or $0.38 per share, compared to approximately $2.3 million, or $0.29 per share, for the same period one year ago, an increase of approximately 38%. FFO for the nine months ended September 30, 2007 was approximately $9.3 million, or $1.08 per share, compared to approximately $7.1 million, or $0.90 per share, for the same period one year ago, an increase of approximately 30%. A reconciliation of net income, which the Company believes is the most directly comparable GAAP measure to FFO, is set forth below:   For the three months ended September 30,   For the nine months ended September 30, 2007   2006   2007   2006   Net income $ 1,590,460 $ 1,777,419 $ 4,677,115 $ 3,476,978 Less: Dividends attributable to preferred stock (1,023,438 ) (484,375 ) (3,070,312 ) (1,313,194 ) Net income available to common stockholders $ 567,022 $ 1,293,044 $ 1,606,803 $ 2,163,784   Add: Real estate depreciation and amortization, including discontinued operations 2,668,383 2,162,640 7,722,349 6,078,450 Less: Gain on sale of real estate, net of taxes paid -   (1,106,590 ) (78,667 ) (1,106,590 ) FFO available to common stockholders $ 3,235,405 $ 2,349,094 $ 9,250,485 $ 7,135,644     Weighted average shares outstanding - basic 8,565,264 7,820,376 8,565,264 7,752,170 Weighted average shares outstanding - diluted 8,565,264 7,981,071 8,565,264 7,896,860   Basic net income per weighted average common share $ 0.07   $ 0.16   $ 0.19   $ 0.28   Diluted net income per weighted average common share $ 0.07   $ 0.16   $ 0.19   $ 0.27   Basic FFO per weighted average common share $ 0.38   $ 0.30   $ 1.08   $ 0.92   Diluted FFO per weighted average common share $ 0.38   $ 0.29   $ 1.08   $ 0.90   Third quarter highlights: Purchased four fully occupied properties with approximately 212,000 square feet for approximately $31.7 million; and Assumed a mortgage note in connection with an acquisition for approximately $4.5 million. "Our results were positively impacted by the four acquisitions completed during the quarter. Approximately $19.1 million of these acquisitions were purchased during the last week of the quarter, thus we expect our earnings to continue to grow for the remainder of the year as we will realize the full benefit of holding these acquisitions for the entire fourth quarter. We are excited about the opportunities that are currently available in the marketplace and our pipeline remains very strong,” said Chip Stelljes, President and Chief Investment Officer. Subsequent to quarter end, the Company: Borrowed $16.0 million pursuant to a long-term mortgage note payable collateralized by security interests in three properties, which accrues interest at a rate of 6.63% per year; and Declared monthly cash dividends of $0.12 per share on the common stock, $0.1614583 per share on the Series A Preferred Stock, and $0.15625 per share on the Series B Preferred Stock, for each of the months of October, November and December 2007. The financial statements attached below are without footnotes so readers should obtain and carefully review the Company’s Form 10-Q for the quarter ended September 30, 2007, including the footnotes to the financial statements contained therein. The Company has filed the Form 10-Q today with the Securities and Exchange Commission ("SEC”) and the Form 10-Q can be retrieved from the SEC’s website at www.sec.gov or the Company’s website at www.GladstoneCommercial.com. The Company will hold a conference call Wednesday, October 31, 2007 at 8:30 a.m. ET to discuss its earnings results. Please call (877) 407-8031 to enter the conference. An operator will monitor the call and set a queue for the questions. The conference call replay will be available two hours after the call and will be available through November 30, 2007. To hear the replay, please dial (877) 660-6853, access playback account 286 and use ID code 258980. Gladstone Commercial Corporation is a publicly traded real estate investment trust that focuses on investing in and owning triple-net leased industrial, commercial and retail real estate properties and selectively making long-term mortgage loans. Additional information can be found at www.GladstoneCommercial.com. For further information, contact Investor Relations at 703-287-5835. NON-GAAP FINANCIAL MEASURE Funds from Operations The National Association of Real Estate Investment Trusts ("NAREIT”) developed FFO as a relative non-GAAP supplemental measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income), and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow from operations as a measure of liquidity or ability to make distributions. The Company believes that FFO per share provides investors with a further context for evaluating the Company’s financial performance and as a supplemental measure to compare the Company to other REITs; however, comparisons of the Company’s FFO to the FFO of other REITs may not necessarily be meaningful due to potential differences in the application of the NAREIT definition used by such other REITs. To learn more about FFO please refer to the Form 10-Q for the quarter ended September 30, 2007, as filed with the SEC today. This press release may include statements that 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, including statements with regard to the future performance of the Company and the closing of any transaction. Words such as "may,” "will,” "believes,” "anticipates,” "intends,” "expects,” "projects,” "estimates” and "future” or similar expressions are intended to identify forward-looking statements. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on the Company’s current plans, expectations and beliefs that are believed to be reasonable as of the date of this press release. Factors that may cause the Company’s 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 include, among others, those factors listed under the caption "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on February 27, 2007, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, as filed on May 1, 2007. The risk factors set forth in the Form 10-K and Form 10-Q under the caption "Risk Factors” are specifically incorporated by reference into this press release. All forward-looking statements are based on current plans, expectations and beliefs and speak only as of the date of such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Gladstone Commercial Corporation Consolidated Balance Sheets (Unaudited)     September 30, 2007 December 31, 2006   ASSETS Real estate, net of accumulated depreciation of $13,771,428 and $8,595,419, respectively $ 309,420,504 $ 235,118,123 Lease intangibles, net of accumulated amortization of $6,722,025 and $4,175,685, respectively 27,607,486 23,416,696 Mortgage notes receivable 10,000,000 10,000,000 Cash and cash equivalents 1,824,794 36,005,686 Restricted cash 1,500,858 1,225,162 Funds held in escrow 1,638,520 1,635,819 Interest receivable – mortgage note 83,333 - Interest receivable – employees 52,728 43,716 Deferred rent receivable 4,664,502 3,607,279 Deferred financing costs, net of accumulated amortization of $1,977,287 and $1,467,297, respectively 3,973,775 3,713,004 Prepaid expenses 547,500 521,290 Deposits on real estate - 300,000 Accounts receivable 31,877   179,247   TOTAL ASSETS $ 361,345,877   $ 315,766,022   LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Mortgage notes payable $ 186,416,801 $ 154,494,438 Borrowings under line of credit 20,000,000 - Deferred rent liability 4,129,426 4,718,599 Asset retirement obligation liability 1,781,817 1,631,294 Accounts payable and accrued expenses 993,915 673,410 Due to adviser 788,533 183,042 Rent received in advance, security deposits and funds held in escrow 2,254,293   1,841,063     Total Liabilities 216,364,785   163,541,846   STOCKHOLDERS’ EQUITY Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding 2,150 2,150 Common stock, $0.001 par value, 17,700,000 shares authorized and 8,565,264 shares issued and outstanding 8,565 8,565 Additional paid in capital 170,640,979 170,640,979 Notes receivable - employees (2,800,724 ) (3,201,322 ) Distributions in excess of accumulated earnings (22,869,878 ) (15,226,196 )   Total Stockholders’ Equity 144,981,092   152,224,176     TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 361,345,877   $ 315,766,022   Gladstone Commercial Corporation Consolidated Statements of Operations (Unaudited)         For the three months ended September 30, For the nine months ended September 30, 2007 2006 2007 2006 Operating revenues Rental income $ 8,024,305 $ 6,214,295 $ 22,834,663 $ 17,109,203 Interest income from mortgage notes receivable 255,555 478,329 758,333 1,589,675 Tenant recovery revenue 80,648   43,352   230,851   92,772   Total operating revenues 8,360,508   6,735,976   23,823,847   18,791,650     Operating expenses Depreciation and amortization 2,668,383 2,162,640 7,722,349 6,026,150 Property operating expenses 204,972 145,058 597,273 435,495 Base management fee 459,202 656,916 1,412,337 2,029,050 Incentive fee 677,104 - 1,896,677 - Administration fee 175,852 - 592,996 - Professional fees 118,371 167,353 442,479 598,771 Insurance 53,943 54,662 171,275 154,868 Directors fees 66,250 33,500 174,750 94,500 Stockholder related expenses 40,991 34,414 215,969 282,478 Asset retirement obligation expense 29,440 30,619 86,542 102,263 General and administrative 17,452 20,394 79,119 48,991 Stock option compensation expense -   314,593   -   394,411   Total operating expenses before credit from Adviser 4,511,960   3,620,149   13,391,766   10,166,977     Credit to incentive fee (526,991 ) -   (1,746,564 ) -   Total operating expenses 3,984,969   3,620,149   11,645,202   10,166,977     Other income (expense) Interest income from temporary investments 33,105 2,006 325,390 13,437 Interest income - employee loans 52,728 41,346 169,608 75,483 Other income 9,896 - 28,127 10,400 Interest expense (2,920,270 ) (2,494,221 ) (8,137,343 ) (6,268,757 ) Total other expense (2,824,541 ) (2,450,869 ) (7,614,218 ) (6,169,437 )   Income from continuing operations 1,550,998   664,958   4,564,427   2,455,236     Discontinued operations Income from discontinued operations 5,975 6,915 471 116,169 Net realized income (loss) from foreign currency transactions 33,487 (1,044 ) 33,550 (201,017 ) Gain on sale of real estate - 1,422,026 - 1,422,026 Taxes (paid) refunded on sale of real estate -   (315,436 ) 78,667   (315,436 ) Total discontinued operations 39,462   1,112,461   112,688   1,021,742     Net income 1,590,460   1,777,419   4,677,115   3,476,978     Dividends attributable to preferred stock (1,023,438 ) (484,375 ) (3,070,312 ) (1,313,194 )   Net income available to common stockholders $ 567,022   $ 1,293,044   $ 1,606,803   $ 2,163,784     Earnings per weighted average common share - basic Income from continuing operations (net of dividends attributable to preferred stock) $ 0.07 $ 0.02 $ 0.18 $ 0.15 Discontinued operations -   0.14   0.01   0.13     Net income available to common stockholders $ 0.07   $ 0.16   $ 0.19   $ 0.28     Earnings per weighted average common share - diluted Income from continuing operations (net of dividends attributable to preferred stock) $ 0.07 $ 0.02 $ 0.18 $ 0.14 Discontinued operations -   0.14   0.01   0.13     Net income available to common stockholders $ 0.07   $ 0.16   $ 0.19   $ 0.27     Weighted average shares outstanding Basic 8,565,264   7,820,376   8,565,264   7,752,170   Diluted 8,565,264   7,981,071   8,565,264   7,896,860   Gladstone Commercial Corporation Consolidated Statements of Cash Flows (Unaudited)     For the nine months ended September 30, 2007 2006   Cash flows from operating activities: Net income $ 4,677,115 $ 3,476,978 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, including discontinued operations 7,722,349 6,078,450 Amortization of deferred financing costs, including discontinued operations 509,990 464,941 Amortization of deferred rent asset 190,122 190,123 Amortization of deferred rent liability (589,173 ) (499,870 ) Asset retirement obligation expense, including discontinued operations 86,542 112,195 Stock compensation - 394,411 Increase in mortgage notes payable due to change in value of foreign currency - 202,065 Value of building acquired in excess of mortgage note satisfied, applied to interest income - (335,701 ) Gain on sale of real estate - (1,422,026 ) (Increase) decrease in mortgage interest receivable (83,333 ) 70,749 Increase in employee interest receivable (9,012 ) (41,346 ) Increase in deferred rent receivable (1,247,345 ) (941,903 ) Decrease (increase) in prepaid expenses and other assets 121,160 (49,645 ) Increase in accounts payable, accrued expenses, and amount due adviser 516,996 248,449 Increase in rent received in advance 137,534   53,097   Net cash provided by operating activities 12,032,945   8,000,967     Cash flows from investing activities: Real estate investments (85,742,539 ) (48,311,928 ) Proceeds from sales of real estate - 2,106,112 Principal repayments on mortgage notes receivable - 44,742 Net payments to lenders for reserves held in escrow (1,186,448 ) (2,537,541 ) Increase (decrease) in restricted cash (275,696 ) 329,547 Deposits on future acquisitions (1,310,000 ) (600,000 ) Deposits applied against real estate investments 1,610,000   1,200,000   Net cash used in investing activities (86,904,683 ) (47,769,068 )   Cash flows from financing activities: Proceeds from share issuance - 26,034,648 Offering costs - (1,308,496 ) Borrowings under mortgage notes payable 32,521,691 31,900,000 Principal repayments on mortgage notes payable (599,328 ) (427,506 ) Principal repayments on employee notes receivable from sale of common stock 400,598 - Borrowings from line of credit 24,200,000 70,400,400 Repayments on line of credit (4,200,000 ) (78,300,400 ) Increase in reserves from tenants 1,318,918 1,315,516 Increase in security deposits 140,525 419,070 Payments for deferred financing costs (770,761 ) (1,699,798 ) Dividends paid for common and preferred (12,320,797 ) (9,690,708 ) Net cash provided by financing activities 40,690,846   38,642,726     Net decrease in cash and cash equivalents (34,180,892 ) (1,125,375 )   Cash and cash equivalents, beginning of period 36,005,686 1,740,159         Cash and cash equivalents, end of period $ 1,824,794   $ 614,784     NON-CASH INVESTING ACTIVITIES   Increase in asset retirement obligation $ 150,523   $ 1,604,416     Additions to real estate included in accounts payable, accrued expenses, and amount due adviser $ 409,000   $ -     NON-CASH FINANCING ACTIVITIES   Fixed rate debt assumed in connection with acquisitions $ 4,506,689   $ 30,129,654     Assumption of mortgage notes payable by buyer $ -   $ 4,846,925     Notes receivable issued in exchange for common stock associated with the exercise of employee stock options $ - $ 1,826,754   Acquisition of building in satisfaction of mortgage note receivable $ -   $ 11,316,774