GLADSTONE COMMERCIAL CORP - Quarter Report: 2009 June (Form 10-Q)

 

 

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 JUNE 30, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

GLADSTONE COMMERCIAL CORPORATION

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ.

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of July 27, 2009 was 8,563,264.

 

 

GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2009

TABLE OF CONTENTS

				PAGE
PART I FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008			3
		Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008			4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			36
Item 4.		Controls and Procedures			37
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			38
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.		Defaults Upon Senior Securities			38
Item 4.		Submission of Matters to a Vote of Security Holders			38
Item 5.		Other Information			39
Item 6.		Exhibits			40
SIGNATURES					41

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		June 30, 2009				December 31, 2008
ASSETS
Real estate, at cost		$	389,668,739			$	390,562,138
Less: accumulated depreciation			29,397,701				24,757,576
Total real estate, net			360,271,038				365,804,562
Lease intangibles, net			29,890,585				31,533,843
Real estate and related assets held for sale, net			956,916				—
Mortgage note receivable			10,000,000				10,000,000
Cash and cash equivalents			2,920,611				4,503,578
Restricted cash			3,345,712				2,677,561
Funds held in escrow			2,296,773				2,150,919
Deferred rent receivable			8,156,144				7,228,811
Deferred financing costs, net			3,763,181				4,383,446
Due from adviser (Refer to Note 2)			—				108,898
Prepaid expenses and other assets			644,822				707,167
TOTAL ASSETS		$	422,245,782			$	429,098,785
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Mortgage notes payable		$	253,950,925			$	255,111,173
Short-term loan and borrowings under line of credit			31,800,000				31,500,000
Deferred rent liability			2,754,690				3,147,472
Asset retirement obligation liability			2,232,940				2,190,192
Accounts payable and accrued expenses			1,495,284				2,673,787
Other liabilities related to assets held for sale			36,348				—
Due to adviser (Refer to Note 2)			1,299,850				—
Obligation under capital lease			241,532				235,378
Rent received in advance, security deposits and funds held in escrow			4,194,849				3,745,523
Total Liabilities			298,006,418				298,603,525
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, 47,700,000 shares authorized and 8,563,264 shares issued and outstanding			8,563				8,563
Additional paid in capital			170,622,581				170,622,581
Notes receivable — employees			(2,588,965	)			(2,595,886	)
Distributions in excess of accumulated earnings			(43,804,965	)			(37,542,148	)
Total Stockholders’ Equity			124,239,364				130,495,260
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	422,245,782			$	429,098,785

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the three months ended June 30,								For the six months ended June 30,
		2009				2008				2009				2008
Operating revenues
Rental income		$	10,379,172			$	9,896,143			$	20,767,420			$	19,059,732
Interest income from mortgage note receivable			189,583				218,805				377,083				457,102
Tenant recovery revenue			82,734				84,635				165,167				170,354
Total operating revenues			10,651,489				10,199,583				21,309,670				19,687,188
Operating expenses
Depreciation and amortization			3,282,629				3,178,718				6,590,438				6,160,187
Property operating expenses			230,785				203,405				467,595				442,459
Due diligence expense			6,886				40				16,433				2,125
Base management fee (Refer to Note 2)			357,650				419,857				730,298				851,725
Incentive fee (Refer to Note 2)			812,653				801,832				1,598,942				1,506,499
Administration fee (Refer to Note 2)			257,207				274,541				481,561				486,737
Professional fees			125,965				147,065				361,161				244,727
Insurance			48,125				41,797				96,804				83,594
Directors fees			50,386				52,251				100,088				106,500
Stockholder related expenses			88,245				102,775				171,892				229,198
Asset retirement obligation expense			35,476				32,325				70,384				62,361
General and administrative			15,453				18,326				26,005				30,506
Total operating expenses before credit from Adviser			5,311,460				5,272,932				10,711,601				10,206,618
Credit to incentive fee			(129,623	)			(173,697	)			(364,704	)			(736,052	)
Total operating expenses			5,181,837				5,099,235				10,346,897				9,470,566
Other income (expense)
Interest income from temporary investments			184				6,689				17,465				16,237
Interest income — employee loans			48,862				50,852				97,748				102,996
Other income			11,320				39,697				11,320				48,993
Interest expense			(4,433,998	)			(3,996,453	)			(8,921,555	)			(7,752,501	)
Total other expense			(4,373,632	)			(3,899,215	)			(8,795,022	)			(7,584,275	)
Income from continuing operations			1,096,020				1,201,133				2,167,751				2,632,347
Discontinued operations
Income from discontinued operations			20,916				18,312				38,754				3,801
Total discontinued operations			20,916				18,312				38,754				3,801
Net income			1,116,936				1,219,445				2,206,505				2,636,148
Distributions attributable to preferred stock			(1,023,437	)			(1,023,437	)			(2,046,875	)			(2,046,875	)
Net income available to common stockholders		$	93,499			$	196,008			$	159,630			$	589,273
Earnings per weighted average common share — basic & diluted
Income from continuing operations (net of distributions attributable to preferred stock)		$	0.01			$	0.02			$	0.02			$	0.07
Discontinued operations			0.00				0.00				0.00				0.00
Net income available to common stockholders		$	0.01			$	0.02			$	0.02			$	0.07
Weighted average shares outstanding- basic & diluted			8,563,264				8,565,264				8,563,264				8,565,264

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the six months ended June 30,
		2009				2008
Cash flows from operating activities:
Net income		$	2,206,505			$	2,636,148
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including discontinued operations			6,600,853				6,172,777
Amortization of deferred financing costs			723,828				505,757
Amortization of deferred rent asset and liability			(266,035	)			(266,034	)
Accretion of obligation under capital lease			6,154				4,156
Asset retirement obligation expense, including discontinued operations			70,845				63,232
Increase in prepaid expenses and other assets			(137,854	)			(286,200	)
Increase in deferred rent receivable			(1,082,278	)			(1,153,008	)
Increase in accounts payable, accrued expenses, and amount due adviser			230,245				703,460
(Decrease) increase in rent received in advance			(210,575	)			122,341
Net cash provided by operating activities			8,141,688				8,502,629
Cash flows from investing activities:
Real estate investments			(54,319	)			(38,667,763	)
Leasing commissions paid			(298,270	)			—
Receipts from lenders for reserves held in escrow			773,187				259,538
Payments to lenders for reserves held in escrow			(919,041	)			(714,551	)
Increase in restricted cash			(668,151	)			(690,763	)
Deposits on future acquisitions			—				(1,650,000	)
Deposits refunded or applied against real estate investments			200,000				1,700,000
Net cash used in investing activities			(966,594	)			(39,763,539	)
Cash flows from financing activities:
Principal repayments on mortgage notes payable			(1,160,248	)			(773,779	)
Principal repayments on employee notes receivable			6,921				140,077
Borrowings from line of credit			39,300,000				45,150,000
Repayments on line of credit			(19,000,000	)			(5,000,000	)
Repayment of short-term loan			(20,000,000	)			—
Receipts from tenants for reserves			1,996,723				1,119,390
Payments to tenants from reserves			(1,339,968	)			(840,433	)
Increase in security deposits			11,396				411,806
Payments for deferred financing costs			(103,563	)			(56,462	)
Distributions paid for common and preferred			(8,469,322	)			(8,470,823	)
Net cash (used in) provided by financing activities			(8,758,061	)			31,679,776
Net (decrease) increase in cash and cash equivalents			(1,582,967	)			418,866
Cash and cash equivalents, beginning of period			4,503,578				1,356,408
Cash and cash equivalents, end of period		$	2,920,611			$	1,775,274
NON-CASH INVESTING ACTIVITIES
Increase in asset retirement obligation		$	—			$	245,199

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Significant Accounting Policies

Gladstone Commercial Corporation (the “Company”) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and was incorporated on February 14, 2003 under the General Corporation Law of Maryland, primarily for the purpose of engaging in the business of investing in real estate properties net leased to creditworthy entities and making mortgage loans to creditworthy entities. Subject to certain restrictions and limitations, the business of the Company is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”).

Subsidiaries

The Company conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership, (the “Operating Partnership”). As the Company currently owns all of the general and limited partnership interests of the Operating Partnership through GCLP Business Trust I and II as disclosed below, the financial position and results of operations of the Operating Partnership are consolidated with those of the Company.

Gladstone Commercial Partners, LLC, a Delaware limited liability company (“Commercial Partners”) and a subsidiary of the Company, was organized to engage in any lawful act or activity for which a limited liability company may be organized in Delaware. Commercial Partners has the power to make and perform all contracts and to engage in all activities to carry out the purposes of the Company, and all other powers available to it as a limited liability company. As the Company currently owns all of the membership interests of Commercial Partners, the financial position and results of operations of Commercial Partners are consolidated with those of the Company.

Gladstone Lending, LLC, a Delaware limited liability company (“Gladstone Lending”) and a subsidiary of the Company, was created to conduct all operations related to real estate mortgage loans of the Company. As the Operating Partnership currently owns all of the membership interests of Gladstone Lending, the financial position and results of operations of Gladstone Lending are consolidated with those of the Company.

Gladstone Commercial Advisers, Inc., a Delaware corporation (“Commercial Advisers”) and a subsidiary of the Company, is a taxable REIT subsidiary (“TRS”), which was created to collect all non-qualifying income related to the Company’s real estate portfolio. It is currently anticipated that this income will predominately consist of fees received by the Company related to the leasing of real estate. There have been no such fees earned to date. Since the Company owns 100% of the voting securities of Commercial Advisers, the financial position and results of operations of Commercial Advisers are consolidated with those of the Company.

GCLP Business Trust I and GCLP Business Trust II, subsidiaries of the Company, each are business trusts formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. The Company transferred its 99% limited partnership interest in the Operating Partnership to GCLP Business Trust I in exchange for 100 trust shares. Commercial Partners transferred its 1% general partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100 trust shares.

Interim Financial Information

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period have been included.

Investments in Real Estate

The Company records investments in real estate at cost and capitalizes improvements and replacements when they extend the useful life or improve the efficiency of the asset. The Company expenses costs of repairs and maintenance as incurred. The Company computes depreciation using the straight-line method over the estimated useful life of 39 years for buildings and improvements, five to seven years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

The Company accounts for its acquisitions of real estate in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations,” which requires the purchase price of real estate to be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from nine to eighteen months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

The Company allocates purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, building, and tenant improvements based on management’s determination of the relative fair values of these assets. Real estate depreciation expense on these tangible assets, including discontinued operations, was approximately $2.4 million and $4.7 million for the three and six months ended June 30, 2009, respectively, and approximately $2.3 million and $4.4 million for the three and six months ended June 30, 2008, respectively.

Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values, included in the accompanying balance sheet as part of deferred rent receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to above-market lease values was approximately $63,000 and $127,000 for both the three and six months ended June 30, 2009 and 2008, respectively. The capitalized below-market lease values, included in the accompanying balance sheet as deferred rent liability, are amortized as an increase to rental income

over the remaining non-cancelable terms of the respective leases. Total amortization related to below-market lease values was approximately $196,000 and $393,000 for both the three and six months ended June 30, 2009 and 2008, respectively.

The total amount of the remaining intangible assets acquired, which consist of in-place lease values, unamortized lease origination costs, and customer relationship intangible values, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which generally range from 10 to 15 years. The value of customer relationship intangibles, which is the benefit to the Company resulting from the likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining term and any anticipated renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the above-market and below-market lease values, in-place lease values, unamortized lease origination costs and customer relationship intangibles will be immediately charged to the related income or expense. Total amortization expense related to these intangible assets, including discontinued operations, was approximately $0.9 million and $1.9 million for the three and six months ended June 30, 2009, respectively, and approximately $0.9 million and $1.8 million for the three and six months ended June 30, 2008, respectively.

Impairment

Investments in Real Estate

The Company accounts for the impairment of real estate in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that the Company periodically review the carrying value of each property to determine if circumstances indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. There have been no impairments recognized on real estate assets in the Company’s history.

In light of current economic conditions, the Company performed an impairment analysis of its entire portfolio at June 30, 2009. In performing the analysis, the Company considered such factors as the tenants’ payment history and financial condition, the likelihood of lease renewal, business conditions in the industry in which the tenants operate and whether the carrying value of the real estate has decreased. The Company concluded that none of its properties were impaired, and will continue to monitor its portfolio for any indicators that may change this conclusion.

Provision for Loan Losses

The Company’s accounting policies require that it reflect in its financial statements an allowance for estimated credit losses with respect to mortgage loans it has made based upon its evaluation of known and inherent risks associated with its private lending assets. Management reflects provisions for loan losses based upon its assessment of general market conditions, its internal risk management policies and credit risk rating system, industry loss experience, its assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Actual losses, if any, could ultimately differ from these estimates. There have been no provisions for loan losses in the Company’s history.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents; except that any such investments purchased with funds held in escrow or similar accounts are classified as restricted cash. Items classified as cash equivalents include money-market deposit accounts. All of the Company’s cash and cash equivalents at June 30, 2009 were held in the custody of one financial institution, and the Company’s balance at times may exceed federally insurable limits.

Restricted Cash

Restricted cash consists of security deposits and funds held in escrow for certain tenants. These funds will be released to the tenants upon completion of agreed upon tasks as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been received by the Company.

Funds Held in Escrow

Funds held in escrow consist of funds held by certain of the Company’s lenders for properties held as collateral by these lenders. These funds will be released to the Company upon completion of agreed upon tasks as specified in the mortgage agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the lenders.

Deferred Financing Costs

Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administrative fees. The costs are deferred and amortized using the straight-line method, which approximates the effective interest method over the term of the financing secured. The Company made payments of approximately $50,000 and $104,000 for deferred financing costs during the three and six months ended June 30, 2009, respectively, and $21,000 and $56,000 for the three and six months ended June 30, 2008, respectively. Total amortization expense related to deferred financing costs was approximately $724,000 and $349,000 for the three and six months ended June 30, 2009, respectively, and $256,000 and $506,000 for the three and six months ended June 30, 2008, respectively.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid assets and deposits on real estate.

Obligation Under Capital Lease

In conjunction with the Company’s acquisition of a building in Fridley, Minnesota in February 2008, the Company acquired a ground lease on the parking lot of the building, which had a purchase obligation to acquire the land under the ground lease at the end of the term in April 2014 for $300,000. In accordance with SFAS No. 13 “Accounting for Leases,” the Company accounted for the ground lease as a capital lease and recorded the corresponding present value of the obligation under the capital lease. The Company recorded total interest expense related to the accretion of the capital lease obligation of $3,077 and $6,154 for the three and six months ended June 30, 2009, respectively, and $4,156 for both the three and six months ended June 30, 2008.

Revenue Recognition

Rental revenue includes rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. Most of the Company’s leases contain rental increases at specified intervals. The Company recognizes such revenues on a straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred rent receivable in the accompanying balance sheet includes the cumulative difference between rental revenue as recorded on a straight line basis and rents received from the tenants in accordance with the lease terms, along with the capitalized above-market lease values of certain acquired properties. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews deferred rent receivable, as it relates to straight line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, the Company records an allowance for uncollectible accounts or records a direct write-off of the specific rent receivable. No such reserves have been recorded as of June 30, 2009.

Management considers its loans and other lending investments to be held-for-investment. The Company reflects loans classified as long-term investments at amortized cost, less allowance for loan losses, acquisition premiums or discounts, and deferred loan fees. On occasion, the Company may acquire loans at small premiums or discounts based on the credit characteristics of such loans. These premiums or discounts are recognized as yield adjustments over the lives of the related loans. Loan origination fees, as well as direct loan origination costs, are also deferred and recognized over the lives of the related loans as yield adjustments. If loans with premiums, discounts, or loan origination fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis. Prepayment penalties or yield maintenance payments from borrowers are recognized as additional income when received.

Income Taxes

The Company has operated and intends to continue to operate in a manner that will allow it to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and accordingly will not be subject to federal income taxes on amounts distributed to stockholders (except income from foreclosure property), provided it distributes at least 90% of its REIT taxable income to its stockholders and meets certain other conditions. To the extent that the Company satisfies the distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to federal corporate income tax on its undistributed income.

Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though Commercial Advisers has had no activity to date, the Company would account for any future income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Segment Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” provides standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker or decision making group in determining how to allocate resources and in assessing performance. Company management is the chief decision making group. As discussed in Note 9, the Company’s operations are derived from two operating segments, one segment purchases real estate (land, buildings

and other improvements), which is simultaneously leased to existing users, and the other segment originates mortgage loans and collects principal and interest payments.

Asset Retirement Obligations

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term “Conditional Asset Retirement Obligation” refers to a legal obligation (pursuant to existing laws or by contract) to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company has accrued a liability and corresponding increase to the cost of the related properties for disposal related to all properties constructed prior to 1985 that have, or may have, asbestos present in the building. The Company accrued a liability during the six months ended June 30, 2008 of $245,199 related to properties acquired during the period, which reflected the present value of the future obligation. There was no liability accrued during the six months ended June 30, 2009. The Company also recorded expense, including discontinued operations, of $35,476 and $70,845 during the three and six months ended June 30, 2009, respectively, and $32,764 and $63,232 for the three and six months ended June 30, 2008, respectively related to the cumulative accretion of the obligation.

Real Estate Held for Sale and Discontinued Operations

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires that the results of operations of any properties which have been sold, or are held for sale, be presented as discontinued operations in the Company’s consolidated financial statements in both current and prior periods presented. Income items related to held for sale properties are listed separately on the Company’s consolidated income statement. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value, less the cost to sell, and are listed separately on the Company’s consolidated balance sheet. Once properties are listed as held for sale, no further depreciation is recorded.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS 141(R)”), which replaced SFAS No. 141, “Business Combinations.” SFAS 141(R) significantly changed the accounting for acquisitions involving business combinations, as it requires that the assets and liabilities of all business combinations be recorded at fair value, with limited exceptions. SFAS 141(R) also requires that all expenses related to the acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition as had been the previous accounting under SFAS 141. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. The Company adopted this pronouncement effective for the fiscal year beginning January 1, 2009, and the adoption could have a significant impact on its results of operations because of the requirement to expense costs associated with acquisitions rather than capitalize the costs as has been done in the past. There was no significant impact from the adoption of this pronouncement during the six months ended June 30, 2009, because there was limited activity during the period related to potential acquisitions.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption had no impact on the Company’s results of operations.

In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3”). FSP No. 157-3 clarifies the application of

SFAS 157 in a market that is not active. More specifically, FSP No. 157-3 states that significant judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of fair value in an orderly transaction. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 provides guidance on the level of reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer. The guidance in FSP No. 157-3 is effective upon issuance for all financial statements that have not been issued and any changes in valuation techniques as a result of applying FSP No. 157-3 are accounted for as a change in accounting estimate. The Company adopted this pronouncement during the quarter ended December 31, 2008, and the adoption had no material impact on the Company’s results of operations.

In April 2009, the FASB issued FSP No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”). FSP No. 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability. FSP No. 157-4 also provides guidance on identifying circumstances that indicate when a transaction is not orderly. FSP No. 157-4 emphasizes that the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The guidance in FSP No. 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this pronouncement during the quarter ended March 31, 2009, and the adoption had no material impact on the Company’s results of operations.

In April 2009, the FASB issued FSP No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1”). FSP No. 107-1 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, whether recognized or not recognized in the statement of financial position. The guidance in FSP No. 107-1 is effective for interim periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this pronouncement during the quarter ended March 31, 2009, and the adoption had no material impact on the Company’s results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 requires disclosure of the date through which an entity has evaluated subsequent events and defines the types of subsequent events that should be recognized or nonrecognized. SFAS 165 is effective for interim or annual periods ending after June 15, 2009. The Company adopted this pronouncement during the quarter ended June 30, 2009, and the adoption had no material impact on its results of operations.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”). SFAS 166 removes the concept of a qualifying special-purpose entity (QSPE) from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”) and removes the exception from applying FIN 46R. This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This statement is effective for fiscal years beginning after November 15, 2009. SFAS 166 is effective for the Company’s year beginning January 1, 2010. The Company is currently evaluating the impact of adopting this standard on the Company’s results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends the consolidation guidance for variable-interest entities (“VIE”) and requires an enterprise to qualitatively assess the determination of the primary beneficiary (or “consolidator”) of a VIE based on whether the entity has the power to direct matters that most significantly impact the activities of the VIE, and had the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. SFAS 167 is effective for the Company’s year beginning January 1,

2010. The Company is currently evaluating the impact of adopting this standard on the Company’s results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the impact of adopting this standard on the Company’s results of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Reclassifications

Some amounts from prior years’ financial statements have been reclassified to conform to the current year presentation. The Company’s property located in Norfolk, Virginia was classified as held for sale during the quarter ended June 30, 2009 and, as a result, the results of operations related to this property for 2008 were reclassified from continuing operations to discontinued operations. Some items within the cash flow statement were reclassified between the financing and investing activities sections during 2008. These items related to payments received from tenants for reserves and payments made to lenders for reserves. These reclassifications had no effect on previously reported net income or stockholders’ equity.

2. Related Party Transactions

The Company is externally managed pursuant to a contractual investment advisory arrangement with its Adviser, under which its Adviser employs all of the Company’s personnel and pays its payroll, benefits, and general expenses directly. The Company has an advisory agreement with its Adviser (the “Advisory Agreement”) and an administration agreement (the “Administration Agreement”) with a wholly-owned subsidiary of the Adviser, Gladstone Administration, LLC (the “Administrator”). The management services and fees under the Advisory and Administration Agreements are described below.

Advisory Agreement

The Advisory Agreement provides for an annual base management fee equal to 2% of the Company’s total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations (“FFO”). For the three and six months ended June 30, 2009, the Company recorded a base management fee of approximately $358,000 and $730,000, respectively, and for the three and six months ended June 30, 2008, the Company recorded a base management fee of approximately $420,000 and $852,000, respectively. For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee rewards the Adviser if the Company’s quarterly FFO, before giving effect to any incentive fee (“pre-incentive fee FFO”), exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. The Adviser receives 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of the Company’s pre-incentive fee FFO. The Adviser also receives an incentive fee of 20% of the amount of the Company’s pre-incentive fee FFO that exceeds 2.1875%.

For the three and six months ended June 30, 2009, the Company recorded an incentive fee of approximately $813,000 and $1,599,000, respectively, offset by a credit related to an unconditional and irrevocable

voluntary waiver issued by the Adviser of approximately $130,000 and $365,000, respectively, for a net incentive fee for the three and six months ended June 30, 2009 of approximately $683,000 and $1,234,000, respectively. For the three and six months ended June 30, 2008, the Company recorded an incentive fee of approximately $802,000 and $1,506,000, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $174,000 and $736,000, respectively, for a net incentive fee for the three and six months ended June 30, 2008 of approximately $628,000 and $770,000, respectively. The board of directors of the Company accepted the Adviser’s offer to waive a portion of the incentive fee for both the three and six months ended June 30, 2009 and 2008, respectively, in order to support the current level of distributions to the Company’s stockholders.

Administration Agreement

Under the Administration Agreement, the Company pays separately for its allocable portion of the Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of the Administrator, and its allocable portion of the salaries and benefits expenses of its chief financial officer, chief compliance officer, treasurer and their respective staffs. The Company’s allocable portion of expenses is derived by multiplying the Administrator’s total allocable expenses by the percentage of the Company’s total assets at the beginning of each quarter in comparison to the total assets of all companies managed by the Adviser under similar agreements. For the three and six months ended June 30, 2009, the Company recorded an administration fee of approximately $257,000 and $482,000, respectively, and for the three and six months ended June 30, 2008, the Company recorded an administration fee of approximately $275,000 and $487,000, respectively.

3. Earnings per Common Share

The following tables set forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2009 and 2008:

		For the three months ended June 30,								For the six months ended June 30,
		2009				2008				2009				2008
Net income available to common stockholders		$	93,499			$	196,008			$	159,630			$	589,273
Denominator for basic & diluted weighted average shares			8,563,264				8,565,264				8,563,264				8,565,264
Basic & diluted earnings per common share		$	0.01			$	0.02			$	0.02			$	0.07

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of the Company’s investments in real estate, including capitalized leases, as of June 30, 2009 and December 31, 2008:

		June 30, 2009 (2)				December 31, 2008
Real estate:
Land		$	55,036,042	(1)		$	55,226,042	(1)
Building			324,811,991				325,515,390
Tenant improvements			9,820,706				9,820,706
Accumulated depreciation			(29,397,701	)			(24,757,576	)
Real estate, net		$	360,271,038			$	365,804,562

On May 5, 2009, the Company extended the lease with one of its tenants on its property located in Akron, Ohio for a period of six months. The lease was originally set to expire in August 2009, and will now expire in February 2010. Except for the extension of the lease term, all other existing provisions of the lease, including the current rental rate, will remain the same during the extension period.

On May 19, 2009, the Company extended the lease on its property located in Eatontown, New Jersey for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 5 years each. The lease was originally set to expire in August 2011, and will now expire in April 2024. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $540,000.

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and future operating lease payments for discontinued operations, in effect at June 30, 2009, were as follows:

		Tenant
Year		Lease Payments
Six months ending December 31, 2009		$	19,428,658
2010			38,819,446
2011			38,525,805
2012			38,614,845
2013			33,261,384
2014			29,025,909
Thereafter		$	160,507,642

In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, the Company would be required to pay property taxes on the respective properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the tenant fails to pay them. The total annualized property taxes for all properties held by the Company at June 30, 2009 was approximately $5.9 million, and the total annual ground lease payments on the Tulsa, Oklahoma property was approximately $134,000.

Intangible Assets

The following table summarizes the net value of other intangible assets and the accumulated amortization for each intangible asset class:

		June 30, 2009								December 31, 2008
		Lease				Accumulated								Accumulated
		Intangibles				Amortization				Lease Intangibles				Amortization
In-place leases		$	15,935,445	(1)		$	(5,906,158	)		$	15,981,245			$	(5,079,343	)
Leasing costs			9,909,528				(3,405,095	)			9,662,731				(2,987,360	)
Customer relationships			17,136,501				(3,779,636	)			17,136,501				(3,179,931	)
		$	42,981,474			$	(13,090,889	)		$	42,780,477			$	(11,246,634	)

The estimated aggregate amortization expense for the remainder of the current and each of the five succeeding fiscal years is as follows:

		Estimated
		Amortization
Year		Expense
Six months ending December 31, 2009		$	2,646,295
2010			5,190,966
2011			4,774,396
2012			4,164,999
2013			2,280,699
2014			2,027,307
Thereafter		$	8,805,923

5. Real Estate Held for Sale and Discontinued Operations

As of June 30, 2009, the Company classified its property located in Norfolk, Virginia as held for sale under the provisions of SFAS 144, which requires that the results of operations of any properties which have been sold, or are held for sale, be presented as discontinued operations in the Company’s consolidated financial statements in both current and prior periods presented. The Company received an unsolicited offer from a buyer for this property. In addition, on July 21, 2006, the Company sold its two Canadian properties and the Company continues to incur legal fees related to the dissolution of the remaining Canadian entities. The table below summarizes the components of income from discontinued operations:

		For the three months ended June 30,								For the six months ended June 30,
		2009				2008				2009				2008
Operating revenue		$	25,875			$	25,875			$	51,751			$	51,751
Operating expense			(4,959	)			(7,563	)			(12,997	)			(47,950	)
Income from discontinued operations		$	20,916			$	18,312			$	38,754			$	3,801

The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying consolidated balance sheet:

		June 30, 2009
Real estate, net		$	858,024
Lease intangibles, net			70,495
Prepaid expenses			199
Deferred rent receivable			28,198
Real estate and related assets held for sale, net		$	956,916
Rent received in advance			8,250
Asset retirement obligation liability			28,098
Other liabilities related to assets held for sale		$	36,348

6. Mortgage Note Receivable

On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million, collateralized by an office building in McLean, Virginia, where the Company’s Adviser and Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the greater of 7.5% per year or the one month London Interbank Offered Rate (“LIBOR”) rate plus 6.0% per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of the term, with payments of principal commencing after the initial period. The balance of the principal and all interest remaining is due at the end of the 12 year term. At June 30, 2009, the interest rate was 7.5%.

The fair market value of the mortgage note receivable as of June 30, 2009 was approximately $9.5 million, as compared to the carrying value stated above of approximately $10.0 million. The fair market value is calculated based on a discounted cash flow analysis, using an interest rate based on management’s estimate of the interest rate on a mortgage note receivable with comparable terms.

7. Mortgage Notes Payable, Line of Credit and Short-Term Loan

The Company’s mortgage notes payable, line of credit and short-term loan as of June 30, 2009 and December 31, 2008 are summarized below:

										Stated
										Interest
		Date of				Principal				Rate at				Principal Balance Outstanding
		Issuance/				Maturity				June 30,				June 30,				December 31,
		Assumption				Date				2009(1)				2009				2008
Fixed-Rate Mortgage Notes Payable:
			03/16/05				04/01/30				6.33	%		$	2,917,085			$	2,948,753
			08/25/05				09/01/15				5.33	%			21,247,266				21,399,644
			09/12/05				09/01/15				5.21	%			12,475,382				12,560,673
			12/21/05				12/08/15				5.71	%			19,116,806				19,241,117
			02/21/06				12/01/13				5.91	%			9,266,886				9,344,908
			02/21/06				06/30/14				5.20	%			19,295,456				19,472,740
			03/29/06				04/01/16				5.92	%			17,000,000				17,000,000
			04/27/06				05/05/16				6.58	%			14,146,730				14,281,616
			11/22/06				12/01/16				5.76	%			14,223,075				14,309,000
			12/22/06				01/01/17				5.79	%			21,735,219				21,846,000
			02/08/07				03/01/17				6.00	%			13,775,000				13,775,000
			06/05/07				06/08/17				6.11	%			14,240,000				14,240,000
			09/06/07				12/11/15				5.81	%			4,393,893				4,426,393
			10/15/07				11/08/17				6.63	%			15,742,955				15,828,612
			08/29/08				06/01/16				6.80	%			6,360,172				6,421,717
			09/15/08				10/01/10	(2)			6.85	%			48,015,000				48,015,000
Total Fixed-Rate Mortgage Notes Payable:															253,950,925				255,111,173
Variable-Rate Line of Credit:			12/29/06				12/29/09	(3)		LIBOR + 1.9%					31,800,000				11,500,000
Variable-Rate Short-Term Loan:			12/21/07				06/20/09	(4)		LIBOR + 2.75%					—				20,000,000
Total Mortgage Notes Payable, Line of Credit and Short-Term Loan														$	285,750,925			$	286,611,173

Mortgage Notes Payable

As of June 30, 2009, the Company had 16 fixed-rate mortgage notes payable, collateralized by a total of 55 properties. The obligors under each of these notes are wholly-owned separate borrowing entities, which own the real estate collateral. The Company is not a co-borrower but has limited recourse liabilities that could result from: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud

or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, and physical waste or damage to the property, resulting from a borrower’s gross negligence or willful misconduct. The Company also indemnifies lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. The weighted-average interest rate on the mortgage notes payable as of June 30, 2009 was approximately 6.0%

The fair market value of all fixed-rate mortgage notes payable outstanding as of June 30, 2009 was approximately $237.4 million, as compared to the carrying value stated above of approximately $254.0 million. The fair market value is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimate of interest rates on long-term debt with comparable terms.

Scheduled principal payments of mortgage notes payable are as follows:

		Scheduled
		principal
Year		payments
Six months ending December 31, 2009		$	1,293,727
2010			50,533,486
2011			2,799,601
2012			3,087,824
2013			11,828,375
2014			20,367,143
Thereafter			164,040,769
		$	253,950,925

Line of Credit

The Company has a $50.0 million senior revolving credit agreement (the “Credit Agreement”) with a syndicate of banks led by KeyBank National Association (“KeyBank”), which matures on December 29, 2009. On June 30, 2009, the Company amended its Credit Agreement to reduce its commitment from $95.0 million to $50.0 million, in exchange for modifications to certain terms under the Credit Agreement. The definition of FFO was modified to exclude from the calculation of FFO acquisition related costs that are required to be expensed under SFAS 141(R). In addition, the aggregate amount the Company can issue under the Credit Agreement as letters of credit was reduced from $20.0 million to $10.5 million.

As long as the Company is in compliance with its covenants under the line of credit, the Company has the option to extend the line of credit for an additional year. The Company must notify KeyBank of its intention to exercise the renewal option 45 days prior to the maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of notification. The interest rate charged on the advances under the facility is based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. The Company’s ability to access this funding source is subject to the Company continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires the Company to limit its distributions to stockholders to 95% of its FFO less those acquisition related costs that are required to be expensed under SFAS 141(R). In addition, the maximum amount the Company may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. KeyBank has the option to obtain updated appraisals for the properties pledged to the line of credit as borrowing base collateral if they believe there has been a material adverse change to the value of any of the pledged properties. If the aggregate value of the updated appraisals is lower than the current aggregate value of appraisals, it would lower the amount of the Company’s borrowing base and reduce the amount the Company could borrow under its line of credit with that borrowing base. The Company does not believe that if updated appraisals were obtained on its pledged properties that any

change in the value of the properties would be significant enough to trigger a scenario whereby the Company would have to repay amounts currently outstanding under its line of credit.

If and when long-term mortgages are arranged for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the removed property. Conversely, as the Company purchases new properties meeting the eligibility standards, the Company may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit may also be reduced by letters of credit used in the ordinary course of business. The Company anticipates that certain of its letters of credit will be returned during 2009, thus further increasing its availability. The Company may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of June 30, 2009, there was approximately $31.8 million outstanding under the line of credit at an interest rate of approximately 2.2%, and approximately $2.8 million outstanding pursuant to letters of credit at a weighted average interest rate of approximately 2.0%. At June 30, 2009, the remaining borrowing capacity available under the line of credit was approximately $15.4 million. The Company was in compliance with all covenants under the line of credit as of June 30, 2009. The amount outstanding on the line of credit as of June 30, 2009 approximates fair market value, because the debt is short-term and variable rate.

Short-Term Loan

On December 21, 2007, the Company entered into a $20.0 million unsecured short-term loan with KeyBank, which matured on December 21, 2008. The Company exercised its option to extend the term for an additional six months, and on March 31, 2009, the Company repaid in full the unsecured short-term loan, using proceeds from borrowings under its line of credit. The interest rate charged on the loan was based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusted periodically.

8. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity for the six months ended June 30, 2009:

														Notes				Distributions in
										Capital in				Receivable				Excess of				Total
		Common				Preferred				Excess of				From Sale of				Accumulated				Stockholders’
		Stock				Stock				Par Value				Common Stock				Earnings				Equity
Balance at December 31, 2008		$	8,563			$	2,150			$	170,622,581			$	(2,595,886	)		$	(37,542,148	)		$	130,495,260
Repayment of principal on notes receivable - employees			—				—				—				6,921				—				6,921
Distributions declared to common and preferred stockholders			—				—				—				—				(8,469,322	)			(8,469,322	)
Net income			—				—				—				—				2,206,505				2,206,505
Balance at June 30, 2009		$	8,563			$	2,150			$	170,622,581			$	(2,588,965	)		$	(43,804,965	)		$	124,239,364

Distributions paid per common share for both the three and six months ended June 30, 2009 and 2008 were $0.375 and $0.75 per share, respectively. Distributions paid per share of Series A Preferred Stock for both the three and six months ended June 30, 2009 and 2008 were approximately $0.48 and $0.97 per share, respectively. Distributions paid per share of Series B Preferred Stock for both the three and six months ended June 30, 2009 and 2008 were approximately $0.47 and $0.94 per share, respectively.

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options:

														Outstanding
		Number of				Strike Price				Amount of				Balance of
		Options				of Options				Promissory Note				Employee Loans at				Maturity Date				Interest Rate
Date Issued		Exercised				Exercised				Issued to Employees				6/30/09				of Note				on Note
Sep 2004			25,000			$	15.00			$	375,000			$	360,501			Sep 2013					5.00	%
Apr 2006			12,422				16.10				199,994				199,994			Apr 2015					7.77	%
May 2006			50,000				16.85				842,500				842,500			May 2016					7.87	%
May 2006			15,000				16.10				241,500				241,500			May 2016					7.87	%
May 2006			2,500				16.01				40,000				36,870			May 2016					7.87	%
May 2006			2,000				16.10				32,200				32,200			May 2016					7.87	%
May 2006			2,000				16.10				32,200				32,200			May 2016					7.87	%
May 2006			2,000				15.00				30,000				30,000			May 2016					7.87	%
Oct 2006			12,000				16.10				193,200				193,200			Oct 2015					8.17	%
Nov 2006			25,000				15.00				375,000				375,000			Nov 2015					8.15	%
Dec 2006			25,000				15.00				375,000				245,000			Feb 2010					8.12	%
			172,922							$	2,736,594			$	2,588,965

In accordance with Emerging Issues Task Force No. 85-1, “Classifying Notes Received for Capital Stock,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, these notes were recorded as loans to employees and are included in the equity section of the accompanying consolidated balance sheets.

9. Segment Information

As of June 30, 2009, the Company’s operations were derived from two operating segments. One segment purchases real estate (land, buildings and other improvements), which is simultaneously leased to existing users and the other segment extends mortgage loans and collects principal and interest payments. The amounts included under the “other” column in the tables below include other income, which consists of interest income from temporary investments and employee loans and any other miscellaneous income earned, and operating and other expenses that were not specifically derived from either operating segment.

The following table summarizes the Company’s consolidated operating results and total assets by segment as of and for the three and six months ended June 30, 2009 and 2008:

		As of and for the three months ended June 30, 2009																As of and for the six months ended June 30, 2009
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	10,461,906			$	189,583			$	—			$	10,651,489			$	20,932,587			$	377,083			$	—			$	21,309,670
Operating expenses			(3,555,776	)			—				(1,626,061	)(1)			(5,181,837	)			(7,144,850	)			—				(3,202,047	)(1)			(10,346,897	)
Other expense			(4,114,021	)			—				(259,611	)(2)			(4,373,632	)			(8,196,656	)			—				(598,366	)(2)			(8,795,022	)
Discontinued operations			20,916				—				—				20,916				38,754				—				—				38,754
Net income		$	2,813,025			$	189,583			$	(1,885,672	)		$	1,116,936			$	5,629,835			$	377,083			$	(3,800,413	)		$	2,206,505
Total Assets		$	401,711,306			$	10,062,500			$	10,471,976			$	422,245,782			$	401,711,306			$	10,062,500			$	10,471,976			$	422,245,782

		As of and for the three months ended June 30, 2008																As of and for the six months ended June 30, 2008
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	9,980,778			$	218,805			$	—			$	10,199,583			$	19,230,086			$	457,102			$	—			$	19,687,188
Operating expenses			(3,414,488	)			—				(1,684,747	)			(5,099,235	)			(6,667,132	)			—				(2,803,434	)			(9,470,566	)
Other expense			(3,084,905	)			—				(814,310	)			(3,899,215	)			(6,167,756	)			—				(1,416,519	)(1)			(7,584,275	)
Discontinued operations			18,312				—				—				18,312				3,801				—				—				3,801
Net income		$	3,499,697			$	218,805			$	(2,499,057	)		$	1,219,445			$	6,398,999			$	457,102			$	(4,219,953	)		$	2,636,148
Total Assets		$	395,292,545			$	10,070,479			$	8,882,725			$	414,245,749			$	395,292,545			$	10,070,479			$	8,882,725			$	414,245,749

10. Subsequent Events

The Company evaluated all events that have occurred subsequent to June 30, 2009 through July 30, 2009, the date of this Form 10-Q.

On July 8, 2009, the Company’s Board of Directors declared a cash distribution of $0.125 per common share, $0.1614583 per share of the Series A Preferred Stock, and $0.15625 per share of the Series B Preferred Stock for each of the months of July, August and September of 2009. Monthly distributions will be payable on July 31, 2009, August 31, 2009 and September 30, 2009, to those stockholders of record as of the close of business on July 23, 2009, August 21, 2009 and September 22, 2009, respectively.

On July 8, 2009, the Company’s Board of Directors approved the renewal of the Amended Advisory Agreement with its Adviser, and the Administration Agreement with its Administrator, through August 31, 2010.

On July 17, 2009, the Company sold its property located in Norfolk, Virginia for $1.15 million, for a gain on the sale of approximately $160,000. The property was removed from the borrowing base assets pledged against the line of credit, however, the removal from the borrowing base had no impact on the availability under the line of credit. After the removal, there was still in excess of $50.0 million of availability from the remaining assets pledged against the line of credit, the maximum the Company is able to draw. The proceeds from the sale were used to partially pay down the Company’s line of credit.

On July 20, 2009, the borrower on the Company’s $10.0 million mortgage loan, which is collateralized by an office building in McLean, Virginia, signed a purchase agreement with a third party to sell the building. The sale is expected to close during the fourth quarter of 2009. The Company signed a letter with its borrower agreeing that if the sale is completed, the Company will accept full repayment of the mortgage loan at the time of sale along with any prepayment penalties associated with the early exit. The mortgage loan was originally set to mature in May 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial and commercial real property and selectively making long-term industrial and commercial mortgage loans. Most of the portfolio of real estate we currently own is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which are corporations that do not have publicly rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having triple net leases with terms of approximately 10 to 15 years and built in rental increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We are actively communicating with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. At June 30, 2009, we owned 65 properties totaling approximately 6.3 million square feet, and had one mortgage loan outstanding. The total gross investment in these acquisitions, including the $10.0 million mortgage loan investment, was approximately $443.7 million at June 30, 2009.

Business Environment

The United States is in a recession, and, as a result, conditions within the global credit markets and the U.S. real estate credit markets in particular continue to experience historic levels of dislocation and stress. The economic downturn and the disruptions in the capital markets have increased the cost of, and decreased our ability to obtain, new debt and equity capital at reasonable prices. The longer these conditions persist, the greater the probability that these factors could have an adverse effect on our operations and financial results. The current economic conditions also make it difficult to price and finance new investment opportunities on attractive terms. While we are starting to see some signs of stabilization in the markets, we do not know if adverse conditions will again intensify or the full extent to which the disruptions will affect us. Continued weak economic conditions could also adversely impact the financial condition of one or more of our tenants and therefore, could make a tenant bankruptcy and payment default on the related lease or loan more likely. Currently, all of our properties are fully leased and all of our tenants and our borrower are current and paying in accordance with their leases and loan, respectively. In addition, no balloon payments are due under our mortgage notes payable until 2010, and the only mortgage note that matures in 2010 has three annual extension options through 2013.

Our ability to make new investments is highly dependent upon external financing. Our principal external financing sources generally include the issuance of equity securities, the issuance of long-term mortgages secured by properties and borrowings under our line of credit. Recent market conditions have affected the trading price of our common stock, however, the price has improved over the past few months and closed at $13.92 on July 24, 2009,which represents a 71% increase to our average closing stock price of $8.16 during the first quarter of 2009. The market for long-term mortgages continues to be frozen as the collateralized mortgage-backed securities, or CMBS, market has virtually disappeared. With the closure of the CMBS market, many banks are not lending on commercial real estate as they are no longer able to sell these loans to the CMBS market and are not willing or able to keep these loans on their balance sheets. We are now seeing banks only willing to issue medium-term mortgages, between two to five years, at substantially less favorable terms. As a result, we intend to focus on using medium-term mortgages to finance our real estate until the market for long-term mortgages returns. Our ability to increase the availability under our line of credit is dependent upon us pledging additional properties as collateral. Traditionally, we have pledged new properties to the line of credit as we arrange for long-term mortgages for these pledged properties. Currently, only nine of our properties do not have long-term mortgages, and eight of those are pledged as collateral under our line of credit. Our line of credit matures in December 2009, however, we intend to exercise our option to extend the term for an additional year, through December 2010, unless we are able to secure more favorable financing.

If we are able to raise debt or equity capital in the near term, in addition to continuing to invest in industrial and commercial real property, we will also seek to expand our investments to other categories such as retail and medical properties. In addition, we also intend to seek to expand our mortgage lending activity to include purchasing mortgage loans from banks and CMBS pools.

However, until we are able to raise debt or equity capital, our near-term strategy has become somewhat dependent upon building the value of our existing portfolio of properties by renegotiating existing leases and making capital improvements to our properties. Capital improvements will be limited to the extent we have available capital. We will continue to review potential acquisitions and we intend to continue our strategy of making conservative investments in properties that have existing financing that we believe will weather the current recession and that are likely to produce attractive long-term returns for our stockholders.

Recent Events

Financing Activities:

During the six months ended June 30, 2009, we had net borrowings under our line of credit of approximately $20.3 million, with $31.8 million outstanding at June 30, 2009. The proceeds from borrowings under the line of credit were used to pay off the $20.0 million unsecured short-term loan with KeyBank.

Leasing Activities:

On May 5, 2009, we extended the lease with one of our tenants in our property located in Akron, Ohio for a period of six months. The lease was originally set to expire in August 2009, and will now expire in February 2010. Except for the extension of the lease term, all other existing provisions of the lease, including the current rental rate, will remain the same during the extension period.

On May 19, 2009, we extended the lease on our property located in Eatontown, New Jersey for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 5 years each. The lease was originally set to expire in August 2011, and will now expire in April 2024. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $540,000.

Dispositions:

On July 17, 2009, we sold our property located in Norfolk, Virginia for $1.15 million, for a gain on the sale of approximately $160,000. The proceeds from the sale were used to pay down our line of credit.

Industry Classifications

Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid dependence on any one particular tenant, geographic location or tenant industry. 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 region. Our largest tenant at June 30, 2009 comprised approximately 7.3% of our total rental income, and our largest concentration of properties was located in Ohio, which accounted for approximately 17.7% of our total rental income. The table below reflects the breakdown of our total rental income by tenant industry classification for the six months ended June 30, 2009 and 2008, respectively:

		June 30, 2009								June 30, 2008
						Percentage of								Percentage of
Industry Classification		Rental Income				Rental Income				Rental Income				Rental Income
Automobile		$	583,327				2.8	%		$	583,327				3.1	%
Beverage, Food & Tobacco			1,094,371				5.3	%			976,441				5.1	%
Buildings and Real Estate			1,012,834				4.9	%			1,000,682				5.3	%
Chemicals, Plastics & Rubber			1,598,724				7.7	%			1,000,838				5.3	%
Containers, Packaging & Glass			1,165,007				5.6	%			1,123,901				5.9	%
Diversified/Conglomerate Manufacturing			1,832,344				8.8	%			1,453,558				7.6	%
Diversified/Conglomerate Services			154,052				0.7	%			154,052				0.8	%
Electronics			3,082,895				14.8	%			3,082,895				16.2	%
Healthcare, Education & Childcare			3,072,707				14.8	%			2,646,309				13.9	%
Home & Office Furnishings			264,872				1.3	%			264,872				1.4	%
Insurance			361,433				1.7	%			361,433				1.9	%
Machinery			1,194,301				5.8	%			1,047,449				5.5	%
Oil & Gas			572,645				2.8	%			576,221				3.0	%
Personal & Non-Durable Consumer Products			677,361				3.3	%			677,700				3.6	%
Personal, Food & Miscellaneous Services			287,503				1.4	%			287,503				1.5	%
Printing & Publishing			1,089,693				5.2	%			1,099,366				5.8	%
Telecommunications			2,723,351				13.1	%			2,723,185				14.1	%
		$	20,767,420				100.0	%		$	19,059,732				100.0	%

Our Adviser and Administrator

Our Adviser is led by a management team which has extensive experience in our lines of business. Our Adviser is controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone is also the chairman and chief executive officer of our Adviser. Terry Lee Brubaker, our vice chairman, chief operating officer, secretary and director, is a member of the board of directors of our Adviser and its vice chairman and chief operating officer. George Stelljes III, our president, chief investment officer and director, is a member of the board of directors of our Adviser and its president and chief investment officer. Our Adviser also has a wholly-owned subsidiary, Gladstone Administration, LLC, or our Administrator, which employs our chief financial officer, chief compliance officer, treasurer and their respective staffs.

Our Adviser and Administrator also provide investment advisory and administrative services to our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly traded business development companies, as well as Gladstone Land Corporation, a private agricultural real estate company. With the exception of our chief financial officer, all of our executive officers serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In the future, our Adviser may provide investment advisory and administrative services to other funds, both public and private, of which it is the sponsor.

Advisory and Administration Agreements

We have been externally managed pursuant to a contractual investment advisory arrangement with our Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll, benefits, and general expenses directly. On January 1, 2007, we entered into an advisory agreement with our Adviser, which we refer to as the Advisory Agreement, and an administration agreement, which we refer to as the Administration Agreement, with our Administrator.

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 on short-term debt and mortgages, tax preparation, 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 may include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers). During the three and six months ended June 30, 2009 and 2008, none of these expenses were incurred by us directly. The actual amount of such fees that we incur in the future will depend largely upon the aggregate costs of the properties we acquire, the aggregate amount of mortgage loans we make and the extent to which we are able to shift the burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the future is not determinable at this time.

Management Services and Fees under the Advisory Agreement

The Advisory Agreement provides for an annual base management fee equal to 2.0% of our total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations, or FFO.

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or the hurdle rate, of total stockholders’ equity, less the recorded value of any preferred stock. We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO in each calendar quarter as follows:

	•		no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized);
	•		100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized); and
	•		20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Quarterly Incentive Fee Based on FFO

Pre-incentive fee FFO
(expressed as a percentage of total common stockholders’ equity)

Percentage of pre-incentive fee FFO allocated to incentive fee

The incentive fee may be reduced because of our line of credit covenant which limits distributions to our stockholders to 95% of FFO. In order to comply with this covenant, our board of directors accepted our Adviser’s offer to unconditionally, irrevocably and voluntarily waive a portion of the incentive fee for the three and six months ended June 30, 2009 and 2008, which allowed us to maintain the current level of distributions to our stockholders. Our Adviser has indicated that it intends to continue to waive all or a portion of the incentive fee in order to support the current level of distributions to our stockholders, however, our Adviser is not required to issue any waiver, in whole or in part.

Administration Agreement

Under the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of our Administrator, and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, treasurer and their respective staffs. Our allocable portion of expenses is derived by multiplying our Administrator’s total expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all companies managed by our Adviser under similar agreements.

Critical Accounting Policies

The preparation of our financial statements in accordance with generally accepted accounting principles in the United States of America, or GAAP, requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Management relies on its experience, collects historical data and current market data, and analyzes this information in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgment on 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 included elsewhere in this report. Below is a summary of accounting polices involving estimates and assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.

Allocation of Purchase Price

When we acquire real estate, we allocate the purchase price to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from 9 to 18 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. Management also considers the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. A change in any of the assumptions above, which are very subjective, could have a material impact on our results of operations.

The allocation of the purchase price directly affects the following in our consolidated financial statements:

	•		The amount of purchase price allocated to the various tangible and intangible assets on our balance sheet;
	•		The amounts allocated to the value of above-market and below-market lease values are amortized to rental income over the remaining non-cancelable terms of the respective leases. The amounts allocated to all other tangible and intangible assets are amortized to depreciation or amortization expense. Thus, changes in the purchase price allocation among our assets could have a material impact on our FFO, which is used by many REIT investors to evaluate our operating performance; and
	•		The period of time that tangible and intangible assets are depreciated over varies greatly and thus, changes in the amounts allocated to these assets will have a direct impact on our results of operations. Intangible assets are generally amortized over the respective life of the leases, which normally range from 10 to 15 years, we depreciate our buildings over 39 years, and land is not depreciated. These differences in timing could have a material impact on our results of operations.

Asset Impairment Evaluation

We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. In determining if impairment exists, management considers such factors as our tenants’ payment history, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industry in which our tenants operate and whether the carrying value of our real estate has decreased. If any of the factors above support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the carrying amount in such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate the hold periods of the properties and cap rates using information we obtain from market comparability studies and other comparable sources. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows using assumptions or market participants. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss we would recognize.

Using the methodology discussed above and in light of the current economic conditions discussed above in “Overview-Business Environment,” we performed an impairment analysis of our entire portfolio at June 30, 2009. We concluded that none of our properties are currently impaired, and we will continue to monitor our portfolio for any indicators that may change our conclusion.

Provision for Loan Losses

Our accounting policies require that we reflect in our financial statements an allowance for estimated credit losses with respect to mortgage loans we have made based upon our evaluation of known and inherent risks associated with our private lending assets. Management reflects provisions for loan losses based upon our assessment of general market conditions, our internal risk management policies and credit risk rating system, industry loss experience, our assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying our investments. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations. We did not make a loss allowance for our existing mortgage loan receivable as of June 30, 2009, as we believe the carrying value of the loan is fully collectible.

Recently Issued Accounting Pronouncements

Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently issued accounting pronouncements.

Results of Operations

Our weighted-average yield on the portfolio as of June 30, 2009 was approximately 9.68%. The weighted-average yield on our portfolio is calculated by taking the annualized straight-line rents, reflected as rental income on our consolidated statements of operations, or mortgage interest payments, reflected as interest income from mortgage notes receivable on our consolidated statements of operations, of each acquisition or mortgage loan as a percentage of the acquisition or loan price, as applicable. The weighted-average yield does not take into account the interest expense incurred on the financings placed on our properties.

A comparison of our operating results for the three and six months ended June 30, 2009 and 2008 is below:

		For the three months ended June 30,																For the six months ended June 30,
		2009				2008				$ Change				% Change				2009				2008				$ Change				% Change
Operating revenues
Rental income		$	10,379,172			$	9,896,143			$	483,029				5	%		$	20,767,420			$	19,059,732			$	1,707,688				9	%
Interest income from mortgage notes receivable			189,583				218,805				(29,222	)			-13	%			377,083				457,102				(80,019	)			-18	%
Tenant recovery revenue			82,734				84,635				(1,901	)			-2	%			165,167				170,354				(5,187	)			-3	%
Total operating revenues			10,651,489				10,199,583				451,906				4	%			21,309,670				19,687,188				1,622,482				8	%
Operating expenses
Depreciation and amortization			3,282,629				3,178,718				103,911				3	%			6,590,438				6,160,187				430,251				7	%
Property operating expenses			230,785				203,405				27,380				13	%			467,595				442,459				25,136				6	%
Due diligence expense			6,886				40				6,846				17115	%			16,433				2,125				14,308				673	%
Base management fee			357,650				419,857				(62,207	)			-15	%			730,298				851,725				(121,427	)			-14	%
Incentive fee			812,653				801,832				10,821				1	%			1,598,942				1,506,499				92,443				6	%
Administration fee			257,207				274,541				(17,334	)			-6	%			481,561				486,737				(5,176	)			-1	%
Professional fees			125,965				147,065				(21,100	)			-14	%			361,161				244,727				116,434				48	%
Insurance			48,125				41,797				6,328				15	%			96,804				83,594				13,210				16	%
Directors fees			50,386				52,251				(1,865	)			-4	%			100,088				106,500				(6,412	)			-6	%
Stockholder related expense			88,245				102,775				(14,530	)			-14	%			171,892				229,198				(57,306	)			-25	%
Asset retirement obligation expense			35,476				32,325				3,151				10	%			70,384				62,361				8,023				13	%
General and administrative			15,453				18,326				(2,873	)			-16	%			26,005				30,506				(4,501	)			-15	%
Total operating expenses before credit from Adviser			5,311,460				5,272,932				38,528				1	%			10,711,601				10,206,618				504,983				5	%
Credit to incentive fee			(129,623	)			(173,697	)			44,074				-25	%			(364,704	)			(736,052	)			371,348				-50	%
Total operating expenses			5,181,837				5,099,235				82,602				2	%			10,346,897				9,470,566				876,331				9	%
Other income (expense)
Interest income from temporary investments			184				6,689				(6,505	)			-97	%			17,465				16,237				1,228				8	%
Interest income — employee loans			48,862				50,852				(1,990	)			-4	%			97,748				102,996				(5,248	)			-5	%
Other income			11,320				39,697				(28,377	)			-71	%			11,320				48,993				(37,673	)			-77	%
Interest expense			(4,433,998	)			(3,996,453	)			(437,545	)			11	%			(8,921,555	)			(7,752,501	)			(1,169,054	)			15	%
Total other expense			(4,373,632	)			(3,899,215	)			(474,417	)			12	%			(8,795,022	)			(7,584,275	)			(1,210,747	)			16	%
Income from continuing operations			1,096,020				1,201,133				(105,113	)			-9	%			2,167,751				2,632,347				(464,596	)			-18	%
Discontinued operations
Income from discontinued operations			20,916				18,312				2,604				14	%			38,754				3,801				34,953				920	%
Total discontinued operations			20,916				18,312				2,604				14	%			38,754				3,801				34,953				920	%
Net income			1,116,936				1,219,445				(102,509	)			-8	%			2,206,505				2,636,148				(429,643	)			-16	%
Distributions attributable to preferred stock			(1,023,437	)			(1,023,437	)			—				0	%			(2,046,875	)			(2,046,875	)			—				0	%
Net income available to common stockholders		$	93,499			$	196,008			$	(102,509	)			-52	%		$	159,630			$	589,273			$	(429,643	)			-73	%