Goodq312 presentation

Gladstone Commercial Corporation

Quarterly Review

for the period ended September 30, 2012

Legal Disclaimer

This presentation may include forward-looking statements. These forward-looking

statements include comments with respect to our objectives and strategies, and the results

of our operations and our business.

However, by their nature, these forward-looking statements involve numerous assumptions,

uncertainties and opportunities, both general and specific. The risk exists that these

statements may not be fulfilled. We caution readers of this presentation not to place undue

reliance on these forward-looking statements as a number of factors could cause future

company results to differ materially from these statements.

Forward-looking statements may be influenced in particular by factors such as fluctuations

in interest rates and stock indices, the effects of competition in the areas in which we

operate, and changes in economic, political, regulatory and technological conditions. We

caution that the foregoing list is not exhaustive.

When relying on forward-looking statements to make decisions, investors should carefully

consider the aforementioned factors as well as other uncertainties and events.

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Overview

• Gladstone Commercial Corporation

• Real Estate Investment Trust (REIT) with publicly traded common and three preferred stocks and registered, non-listed senior common stock

• Common stock (NASDAQ: GOOD)

• Preferred stock (NASDAQ: GOODN, GOODO, GOODP)

• Focused on acquiring and holding single tenant, net-leased properties

• Went public in 2003 and have never lowered or missed paying a scheduled dividend

• Current dividend is $1.50 per common share per year, paid monthly at $0.125 cents per share

• Common stock current yield of 8.1% (as of November 1, 2012)

• Managed by Gladstone Management Corporation (a registered investment adviser with the SEC) – a billion dollar fund manager

• One of a family of funds known as The Gladstone Companies (www.gladstone.com)

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Disclaimer: Past performance is not an indication of future performance

http://www.gladstone.com/

What is Gladstone Commercial?

• A publicly traded equity Real Estate Investment Trust (REIT)

formed to invest in and own net leased industrial, commercial,

medical and retail real property

• Net leased properties are properties in which the tenant pays

rent plus pays for the upkeep, insurance and taxes on the

property

• The company seeks to:

• Own quality properties with great tenants

• Obtain current income from rents

• Pay monthly distributions to stockholders

• A company operated by an experienced management team, as

discussed in the following slides

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Experienced Management Team

David Gladstone, Chairman

• Over 25 years of experience investing in mid-sized and small private businesses

• Current Chairman and CEO of all three Gladstone funds, public companies #7, #8 and #9 in his career

• Past Chairman of Allied Capital Commercial (REIT) and Allied Capital and American Capital when they were successful

• Past board member of Capital Automotive REIT

• MBA from Harvard Business School, MA from American University, BA from University of Virginia

Bob Cutlip, President • Over 25 years commercial real estate

operations experience • Past Managing Director at Sealy &

Company, LLC, where he led the Southeast & Mid Atlantic operations for a vertically integrated real estate operating company

• Past EVP of First Industrial Realty Trust where he directed the acquisition and development business activities in 26 markets in North America

• Past Regional EVP of Duke-Weeks Realty, responsible for development, acquisitions and operations of the Mid-Atlantic region

• Past National Chairman of National Association of Industrial and Office Properties

• MBA from University of Southern California, MS in Civil Engineering from Vanderbilt University, BA in Civil Engineering from U.S. Air Force Academy

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Terry Brubaker

• Chief Operating Officer of all funds

• More than 25 years experience in managing businesses

• Currently COO and head of all portfolio management for all three Gladstone public funds

• Previously on the acquisition team of James River Corp., as it grew from $200 million to $7 billion in revenues

• Group VP of two operating divisions at James River with 2,300 employees, $440 million in revenue and 14 locations

• After James River, was CEO of two businesses with 800 employees, $250 million in revenue and 4 locations

• Former consultant with McKinsey & Company

• MBA from Harvard Business School; BSE in Aeronautical Engineering from Princeton University

Chip Stelljes

• Chief Investment Officer of all funds

• Currently President of Gladstone Capital (GLAD), a lending company

• More than 25 years experience in portfolio investing

• Currently CIO and head of all investing for all Gladstone public funds, reviewing hundreds of opportunities and supervising the due diligence process on each new investment

• Past EVP at Allied Capital, making loans and investments in middle market companies

• Past manager of Camden Partners and Columbia Capital funds, investing in communications, healthcare and business services

• MBA from University of Virginia Business School; BA Degree in Economics from Vanderbilt University

David Dullum

• Currently President of Gladstone Investment (GAIN), a buyout fund

• More than 25 years experience in portfolio investing

• Currently head of Gladstone Investment and seeking mezzanine and buyout opportunities

• Experienced in investing, due diligence, reviewing hundreds of new opportunities and reviewing each new investment

• Past partner of New England Partners, a small buyout fund located in Boston and Washington, DC

• Past partner of Frontenac Company for over 14 years in Chicago, investing in many mid-market businesses in the Midwest

• MBA from Stanford; BS in Engineering from Georgia Tech


• Buzz Cooper, Managing Director

• Over 25 years of investing experience in real estate

• Former principal of Allied Commercial Corporation REIT, where his responsibilities ranged from buying loans from RTC and banks to making real estate backed loans

• Chris Massey, Managing Director

• Over 20 years experience in commercial real estate investment and management

• Managed a $450 million institutional grade real estate portfolio for Kennedy Associates, a $6 billion pension fund advisor and prior to that with JE Robert

• Matt Tucker, Director

• Over 15 years experience of investing experience in real estate

Seasoned Professional Real Estate Officers

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Over 20 professionals concentrating on sourcing, due diligence and portfolio management and 15 professionals in reporting

*Directors noted here are not members of the funds’ boards of directors, rather, these are junior Managing Director positions of the Adviser

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Managing Directors and Directors*

David Gladstone Bob Cutlip Terry Brubaker Chip Stelljes Dave Dullum

Chairman & CEO President Chief Operating Officer Chief Investment Officer Sr. Managing Director

25+ Years Experience 25+ Years Experience 25+ Years Experience 25+ Years Experience 25+ Years Experience

Buzz Cooper

25+ Years Experience

Chris Massey

20 Years Experience

Bob Pierce


Lud Kimbrough


John Freal


David Meier


Laura Gladstone

13 Years Experience

John Sateri

24 Years Experience

Jennifer Simpson

14 Years Experience

Chris Daniel

21 Years Experience

Matt Tucker

15 Years Experience

Greg Bowie

11 Years Experience

M. Kipp Kranbuhl

15 Years Experience

Chris Lee

12 Years Experience

Michael Beckett

18 Years Experience

Blair Gertmenian

11 Years Experience

Erika Highland

12 Years Experience

Kyle Largent

11 Years Experience

What We Do

Buy real estate and lease it on a triple net lease (NNN) basis

• Tenant initially owns real estate and their business is growing and the

underlying real estate has equity value

• We buy the property and lease it back to tenant for use in the business

• The lease has annual rental increases, NNN meaning that the tenant

pays for upkeep, taxes, insurance, etc.

• The tenant receives the money it had invested in the real estate to now

invest in the business

• We get a long-term lease with income from monthly rent payments to

pass on to our shareholders as monthly distributions

• We also buy property that is owned by a landlord and leased on a

NNN basis to a tenant so we become the new landlord/owner.

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What is a Triple Net-Leased Property?

• Tenants pay rent to the landlord and the tenant assumes all obligations for

maintenance of the property; including paying taxes, insurance and structural

repairs

• Typically, these are free-standing buildings with a single tenant

• Properties may be used for a variety of purposes (commercial, office,

medical, industrial, warehouse, retail)

• Usually, the building or the location is integral to the business operations and

the business can’t be easily moved or the building replicated

• Business owners elect to lease their properties as a financing decision – and to

maximize their returns by focusing their capital on the operating business,

leaving the predictable and lower returns of real estate ownership to the

landlord

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Higher Risk

What makes the Triple Net-Leased properties

a compelling investment?

• Higher return relative to lower risk

• Reasonably predictable returns due to tenant

responsibilities and long term leases

• Opportunity for growth in cash flow and

valuation due to contractual rent increases

• Ability to access debt financing due to

predictable cash flows

• Growth in rent and ownership of real assets

helps to hedge against inflation

• Opportunity to add value at a time of

acquisition through proper negotiation and

underwriting

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Lower Risk In

crea

sin

g D

ecreasing

Property Sectors Sensitivity to the Economy

Lodging

Office

Industrial

Self Storage

Multi-Family

Regional Malls

Strip Centers

Triple Net-Lease

Student Housing

Healthcare

Growth Strategy

• Acquisitions:

• Focused on acquisitions of individual properties for $5 to $30 million

• Continue to diversify our portfolio of properties by geography, tenant and industry

• Many opportunities today

• Debt:

• Maintain an approximate 65% of mortgage debt on each property to 35% equity (approximate 2 to 1 ratio)

• Develop consistent and efficient sources of permanent mortgage financing

• Expand our line of credit, as needed

• Equity:

• Continue to raise funds through common and preferred stock offerings

• Attract more individual investors and some “buy and hold” institutional investors

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Market Opportunity

• Provide real estate liquidity for small and middle market

companies that are not rated

• Use our existing deal flow from strategic relationships with

LBO funds and senior lenders

• Concentrate on conventional real estate with leases to quality

tenants

• Provide real estate liquidity for medium or larger business that

have a high credit rating

• Use our relationships with real estate brokers to find these

opportunities

• Buy and hold our properties and do not sell unless circumstances

dictate

Our strategy is to be a strong player in this triple-net segment

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Good Market Opportunity

• Light manufacturing

• Manufacturing of small products (plastic closures, disposable tableware)

• Specialty manufacturing

• Special purpose buildings with a conditional use permit (paper manufacturing, commercial bakery)

• Established software companies

• With large amount of computer equipment (data center)

• Offices

• Headquarter offices of the business (electronics, telecommunications)

• Business services

• Service companies with logistic services (consumer products)

• Medical services/Healthcare

• Buildings used to deliver medical services (medical practice)

• Warehouses

• Supply chain entities on long-term leases

• Specialty retailing

• Special purpose retail outlets (drug stores)

Areas Where Opportunities Exist to Own Properties

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We have not invested in the following:

• Hotels/Lodging

• Self Storage

• Multi-family Apartments

• Single family homes

• Regional Malls

• Strip Center Malls

• Student Housing

• Hospitals

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Our Business Model

• Long Term Leases: Typically 10 to 15 years (most leases come due after 2019)

• Lease Escalations: CPI (with minimums) or fixed escalations

• Good Investment Returns: Current yield or “weighted average cap rate” on our

properties was 9.3%

• Low Overhead: Pure triple-net lease with few responsibilities (such as the roof)

• Flexible: Provide funding for additions to the building

• Protective Covenants: If the business is sold we expect to re-negotiate the lease

• Credit Enhancement: Cross guarantee and corporate guarantee of the lease

Characteristics of Our Leases as of September 30, 2012

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How Do We Underwrite Deals and Mitigate Risk?

• Achieve Above Market Returns: • Underwrite numerous deals, but ultimately invest in only those that fit our model

• Seek credit worthy tenants

• Underwrite the tenant as if we are making a loan to them or seeking their own equity

• Underwrite the real estate as if the tenant will vacate the property at the end of the lease

• Focus where there is less buying competition from individuals or institutional buyers

• Protect The Downside: • Diversify by industry, geography and tenant

• Focus on recession resistant businesses

• Look for long-term leases

• Match each long-term lease with a long-term mortgage

• Buy existing properties with tenants that have an operating track record and substantial cash flow from operations

• Focus on real estate fundamentals, without relying purely on tenant credit

• Analyze financial strength of tenant operator and augment with credit enhancements, where possible

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Dual-Focused Underwriting Process

• MAI Appraisal on each property

• Visit to review property

• Call brokers in the area to verify the

value of similar properties

• Phase I or II environmental report and

sometimes buy environmental liability

insurance

• Structural report to assure the building

is structurally sound

• Review the title report to assure there

are no deed problems

Due Diligence on the Real Estate

• Detailed underwriting of the

business

• Review tenant financial statements

and projections

• Prove out the cash flow of the

business

• Investigate the management of the

business

• Determine the risk rating and the

probability of default

Due Diligence on the Tenant

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When our Leases Expire

Lease expirations as a percentage of the total annualized

rents being received as of September 30, 2012

0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015 2016 2017 2018 2019 After

Largest Tenants

Largest tenants as a percentage of the total annualized

rents being received as of September 30, 2012

Company A - 6.7%

Company B - 4.2%

Company C - 3.9%

Company D - 3.5%

Company E - 3.2%

Company F - 2.9%

Company G - 2.7%

Company H - 2.6%

Company I - 2.5%

Company J - 2.4%

All remaining tenants - 65.4%

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• Long-term mortgage on each property for the term of the lease on the property

• Asset coverage ratio of our mortgages is 59.4% of cost of all properties to mortgages

outstanding

• Weighted average remaining term of our mortgages is 6.3 years

• Each property is held in a separate, bankruptcy remote LLC or LP

• Only $2,000,000 of our mortgages are guaranteed by our parent company

• Line of credit for $75,000,000 up for renewal in December 2013

Character of our Debt as of September 30, 2012

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When our mortgages come due

Mortgage Debt Maturing as of

September 30, 2012

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017 2018 2019 Thereafter

$ Millions

Portfolio Diversification as of September 30, 2012

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% of Total Rental Income

Telecommunications - 14%

Electronics - 13%

Healthcare - 10%

Diversified/Conglomerate Manufacturing - 7%

Chemicals, Plastics & Rubber - 6%

Beverage, Food & Tobacco - 6%

Personal & Non-Durable Consumer Products - 5%

Containers, Packaging & Glass - 5%

Machinery - 5%

Buildings and Real Estate - 4%

Printing & Publishing - 4%

Education - 4%

Personal, Food & Miscellaneous Services - 4%

Automobile - 3%

Oil & Gas - 3%

Diversified/Conglomerate Services - 3%

Banking - 2%

Childcare - 1%

Home & Office Furnishings - 1%

Geographic Diversification as of September 30, 2012

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• Approximately 80% from real estate brokers

• From leveraged buy-out funds who buy a business but do

not want to own the real estate

• From developers who build the property and then want to

sell it

• From tenants who want us to “build to suit”

• Banks wishing to sell properties

Source of Properties to Buy

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Track Record: Gladstone Commercial

• Common stock traded on NASDAQ (GOOD)

• Paying $0.125 per common share per month, or $1.50 per common share per year

• Never missed or reduced a dividend since inception

• As of November 1, 2012, the company has paid 94 consecutive monthly common stock dividends. Prior to paying distributions on a monthly basis, the company paid five consecutive quarterly dividends.

• Common stock yield at 8.1% (as of November 1, 2012)

• Distributions were an 83% return of capital in 2011

• Estimated Net Common Book Value (book value with depreciation added) is $14.52 per share

• Raised $25 million through a Series A Preferred stock offering at 7.75% yield and $28 million through a Series B Preferred stock at 7.5% yield paid monthly

• Recently raised $38.5 million of Series C term preferred stock at 7.125% yield, monthly pay

• Has over $480 million invested in 78 wholly-owned properties

• All existing tenants paying as agreed and buildings are 98.8% leased (2 buildings vacant)


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FFO - Earnings

• 2005 = $7,253,000

• 2006 = $9,428,000

• 2007 = $12,496,000

• 2008 = $13,524,000

• 2009 = $13,521,000

• 2010 = $14,078,000

• 2011 = $15,707,000

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0

2

4

6

8

10

12

14

16

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2004 2005 2006 2007 2008 2009 2010 2011

Funds From Operations did not decline during

the worst recession in recent history (2008-2010) $ millions

Shareholder Focused

• Maintain the monthly distribution and grow when earnings (FFO) are secure

• Emphasis on stability first and growth second

• Liquidity: Shareholder may buy or sell the stock in the market

• Quarterly reports and calls to shareholders

• Robust informational website (www.gladstonecommercial.com) and notifications by e-mail and press releases

• Shareholder dividend reinvestment plan for common stock

• Audited by PricewaterhouseCoopers LLP

• Shareholder service to answer questions by calling (866) 366-5745

• Adviser with strong reputation (www.gladstone.com)

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http://www.gladstonecommercial.com/


Highlights

• Experienced Management Team: Operating team of 50+ professionals has a successful track record of underwriting private businesses as tenants and NNN real estate

• Conservative dual underwriting strategy: Focused on the cash flow of the business tenant’s operations and the value of the real estate

• Successful CEO: Has a “brand name” reputation demonstrated by the success of nine public companies and multiple REITS

• Business Model: Emphasis on deal flow from strategic relationships with bankers, LBO funds and real estate intermediaries

• Market Opportunity: Right time in the business cycle to buy properties

• Focused on steady cash flows: Rental streams from tenants to drive distributions to our shareholders

• Management is Invested: Management and directors own the stock

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How to invest: 4 ways

• Common stock: “GOOD” – As of November 1, 2012, yield is 8.1%

– Dividend is $1.50 per year but paid monthly

• Permanent preferred stock: “GOODP” or “GOODO” – Yield is approximately 7.5%

– Paid before common and senior common stocks and is cumulative

– Not convertible and not required to be redeemed

• Term preferred stock: “GOODN” – Yield is approximately 7.125%

– Paid before common and senior common stock and is cumulative

– Not convertible but redeemed on January 31, 2017

• Senior common stock: contact Pat Ferrer (678-447-1607) – Yield is 7%

– Paid after preferred and before common stock and is cumulative

– Convertible in five years into common at the price of the common the day purchased

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Other Information

• Website for Gladstone Commercial

• www.gladstonecommercial.com

• Contains much more information about our company

and the properties we own

• Website for our adviser

• www.gladstonemanagement.com

• About other funds managed by the adviser

• www.gladstone.com

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http://www.gladstonecommercial.com/

http://www.gladstonemanagement.com/


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Goodq312 presentation