Good day ladies and gentlemen, and welcome to the Gladstone Commercial Corporation's Second Quarter Earnings Ended June 30, 2016, Earnings Call and Webcast. At this time, all participant lines are in a listen-only mode to reduce background noise. But later we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, David Gladstone. You have the floor sir.

Thank you, Andrew. Nice introduction and we thank all of you for calling in. We always enjoy these times that we have together on the phone and wish we had more times to talk to you. If you are ever in the Washington D.C. area, we're located in the suburb called McLean Virginia and you have an open invitation to stop by and see us if you're here in this area. You will see a great team at work; we have over 60 members of the team now. So it's a strong Growing Group. We'll now hear from Michael LiCalsi, our General Counsel & Secretary. Michael is also the President of Gladstone Administration which serves as the Administrator to all of the Gladstone Funds and related companies as well. He will make a brief announcement regarding some of the legal and regulatory matters concerning this call and report. Mike?

Good morning, everyone. The report you're about to hear may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the company's future performance and these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And there are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, include all the Risk Factors included in our Forms 10-K and 10-Q that we filed with the SEC. And they can be found on our website www.gladstonecommercial.com and on the SEC's website www.sec.gov. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. And in our report today, we also plan to talk about funds from operation, or FFO. FFO is a non-GAAP accounting term, defined as net income excluding the gains or losses from the sale of real estate and any impairment losses from the property plus depreciation and amortization of real estate assets. The National Association of REITs has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. Now please see our Form 10-Q, filed yesterday with the SEC, and our financial statements for a detailed description of FFO. And today we also plan to discuss core FFO, which is generally FFO adjusted for property acquisition costs and other non-recurring expenses. And we believe this is a better indication of the operating results of our portfolio and allows better comparability of period-over-period performance. And to stay up-to-date on our fund, as well as all the other Gladstone publicly traded funds, you can sign up on our website to get e-mail updates on the latest news. You can also follow us on Twitter, username, GladstoneComps; and on Facebook, keyword, The Gladstone Companies. Finally you can visit our general website to see more information www.gladstone.com. And the presentation today is an overview. So we ask that you read our Press Release issued yesterday, and also review our Form 10-Q for the quarter ended June 30, 2016. Please also see the financial supplement which provides further detail on our portfolio and our results of operations. These can all be found on our newly redesigned website gladstonecommercial.com. Now we will begin today's presentation by hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Michael. Good morning everyone. During the second quarter we acquired a $17 million property located in Salt Lake City, Utah; raised $25 million in a direct placement of preferred equity; and implemented an ATM program on this new preferred; executed two new leases with tenants are partially vacant Maple Heights, Ohio, and Minneapolis, Minnesota properties; sold a non-core property located in Dayton, Ohio; executed contracts to sell our properties located in Angola, Indiana, Rock Falls, Illinois, and Montgomery, Alabama; refinanced $26.2 million of maturing mortgage debt at lower interest rates; and redesigned our website to provide better information to our investors, analysts, investment sales and leasing brokers; and included a new section in our preferred stock. Subsequent to the end of the quarter we also announced the redemption of the remaining $13.5 million of our outstanding Series C in August. We had another excellent quarter as we executed new leases to increase the occupancy of our portfolio to 98.5%. We also put another high performing asset in our portfolio. We continue to be pleased with our activity and have a healthy pipeline of acquisition candidates totaling about $300 million. Our acquisitions team has spent considerable time over the past several months connecting with our peers to determine the direction of the market. Interest rate volatility, a perceive global economic slowdown, and an energy glut raised our concerns. Our findings reflect that the largest net lease peers have noted that they will be reducing their net acquisitions volume this year or even pausing due to the belief that valuations appear to be too high. These thoughts, as well as as reduced year-to-date investment volumes compared to 2015, as reported by market research firms, could be indicating that cap rates may expand in the months ahead. Our team is going to…

Thanks, Bob, good morning everybody. We continue to have a strong balance sheet as we systemically grow our assets and focus on decreasing our leverage. We have reduced our debt-to-gross asset level to 54% from 57% at the end of 2016 through refinancing maturing mortgage debt at lower leverage levels. We expect to continue this strategy over the next several years. We continue to use our line our credit to make acquisitions that we believe can be financed as longer-term mortgage debt that we believe are good additions to our unsecured property pool. Long-term mortgage debt continues to be available but at slightly higher rates than we experienced during 2015. The yield on the 10-year treasury has been very volatile despite the Federal Reserve's efforts to raise interest rates; the yield on the current 10-year treasury is 90 basis points lower than it was at the beginning of 2015. Since the beginning of 2016, the yield on the 10-year treasury has been as high as 2.2% and as low as 1.3%. This volatility has been driven by global uncertainty, questions regarding the strength of the economy, and the Federal Reserve Bank's stated desire to increase interest rates. In response to the volatility, CMBS lenders became a less reliable source of mortgage financing as they increase the spread to which they were willing to make loans. The banks have also widened their spreads by 10 to 25 basis points and the life insurance companies have reintroduced for us. Banks in particular are trying to move into the vacuum left by the CMBS lenders. The CMBS loan originations down by more than 40% year-to-date, the life insurance companies and banks have become more selective in determining which properties they will finance. However interest rate still remain attractively low and we continue to…

Okay, thank you very much. Good report, Danielle, good ones from Bob Cutlip and Michael LiCalsi too. Just to reiterate in summary the real big things that happened this quarter we acquired a new property for $17 million, raised $25 million in new permanent preferred and redeemed $25 million of term preferred stock. On leasing vacant spaces we continue to increase the overall occupancy, we renewed all of the 2016 leases except for small office lease leaving only about 4% of the forecasted rents expiring until the beginning of 2020. We refinance maturing loans at lower interest rates and positioned ourselves for more growth. We've continued to add quality real estate to the portfolio and sure if the existing properties. As many of you know, we didn't cut the monthly cash distribution during the recession that was quite a success story as we watch many of the good companies that cut their distributions, most of them have never recovered from the dividend that they had back at the original level. We're on a great position not to have problems if the economy hits the skids again. Here is what we are doing today. We need to increase the common stock market capitalization in order to increase the trading volume, to give some of the institutional investors who want to buy a lot of the stock the ability to do that. The institutional buyers always want to know the number of shares outstanding, so if they buy $10 million to $20 million worth of our stock then they know there will be enough liquidity, if they want to sell. We still don't have enough shares outstanding to give them that confidence. However we've been consistently building our assets and equity base and we've actually doubled the size in the last five…

[Operator Instructions]. We will be taking our first question from the line of John Roberts with Hilliard Lyons. Your line is open.

Just wanted to get a little more color on sort of your expect -- I think Bob made some $300 million in potential acquisitions sort of in your pipeline. I'm just trying to get a better feel on what amount you anticipate potentially closing for the remainder of the year?

Okay, Bob he is going to take over that.

Hey, John.

Hey, Bob.

How are you doing?

I'm going great, how are you?

Pretty good, really pretty good. You know I'm always optimistic but like right now we have one property that is in due diligence. We have and that's about between $22 million and $24 million. We have two other properties in letter of intent stage that is in excess of $30 million. One of those is what I would consider to be a done deal because it's an expansion of an existing facility that we have next Mercedes-Benz Assembly plant in Alabama and we have another property in letter of intent stage in Phoenix, Arizona, that's also in the high 20s. So I'm encouraged but one of the things we are finding, John, is that we were amazed [ph] on a number of properties and suddenly they're coming back to us and our leaders in the field particularly in the Mid-West and the Western region are seeing a little bit of cap rate expansion in some of the markets not all the markets but in some of the markets that we are looking at. So we are still being a little cautious but as you can see we are seeing properties a little bit higher in volumes than we've had in the past. We've averaged about $16 million to $18 million for acquisition over the past three to four years and now we are in the low to mid 20s, which is somewhat encouraging to me as we get larger. So I can't give you a full specific number on it but you can see from the pipeline beyond just the initial review we have, we have a number of assets that are looking pretty good for closing between now and probably the beginning of the fourth quarter.

Super. Had some great color. The other thing I just wanted to ask, you looked at any obviously your little capital constraint at this point. Are you looking at any non-traditional capital?

No, John we haven't looked at anything non-traditional we either do preferred or common in terms of capital. So we don't.

Not looking at convert, is there anything along that line David?

No, I think we can raise pretty much all the preferred we want to at this point in time at 7 and yes we could get a little bit lower price if we went to converts just haven't looked at that I think the stock is going to bounce up pretty quick.

Great, okay thanks.

Next question?

[Operator Instructions]. We have a question from the line of John Massocca from Ladenburg Thalmann. Your line is open.

The question on for the series of the termed -- the series you term preferred can you give any color on how you guys plan on taking off the remainder of the balance there?

Yes, we have really strong line of credit. So we are also in the marketplace with our ATM program, aftermarket program and its generating pretty good success right now on this new preferred that we have. The institutions are liking the idea that you can't pay it back or can't redeem it for five years. So we are getting pretty good transactions there and the common stock seems to be going very well. So between the common stock, the preferred stock, and our line of credit we can easily take out $13 million.

And David just add on this, John this is Danielle, we've actually already put our intent to redeem that is we're planning to redeem that on August 19 then we have current availability to go ahead and do that.

Okay, that makes sense. And then touching maybe more to the dispositions front, what are the plans for the proceeds or the -- or assets are currently under contract to be sold?

Well it would be a combination of the -- of use for working capital and as David and I have talked in the past, we're getting out of these smaller markets so that we can redeploy the capital into our target markets. So for example the four properties that we have under contract right now, right now those proceeds would be used for the acquisition that we're planning in Florida and the other one that we are looking as partial anyhow and as well as one in Phoenix. So we're not in any big rush, John, because you know most of these properties we've already been through renewals, and they've been through the recession, so they are strong companies but just over time we think putting our capital in these target markets is going to improve our operating efficiencies and also over time as we do exit some of these we will be selling three to five assets which will result in cap rate compression as compared to one-off in small markets. So it's going to be a work in progress, no big rush but it would be used to be redeployed in those target replacements.

That makes a lot of sense. And then a quick detailed question, it seem like there is some other income that came in this quarter that was tied to the Newberry property?

Danielle what is that?

So that was a tenant that vacated that property, it was some settlement income we received, there was some issues with some deferred maintenance and capital, so we reached the settlement with them. And part of it was the repairs about $800,000 for repairs and the excess of it which is what you see in the other income line was considered legal settlement income. So it's a one-time thing.

So that's completely one-time.

Yes.

That makes a lot of sense. Thank you very much everyone.

Okay. Any other questions?

We have a question from the line of Larry Raiman from LDR Capital Management. Your line is open.

Thank you. Good morning and nice job on the quarter and the call. A quick question again with regards to your core portfolio, could you describe what percentage of the tenants on lease had stipulated rent bumps and do you account for that on a straight line basis. I'm just trying to get at the core portfolio growth, if no transaction activity was done, what's the embedded growth in the portfolio?

Bob?

Hey, Larry, all of ours have stipulated rents, rent growth. We have a few properties that are CPI related but most of them are between 2% and 3% and yes Danielle can may be add to this but we do account for them in a straight line basis.

Yes that's correct. They are all accounted on a straight line basis. So when transit rental income growth would be on growth from our portfolio.

So to follow-up, I appreciate that and thank you for that answer there. On a reported basis, where you're reporting core FFO and FFO that is straight line your cash flow on a comp basis could be different and could be growing where as a core may not because you already accounted for the straight line acknowledgement of that lease. Would that be fair to say?

That's fair, yes.

And may be that could be helpful for investors to see that cash flow trend in addition to the reported core and basic FFO number not just to make it too complex but it might help both the embedded cash flow growth in the portfolio.

That's a good point Larry and in addition because we -- because we really on every deal we do, we do secured fixed rate debt and we have locked in that return and that increase in cash flow year-over-year as compared to if we had variable rate debt in a rising interest rate environment. So that's why we are very excited about the next three to four years with very few leases rolling and our cash, cash income is going to be growing year-over-year because we've locked in the debt cost.

Okay. Thank you and then just one final follow-up and I will back to the floor for anyone else. So there's a question and that is on the debt summary, just a follow-up and just you comment, you have fixed rate financing and then also variable rate financing with caps, could you describe the proportion of that breakdown fixed rate versus variable with caps?

Danielle can we know the number?

For our total portfolio, I would say most of the variable rate is on the refinancings we have done in the past 18 months. So I would say maybe $55 million to $60 million of our total mortgage debt is variable rate but again they all have interest rate caps that caps on, it is typically LIBOR plus 2.5, 2.25 to 2.75 and then we, we put 3% interest cap on the LIBOR one there.

Okay. So will the remaining 90 -- so those $530 million of debt, about 10% is the variable rate with the cap the rest is fixed rate financing?

Yes that's ballpark number but that's correct yes.

All right, next question?

I have no other questions in the queue at this time. But I will give one more call for questions. [Operator Instructions]. And I'm not getting any further questions; I will turn the back over to Mr. Gladstone for closing remarks.

All right, thank you, Andrew, and thank you all for calling in. That's the end of this call.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program. And you may all disconnect at this time. Everyone have a great day.