Welcome to the Gladstone Commercial Corporation's Third Earnings Ended September 30, 2016 Earnings Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to David Gladstone. You may begin.

All right. Thank you for that introduction and thank you all for calling in. We always enjoyed this time we have with you on the phone and wish we had more talks like this. If you're ever in the Washington DC area come by and see us we’re in a suburb called McLean, Virginia and we have an open invitation to stop by and say hello. We have about 60 members of the team now. 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? You hear first for Michael LiCalsi, our General Counsel and Sec. Michael's also the President of Gladstone Administration which serves as the administration to all the Gladstone public funds and related companies as well. He will make a brief announcement regarding some of the legal regulatory matters and then call for a report. Go ahead Michael.

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 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 including all of the Risk Factors included in our Forms 10-K and 10-Q that we filed with the SEC. These 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. 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 our 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 for 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. We also created a financial supplement which provides further detail on our portfolio and our results of operations. They can all be found on our website gladstonecommercial.com. Now we will begin today's presentation by hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Mike. Good morning everyone. During the third quarter we acquired a $23.9 million property located in Fort Lauderdale, Florida raised $30 million in a direct placement of our Series D preferred stock and redeemed the remaining maturing series C term preferred stock. Raised $12 million in net proceeds from sales of our Series D preferred and $10.5 million in net proceeds from sales of our common both through our ATM program. Executed one new lease with a tenant in our partially vacant Chicago industrial property raising the occupancy to 100% and renewed or extended three leases with tenants in our South Hadley, Massachusetts, Richmond, Virginia and Maple Heights, Ohio properties. We sold three properties located in Rock Falls, Illinois and Angola, Indiana executed a contract to sell our Toledo, Ohio property and repaid $12.7 million of maturing mortgage debt and placed $4 million of financing on our previously unsecured property. Subsequent to the end of the quarter we executed a lease amendment with our tenant in our Vance Alabama property to expand that property by 75,000 square feet. The tenant will enter into a new 10 year lease at the expansions completion in mid-2017. We extended the lease with T-Mobile in our Wichita Kansas property for five years, executed a letter of intent with a tenant to occupy the remaining space in our Burnsville, Minnesota property anchored by Bosch and continued our program of meeting with registered investment advisors and institutions to promote our brand. Over the past 3.5 months we have held 22 such meetings and will continue to do so in the future. We had another excellent quarter as we continued to re-lease vacant property and continue our industry high occupancy. We also added another high-performing asset to our portfolio. We continue to be pleased with our…

Thanks, Bob. We continue to have a strong balance sheet as we systematically grow our asset and focus on decreasing our leverage. We reduced our debt to growth asset level to 51% today from 57% at the end of 2015 and a high in the mid 60% range in 2009. We did this through refinancing maturing mortgage debt at lower leverage levels and redeeming our term preferred stock with equity. We expect to continue to decrease our leverage over the next several years. 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 to yield on the current 10 years about 50 basis points lower than it was at the beginning of 2015. Since the beginning of 2016 the yield on the tenure has been as highs 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 stated desire to increase interest rates. In response to this volatility CMBS lenders have become a less reliable source of mortgage financing as they continually change the spreads at which they're willing to make loans. In early 2015, CMBS spreads were between 280 and 300 basis points and by the third quarter of 2016 they had dropped to between 210 and 240 basis points. With the change in the risk retention rules approaching CMBS spreads for loans closing after November 2016 have widened by approximately 30 basis points. The banks have also widened their spreads by 25 to 50 basis points in the life insurance companies and CMBS lenders have introduced floors. Thanks in particular trying to move into…

All right. Thank you Danielle. Another good report and certainly a good report from Bob Cutlip and Michael LiCalsi too and I want to say goodbye to our CFO, Danielle Jones so we all wish you well, she did a great deal to help the company grow to where it is today. I also want to say welcome to Mike. Mike Sodo, he is the new CFO who is part of the financial team at Capital Automotive REIT here in McLean when I was on the Board of that great company. He brings a lot of strong skills to the company so we welcoming Mike on Board and you will hear from him next round. The main news to report this quarter is the acquisition of almost $24 million worth of new property and raising preferred stock. We always worry about deferred stock that comes due but we were able to raise additional preferred stock to pay off the old preferred stock that was coming due in 2017. As Bob mentioned, we're leasing more vacant space. We renewed all of the 2016 leases except for small office lease leaving about 4.5% of forecast rental expiring, that is all the way through 2019 to 2020. Refinance maturing loans at lower interest rates and positioned ourselves I think for some very strong growth for the next three or four years. Continued to add quality real estate to our portfolio and shore up the existing properties that we have. As many of you know, this company didn't credits monthly cash distributions during the recession and that was quite a success story. We watched some very good companies cut their distributions and most of them have never recovered to bring their dividend back to the original level. We are in a great position not…

[Operator Instructions]. Our first question comes from the line of John Massocca of Ladenburg Thalmann. Your line is now open.

You just kind of touched on you had an acquisition pipeline going. Can you give us any more detail on that? What is the size of the pipeline? Do you have anything under LOI [ph]?

Right now our overall pipeline is over $325 million. We have at this point, one property in the letter of intent stage, that is out in the West Coast and we have two properties that are really in due diligence. One of those is in Philadelphia and the other one I consider in due diligence it's our expansion of that property we have Vance, Alabama. Until the construction is completed we keep that in due diligence. So the balance of those properties are literally across the country. As we try to tell everybody and its reality, we only focus on the secondary growth markets. So the totality of our pipeline right now is in cities such as Dallas, San Jose, Denver, a couple of properties there we’re chasing, Philadelphia, as I said, Seattle, Nashville and South Florida and then at that property in Vance, Alabama that’s in expansion.

Okay. And then kind of touching on dispositions, I know you guys increased your assets held for sale. What you think of the ultimate size of disposition program or is this something we were going to be selling a couple million dollars of assets every quarter as you look to kind of fine tune the portfolio?

We are approaching it from two separate directions. First of all, I think as David has said and what really surprised me and attracted me to this company, I'm not concerned about the credit. The issue that we are facing and I'm hearing it when I go out and talk with these investment advisors and the portfolio managers, is that they're really like to see us reduce the totality of all of the markets we are in. Our focus really, John, is going to be identifying those single asset markets that are kind of early tertiary. For example, the five that I talked to you about their in Toledo, Montgomery Alabama, South Hadley, Massachusetts, [indiscernible] New York and Hazelton, Missouri and where we are in the cycle right now, where everyone says it is peaking we figure that as the opportunity presents itself we are going to sell those. I can't tell you how many we think we are going to sell but we will probably sell as this market continues to peak and then as David and I have said, we have got great cash flow from these tenants and from the assets. We do want to reduce the total number of markets that we are in. We will continue to do that until the market turns.

Okay. That's absolutely makes sense. Tell me more detail on the existing portfolio. If I look at page 16 of your supplemental the number of percentage of rents you get from publicly traded companies increase pretty dramatically, 19% what drove that? I don't think it was entirely the Citrix acquisition, was it?

Say this again now.

If I look at page 16 of your supplemental versus last quarters kind of same chart you gave there, it says there is a publicly traded companies accounting for 49% of rents - that was about 30% last quarter. So what drove that increase?

You know, I'm going to have to respond back to you. I don't have that specifically with me, John. I will get that back to you before lunch today. Okay?

No problem. That's it for me that.

Okay. Just to finish up on John's point, it's opportunities that come up. We have a said to ourselves let's go after public companies. We have just seen buildings come up that are owned by public companies or rented by public companies. There has been no special desire to go after public versus private.

Our next question comes from the line of [indiscernible]. Your line is now open.

This is actually Rick Murray [ph]. Just curious if you could help us understand the impairment charge in the quarter?

Sure. I can start and then maybe you can talk about the asset specific, Dave. Again Bob, touched on the previous question that we have five assets held for sale. Two of them, the one in South Hadley, Massachusetts we talk about a $1.1 million impairment loss and a one and Hazelton, Missouri we talk about a $700,000 impairment loss on - the one in Hazelton I will say that one actually the tenant had a purchase option that we entered into when we put them in the building. I want to say about 2010 and they exercise that purchase option and so that’s why that property is held for sale and how the impairment came about there. I will let Bob touch on Yankee a little bit more.

Yes, the Yankee Candle is in that property in South Hadley and they have been in the property for a long time. The reason that we had to impair it is that we have several times tried to sell this asset. It is in what is, really it's an industrial assets, 150,000 square foot, irregular configuration in a residential area. So when we acquired the property it absolutely made sense with Yankee in there. They then made this property really their excess storage location and all we are doing now is getting one-year renewals. It's a non-core location for us and so we figured listen, we are going to get the highest and best cost we can right now. Let's go ahead and exit the property and move on down the road. So that's really why we did that one, Rick.

Rick, also that there may be some that are sold for more than we have in them so there may be some gains coming down the road.

There have been gains. Last year, in 2015, we realized net gains of about $1.3 million to $1.5 million. Yes, the number of assets that we have that are being held for sale, a number of those are going to be capital gains. It's just that we think right now we can get the most we can from those assets and try to redeploy those in those growth markets that we are pursuing.

My other question was, I guess a little bit more strategic I'm trying to reconcile your commentary about the Outlook which, frankly, I think is very prudent and thoughtful, but trying to marry that with the focus on maintaining a dividend which is not well covered and perhaps a reduction of the dividend would give you a little bit more flexibility in your deleveraging and also opportunities to take advantage of things that may present themselves in what could be a choppy environment as you suggested.

Rick, what you just a said cut dividend is something that we never mentioned here because we are not going to do it unless we're just forced to. We are going to go forward and we're going to build up the company so that we are in a situation where we are in excess and we aren't in excess of what we're paying out as a dividend and hopefully that occurs soon. The ideas is once we get to that point we can begin to raise the dividend. Our model will be much like in an in or oh in the sense that we would be raising the dividend a little bit every quarter and trying to push forward and continue to increase the dividend because that's who we are after, is dividend lovers.

Yes, let me add to this because Rick, I think I have chatted about this in the past. When we look just back over the last three years starting at the end of 2013 through 2016, because of some of the legacy asset issues and the renewals and the releasing that had to take place we had to pay additional operating expenses and had lost rents that amounted to almost $6.5 million to $7 million over a three-year period with about 19 million to 20 million shares on average that equates a loan to like let's say $0.08 the $0.10 per share but we maintained at $1.50 and David and I were committed to keeping the dividend because we were able to acquire accretive assets and maintain that number. As we go forward now with most of this behind us we think that now that accretion and our continued ability to acquire assets with good, let's say, margins over our costs, our whack, we will be able to be raising that FFO and the core FFO which should translate into some dividend increases. It's just a commitment that we've made throughout the history of the company. We have experienced something that a lot of the, let's say, a lot of the REITs that went public much later than us and after the, let's say the downturn have not had to experience and they are going to be experiencing over the next three to four years and we are not.

[Operator Instructions]. I'm showing no further questions at this time. I like to hand the call back over to David Gladstone for any closing remarks.

All right. Thank you all for calling in and we will talk to you again next quarter.