Good day, ladies and gentlemen and welcome to the Gladstone Commercial Corporation’s Fourth Quarter and Year Ended December 31, 2016 Earnings Call and Webcast. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to introduce the host of this conference call, Mr. Michael LiCalsi. You may begin.

Good morning and thanks everyone for calling in. We enjoy this time we have with you on the phone and wish we had more to talk with our loyal shareholders. As you know, David Gladstone usually does the introductions, but he is travelling today, he will be on the call later to give a summary after Mike Sodo’s portion of the call. And he will answer some questions along with Mike Sodo and Bob Cutlip at the end of the presentation today. As many of you know, I’m the President, Gladstone Administration, my name is Michael LiCalsi. Gladstone Administration serves as the administrator to all of the Gladstone public funds and related companies. I will make a brief announcement regarding some legal and regulatory matters concerning this call and report. And this report 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. 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. And they can be found on our website, www.gladstonecommercial.com and on the SEC’s website, www.sec.gov. This 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 operations, or FFO. FFO is a non-GAAP accounting term, defined as net income excluding the gains…

Thanks, Mike. Good morning, everyone. During the fourth quarter, we acquired a $25.5 million property located in Philadelphia and placed a $14.8 million mortgage note on that property; executed a lease amendment with our tenant in our Vance, Alabama property to expand that property by 75,000 square feet and extend the lease by 10-year upon construction completion in June of this year; raised $13.9 million in a direct placement of our common stock; raised $3.5 million in net proceeds from sales of our Series D Preferred and $9.4 million in net proceeds from sales of our common, both through our ATM program; executed one new lease with a tenant to occupy the remaining space in Burnsville, Minnesota property, extended the leases with the tenant in our Wichita, Kansas property for five years, sold two properties located in Montgomery, Alabama, and Toledo, Ohio, and we were added to the MSCI U.S. REIT Index. Subsequent to the end of the quarter, we sold a non-non-core Franklin Township, New Jersey property for a nice capital gain of $5.9 million, continued deleveraging our portfolio by repaying $13.8 million of fixed rate debt which as at 6% interest rate and also repaying $8.2 million of variable rate debt. And we continued our program of connecting with registered investment advisors and institutions to promote our brand. Over the past six months, we have held 25 such meetings 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 activity and have a healthy pipeline of acquisition candidates. As I’ve noted during our last quarterly call, our acquisitions team has spent considerable time over the past several months researching the direction of the market.…

Thanks, Bob, and good morning. I’m happy to be participating on this call after taking over as CFO during the fourth quarter. I’ll start by reviewing our operating results. All per share numbers I reference are based upon fully diluted weighted average common shares. Core FFO available to common stockholders was $37.1 million or $1.55 per share for the year and $9.4 million or $0.38 per share for the quarter, and slightly decreased from the third quarter. This was largely a function of increase in common shares, which I will expand on later in my remarks. Our fourth quarter results resulted in increase in total operating revenues of $22 million, as compared to total operating expenses of $13.7 million for the period. The increase in revenue largely results from our Philadelphia acquisition and a full quarter of revenue for our prior acquisitions. Property operating expenses were higher with increased landlord obligation expenses, and G&A expenses were higher due to an increase in legal and accounting fees. We did see a decrease in interest expense from reductions in interest rates through our refinancing efforts. Now, let’s get further into our debt activity and structure. [Ph] We continue to have a strong balance sheet as we grow our assets and focus on decreasing our leverage. We reduced our debt to growth assets during the year to 52% from 57% at the end of 2015 through refinancing maturing mortgage debt at lower leverage levels and redeeming our Series C Term Preferred Stock. The Series C was considered debt due to its mandatory redemption date. We continue to expect to gradually decrease our leverage over the next several years. We continue to use our line of credit to make acquisitions that we believe can be financed with longer term mortgage debt or that we…

Alright, Mike. That was good report. Good to know the details; and Bob Cutlip, that was an excellent report as well. And Michael LiCalsi, you do the introduction better than I do. We have to maybe change the way we do these things as we begin. I think the main news again is the new property for a little over $25 million, we have raised some common and preferred to get ready for the quarter that we’re in, putting some more money to work and lease more vacant space and renewed all of the 2016 leases except for a small office lease, so leaving only about 4.4% of forecast rents expiring to the beginning of 2020, so long time before we have any leases coming due, and refinance many of the loans and position ourselves really for more growth. As many of you know, this Company didn’t cut its monthly cash dividend during the recession and that was quite a success story as we watch many other good RIETs cut their distributions and many of them have never recovered from the beginning of that disastrous period. We are in a great position, I think if the economy slips again. Here is what we’re doing today. We need to increase the common stock market capitalization in order to increase the trading volume to give some of the larger institutional investors who want to buy a lot of stock, the ability to do so. These institutional buyers, they always want to know, the number of shares outstanding, so if they buy $10 million to $20 million of our stock and they know there will be enough liquidity, if they want to sell or they need to buy some more. We were included in the MSCI U.S. REIT Index; that’s certainly been a…

[Operator Instructions] Our first question comes from John Roberts with Hilliard Lyons.

Good morning, David, Bob.

Good morning.

You had -- that large purchase you made, it’s much larger than you typically have done in the past. Is there a change in strategy to go for larger size property versus maybe what you have historically?

No, I think John, our sweet spot is still anywhere from 10 to as high as 30 million. As you know, we’ve been averaging -- from the inception of the Company, we’re right like 9 million to 10 million, but really over the past four years, we’ve been in the 16 million to 17 million on average. So, this is not really outside of the envelope at all. It was a very attractive deal in a target market that we have, and with the cap rate we’re able to get with the long-term, really long-term lease, we felt it was worthy of investment. But, I think you’re going to still see us somewhere between, for the most part, between 15 and 20, 22 million to 25 million. Getting above 30 to 40 still at our size is -- Dave and I just think it’s -- we don’t want to get over the tips of our skis. We don’t want one asset, one tenant to be an issue; we’ve never had any major issues in the past. But, looking forward, we still don’t want to have that opportunity. So that sweet spot is going to stay 10 to probably 30 million.

Great. That’s good color. And what should we expect on security instrument wise? You did quite a bit on the ATM and common and preferred. Should we look at somewhere in the 10 to 15 a quarter type number, is that a good number for us to model in?

So, as we look back historically over acquisitions, we’ve been somewhere between the $75 million to $150 million range per year going back two or three years. In the context of our efforts to moderately delever over time, I think it’d be reasonable to assume that new property acquisitions would be approximately 50% leverage, 50%, 55%. So, as you’re solving for those numbers, John, I think you’re probably in the right range. For us, it’s really an exercise and being prudent in the timing of issuances within the common and preferred. We don’t want to be doing that in dilutive fashion. So, myself as CFO, I have daily conversations with Bob and the deal team really to see for those candidates for new property acquisitions, the probability and timing of those, so I can properly guide through the ATM program and do those issuances. Fortunately with the common being at 20 bucks a share, Series D is roughly 25 to 30. Those are places at which we can do accretive deals through the ATM.

Super. Thanks a lot.

Our next question comes from Laura Engel with Stonegate Capital Partners.

Good morning. Hi, David and Bob. Thanks for taking my questions. I wanted to see overall, it looks like maybe some of the new releases and some of the renewals are coming in at shorter terms. I guess, can you comment on that and then can you also comment on kind of what type of pricing power, you all are seeing as far as inventory that’s available versus you’re potentially increasing the rates as you renew or get new tenants? Thanks.

Okay. I think on the renewal side, I think what we’re looking at is we have leases that have stipulated provisions that are typically five-year renewals. And so, we are pretty much stuck to that and the tenants want the flexibility. So that drives our renewals more than anything else. And for new leases, they really have range from five to seven years. So, we try to get it extended as much as possible. But I think tenants with what’s going on with the changeover of the government and where interest rates are going and accounting changes, the tenants are being a little bit more hesitant to go really long term. So, I think on renewals, number one, they are going to stay in probably the five to seven-year. But, most of the deals that we are chasing out there are actually 10-year leases and beyond. So, I’m not that concerned. And from a pricing standpoint, in the secondary growth markets, we are having some improvement in the pricing. But in these tertiary markets, our goal is to make sure that we at least maintain the straight line rent at the same. To give you a little history, in 2015, our straight line rents on our renewals and new leasing turned out to be about 7% increase. Last year, frankly, and being brutally honest, it was flat. This year so far, the deals that we’ve done already for 2017 are about 2% up. But the thing that we have to deal with, when you are in the net lease business, if you do 10 to 15-year leases and you have to 2% to 3% escalations year-over-year, you’re in the real estate business, you’re going to go through at least one, maybe two recessions during that period. And so, the likelihood of you being at that market rent consistently is going to be challenging. But with that said, we are seeing some good pricing power in Columbus, and in Indianapolis, and even in Minneapolis, because the office markets for sure are getting a little tighter.

Right, okay. Okay, great. Well, I appreciate the color. And congrats on the strong quarter and I will get back into queue.

Our next question comes from Joe [Indiscernible] Services.

Good morning. Thanks for taking my question. And I apologize if you’ve covered this matter already, because I haven’t been listening to your conference calls every quarter. This was at some point last or the year before, you announced you were going to call the Series B Preferred, if I remember correctly, but then you didn’t announce. So, you have the -- that was an ATM program for the Series B. Am I correct introducing [ph] you’ve decided not to call the series?

There are no current plans to call the Series B. Our ATM issuances currently are going through the lower coupon Series D.

So, what do you…

Sorry, the coupon in the Series D is 7, the series -- you maybe misinterpreting the Series B for the Series C that was actually redeemed in 2016. Is that possible?

No, no, no. You said the lower coupon Series B, is that more than one Series B.

Series A that’s 7.75; Series C at 7.5 and the new Series D is at 7% coupon. So, my comment was that currently through the ATM, we are issuing both common stock as well as the 7% coupon Series D as in David’s duck. There is no other activity for the Series A or B currently.

Okay. Are you issuing more Series B, as in boy?

No, we have not really. No.

No, okay. I thought the news release said something about an ATM program for Series B. Perhaps I misread it.

The program is actually just not actively being utilized.

You have it but you’re not using it?

Correct. We were only issuing through the Preferred Series D.

Okay, alright. That’s all I had. Thank you very much.

Our next question comes from Jeff Rounder [ph] with UBS.

Good morning, David. Good morning Bob; and congratulations on a very nice quarter. David, I have a follow-up question for you from the first caller. I’m a little bit confused or a little bit conflicted in that. On the one hand, I understand you’d like to have more common shares, not referring to the preferred stock, but more common share, maybe ATM offerings, to increase the size of the outstanding shares to make it more attractive to institutional investors. On the other hand, you indicated that the price of office spaces continues to climb and is pretty higher right now. So, obviously, any issuance of common shares would mean we have to invest the money. I’m getting the impression that maybe the investments are as attractive now as they were over the last number of years. Can you reconcile that?

Sure. The situation is always for us is the difference between the ramp on the one hand and what we can borrow at and raise money at on the other hand. As long as the spread remains strong, you don’t mind putting the money to work in new properties. Every transaction we look at, we put through a rigorous model that Bob and his team have developed. And that tells us exactly how accretive it will be to our common shareholders. And that is driving everything. We do have opportunities; it’s just that every now and then the marketplace kind of craters goes the wrong way and we have to stay out for a while. Right now, it’s slow, because I think the pricing hasn’t quite caught up with what’s going on in the debt marketplace. So we are finding transactions. And as long as we can do 20 or so million every quarter, I think it’s a good run rate. And so, far we’ve been able to do that. I would love to go faster, but I just think it takes a lot of effort that we don’t have the ability to do to put a lot more to work. So, we raise money as we needed. The wonderful thing about an ATM program on your common or preferred stock is that you can open it up and take some dollars in and then put it to work. So, you don’t have that big gulp that you do when you do an equity offering of $20 million or $30 million. Even this last preferred offering that we had and we did it, because one institution needed some money to put enough of our stock and to match this new thing that we’re involved in. And so, as a result, it was just an opportunity and we took it. Looking back, maybe not have taken it, but we do have money for the future. And I think Bob and his team will put that to work in the next quarter.

Well, thank you very much for the insight. And again, I would just like to emphasize something that you mentioned previously about the fact that during the recession of 2008-2009 whereas many REITs and obviously BDCs cut their dividend, Gladstone Commercial maintained that solid $1.50 dividend and certainly you guys need to be congratulated for that.

Thank you very much. Can we have the next question, please?

Our next question comes from John Massocca with Ladenburg Thalmann.

Good morning, everyone.

Good morning, John.

So, quick question; after the lease-up of Burnsville, can you remind us what partial vacancy you guys have left in the portfolio and any prospects you for leasing of that vacancy, but not including the fully vacant property?

Not including that -- we have -- remember that small medical facility that we have in Houston, Texas, we have about 5,000 square feet left in that and we have a prospect right now -- two prospects for about 3,500 square feet for that. Heritage Park is our multitenant property in Indianapolis, and we have a small 2,900 square foot vacancy there. And this year, we have another 2,000 that we are discussing with the tenant, but there is only 2,900 square feet there. But then, you’ll recall, our Maple Heights property in Ohio -- Central Ohio, we have about 100,000 square feet that’s vacant in that warehouse facility that we have one prospect for that entire space. But that’s all we have. And then, in Raleigh, North Carolina, we have 114,000 square foot warehouse facility and it’s about 6,000 square feet vacant -- 7,000 square feet vacant there. That’s about it.

So, if I am hearing correct, outside of the Massachusetts property, the bulk of vacancy is really that Maple Heights property?

That’s right. That’s correct.

And then, can you guys maybe walk the process, the thought process behind the Franklin Township sale? Was this more of an opportunistic sale or you thought you got really good pricing on it or something that’s more part of your stated strategy of moving out of non-core market?

It’s kind of a little bit of both, John. We do not have a desire to be in that industrial market. Most of the people, who, from a prior life I’m very familiar with, are very strong; they are chasing cap rates way down, as you know from exit 8 to exit 12; it’s extremely strong there. And so, this is a building that was built in the early 80s, it’s very little clear height; there is only 3.5 years left on the lease, possibility of them renewing, but if we can -- we bought it from $8.2 million and if you can sell it for 12.8, I’d rather take that money and put it in our target market that you’re familiar with as we’re going forward, and that’s our plan.

Okay

So, both opportunistic and it was a non-core location we wanted to get out of.

Okay. And then, as you look to kind of -- I don’t want to say necessarily redeploy that money, one for one. But, when you guys look at acquisitions, would you be looking for kind of buildings within industrial sector that are newer, maybe higher clear height than that or is that kind of a space you like to play in, just maybe assets where you think you can get better pricing versus what you could sell the one in Franklin Township for?

We will -- from an industrial standpoint, we are only seeking properties that have at least 30 feet clear. Our sweet spot is under 500,000 square feet. And we are now chasing -- in our current pipeline, we have three assets that kind of put that bill, one of them is like 34 clear in Denver, Colorado. So, we are not going to chase the low clear height. Now, one thing that we are investigating very extensively is the last mile that you’re seeing in the e-commerce, where the urban logistic centers are going to be very, very important. And those are probably going to anywhere from 24 clear to 30 clear. So, we will look at those, but for the most part, any distribution facilities, we really want it to be minimum 30 clear and precast or tilt wall construction.

[Operator Instructions] I’m not showing any further questions at this time. I’d like to turn the call back over to David.

Okay. Thank you and thank all of you for your questions. We really like the questions, it gets us to give you more information that you’re looking for. And we’ll see you next quarter, should be a good quarter ending March 31st. That’s the end of this call.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.