Greetings. Welcome to Gladstone Commercial's Second Quarter Earnings Call. . Please note this conference is being recorded. At this time, I'll now turn the conference over to Mr. David Gladstone. Mr. Gladstone, please go ahead.

Well, thank you, Rob. That was a nice introduction and instructions. And thank all of you on the line for calling in and listening to us this morning. We enjoy this time together and having you on the phone. I wish there was more times like this to talk to you. Going to start out, as we always do, with Michael LiCalsi, our General Counsel and Secretary, give us some legal and regulatory matter concerning the call today. Michael?

Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. Now these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents we file with the SEC. You can find them on our website at gladstonecommercial.com. Specifically, go to the Investors page, or on the SEC's website, which is www.sec.gov. Now we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Now today, we will discuss FFO, that's funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate, any impairment losses on property, plus depreciation and amortization of real estate assets. We'll also discuss FFO as adjusted for comparability, and core FFO, which are generally FFO adjusted for certain other nonrecurring revenues and expenses. Now we believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. And please take the opportunity to visit our website, once again, gladstonecommercial.com, sign up for our e-mail notification service. You could also find us on Facebook. Keyword there is the Gladstone Companies. We even have our own Twitter handle, and that's @GladstoneComps. Today's call is simply an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, you can find them on the Investors page of our website. Now with that, I'll pass it over to Gladstone Commercial's President, Bob Cutlip. Bob?

Thank you, Michael. Good morning, everyone. During the second quarter, we acquired a 25,200 square foot industrial service facility in Baytown, Texas for $8.1 million. Collected 100% of cash-based rents during the second quarter. No amounts have been abated throughout the pandemic. Leased 61,000 square feet in our Blaine, Minnesota industrial facility through 2028. Leased our 238,000 square foot industrial facility at the Port of Catoosa in Tulsa, Oklahoma, for 12.5 years. Renewed a lease of a 315,000 square foot industrial facility in Monroe, Michigan, which is a Detroit suburb, through August of 2029. And issued $100 million of Series G preferred stock, where proceeds were used primarily to redeem all our outstanding Series D preferred stock. Subsequent to the end of the quarter, we acquired an 80,600 square foot industrial facility in the St. Louis, Missouri MSA for $22 million; renewed a lease of 12,600 square feet in our office property in Burnsville, Minnesota through December 2029; and renewed a lease of a 60,245 square foot flex office building in San Antonio, Texas through November of 2031. On the personnel front, we appointed Gary Gerson as our Chief Financial Officer in June. And as you know, Gary is with us today. He had been our interim CFO since March and was previously the company's Treasurer several years ago. We're very pleased to have him on board as our permanent CFO as he has seamlessly stepped right into the Capital Markets leadership role. In addition, we have appointed Buzz Cooper as our Chief Investment Officer. Buzz is an Executive Vice President in the firm and our South Central region leader. He leads our acquisitions team and has the knowledge and experience of acquiring a significant percentage of our current portfolio of properties across several regions. And Buzz has been with…

Thank you, Bob, and good morning, everyone. I'll start my remarks by reviewing our operating results for the second quarter of 2021. All per share numbers our reference are based on fully diluted weighted average common shares. FFO adjusted for comparability and core FFO available to common stockholders were $0.36 and $0.37 per share for the quarter, respectively. FFO -- core FFO available to common stockholders during the second quarter of 2020 were $0.40 and $0.41 per share, respectively. FFO adjusted comparability and core FFO available to common stockholders for the first 6 months of 2021 were $0.76 and $0.78. FFO and core FFO available to common stockholders during the first 6 months of 2020 were both $0.80 per share, respectively. Our same-store cash rent in Q2 grew at 2.8% over the second quarter of 2020. And for this first 6 months of 2021, it grew at 4% over the first 6 months of 2020. Second quarter results reflected stable total operating revenues of $33.4 million, with operating expenses of $25 million, as compared to operating revenues of $33.5 million and operating expense of $25.9 million for the same period in 2020. We continue to enhance our strong balance sheet as we grow our assets and continue to focus on reducing our leverage. We have reduced our debt to gross assets over the past 6 years by over 20% to 44.8% through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are within 1% to 2% of our target leverage level. During the quarter, we issued $100 million of 6% Series G perpetual preferred stock. were primarily used to redeem our 7% Series D preferred stock. In addition to reducing our dividend expense, the offering provided us with over $8 million of additional investable…

Okay. Thank you Gary. It was good months from Bob as well as Michael in getting up-to-date on things going on, encouraging you all to go to the website or some kind to get your hands on that Gary has prepared and get up-to-date on a lot of items that are in those packages. The team has performed very well. We've not been hurt much by the government and all other various reactions to the virus. This is a very nice quarter that ended June 30. If we heard a lot today, and the number of transactions, new leases, . Operations are very impressive, as Gary and Bob reported -- have collected 100% of the cash-based rents during the second quarter. They have acquired industrial assets in Baytown, Texas and St. Louis, Missouri. We executed -- they executed 12 leases in transactions this year, the date ending June 30 -- ending July 31, representing about $8.4 million in annualized straight-line rent. They issued $100 million of 6% Series G perpetual preferred used. Almost all of it to retire the 7% Series D preferred that we had outstanding. The issuance reduced our total dividend by providing over $8 million in additional investable capital, a very nice transaction. The commercial team is growing the real estate that we own at a good pace. The team is doing a great job managing the properties that we own, especially during this pandemic, and have turned in a really good results. Our team is strong. It continues to pursue potential quality properties on the list of acquisitions that they are reviewing. Our acquisition team is seeking strong credit tenants. We underwrite the credit at a tenant, unlike a lot of people that just buy the real estate assets. They know the quality tenants. The real estate makes excellent investments. And our asset managers are actively managing the properties that the company owns in order to maximize their value. It's a different environment that we're in today, but the team is up to the challenge of the things going on in the middle market. The middle market businesses are the real estate that we own that's occupied by middle market businesses. Like many of our tenants, they've been challenged with previous government restrictions related to the virus, but our tenants continue to pay their rents. And for that, we're very thankful because we can turn around and pay that out as dividends to you, guys. These are times that have never been seen before and probably won't see them in the future, I hope. But this first-class team is doing a great job. Okay. Rob, I'm going to stop here and have the -- have you come on and help our listeners ask some questions for us.

. Our first question comes from the line of Rob Stevenson with Janney.

Gary, can you talk a little bit more about what's the sequential revenue drop? And what caused that? And to what extent has the leasing that you guys done here in the second and third quarters sort of caused that to bump back up?

Well, I think two of the biggest issues here were, we had some accelerated rents from Q1 that didn't follow into Q2. And we had some additional -- we had a reduced G&A cost in Q1 due to reduced due diligence costs and an increased G&A costs in Q2 due to some professional, legal and stockholder related costs. But to get to the point of your question. Yes, the unfortunate part of the Q2 numbers, that they don't include a lot of what you just heard today because of timing. For example, the $30 million of acquisitions, the $8 million acquisition was done in the middle of June. The $30 million -- $22 million acquisition was done in the middle of July. So not really reflected in Q2 numbers. The Port of Catoosa vacancy which was resolved, that lease didn't get signed up until the end of June. So that is not in the numbers. So yes, going forward, you'll see a lot of the things that we did in this quarter, which unfortunately weren't represented in the numbers because of timing will be represented in our numbers going forward.

Okay. And on the 310 million square feet of vacant space that you guys have leased, I mean, how much free rent, et cetera, is in there? When does that actually start paying effectively cash rents for you, guys? Has that already started? Is that sometime later this year? How should we be thinking about that?

The doesn't start until the -- I think it's November, Rob, everything else is starting, as I can recall.

Okay. And then last one for me. What was the spread on the rents on the roughly 600,000 of square feet of renewals that you guys have done since the end of first quarter?

Let me tell you, I've got the information from January. We had -- when we -- we had 12 properties that we did transactions, 10 of those properties representing about $6.3 million of straight-line rent went up about 8.5%. They went up about $560,000. So that's a good plus up that we're going to actually realize going forward. And then there's 2 other assets that had reductions in rent, but they're actually a plus up. And I do want to address those. One is the Blaine Minnesota property that we converted from a single-story office to an industrial property. That property had been vacant for over a year and was costing us approximately $550,000 in OpEx bleed, as I call it. But we converted that to an industrial property. Karen Priesman, the Head of Asset Management for the Midwest region, and we -- once she repositioned that property, she leased 2/3 of that property. And now we've got a plus up of about close to $800,000 when you consider the OpEx and the leasing. So that's going to be a good plus up for us over the next 12 months. And then the other one that Gary was talking about, this was our Port of Catoosa property. That property was costing us about $500,000 in OpEx bleed. And now with it being leased, and the lease is over $1 million, as I referenced in my comments, you add the OpEx bleed of $500,000 with that $1 million, that's a $1.5 million shift going forward starting in July. Now it's not cash, as I indicated. There's still cash free rent, but that will burn off, and the FFO, of course, stops -- starts right now.

Okay. And then actually, I lied. This is one more for Gary. The -- when you talk about G&A, first quarter was artificially low, second quarter artificially high. How much of the stuff that's in the second quarter number is nonrecurring? I mean, is it -- it's somewhere -- I think the year-to-date is somewhere 1.7 or so. Is it so, about 865. I think it's probably the average for that. Is that a good run rate going forward, the sort of average of the first 2 quarters? Is there stuff that we need to be removing from that to figure out a run rate going forward? How should we be thinking about G&A in the back half of the year?

I mean I think if you look at our G&A from a longer-term perspective, in the mid-800s is I think where we've been averaging. And I think that's probably reasonable. I think a lot of what you -- you were saying, we're looking at G&A from -- it was artificially low in Q1 and artificially high in Q2, so.

The next question is coming from John Massocca with Ladenburg Thalmann.

So last quarter, I think you were saying that you kind of saw the potential investments in 2021 as being kind of $110 million to $130 million. Has that changed at all based on what's happened in 2Q, based maybe on the interest rate environment out there? And what that's going to cap rates? Just any kind of changes or maybe no changes to those investment expectations?

Well, right now, John, we've got about $60 million in the letter of intent stage and just under $5 million in due diligence that we're going to close in the next week or so. So I'm thinking that we're still going to be north of $110 million. I don't know that we'll get to $130 million. But I do believe with now the increased activity that we have in the markets we want to be in, that we should be able to reach that level for sure.

And I guess maybe since we kind of last talked, has there been any kind of market change in the cap rate environment, particularly for your kind of subsector of kind of smaller assets in non-gateway markets?

Well, you're still seeing -- in the gateway markets, you know that they're down in the low 5s to high 4s. What we're seeing in our secondary markets is that we're able to find product that is in the mid- to high 5s. With 7- to 10-year leases, that gets us a GAAP cap rate, as you saw there, about 7%. And correct me if I'm wrong, Gary, but I think now with our stock price where it is now and our capital -- and our cost of debt, we're at about 5 weighted average cost of capital. So we still have that 50 to 75 basis point spread that I really want to insist upon with our acquisition teams.

Okay. And then on the Austin office asset, you kind of mentioned that there might be something actionable maybe by the end of 3Q. And I understand maybe there's stuff you cannot talk about at this point in time. But any other color you can provide on what's giving you kind of the confidence that there may be something more you can talk about in 3 -- at the end of 3Q?

I think at the end of 3Q, for sure. We're just seeing a lot more interest in property tours as well as buyers. Buyers have come into the Austin market, and that's why we're looking at a kind of a dual strategy there of potentially re-leasing it and/or selling it. And we may end up trying to lease part of it and then sell in the building and redeploying that capital in industrial. But at least I'm encouraged that we're getting a lot more foot traffic and a lot more interest on both the tenant prospect side and the buyer prospect side.

And I guess maybe on a price per square foot basis roughly, what is the difference out there in the market today, selling it, leased or partially leased versus completely vacant?

Are you talking about the sale price differences?

Yes. If you were going to try to sell the Austin asset.

Okay. Right now, I'd rather not talk about that publicly because we are in conversation with parties. And therefore...

They have access to it. They have access to it.

And then one last quick detail one back on Tulsa. I know the cash rent doesn't start until November. But if we think about that cash rent versus maybe the pre-vacancy cash rent, should that be kind of relatively level with what that asset was doing before?

No, John. No, John, it isn't. You know I'm a transparent kind of guy. We leased it. The leaders there, Buzz Cooper and Perry Finney, found an excellent tenant. They only wanted to be in the majority of the building. And when we looked at where they were going to be in the building and the difficulty of potentially leasing the balance, Buzz was able to convince them to take the entire building. It cut us down a little bit in the rent, but it picked them up paying the balance of the OpEx in the building. So we're down a little bit. Let me put something on the website so at least you'll know what it is. I don't have the specific amount, but it is below where we were before.

That's from the line of Craig Kucera with Wunderlich Securities.

It looks like you had about a million. It looks like you had another million so in lease terminations here in the second quarter, can you characterize where those buildings were at and -- and sort of type of buildings that you -- or that did occur?

I know the second quarter.

We are fumbling trying to look at that.

We'll have to. We'll have to get back to you on that one.

Craig, we will put something on that website that tells you where those are and I don't know why we don't know those, but there are not at top of mind, so we'll have to get back to you.

That's fine. I guess the kind of other follow up question, that regard to that, I think there is maybe a portion of that as yet to be recognized. We expect to see that accelerated in the third quarter or is that would that be randomly spread to the rest of the year or in '22.

Again we'll have to get back to you on that. Craig, I know that we will have something at the end of the third quarter, but we also have negotiated buy it, really goes into the next year, and that's an addition to the current rent that they are paying. So it's going to be an combination on those two.

All right. Do we have a fourth question?

We do not sir.

All right. Well let me summarize. We had a good quarter. It looks like the road is wide open for us to have this second half and so with that since there is no other questions, we will terminate this. And so that's the end of this presentation. Thank you all.

Thank you. This concludes today's conference. You may disconnect you lines at this time. Thank you for your participation.