Greetings and welcome to Gladstone Commercial's Corporation’s Fourth Quarter and Year-End Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chief Executive Officer. Thank you, and over to you, sir.

Thank you, Peter, for that nice introduction. And thanks to all of you for calling in this morning. We enjoy the time we have with you on the phone and wish we had more time to talk with you, but it’s once a quarter. Now let’s hear from Michael LiCalsi, our General Counsel and Secretary to give you a legal and regulatory matters concerning this call report. Mike?

Thanks, David, and good morning everybody. 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 the Investors page of our website, which is gladstonecommercial.com. Also, you can find them on the SEC's website, which is www.sec.gov. And 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’ll also discuss FFO, which is Funds from Operations. Now is 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 mention FFO as adjusted for comparability, and core FFO, which are generally FFO adjusted for certain other non-recurring revenues and expenses. And we believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. Now we ask that you take the opportunity to visit our website, once again, that’s gladstonecommercial.com, sign-up for our e-mail notification service. You can also find this on Facebook. The keyword there is The Gladstone Companies and on Twitter at @GladstoneComps. Now today's call is an overview of our results, so we ask that you review our press release and Form 10-K, both issued yesterday for more detailed information. Again, Investors page of our website where you can find those. Now I'll hand the call over to Gladstone Commercial's Co-President, Bob Cutlip.

Thank you, Mike. And good morning everyone. During the fourth quarter of 2021 and ending January 31, 2022, we continued our focus on industrial acquisitions and improving our operations. We acquired a 161,400 square foot industrial facility on 20.4 acres in Monroe, North Carolina, a Charlotte suburb, for $12.8 million with 7.9 years of remaining lease term in a GAAP cap rate of 5.7%. Acquired 120,000 square foot industrial facility on 7.5 acres in the Atlanta, Georgia MSA for $12 million with 15 years remaining lease term and a GAAP cap rate of 7.3%. Acquired a 300,000 square foot industrial facility on 16.3 acres in Crossville, Tennessee for $29 million with 11 years of remaining lease term and a GAAP cap rate of 6.5%. Leased a 42,900 square foot industrial facility in Redding, Pennsylvania, through June of 2031. We’ve renewed and extended the lease at our 71,800 square foot industrial property in Syracuse, New York, through May of 2035, sold a 42,200 square foot single story office property in Richmond, Virginia, extended the lease of our 127,000 square foot tenant at the Mercedes Benz assembly plant in Vance, Alabama through 2032 and collected 100% of cash base rents during the fourth quarter. These investments and releasing activity further reinforce our strategy to increase our portfolio’s industrial allocation and improve property operations while removing non-core assets. Recent acquisition activity has been quite strong. The third and fourth quarter investment volume totaled $80.5 million with a GAAP cap rate of 6.85%. All properties were industrial. For the full year we invested just under $100 million and an average GAAP cap rate of 7% and a weighted average lease term of 13.4 years. The acquisition volume since 2019 is approaching $400 million, and all assets have been industrial in nature. Our industrial allocation…

Thank you, Bob. And I wish to express my gratitude and appreciation for the faith and trust that you, David and the board are placing in me. I look forward to building upon the past performance as I believe we now have in place the talent to provide strong growth for our company and shareholders. As Bob stated, this is reinforced by the results and production for the latter part of 2021 and anticipated in early 2022. Market conditions are worthy of comment, particularly with the continued effects of COVID-19 virus. A review of research reports relating to industrial and office statistics for the fourth quarter reflects both improvements and continued challenges. First, CBRE. Investment sales volume for all property types was approximately $750 billion for the year 2021 and is the highest since 2007. Prices for all property and types increased by 22.9% in 2021 according to Real Property Analytics. Industrial overall activity continues to be strong with vacancy at the 4% to 4.5% level, depending upon the research report. Net absorption exceeded 100 million square feet per quarter for the year and over 500 million square feet is under construction. Although supply and chain disruption is creating challenges for all product sectors, e-commerce and logistics demand continue to drive the industrial sector. Office vacancy in the fourth quarter of 2021 saw an increase in demand. For CBRE, net absorption totaled 18.7 million square feet in the fourth quarter with overall vacancy rates dropping 20 basis points to 16.6% quarter-over-quarter. This is the first drop in vacancy since mid-2019 and first positive absorption compared to the prior six quarters. The vacancy level does not include significant sublease space available on a national basis. New supply activity continues as just under 100 million square feet is under construction. Supply chain issues have created an increase in cost for materials and has caused a strain on their availability. As it relates to our growth opportunities, we are seeing an increase in investment sale listings. Our current pipeline of acquisition candidates is approximately $350 million in volume, representing 17 properties, one of which is office with the balance being industrial. Of the 17 properties, 3 properties and due diligence totaling $32 million. 4 properties are in the letter of 10 stage, totaling $108 million. And the balance are under initial review. Our team is staying actively engaged in the markets as we believe acquisition opportunities continue to arise as we can pursue and will pursue them. So in summary, our full year and fourth quarter activities reflected strong leasing and rental collection success, continued active engagement to identify industrial acquisition opportunities and collectively positions us well to pursue growth opportunities. Now let me turn it over to Gary for a report on the financial results, including our capital markets activities. Gary?

Thank you, Buzz. And good morning, everyone. I'll start my remarks by reviewing our operating results for the fourth quarter of 2021. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were both $0.40 per share for the quarter respectively. FFO and core FFO available to common stockholders during the fourth quarter of 2020 were $0.37 and $0.38 per share respectively. FFO Adjusted for comparability and core FFO available to common stockholders for the full year 2021 were $1.60 and $1 57, respectively. FFO and core FFO adjusted for comparability available to common stockholders during the full year 2020 were $1.56 and $1.57 per share respectively. Our same-store cash rent in the full year 2021 grew at 3.2% overall over the full year 2020. Our fourth quarter results reflected total operating revenues of $35.3 million, with operating expenses of $25.4 million as compared to operating revenues of $32.9 million and operating expenses of $24.7 million in the same period. 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 leverage to gross assets over the past six years by over 20% to 45.5% through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe we are 1% to 2% away from our target leverage level. We continue to primarily use long-term mortgage debt to make acquisitions. As we grow through disciplined investments, we also continue to expand our unsecured property pool with additional high quality assets. Overtime, we expect this will increase our debt financing options. Looking at our debt profile, 61% is fixed rate, 33% is hedged floating rate and 6% is floating rate the majority of…

All right. Thank you. That was a good report, Gary, and a good one from Bob and certainly from Buzz Cooper. Welcome on board, Buzz for your first time through. Michael LiCalsi also made good contribution to telling the world and the team has performed very, very well, and we've not been hurt much by the various government reactions to the buyers. So nice quarter, guys. You have heard a lot today about the number of transactions and new leases for the quarter. And it is impressive. We've collected 100% of the cash based rents. During the fourth quarter, we acquired 3 industrial assets during the quarter for a total investment of $53.8 million, two industrial properties and extended the leases in January of January of 2022. And we executed 15 lease transactions this year, representing about $13.6 million of enterprise straight rents. Commercial team is growing. The real estate we own is at a good pace, and we're adding to it. The company outlook, I think is strong. The professionals behind it are strong. So at this point in time, our acquisition team is seeking more strong credit tenants. We are tenant-oriented as opposed to real estate oriented. And if the tenant can pay, it usually means everything is okay. We know that the quality of the tenant and the real estate make excellent investments. And that's what we shoot for every time we're out there in the marketplace. Our asset managers are actively managing the properties that we own today and we continue to grow those in value. It's just a different environment we're in today, but the team is up for the challenge. The middle market business is like many other. Our tenants have been challenged with previous government restrictions related to viruses, inflation, supply chain disruptions. But our tenants continue to pay their rents. These are times that have never been seen before, and there will be future challenges. But we have a first-class team and they're doing a fantastic job. Okay. Paul, if you'll come on now, we'll answer some questions from those who are calling in.

Thank you. At this time, we will be conducting a question-and-answer session. The first question is from Rob Stevenson with Janney. Please go ahead.

Hi. Good morning, guys. Bob or Buzz, what's the current acquisition pipeline? How much is under contract or letter of intent? And how should we be thinking about 2022 acquisitions? You did $100 million last year. Any reason to think that the 2022 acquisitions won't be in the same ballpark?

I'll start. And then Buzz will add to it. Because Buzz really understands what's going on in every one of our markets. We've got like, as he indicated, $32 million that's in due diligence. That's under contract. We got another $100 million to $110 million that is in the letter of intent stage, and we're expecting probably a third of that to convert to a contract within the next probably 30 days. And I think what we need to think about, Rob, is look at the last two quarters. The third and the fourth quarter, as I indicated that we acquired $80 million. That's an annualized of about $160 million. And I think what's transpired is Buzz has really got a great team in place right now who really are well connected in our secondary growth markets. And so I would expect with what we have right now that we for a calendar year basis, will be looking well north of $120 million. Now if all bets are off, if interest rates go through the roof and we have to be conservative, because we are conservative and care about cash flow stability. But I think right now, it's improving for us. So Buzz, why don't you even expand upon all that?

Thank you, Bob. And Rob, thank you. One thing I would note is, to Bob's point, $32 million that we do have in diligence in the legal process and underwriting of the tenancy and third-party reports. Behind that, we do have some $110 million that we are deep into discussions on and in LOI. I believe that we will move a great portion of that forward, if not all. One thing to note is that these are also cross regional opportunities, taking us from the Southeast and Florida over through and hopefully into the West, in Denver. So the team is actively looking for what I'll say are perhaps a little more creative opportunities for us as it relates to our traditional acquisitions. But the pipeline is strong. And we've seen an uptick here as it relates to the marketplace and properties out for consideration. So we feel very confident going forward.

Okay. And how are you guys thinking about dispositions this year?

Gary and I have been stating on most of the calls that we'd like to limit our dispositions to $15 million to $20 million per year. However, if we see something that is going to be a very significant increase in our capital gain that we can redeploy the cash proceeds. It could go higher than $20 million. But right now, we're still estimating $15 million to $20 million. And that's kind of on an average basis, when we look two to three years out. But it could increase depending upon any crazy -- let's say, offers that we receive that make sense for us long-term.

And how are you thinking about the Austin office asset at this point?

I'm going to let Buzz expand upon that. Because Buzz was responsible for the tenant that we have in there right now and his team. And let him expand upon that.

I live and breathe that asset. It has -- obviously, we've refilled it, if you will to approximately over half of the building at a rental rate that gives us approximately 90% of the cash we were receiving in Austin off that asset at the time that, that tenant left. We have had some looks. Texas did go through, as we've hit the increase in the virus if you will. So the past 60 days have been relatively quiet, coming out of the New Year and so forth. However, recently, there has been an uptick in interest. Our leasing team is actively aggressive down both in Texas but also nationally and internationally as it relates to trying to bring tenancy. As you may know, Austin is exploding. Every day, it seems either a new tower is being announced to be built where new tenants such as TikTok is coming to town, taking a large bit of space. We also saw some activity as it relates to announcements, nothing concrete from tenancy of life sciences, actually across our -- from our building on Parmer. So we feel very confident that we are going to get some hits here relatively soon. We've had a couple people we've traded paper with. They have not come to fruition for various reasons. But as pointed out, I'm sure previously on calls, we have a strong rental rate that's very well north of where we exited with GM historically. So we believe there's good upside there and hope to have it filled relatively soon.

Okay. And then just one last maintenance one for me. Gary, what was the common and preferred capital that you issued in the fourth quarter? The release had the 2021 full year information, but I didn't see the quarterly issuance on the common and preferred.

I believe -- give me a minute.

We can follow up off-line. It could be email, whatever.

I'm sure we have it in our release, but I'll follow up on you.

All right. Thanks, guys. Appreciate the time.

Next question, please.

Thank you. The next question is from John Massocca with Ladenburg Thalmann. Please go ahead.

Good morning, everybody.

Good morning, John.

So going back to the pipeline a little bit. What's kind of the overall cap rate outlook for the potential acquisitions that are in the pipeline? Is it comparable with what was closed in 4Q? Or has there been any shift in cap rate? I know it's early days, but any shift in cap rate given some of the changes in interest rates here recently?

Well, in 2021, the average cap rate was about 7%. And I think that what we're looking at here from a long-term standpoint as well as short term, is we are looking at industrial anywhere from 5.25 to 6 going in cap rate. And then we're looking at office product that is at least 50 to 75 basis points higher. And of course, it depends on the market, depends on the credit and it depends on the term and the configuration. But I see us staying at that level, John. Buzz, you might want to expand upon it as to what we really now have that's closing in the next three months.

And to Bob's point, the average cap rate there is consistent with what we accomplished in 2021. Because of these cross regional opportunities, the cap rates are a little higher, which works to our benefit. And we are getting longer term. So I would expect them to be very similar to where we were in 2021. Of course, there's interest rate factors coming into the new deals that will have an effect. But I think we'll be pretty close to where we are today, if not better.

John, I think -- go ahead.

No, pick it up.

I was going to say, I think as we've noted in the past, we stay very close to Gary and his team as to what our true cost of capital is. And that of course, varies based on debt changes as well as equity costs. And so we just will not go forward with anything unless we have a 50 to 75 basis point spread over our cost of capital. And we have done that religiously and tend to do that going forward.

Okay. And then maybe looking at the in-place portfolio and putting Austin to the side a little bit because it's its own specific thing. What's the outlook for the lease up or sale of some of that remaining, let's call it non-Austin vacancy?

Are you referring to within the next -- this calendar year?

Just the general. I mean, I know it's not a huge number. But I mean rough numbers, let's say, you still have kind of 2%, maybe a little less than 2%, somewhere between 2% and 1% of the portfolio that's vacant that's not the Austin building or the remaining vacancy in the Austin building. And just what's kind of the outlook for any resolution to that vacancy going forward?

Okay. John. We've got 3 leases that are expiring this year, three in June, one in July and one in October. All three of those tenants, so that you know have told us they are going to depart. But one of the properties that is -- the lease expiration is in July, we're in final negotiations with a tenant to take that space. And then there's a property that in Salt Lake City and we have a good prospect for that. That's at about 40,000 square feet. And then the properties that the lease expires at the end of October, it's in South Carolina -- Columbia, South Carolina. And we've got one strong prospect for the entire building. I think if I had to put a probability on it, I feel very good about two of those, but it's out in the future. All three of those are office properties. And so we will be aggressive to lease the space, particularly under current conditions. Buzz, you want to expand upon that?

To Bob's point, we are aggressively working on the leasing side of all those equations as well. As I referenced with the office market, coming back a little bit, there have been inquiries relative to certain assets, whether it's a user that may wish to purchase it or occupy it or a value add shop. So we're looking at all alternatives.

Okay. And then on the balance sheet side of things, what does the market look like for refinancing some of the debt that's maturing? Where are you seeing rates today? And how is the outlook for kind of refinancing with mortgages versus going to more unsecured financing?

Well -- this is Gary. We are of course, seeing interest rates go up a little bit. I mean, we are seeing -- the Fed is saying they're going to raise rates in March and so forth. But the rates haven't really increased that much at this point. So I don't think it's going to really hurt our balance sheet or our income as we go forward to refinance. And as you referred to unsecured, that could be a potential option. So we're looking at these things and we are looking at the interest rates. But so far, we have not seen them bump up to a point where they're going to be a significant problem.

I mean if you had to say -- and I understand, obviously, by the time you come to refinancing, the markets may have moved one way or another. But is it kind of roughly a flat event? Could it potentially be accretive refinancing, non-accretive refinancing? How are you thinking about that today?

The mortgages coming due have -- I don't have the exact interest rate in my mind right now, but it's significantly over 4%. So right now, we would see a refinancing of those mortgages as accretive given today's interest rates.

Okay. Very helpful. That's it for me. Congratulations, Buzz. And I think we're going to have one more call, Bob. So I might save my congratulations. But if not, congratulations to you as well.

Thanks, John.

This is Gary again. I do have -- there was a previous question about the amount of equity from our ATM that we sold during the fourth quarter. And that was net of proceeds $12.4 million of the $36.6 million we sold for the full year 2021.

Okay. Next question?

The next question is from Craig Kucera with B. Riley. Please go ahead.

Hi. Good morning, guys. I may have missed this, but what was the contribution to revenue this quarter from the Austin assets that were leased in the third quarter, the former GM assets?

That -- it's about $1.6 million for the quarter -- the fourth quarter, which was the first full quarter of that asset.

Got it. So there was no free rent period tied to that -- those assets, correct?

That's straight line.

Got it. Okay. And I feel like earlier this year, you had leased up some vacancy in Tulsa. And I think that tenant was expected to start paying in the fourth quarter. Can you give us a sense of what they're paying and sort of what the outlook is there for 2022?

I don't have the rental figure right off the top of my head. Outlook is very good. They've made great improvements within the property and are going to look to I believe, start their shop working, producing product by the end of this quarter. They are paying rent currently.

Okay, great. That’s it for me. Thank you.

Next question?

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. David Gladstone for closing remarks. .

All right. Thank you all for listening. And thanks to Rob and John and Craig for good questions. And we hope to see you again next quarter. And right now, we're doing well. And I think the outlook is good as well. That's the end of this call.

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