Greetings and welcome to the Gladstone Commercial Corporation Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, CEO. Thank you, sir, you may begin.

Thank you, Latoya. That was a nice introduction and thanks to all of you for calling in. We appreciate this time we have with you on the phone, which we had more time to talk with you to make sure you understand what we're up to. Now, we'll hear from Michael LiCalsi. He's our General Counsel and Secretary to give a legal and regulatory matters concerning this call and the report.

Thanks David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. 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 the risk factors listed in our Forms 10-Q and 10-K and the other documents we filed with the SEC. You can find them on our website, which is gladstonecommercial.com, specifically the Investors page or 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. And today, we'll discuss FFO, which is funds from operations and is a non-GAAP accounting term defined as net income, excluding gains or losses from the sale of real estate, and any impairment losses on property, plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which is generally FFO adjusted for certain other non-recurring revenue and expenses. We believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. We ask everybody to take the opportunity to visit our website, once again, gladstonecommercial.com, sign up for our e-mail notification service. You can also find us on Facebook, keyword there is the Gladstone Companies. And on Twitter, we're at @GladstoneComps. Today's call is 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, if you go to the Investors page of our website, you can find them there. I'll hand the baton over to Gladstone Commercial's President, Buzz Cooper. Buzz?

Thank you, Michael. Good morning, everyone, and thank you for dialing in. I will cover the highlights for the last quarter to provide some comment on the state of the portfolio and market outlook before turning the call over to Gary Gerson, Gladstone Commercial's CFO, to review our financial results for the period and our capital and liquidity position. During the third quarter of 2022, we continued our focus on industrial acquisitions and improving operations. We amended, extended and upsized our syndicated revolving credit and term loan facility from $325 million to $495 million. We used the net proceeds to pay down mortgage loans and borrowings under our revolving credit facility. We acquired a 246,000 square foot industrial portfolio with locations in Vineland, New Jersey; Brighton, New Jersey for $32.5 million and a 15-year sale leaseback transaction. We acquired 67,000 square foot industrial building in Jacksonville, Florida for $8 million and a 20-year sale-leaseback transaction. We acquired 49,000 square foot industrial building in Fort Payne, Alabama for $5.6 million in an UPREIT transaction. We sold our Jupiter, Florida office property for $19 million, resulting in a gain on sale of $8 million and a levered IRR of approximately 18%. We sold 60,000 square foot office property in Parsippany, New Jersey for a 15% levered IRR. We sold 25,000 office property in Boston Heights, Ohio and leased 41, 225 square feet at our Parmer Austin, Texas office building to Cognizant Technology Solutions for a 5.7-year term at market rates. We leased and renewed 120,000 square foot at our Horsehead, New York industrial building for a five-year term at market rates. We leased 47,566 square feet at our Fort Lauderdale, Florida office building to Moss & Associates for 5.3-year at market rates. Subsequent to the end of the quarter, we acquired a…

Thank you, Buzz. Good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the third quarter of 2022. All per share numbers I reference are based on fully diluted average common shares. FFO available to common stockholders was $0.23 per share, and core FFO available to common stockholders was $0.44 per share for the quarter, respectively. FFO Adjusted for comparability and core FFO available to common stockholders during the third quarter of 2021 were $0.44 and $0.39 per share, respectively. FFO available to common stockholders for the three quarters ended September 30, 2022, was $1.21, and core FFO available to common stockholders for the same period was $1.22. FFO adjusted for comparability and core FFO for the three quarters ended September 30, 2021, were $1.20 and $1.17, respectively. Our same-store cash rent in the first three quarters of 2022 increased by 0.2% over the first three quarters of 2021. Our third quarter results reflected total operating revenues of $39.8 million, with operating expenses of $37.4 million, which included an impairment charge of $10.7 million on our Columbia South Carolina office property, as compared to operating revenues of $34.3 million and operating expenses of $25.5 million for the same period in 2021. Moving on to the balance sheet, we continue to grow our assets and focus on reducing our leverage. In the third quarter, we increased total assets by approximately $16.3 million. We continue to reduce our debt to gross assets and are now down to 44.8% as of the end of the quarter. We believe we are 1% to 2% away from our target leverage level. During the third quarter, we amended, extended and upsized our syndicated credit facility. We increased term loans from $225 million to $370 million and increased…

Well, that was a good report, Gary, and a good one from Buzz and Michael, too. The team has performed very well and reacted admirably to all the various changes presented by the pandemic and the economy. Overall, given all of these changes that are going on, I think we have had a very nice quarter and look forward to a good quarter going forward. You heard a lot today, numbers of new transactions, new leases, and the quarterly numbers are impressive. The team amended and extended our credit facility, which was coming due anyway, and they've done a great job of pushing it on up to $495 million. We collected all of our cash rents that we're accruing. So the team acquired also four industrial assets during the quarter for a total investment of $46.1 million, sold three office buildings. Again, that's our goal is to push out our office properties. So we sold three during the quarter. Also, lease renewals, 208,791 square feet, which is part of a 501,501 in total leases renewal to date. Subsequent to the end of the quarter, the team acquired industrial properties for about $12 million and sold an additional office property. So we're continuing to roll over and become almost purely operational oriented toward the industrial or commercial side. The commercial team continues to growing its real estate. We own at a good pace. The team is doing a great job. Very happy to say that the company is in great shape. As all of you know, we're in the middle market. Most of our tenants are middle-market companies. That's where we perform best. Our other funds have always been oriented toward the middle market. Like many of our tenants are being challenged now with inflation, pretty brutal when they move the inflation rate up so quick by spending so much money. Rising interest rates are a big threat to everyone in this business that's doing real estate transaction. The recession, while it might be categorized as a light recession, is still here. And the supply chain disruption seems to be getting better, but it's still there as well. I'm really proud to say that our tenants continue to pay their rents. These are times that's never been seen before, and there will be future challenges. But we have a first-class team, and I'm glad to say that they are up to the challenge. I personally have been around long enough to do seven or eight of these recessions, so I think we'll make it through this one as well. I'm going to stop now, and Latoria [ph], if you come on and tell people how they can ask us some questions, we'll try to give a little bit better answer to these questions that come up. First question?

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Gaurav Mehta, EF Hutton. Please proceed.

Thanks. Good morning. First question on your lease expirations. Can you maybe provide some color on the one lease that you have expiring in 4Q and then maybe some early color on the leases expiring in 2023?

Yes, Gaurav, I'm happy to do that. We are actively managing, obviously, the leases that are coming due. We have one property that the lease, down in South Carolina, is a property that we're aggressively working to re-lease it. We've had a couple of interested parties, although they have not come through, they are government in nature, very slow. So with that property, we're looking to see what other alternatives we have. That being said, it's going to be a challenge for us, we are working through it and aggressively monitoring it and trying to, again, affect a change with that property, whether perhaps through sale or occupancy. On the others that we have coming due in 2023, again, that one is the only one in 2022. We believe that several of them, we are either going to have sold or working to occupy. Specifically down in Texas, we have one or two that we are holding for sale currently and another one in Richardson we're looking to exit. We believe that the total we have is manageable. And again, the team has done a great job. Obviously, historically managing these vacancies and problem children, if you will, into highlight what David said, these office properties, we are looking to reposition or get occupied or out of as quickly as we can. Another question or….

Yes. One more, if I could. On the acquisitions, I look at the cap rate for 3Q at 7.2%. And then in 4Q, you acquired another property at 8.1% cap rate. The higher cap rate on the 4Q acquisition is that specific to that property or maybe that reflects where the market cap rates are moving with higher interest rates?

You are correct with the statement. It was a function of, honestly, the team doing a great job of having to go back with the high interest rate costs that occurred from the time of commitment with the seller we discussed with them in order to improve and maintain our economics, making the deal as accretive as possible. But as I mentioned, we are seeing some capital expansion. We hope that the sellers get on board with that sooner rather than later. But we will maintain our discipline as it relates to, obviously, our underwriting, but also making sure our deals are accretive. The team has had a couple that we've had to look to adjust, and we'll continue that where we need to do such.

Okay. Thank you. That’s all I had.

Thank you.

Okay, next question, please.

[Operator Instructions] Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed.

Good morning.

Good morning, John.

So maybe sticking with kind of the acquisition line of questioning, what are you seeing in terms of deal volume, particularly as we get into kind of the busy season here in 4Q? I mean we've heard from some peers that maybe the moves in interest rates have kind of created a buyer-seller disconnect. Is that what you're seeing? And then roughly speaking, what are you expecting for 4Q, either what's under PSA and LOI, just kind of broader expectations? And then maybe how are you looking at 2023 at this point?

So John, I agree with what you said in the marketplace. We are seeing a slowdown of opportunities. However, the team is -- look back here for the last 18 months to two years, has been very successful with, what I'll call, off-market sale-leaseback transactions. We are continuing that focus. We are hopeful that the sellers do get a bit of the understanding that cap rates need to rise due to the cost of, obviously, borrowing and on the transaction themselves. There needs to be some realization by them that they're not going to get what they were going to get nine months, 18 months ago. Deal volume is there, although, again, as I mentioned, we are seeing a slowdown in opportunities. Deals that are coming out that generally happens here toward the end of the year after we come out of the summer into fall. But we are seeing some off-market opportunities that we continue to pursue. And again, as mentioned, generally, sale-leaseback transactions with shops and otherwise. And certainly, in this environment, we have companies looking to sell their properties in order to generate cash to put into their businesses. And part of our underwriting, we understand where that money is going. We want to make sure it's going back to a great extent into the business itself. So I would reference that going into 2023, I think that we will see and be more discerning on the acquisition side, just as it relates to opportunities until these sellers get a little -- maybe a little more religion or pain as it relates to selling their properties.

Okay. And then on your balance sheet, what are you thinking about in terms of cost of debt right now? In 2023, it looks like it might be kind of a busy year in terms of refinancing. So what are you expecting in terms of cost of that debt maybe versus what's in place today?

Well, I think that we have swapped a fair amount of our term amount -- of term loans out. We continue to look at doing some more of that. I think overall, right now, everybody expects the short-term rates to increase. I'm looking at the forward curve right now. It shows getting as high as 5.1%. We're seeing mortgages in the sixes. So yes, we expect interest rates to go up. We expect that if we were to use mortgage debt that we would have a property that had a high enough cap rate to be able to be financed by that mortgage debt. And again, with our hedging strategy, we're trying to manage any of these interest rate increases. But yes, we certainly see that going up. And if we do see expenses going up, we'll have hopefully revenue to offset that.

John, I think we've locked these together, that is the interest rate we're paying on the debt is on the same term, long-term that we always look for matching the book on these things. So the mortgages we have in place are in pretty good shape to take care of us over the -- certainly in the next year or two. So I think, right now, we worry about new deals. And as you heard from Buzz, it's really hard to talk to some of these sellers, because they're still mind fixed on the prices that were floating around six months ago. And it's just not possible. And so there's a huge, disconnect between what we can borrow at and then allows us to pay and on the other end, what the seller wants to get out of that property. So it's -- it will take a while for that to work its way through people's brains and know the real problem of mortgage is high. And we can't go high on the property, because it would mean a loss for us. So we're holding steady. And I think we'll do well this quarter. It's anybody's guess, where we're going to be in 2023, but I think we will be the same.

Okay. And then on the in-place portfolio, apologies if I missed this earlier in the call, but any update on kind of the last bit of Austin, the lease-up? How is that looking? And what's the outlook for that property, if you kind of get it closer to fully leased up, the kind of interest rate environment changed, whether that's a disposition candidate or not?

We do have a couple of prospects relative to the remaining square feet of approximately $100,000 in that building. The cash flow on that building is now positive as it relates to what it was when GM occupied the full building. As it relates to Austin itself, there has been a slowdown that is occurring there, as it relates to both residential, as well as there's a great deal of sublet space on the market. And that, of course, creates a drag for us with prime space. That being said, we are having some discussions internally as it relates to that building, making some assumptions and projections as it relates going forward into 2023. We love the cash flow coming off that building, but I do believe that if we can increase the value, there may be a repositioning of it to allow us to, again, go buy some more industrial product.

Is there still a market to kind of recycle out of that asset given where interest rates are today?

And I didn't catch that a market to sell?

Recycle out of that, the Austin property, given the interest rates are today.

Yes, I believe there is. Honestly, we'd like to have that second floor occupied in order to make it more valuable because of the decrease in potential value as it relates to the interest rate cost. But that being said, yes, I do believe there is. It is well-positioned within that farmer space as swing space for the development that's going on around it.

All right. That was from me. Thank you very much.

Thank you. Okay. Next question?

Okay. Next question comes from Craig Kucera with B. Riley. Please proceed.

Yes. Hi. Good morning, guys. Yes. Just one for me. Given your unique viewpoint into the middle market, a lot of which is manufactured based in your portfolio, are you seeing any signs of stress among your tenants, maybe categories where their input costs are outpacing their ability to raise prices? And does that give you any pause on acquiring any assets in any particular category?

I think, cash flows, generally speaking, are in pretty good shape for us. We've chosen tenants that are strong or stronger than most in the market. So I think we're in good shape for that. There's no question that interest rate hikes hurt everybody in this business. It means we can't add a lot of new transactions, and there are plenty of transactions out there, but there's this huge disconnect between what we can pay because of higher interest rates and what the tenants willing to pay. So we're treading lightly here. I hope it will shake out, and people will get some idea that the marketplace is driving everything. And it's not something we're trying to gouge somebody to get a better deal. But I don't think there's any change on the horizon in terms of interest rates going down in 2023. And so I think we're going to be working hard for our money on 2023. It's not going to be the easy money world that we lived in for so many years. We are perfectly positioned in order to take the -- whatever comes at our way. We've got good bankers. We're not wired into one banker only. We've diversified our banking group. And in addition, we have a wonderfully diversified portfolio, not only in geography, but also in kinds of manufacturing plants that are out there. This is back to Buzz' old hometown of looking at small businesses and making loans to small businesses because it's really down to the credit quality of the tenant. It's not so much as this a great piece of property. Sure, you want a great piece of property, but you want a good, strong tenant that can keep paying. And I think we're in that shape.

Okay. Thank you.

Are there any other question?

There are no further questions at this time. I would like to turn it back to you, Mr. Gladstone, for closing comments. Well, we thank all of you for calling in. It's a nice time to spend with you. And I hope in January, when we talk again, you have a lot more questions for us. We like the questions. That's the end of this call. And thank you, Latoya.

This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation, and have a great day.