Greetings and welcome to the Gladstone Commercial Corporation Second Quarter Earnings 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, Mr. David Gladstone, Chief Executive Officer. Thank you. You may begin, sir.

All right. Thank you very much. Very nice introduction. And thanks to all of you for calling in. We really do enjoy this time we have with you on the phone and wish we had more time to talk with you. But first, before we get started, Michael LiCalsi, our General Counsel and Secretary is to give a little legal and regulatory matters overview. Michael?

Thanks, David. 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. 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 filed with the SEC. If you go to the Investors page of our website, you can find them there. You can also find them on the SEC's website at 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. Today, we will discuss FFO, which is 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 and any impairment losses on property, plus depreciation and amortization of real estate assets. We'll also discuss 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. Please take the opportunity to visit our website, once again, that’s gladstonecommercial.com to sign up for our email notification service. On Facebook, you can find us at The Gladstone Companies, and on Twitter, the handle is @gladstonecomps. Now, 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, that's on the Investors page of our website. With that, I'll turn it over to Gladstone Commercial's President, Buzz Cooper. Buzz?

Thank you, Michael, and thank you all for calling in. Today, we will discuss economic and portfolio topics that are top of mind. The country is going through a transitional period economically, which has affected the commercial property markets. Although remote work and lingering effects of the pandemic have weakened the office property market, the industrial property markets remain strong. As we continue to pivot to a higher percentage of industrial assets by divesting non-core office assets, we are lowering our exposure to office market and de-risking our portfolio. I would like to highlight several positive developments. Our overall portfolio remains stable and strong and we continue to see attractive acquisition candidates. Further, we continue to have success with re-tenanting and capital recycling into industrial assets. With these facts in mind, let me move on to a discussion covering the results of the last quarter, provide some comments on the state of the portfolio and market outlook before turning the call over to Gary Gerson, our CFO, to review financial results for the period and our capital and liquidity positions. During the second quarter of 2023, we continued our focus on industrial acquisitions and improving operations. We acquired a 76,000 square foot industrial manufacturing facility in Riverdale, Illinois at a GAAP capitalization rate of 9.7%, fully leased our 119,224 square foot office building in Fort Lauderdale, Florida for 11.1 years, executed a lease with a sub-tenant of our 125,682 square foot industrial property in Milwaukee, Wisconsin for 10 years through 2038. We extended the lease of our 220 -- excuse me, 220,500 square foot Monroe, Michigan industrial facility for an additional five years, extended lease at our 13,919 square foot Cumming, Georgia medical office building for an additional five years, extended the 22,031 square foot lease at our Burnsville, Minnesota…

Thank you, Buzz. I'll start my remarks regarding our financial results morning by reviewing our operating results for the second quarter of 2023. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common stockholders were both $0.41 per share for the quarter. FFO and core FFO available to common stockholders during the second quarter of 2022 were both $0.39 per share, respectively. FFO and core FFO for the six months ended June 30, 2023 were $0.77 and $0.78, respectively. FFO and core FFO for the same period in 2022 were both $0.78 per share. Our same store cash rent in the first two quarters of 2023 increased by 9.5% over the same period in 2022. This was primarily due to one-time accelerated rental payment from a lease termination. Our second quarter results reflected total operating revenues of $38.7 million with operating expenses of $33.7 million as compared to operating revenues of $36.4 million and operating expenses of $27.8 million for the same period in 2022. Operating expenses were higher in this period in 2023 mainly due to an impairment charges of $6.8 million taken against three office properties, all of which are currently held for sale. In connection with the preparation of our financial statements for the second quarter of 2023, we identified errors in the calculation of depreciation of tenant funded improvement assets at a number of our properties. We had depreciated these assets through a term that was different than their useful lives. Their correction resulted in changes to depreciation expense, a non-cash amount and net income. The correction of these errors had an immaterial impact on the incentive fee and no impact on any other advisory fee. The identified errors were included in our…

Well, thank you very much, Gary. That was a good report, good one from Buzz as well, and Michael. Team has produced very well this quarter and reacted admirably to the various challenges presented by the lasting impact of the pandemic and our economy that seems to be in a bit of turmoil. Overall, we have a nice quarter. You've heard a lot today. Summary, during the quarter we had 76,000 square foot building in industrial building and we collected 100% of cash rents. We also reviewed and leased 502,000 square feet of remaining lease terms from 5.4 to 14 years and six of our properties. So we're going right along in our renewals. Subsequent to the end of the quarter, we acquired two additional properties, including 100,000 square foot industrial facility. We also renewed 397,000 square feet of remaining lease ranging from 13.9 to 18.7 years at two of our properties. So again, everything is filling out as we'd like to see it. The commercial team is growing the real estate own at a good pace and the team is doing a great job of managing the properties we own, especially during these times that are a little bit challenged by all the interest rates. The company outlook, again, the team is strong, professionals continue to pursue potential quality properties on the list of acquisitions they are reviewing. Our acquisition team is seeking strong credit tenants. They know that the quality of the tenants is that -- on the real estate make an excellent investment. Our asset managers are actively managing the properties that company owns in order to maximize their value. It is a different environment that we're in and the team is doing a good job of doing that. So I'm going to stop here and let the operator come on and help us listen to some questions that should be asked from some of the listeners.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Rob Stevenson with Janney Montgomery Scott. Please proceed, sir.

Good morning, guys. So you had -- call it, a little over $63 of assets held for sale at June 30. Sold one already for just under $7 million. So call it $57 million more or less still held for sale. What's the expected timing on those remaining five dispositions? Are they likely to close in third quarter? By year end? Or some of that spill over into ‘24? And where's pricing coming in versus your acquisition cap rates?

Thanks, Rob. I will give a shot at this. Also, I have my Chief Investment Officer, EJ Wislar here. Of the number you mentioned, I think one may bleed into ’24. Other than that, not expecting such. And the reason would be, it is a repositioning within the marketplace of the property. So it could fall into '23, but most likely, I think it'll be first quarter '24. And as it relates to valuations, I don't have the exact figure of what we -- as we laid out with impairment, but other than that, I can't be certain because a few of them honestly have some necessary adjustments coming to it currently as we go through due diligence.

Okay that’s helpful. And then how should we be thinking about the investment grade tenant base in the portfolio? If I go back pre-COVID, year-end 2019, your portfolio was 63% investment grade tenants. Now it's 51%. I assume that the vast majority of that is the migration from investment grade office tenants to industrial. But when you're looking at new acquisitions, how are you guys thinking about the credit quality of industrial tenants in the sort of smaller and mid-range assets versus the sort of underwriting that you did when you were focused on investment grade office tenants?

Again, I'll let EJ have a statement here as well, but we have not gotten away from our historical and prioritized underwriting as it relates to all of our tenants. We lost some credit tenants as it relates to their either going remote and we're selling buildings. But as it relates to our internal underwriting as well, we have maintained those standards. EJ?

Yeah, it's obviously really important to us on the underwriting side to your point to make sure we're putting good credit tenants into the portfolio. As we've moved more into industrial to your point, you do see more middle market type businesses, especially in the manufacturing space. What we do find though is you're able acquire assets that are a lot more mission critical to the tenant. So you have a lot higher renewal probabilities than your legacy office assets. So it’s a bit of a balancing act as we look to construct the portfolio. But for us, it's -- the key is making sure that the asset you're acquiring a major revenue and EBITDA driver to the underlying business in order to ensure a high renewal probability mixed in with the overall corporate strength of that tenant.

Okay, that's helpful. And then, Gary, you guys bought back $1 million of stock. What was the average price there or how many shares did you wind up buying? I didn't see that in the release.

We can get back to you on the average price. I believe it was somewhere around $12.

Okay.

But, in around 90,000 shares, something around that neighborhood.

Okay, that's helpful. And then lastly, you guys paid down -- in the release, you guys paid down $36 million of debt here in the third quarter. Any disposition proceeds off of that stuff likely to be used to pay down additional debt? Is it -- are you still in the market to buy back stock? Is it just going to be to fund acquisitions? How are you thinking about sort of uses of proceeds from the dispositions and any type of free cash flow at this point?

Obviously, we look to redeploy capital into industrial acquisitions as we've stressed. We'll be talking internally as to whether or not we continue to look to buyback at this point. It is on the table. But at this point in time, what we want to do is redeploy that capital into, for lack of a better word, higher accretive deals.

Okay. That's helpful.

And obviously, move away from [indiscernible].

All right guys, thanks.

Just so you know, Rob, it was 80,000 or so shares at an average price of $12.40.

Okay. Do we have a new question?

Thank you. Our next question is from Craig Kucera with B. Riley Securities. Please proceed sir.

Yeah. Hey, good morning, guys. Could you give us a little bit more color on the lease termination this quarter, where the tenant was located, anything in that regard?

Certainly. I'll let EJ have that. He did a great job with his asset manager on getting that completed for us.

That was specific to the Fort Lauderdale office property where Citrix was the legacy tenant there as part of their take private few years ago, they’ve gone remote. And so we've been working with them, putting a sub-tenant in, and we worked then with a sub-tenant to make that a prime lease. It’s a great opportunity for us to effectuate a termination fee and go direct with the tenant that took the entire facility. The cash value of that was approximately $2 million, offset a bit by some deferred rent assets there. So it was a great outcome there, being able to execute it over a 11-year lease to go direct and make that their corporate headquarters for the new tenant.

Got it. That's helpful. And did you mention with the two dispositions this quarter, what the cap rate was?

I don't think we mentioned it, but on average, I may have to get back to you on that. I'm not sure I have that handy.

Yeah, it's for the -- one of them had some vacancies, so a true cap rate on in-place wouldn't be the best way to look at it. The office building that was sold subsequent to the quarter was fully leased and that was exited just inside of a 6.5% initial cap. So we'll be looking to redeploy that at least at 200 basis point spread. So that'll be a good outcome there.

Got it. And a big pickup in assets you are expecting to sell, of course. Are -- is one of those buildings, the former Verizon call center that went dark at the end of last year? And can you just give us some color on what the sort of average occupancy of those buildings is?

Verizon is a big one. We are looking forward to that sale in this quarter. We are waiting for a blessing in order for it to close from the municipality and that will get that off our books. That's the primary, if you will, [size one] (ph) that I think you're referring to.

Correct. Got it. And I guess what I'm just looking for is just some color on, are these office assets that have meaningful vacancy or they -- are there any industrial assets in that pool or just any color would be helpful?

There's not any industrial assets in that class and relative to the -- Verizon was a single-story office. Our two-story building in Richardson, Texas. And again, I'll point out these are held for sale obviously with PSAs on them. We're currently being negotiated. And total square foot there is 558,000 square feet. And again, we should get them all done, save one by the end of this year.

And to that point, the majority of those have some vacancy or are completely vacant. And so the thought process there as we kind of look at the office market today, there are some office markets where there is still good activity like Fort Lauderdale, but in certain markets where absorption is negative or leasing is very slow, we view it as a more prudent capital allocation strategy to exit those deals, redeploy them versus sinking money into those buildings. So that's kind of the thought process there and should hopefully see an uptick in occupancy we move through those vacant assets.

Okay. That’s helpful. And I apologize, but there was some background noise when you were reading through your comments on your sort of acquisition pipeline and what was under due diligence, et cetera. Can you go through those again just so we have a little clearer listening on that?

What I'll do, just so that it is more clear, is I'll let EJ provide an update on that for you. But the team is actively engaged looking at many opportunities.

Yes, look, the pipeline is about $408 million plus or minus. Two deals. We have LOIs out. We had closed a few deals recently subsequent to quarter end, so nothing's currently in diligence. We’ve got a few deals we think are very actionable at the moment. We're viewing a lot. And as Buzz mentioned in the prepared remarks, I'm seeing a lot of interesting sale leaseback opportunities.

Got it. And are you at this point comfortable handicapping sort of what your expectations are on the acquisition front for the rest of the year or third quarter or is it still sort of TBD?

I'd say it's more TBD. Obviously, with the -- as it relates to what cap rates are doing and the availability of capital and debt.

Got it. And just one more for me. We've seen REITs, I think, in a lot of sectors sort of pick up their activity of stepping in as sort of a temporary lender for merchant builders. I don't know if new product necessarily fits kind of what you've been doing on the industrial front, but is that something you guys are looking at as far as sourcing some additional transaction volume?

I don't know if we're going to be merchant builders per se. We certainly would look at, and have been exploring internally how we can generate more business, whether it's through JV or otherwise. But I'll let EJ have a throw at that.

Yeah, to your point, obviously, with a lot of regional banks and banks sort of on the sideline, the construction lending world. We have seen some groups private in public that are traditionally equity players stepping in to provide construction financing. We see those opportunities. We have some of those discussions. In our view, as we kind of look at our capital allocation strategy, you can still see better returns on the equity side, especially in the sale leaseback space as we look to construct a long-term weighted average lease term for our portfolio. So, we look at those, I don't see us doing any in the near term.

All right. Thanks.

Thank you.

Do we have another question?

Thank you. As there are no further questions at this time, I am turning the call back to Mr. David Gladstone for closing comments. Please proceed, sir.

Well, we thank you very much for good meeting and wish you all well and we'll see you next quarter. That's the end of this call.