Greetings, and welcome to the Gladstone Commercial Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, CEO. Thank you. You may begin, sir.

Well, thank you, Latania. Good to hear from you again. That's a nice introduction, and thank you all for calling in this morning. We enjoy this time we have with you and on the phone, and I wish we had more time with you. Now I'll turn it over to Catherine Gerkis, she's our Director of Investor Relations and she will provide a brief overview regarding certain items in this report today. Catherine, go ahead.

Good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements, due to various uncertainties, including risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comps as well as Facebook and LinkedIn, Keyword for both is the Gladstone Companies. Today, we'll discuss FFO, which is funds from operations, 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 may also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's President.

Thank you, Catherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending September 30, 2025, our current portfolio and our 2025 outlook. From a macro level, Q3 provided a welcome sense of stability and positivity in the capital markets. The Fed reduced their funds rate by 50 basis points this year and long-term rates trended downward as well with a 10-year treasury making its way back to the 4% range. New acquisition offerings had the typical summer slowdown with an uptick after Labor Day weekend. We also noticed a gradual downward trend in asking cap rates, which we expected as those tend to move in harmony with long-term treasury yields. In spite of the standard summer slowdown, our team achieved several key accomplishments both at the balance sheet and portfolio levels. Dealing with the portfolio first. As we have discussed in the past, we remain steadfast in several key focus areas: growing our industrial concentration, adding value on our existing portfolio through renewals, extensions, strategic capital investments, and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By concentrating on these key focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates and straight-line rental growth across the portfolio. These focus areas drove our activity in Q3. Regarding industrial concentration, we acquired a 6-facility cross-regional industrial manufacturing portfolio via a $54.5 million sale-leaseback transaction. This brings our acquisition total for the year through Q3 to $206 million and brings our industrial concentration to 69% of our annualized straight-line rents compared with industrial concentration of 63% at the start of the year. We're making great progress along those lines. As it relates to our working our existing portfolio, our asset management team continues…

Thank you, Buzz. I'll start my remarks regarding our financial results this morning. by reviewing our operating results for the third quarter of 2025. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO share available to common stockholders for both $0.35 per share, respectively. FFO and core FFO available to common stockholders during the third quarter of 2024 were both $0.38. FFO and core FFO for the 9 months ended September 30, 2025, were $1.02 and $1.03 per share, respectively. FFO and core FFO for the same period in 2024 were $1.07 and $1.08 per share, respectively. Same-store lease revenue increased by 3.1% in the 9 months ended September 30 over the same period in 2024 due to an increase in recovery revenue from property expenses and an increase in rental rates from leasing activity subsequent to the 9 months ended September 30, 2024, partially offset by a settlement received at 1 of our properties related to deferred maintenance in the prior period. Our third quarter results reflect the total operating revenues of $40.8 million with operating expenses of $26 million as compared to operating revenues of $39.2 million and operating expenses of $28.5 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates, expenses were lower in the third quarter of 2025 versus the same period in 2024, mainly due to an impairment charge in 2024 and crediting back all the incentive fee in 2025 offset by higher depreciation and property operating expenses in 2025. In Q3, we increased net assets from $1.21 billion to $1.265 billion, which was a result of the portfolio acquisition this quarter. During the quarter, we increased our revolver commitment by $30 million to…

Well, it's a good day today. It is a good one for Buzz and Catherine too. The teams are really performing very well. Overall, a very nice quarter for all of us, I enjoy those dividends, I'm sure you guys do. We acquired a 6-facility industrial portfolio for a total of $54.5 million during the quarter, and we sold 1 industrial property and completed leasing activities on 14 properties comprising of 734,000 square feet. That is an annual increase in our straight-line rents of about $1.1 million, so that's nice to see. Subsequent to the end of the quarter, we extended and increased our bank credit facility, which is now at about $600 million. The commercial team is growing the real estate we own at a nice pace, and we're doing a good job of monitoring properties we own, especially during some of these challenging times that we have. Our team is strong professionals and continue to pursue potential quality properties on the list of acquisitions they are reviewing and our acquisition team is seeking strong credit tenants. Well, that's a good summary, and let's move on now to some good questions from those. So operator, Catania, could you come on and call on these people, and let's hear some questions from them.

[Operator Instructions] The first question comes from Gaurav Mehta with Alliance Global.

I wanted to ask on your industrial allocation, it's running close to 70% target that you've talked about in the past. I wanted to get some more color on what you expect going forward? Do you expect that industrial allocation will keep increasing beyond 70%? Or are you around where you want it to be?

Thank you, Gaurav. Yes, we do anticipate that increasing going forward. Obviously, there may be some ups and downs as it relates to dispositions within the portfolio. But our intent is to increase our industrial percentage as it relates to the straight-line rent going forward, certainly for the foreseeable future.

Okay. Second question I want to ask is on your expenses. The same property operating expenses for third quarter and year-to-date are running at more than 20%. I just want to get some more color on the expense increase you're seeing in your portfolio.

We had some capital expense items.

Are you talking about operating expenses?

Yes, same property operating expenses.

We have -- unfortunately, we've seen increases in expenses mainly due to things like inflation, and that's one of the main drivers.

Insurance.

Yes. And that's -- and those are the -- insurance is -- that's been driven by returns for insurance companies as well as inflation.

And as you know, Gaurav, we pass on to the tenant and what we can and charge them back as it relates to the structure of the lease. But as Gary references, we have seen obviously a little effect of inflation and costs rising.

Okay. And then lastly, on the capital expenditure for third quarter at more than $10 million. Can you provide some more color on what drove that higher?

What drove that higher was renewals. You noticed we had several renewals both from the second quarter into the third quarter. And so as a result of that, that's positive CapEx accretive to the company as it relates to those dollars put out, obviously are keeping tenants, adding tenants and with increased rents.

Okay. Operator, do you have some more questions?

Next question comes from Barry Oxford with Colliers.

David, just to build on that CapEx being higher in the quarter. How do you think of that in relation to the dividend? Are you confident in the dividend when you look at your CapEx expenditures going out. Now I realize that that's kind of good CapEx because on the renewals, you're going to be getting higher income going forward. But how do you think about the dividend in relation to the CapEx?

The dollars going out are accretive. So I don't see that it has an effect relative to the dividend other than at some point in time increasing.

Okay. And then switching gears. When you look at the acquisitions pipeline for now and going out into '26, do you feel you can match '25 or just too early?

I think it may be a little too early. We obviously plan to and hope to, we have 2 transactions currently that we'd love to see getting the door perhaps by the end of the year, if not into the next. I think 1 may fall into this year. Competition, as we have referenced previously and I think as all of us do, is strong. But again, as we've worked on our balance sheet and look to bring our cost of capital down, we believe we'll be able to be competitive in the marketplace. And again, the team is doing a really strong job uncovering off-market transactions as well as repeat transactions.

The next question comes from Craig Kucera with Lucid.

I saw in the Q that you had on lease termination. Can you give us some color on the tenant and what type of assets it is? And was that the termination fee?

No, we didn't have a termination fee. We had 1 lease termination. I believe that was the...

[indiscernible].

Okay. I thought I saw some accelerated right now. I was just trying to figure out when and how that would be recognized because none of it has been recognized yet year-to-date.

We'll look into that. Honestly, I need to -- I'm trying to get a little help here. Okay. We did have 1 small tenant quest that we did terminate and we're rolling into a new lease within that building in Ohio. So the termination was let the tenant out, but a new tenant jumped right in and took more of that space in the building.

Got it. So with that remaining termination fee be recognized in the future? Or is that not going to be recognized?

There was no fee. We just terminated that and rolled right into the new tenancy.

Okay. That's helpful. Changing gears, you stepped up and certainly added to your automotive exposure here with the portfolio acquisition. I think it's now about 15% of our ABR. Just given the recent bankruptcy news out there, I'd be curious to hear your thoughts on the space and how it relates to what's in your portfolio.

One thing, of course, and we have shown this over the years, we do extensive underwriting within our tenancies, as you know, and we have a robust investment committee. We do keep an eye on our concentration. Yes, we have 1 asset you know with GM down in Austin, Texas, that is not, for lack of a better word, concerned from a credit standpoint nor are they a manufacturer, it is an office building and that does mature at the end of next year. So we are currently looking to reposition that property as we get into next year with hopeful additional tenancy or end user. So when you do calculate that, we have to take into consideration the fact that, that's strictly just an office building in a good market, but unfortunately, in Austin, there currently is about $5 million, both industrial and office under construction. So we have heavy competition there. But as I mentioned, that we do underwrite heavily to keep an eye on concentration, but we feel confident with the tenancy that we have.

Okay. Great. Your leverage has ticked up year-over-year. You've obviously been very active in the acquisition market, issued some equity but mostly debt. I'm curious, are you looking to maybe ramp up your asset sales to maybe bring down leverage or any dispositions on the horizon expected?

No. I mean we'll continue to, with our capital recycling program, to reinvest into more secondary markets, from tertiary markets, industrial, from office and so forth. But what we will probably be doing is issuing a little more equity and bringing our leverage down upon new acquisitions. So when we acquire a new acquisition, we'll probably put more equity into it to continue to delever the balance sheet. Yes, we got -- we're a little higher than we want to be. But I think the results speak for themselves, and we're going to -- we're not going to go higher on the leverage than we are today.

The next question comes from Dave Storms with Stonegate.

Just want to start maybe trying to get a read on where you see cap rates at or going? I know it was mentioned in the prepared remarks that you're seeing rates move down with the rate cut, the Fed rate cut. But it looks like between last quarter's acquisitions to this quarter's acquisitions, the weighted average cap rate expanded by like 65 basis points or so. Is this more one-off transactions? Or maybe just any thoughts there around cap rates?

We do see cap rates coming down. I think that there was an anticipation of a greater rate cut than what occurred. So that had an effect, obviously, and does at the moment. We'll see what happens, I guess, in December. But we do see cap rates compressing a bit. So we hope to take advantage of that, again, from our capital and the cash that we have on hand. But we are seeing good accretive plus 8.5% on average cap rates for us, and we just hope to find other good solid and you noticed we've moved up as it relates to the size of transaction going forward at the end of this year, but also into '26.

That's very helpful. And then maybe just circling back to some of your underwriting. Are you seeing any impact from the government shutdown on any of your tenants, maybe you can call up as second order impact, anything like that?

We actually have not. And as you know, we have a very robust property management team. One of the foundations of this company is our underwriting and the portfolio management team staying in front of our tenancies and they have not, as they've checked in with them, had expressed great concerns as of this moment as it relates to the shutdown.

The next question comes from John Massocca with B. Riley.

Maybe touching on the CapEx -- maybe touching on the CapEx spend during the quarter a little bit more. I mean, is that typical of what we should expect going forward as you kind of address some of the remaining '26 and '27 lease expirations and get in front of them? Or was this quarter just because of the amount of leasing activity may be a little abnormal relative to what you would expect as we look into 2026?

Yes, I would say you're correct. Just as we did have great success with a great number of re-leasings as we look forward into '26 and even '27. Several of our tenants, we've been in contact with all of them, and we feel confident on the renewals and the properties involved, honestly we don't see the heavy CapEx we've had this past 9 months, the past 3 quarters. We do see it trailing down. So again, it's good dollars spent, but we are not anticipating as heavy a hit.

And now in the spending in the quarter, does that reflect at all the mix of the lease -- leasing activity being between office and industrial? Is it -- I guess it was a heavier office component this quarter? Or just kind of curious if there's another factor involved.

No other factor involved as a combination between the 2 with and again, office is more expensive than industrial. So it was more weighted toward office, which, of course, extending those terms will become part of our capital recycling moving out of office.

And then on the investment front, just given where kind of cost of capital is moving both on the debt and equity side for you all, how should we think about kind of a return hurdle you're looking at, either in terms of a GAAP cap rate, cash cap rate IRR, I mean, are you still, you think, in a place where your cost of equity capital allows you to be expressive on the acquisition front? And a, kind of how is that looking versus what you're seeing in terms of cap rate movements in the pipeline?

And the cap rates within the pipeline, if you will, and what we see is some compression. We do believe we'll have to -- as we analyze our transactions depending on where our cost of capital goes. We're averaging north of 8.5% and I see that going forward. And again, as we move up the chain as it relates to size a little bit, hopefully, we'll have a little better efficiency as it relates to those cap rates.

And I guess at 8.5%, if that's where cap rates are today, do you think you're able to kind of -- your cost of capital is at a place where that's essentially you have a green light to acquire assets?

Yes.

At this time, I would like to turn the call back over to Mr. David Gladstone for closing comments.

Well, thank you. We've got a good team, and they've done a good job and we continue to grow the assets and pretty soon, we'll catch up with some of those bigger deals out there. But hopefully, this next quarter is going to be just as good as the past quarter. That's the end of this, and we thank you all for calling in. Next time, be more prepared with more questions. We like questions because that tells us where you're thinking and where you're going.

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