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Greetings, and welcome to the Gladstone Commercial Corporation Third 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, David Gladstone, Chief Executive Officer. Please proceed, sir.

Thank you so much for that nice introduction, and thanks to all of you for calling in. We enjoy this time we have with you on the phone and wish we had more time to talk with you. Now, we’ll first hear from Michael LiCalsi, the General Counsel and Secretary, who gives us good legal and regulatory information. So, Michael, go ahead.

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. 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 those on Investors page of our website, gladstonecommercial.com, 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. Today, we’ll discuss FFO, which is funds from operations. It 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. We believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. Please go to our website, once again, gladstonecommercial.com, sign up for our email notification service. You can also find us on Facebook, keyword The Gladstone Companies, and Twitter, 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. With that, I'll turn it over to Gladstone Commercial's President, Buzz Cooper.

Thank you, Michael. Thank you all for calling in. Today, we will discuss our operations and topics that are top of mind. Before discussing portfolio developments, I would like to briefly highlight the broader economic backdrop in which we operate In July 2023, the Fed raised rates by 25 basis points, raising the target policy rate to its highest level in 22 years. The impacts of the Fed's policies are becoming more pronounced in the real estate world, with new construction starts across all asset classes slowing significantly. The office market continues to feel the impact of work from home dynamic, while, despite a slight slowing in rent absorption, the industrial market continues to outperform, which is driven primarily by e-commerce demand and reshoring initiatives. Uncertainty in geopolitics, capital markets, and Fed policies, continue contributing to volatile real estate markets today. Despite this uncertainty, we are sticking to our core strategies, divesting non-core office assets, acquiring mission-critical industrial assets in the path of growth markets, and diligently underwriting tenants credits. By focusing on these strategies, we believe we position our portfolio for growth and outperformance. With that, I would like to highlight a few portfolio developments for the third quarter. First, as of September 30th, our industrial concentration as a percent of annual straight-line rent increased to 59%, a strategy we initiated and have stated since before 2019. We acquired 100,000 square foot industrial manufacturing distribution facility in Cedar Hill, Texas, for $9.1 million in a 20-year sale leaseback transaction at a GAAP cap rate of 10.1%. We acquired a 7,714 square foot medical property in Burleson, Texas, with a 10-year lease in place. We sold three office assets in Pittsburgh, Pennsylvania, Eatontown, New Jersey, and Taylorsville, Utah, for a combined $19 million in three separate transactions. We extended two leases on our Wilmington, North Carolina industrial asset, and New Albany, Ohio, office property. The new leases resulted in term extensions through 2037 and 2042, respectively, and straight-line rent increases. During the quarter, our asset management team grew same-store revenues by 5.4% Q3 2022 to Q3 2023. Subsequent to the end of the quarter, we acquired a 69,920 square foot industrial manufacturing distribution facility in Allentown, Pennsylvania, for $7.8 million in a 20-year sale leaseback transaction at a GAAP cap rate of 9.2%. Again, subsequent to the end of the quarter, we also acquired a 67,709 square foot industrial manufacturing distribution facility in Indianapolis, Indiana, for $4.5 million in a 20-year sale leaseback transaction at a GAAP cap rate of 10.8%. These developments are all consistent with our outlined strategy and our team continues to create value through the repositioning and sustained disposition of our legacy office assets. Year-to-date, we have sold six office assets and executed new leases or extensions at an additional five office assets. The combined GAAP cap rate on new acquisitions during the third quarter was 9.54%, and the disposition cap rate on stabilized office sales was 8.23%, resulting in 130 basis point increase in yield. This capital recycling is highly accretive to the portfolio in the short term, and better positions the portfolio in the long term. Another example of the strength of our portfolio, we were able to generate a same-store GAAP rent increase of 38% at our Fort Lauderdale office asset by executing a full building lease. This was a tremendous outcome for our shareholders, and allows us to be strategic with our long-term plans for that asset. Since 2019, our industrial concentration as percentage of annualized straight-line rent has increased from 32% 59%. Furthermore, all industrial acquisitions are mission-critical to quality tenants in well-located growing MSA. Our new acquisitions are all poised to benefit from reshoring initiatives as corporations try to insulate themselves from geopolitical tensions to bring their manufacturing operations back to the United States. I would also like to point out that the company has collected 100% of rents since the beginning of year. Going forward, we plan to continue targeting industrial assets, particularly leveraging our experience in negotiating acquisitions for sale leaseback transactions. We appreciate these transactions as opportunities to negotiate leases that are mutually favorable for both the buyer and the seller, and utilizing our tenant underwriting skills. We will always evaluate third party transactions as well, with a goal of further increasing our industrial concentration in the next six to 12 months. As of the end of the quarter, our pipeline consists of $366 million of opportunities. $45 million were in the LOI stage, with the remainder under initial review. While the bid-ask spread between buyer and sellers narrowed somewhat in the third quarter, we expect to see more opportunities at attractive yields in the new year as seller expectations normalize. I'll now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and our liquidity position. Gary?

Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the third 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 $0.33 and $0.34 per share for the quarter, respectively. FFO and core FFO available to common stockholders during the third quarter of 2022 were $0.43 and $0.44 per share, respectively. FFO and core FFO For the nine months ended September 30, were $1.10 and $1.11, respectively. FFO and core FFO for the same period in 2022 were $1.21 and $1.22 per share, respectively. Core FFO was affected this quarter by one-time expenses related to property distribution, professional fees, and increased interest costs. FFO was further affected by derivative maturities and defeasance costs. Our same-store rent in the first three quarters of 2023 increased by 5.4% over the same period in 2022. This was due to a one-time accelerated rental and increased recovery revenues. Our third quarter results reflected total operating revenues of $36.5 million, with operating expenses of $29.6 million, as compared to operating revenues of $39.8 million, and operating expenses of $37.2 million for the same period in 2022. Operating expenses were lower in this period, mainly due to $6.8 million of impairment charges taken in 2023 versus $10.72 million taken in the same period in 2022, waiver of the incentive fee in 2023, and reduced depreciation expense in 2023 due to revisions related to tenant-funded improvement assets also resulted in lower operating costs. Looking to our debt profile, 41.6% is fixed rate, 49% is hedged floating rate, and 9.4% is floating rate, which is the amount drawn on our revolving credit facility. As of September 30, our effective average SOFR rate was 5.31%. Our outstanding bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest caps. We continue to monitor interest rates very closely and update our hedging strategy as needed. As of today, our 2023 and 2024 loan maturities are manageable. We have no further maturities in 2023, and $19.6 million coming due in 2024. As of the end of the quarter, we had $70.95 million of revolver borrowings outstanding. We had no activity this quarter in issuing equity through our at-the-market or ATM program. We received net proceeds of $900,000 from sales of our Series F preferred stock. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. As of today, we have approximately $6 million in cash and $43.6 million of availability under our line of credit. We encourage you to also review our quarterly financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is $0.30 per share per quarter or $1.20 per year. Our common stock closed yesterday at $12.53 per share, with a yield of 9.58%. And now, I'll turn the program back to David.

Wonderful, Gary, good report. Good one from Buzz and Michael too. The team has performed very well and reacted admirably, I'd have to say, to the various challenges presented by the lasting impact of much higher interest rates, which were always very difficult for real estate companies. Overall, though, very nice quarter, and the company's doing well. You heard a lot today and in summary, during the third quarter, we acquired two industrial facilities. We sold three non-core properties. All of them are office buildings, so you can see we're continuing to get out of the business of renting office space. We also renewed or leased two of our properties. Subsequent to the end of the quarter, we acquired one industrial facility as well. The commercial team is growing the real estate we own at a good pace, and the team's doing a great job of managing the properties we own, especially during these times with these very high interest rates. Our team of strong professionals continues to pursue potential quality properties on the list of acquisitions they're reviewing. Acquisition team sees a little pickup in opportunities for us. So, I'm going to stop at this point in time and have the operator come on and get some questions from the people who are on the phone.

[Operator Instructions] Our first question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.

Good morning, guys. Buzz, the buyers of your office assets today, are they the users or is there still 1031 demand in your various markets for these types of smaller assets?

Good morning, Rob. The majority of them are honestly developers looking to reposition the properties in the respective markets. There are a few owner users that we have sold to, but majority are looking to reposition the properties. They see it as value add more than occupancy of office per se. They're generally going into multifamily.

Okay, that's helpful. And any known non-renewals and move-outs that you're planning for over the next 12 to 18 months?

Let me see. We've got one that we know is moving out. And we are in the process of, as we do, as you know, stay in front of our tenancy very tightly. Our portfolio managers and asset managers work very hard and closely to know what's happening with our tenants on the ground. But at this point in time, I know of one, but we do have that building under due diligence as it relates to a sale.

Okay, that's helpful. And then Gary, there were a lot of moving parts in the third quarter earnings. Obviously, fourth quarter's going to have the impact of any acquisitions, dispositions that you did do here in the third quarter, and also higher rates. But anything else that's either carrying over from the third quarter drag-wise or alternatively going away that we should be thinking about when updating our models?

I mean, we did have - thanks, Rob. We did have an unusually high amount of G&A costs this quarter, legal associated with dispositions and so forth. And then we also had some financial costs related to a defeasance of a mortgage, as well as cap - some realized losses on some cap maturities. So, those won't be going forward. But we did have some increase in interest costs, primarily due to refinancing a couple of mortgages on the line of credit instead of going into the mortgage market as the - unfortunately, the line of credit was cheaper, but more expensive in turn to the mortgages. We refinanced with it hoping to go to the market when the rates go down on those, but that unfortunate drag will continue. But as far as dispositions, as we dispose of our office properties, we'll see less of a drag in operating expenses. So, I can't forecast what that's going to be, but hopefully over the next couple of quarters, you'll definitely see that as an increase in overall (NOI).

Okay. And other than the stuff that you've mentioned in the various releases, is there anything that you're expecting to close on acquisition disposition-wise in the fourth quarter? Or are you waiting for pricing to sort of change, et cetera, or financing costs to come down?

We have a number of - I'll give this to Buzz, but we do have a number of buildings right now held for sale. But in some of those, we’re hoping they will close in the fourth quarter. But Buzz, I'll let you have the rest of that.

Sure. On the acquisition side, Rob, here as we hit two and a half months out, if you will, before year-end, we have a few under review that we would love to push to get closed in this quarter. I'm not sure that's going to occur. So, at this point in time, I would say most likely not at the end of the year, but as we just closed, when you saw right at the beginning of this month, or sorry, just closed I guess on Friday, we are doing all we can to push, for lack of a better word, get those assets on our books in our portfolio. But at this point in time, we've seen a relative, I'll call it less year-over-year activity going toward the end of the year. Haven't seen a plethora of packages out for properties for sale as people try to dispose of them in 2023 versus 2024, which tells you that the brokers and the sellers are, I think, currently sitting on the sidelines a bit. We still have several to look at in a good volume of dollars of over $366 million that we're looking at. But at this point in time, I don't foresee - we'll close some sales before the end of the year, but I don't see that we will have any new acquisitions, unless something were to fall quickly into our laps.

Okay. And then any proceeds that you have there on dispositions just go towards repaying the line until the acquisitions get teed up?

That and/or the mortgage that the building may be encumbered with.

Okay. All right guys. Thanks. I appreciate the time this morning.

Thank you. Next question, please.

The next question comes from Dave Storms with Stonegate. Please proceed.

Good morning. Just curious if you could kind of talk to us about how you think your lease profile term, or the term of your lease profile will shift over 2024.

As it relates to new acquisitions, of course, as I mentioned Dave, we're looking for long-term sale leasebacks. Recent closings obviously reflect that 15-plus years in order to increase our WALT. On the renewals, we are pushing for longer, and have a few that we are looking at, but generally, they are five-year renewals. So, that puts the concentration obviously on the origination side versus renewal to 15, 20-year sale leasebacks. But we do not have any great concentration of lease expiring into 2024. So, I believe we'll be able to keep our WALT and increase our WALT going forward.

Very helpful. Thank you. And then, just as it relates to occupancy, it's kind of taken a step up every quarter here in the year and is even up another 80 basis points or so since the end of the quarter. How much more headroom do you think is there, and are you having to give any concessions or anything like that to get those occupancy numbers up?

With new leases, obviously there are some concessions as it relates to TI dollars. We are not, however, going to give away just to get occupancy. We need to make sure that these transactions are accretive to our portfolio and help the company overall. But yes, we do see concessions in marketplace, some larger than others, but the team actually has done a great job in negotiating the balance between term and cost to get that term. As we know, capital expense into an existing deal can create creative positive numbers to the deal itself and to the portfolio overall. In fact, in in a couple of cases, they're much more accretive than they would be on a new deal. So, we look at it carefully as it relates to the TI dollars and capital spend into the existing portfolio because tenant improvement dollars obviously can be as accretive as new dollars out the door.

Very, very helpful, thank you. And then just one more if I could. How do you think about geographic-focused acquisitions going forward? It looks like your last two acquisitions were in Pennsylvania and Indianapolis. Are you focusing more westward, southward, or kind of right in those core markets? And then thank you.

Sure. We are not focused west of the Rockies at this point in time. It's just too expensive to play. Majority of growth, as we've seen in the country from various industries, has been more Midwest to south, southeast Texas, if you will, to the east. So, that is where we see the focus. Because that's where we see the opportunities. And as you've heard in the past, we look to - look for acquisitions in the path of growth so that we can get the returns that we're looking for. But we're not going to get away from our credit necessities as it relates to evaluation of the tenancy. But mostly, you're going to see this growth, not in the northeast, but it's going to be in Illinois, Ohio, to the south, if you will, and over to Georgia, Florida, with a few opportunities being created, when I say in the northeast, in New Jersey, with a couple of assets we have as we look to build a concentration there, but they've got to be accretive to the portfolio. Okay?

Thank you.

Next question, please.

[Operator instructions]. Our next question comes from John Massocca with B. Riley. Please proceed. Good morning.

Good morning. So, sticking with kind of dispositions, were any of the assets that were sold either this quarter or subsequent to quarter end vacant? And I guess for ones that were occupied, what's kind of the rough disposition cap rate or even kind of gross NOI that that went away as a result of the sales?

I've got that answer for you, John. Give me one second. With the dispositions, one that we had discussed previously, a building down in South Carolina had a tenant that purchased the building. So, that one, however, we had not been responsible for the building, but it did indeed close here at the beginning or last quarter. On other dispositions, they are not - we have one vacancy that did get sold. And the others that we, as Gary mentioned, held for sale, those are all currently occupied, I think save one. And I'm not sure that gives you the complete answer that you're looking for, but we feel very good about our dispositions and what we have coming up is we lace to that toward the end of the year because they're all under contract. And then as we look early into next year, the first six months, we are actively engaged with the property as relates to either having it occupied because we've had several leases - sorry, several tours at our buildings, as well as sales for repositioning the properties generally for multi-tenant.

Okay. I guess maybe ask another way, I mean, how is the cap rate on dispositions comparing to acquisition cap rates?

As I mentioned earlier on the one that had a, I think, 130 basis point swing to it, we are making sure that what we can do is going to be accretive to the portfolio. We also have to weigh that, if it is an empty building as it relates to the burn associated with carrying the building. So, we have to balance that out, but we are increasing the value of the portfolio also as mentioned, with a couple of the renewals that we are doing that again, the office building reference might give us ability to redeploy that cash as the building has increased in value as a result of full tenancy.

Okay. And then on the balance sheet side, as you kind of think about the - I think you mentioned on the 3Q call, sorry, the 2Q call, that some forward starting swaps that came on and replaced caps, I mean, is the full impact of that reflected in the current quarter, or was that kind of mid-quarter? And I guess, is there any kind of other onetime stuff as it relates to kind of swapping out interest rates that may be worth noting in the next couple of quarters?

Well, right now, we have $310 million of swaps. The one that was forward starting, started at the beginning of July. So, that's all within this quarter. So, there won’t be any additional effects ongoing with those swaps. They are what they are. They're on our term loans. We would probably, you might see a little bit in first quarter some realized losses of some cap maturities in first quarter, but that should be it. We don't have any - we’re working on our hedging strategy. We don't have any plans right at the moment to swap or cap anything right now, but that could change, given where interest rates go.

Okay. And then lastly, the advisors incentive fee, how should we think about that in the near term? I know you've kind of waived it for the last couple of quarters.

Obviously, that discussion will occur at the board level. We have not made any decisions at this point in time to do anything different than what we are currently doing in waiving it. But that will be discussed at the right time.

Okay. that's for me. Thank you very much for your time.

Okay, next question.

Thank you, Mr. Gladstone. There are no questions in queue at this time. I would like to turn it back to you for closing comments.

Okay. Thank you so much, all of you, for calling in. We love all those good questions you have. Hope next quarter we end it with a lot of good questions as well. That's the end of this call and we thank you all again.