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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone. Thank you, Mr. Gladstone, you may begin.

Well, thank you for that nice introduction and thanks to all of you for calling in. We enjoy this time talking with you all and the analysts that call in. We have a good time on these calls and would like to have a lot of good questions this time. Now, we'll hear from Michael LiCalsi, our General Counsel, and he's also Secretary, to give a few legal regulatory matters concerning this call. Michael?

Thanks, and good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. 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 the risk factors in our 10-Qs and 10-Ks that we file with the SEC. You can find them on our website, specifically the Investors page, that's gladstonecommercial.com, or 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. And today, we'll discuss FFO, which is funds from operations. And 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 is 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 visit our website, once again that's 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 @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. Now, I'll hand it over to Gladstone Commercial's President, Buzz Cooper. Buzz?

Thank you, Michael, and thank you all for calling in. Today, we will discuss our operations and topics that are top of mind. In June, the FOMC decided to keep the benchmark federal funds rate at 5.25% to 5.5% for the seventh consecutive meeting. While this prolonged high interest rate environment has severely impacted real estate capital markets, we continue to see leasing and investment activity normalize. Last week's job report, which missed expectations on job growth, coupled with a downward revised June print, has led many to believe that the US is headed toward a recession, which is one of the reasons the stock market dropped significantly in the last few days. Given the economic weakness, the Fed is under increased pressure to reduce interest rates. We believe a single rate cut is assumed by most market participants with the opportunity for one or two additional cuts by year-end. Although the economic news is negative, aside from one tenant, we have not seen a material decrease in tenant credit quality across our portfolio. As it relates to specific asset classes, we see continued outperformance in industrial for both the near and long term. In the near term, we see industrial vacancy rates peaking as new developments have slowed for the last several quarters. According to CBRE, industrial product under construction for Q2 dropped to 291.9 million square feet, the first time under construction product has been below 300 million square feet since Q2 2019. In the long term, we see significant tailwinds driven by reshoring and near-shoring manufacturing operations, trends which will benefit our existing portfolio and play to our proven expertise underwriting middle market credits. Moving on to a few company and portfolio specific highlights for the second quarter. During the quarter, we increased our industrial concentration as a percentage of annualized straight-line rent from 60% to 62% and decreased office from 36% to 34%. We successfully leased and marked-to-market nearly 1 million square feet in Taylor, Pennsylvania. We acquired an industrial asset in Southern Pennsylvania for $11.7 million with a weighted GAAP cap rate of 12.3%. We successfully sold our 29,000 square foot office asset in Egg Harbor, New Jersey. Through the second quarter, our portfolio management team has released or renewed nearly 2.4 million square feet across five assets for an aggregate of $3.6 million straight-line rent plus up. Through the remainder of 2024, we have just 6,600 square feet of expiring leases. We collected 100% of cash base rents and portfolio occupancy increased to 98.5%. Subsequent to the end of the quarter, we also renewed a lease on a 72,000 square foot office lease in Columbus, Ohio to the end of the year 2030. Additionally, we should close shortly on a sale of two medical office building properties located in Georgia that we have held for sale. Lastly, we raised an additional $21.6 million in net proceeds from the sale of approximately 1.5 million shares of common stock and $100,000 in net proceeds from the sale of 3,200 shares of Series F preferred stock. Before turning the call over to Gary, I will highlight our plans and goals for the next 12 months. We will continue growing our industrial concentration as capital markets open up and we dispose of non-core office assets. We plan to increase this concentration above 70% of annualized straight-line rent in the next six to 12 months, and we currently have one opportunity under contract for $10 million scheduled to close in the third quarter. We will continue disposing of non-core office assets. As of June 30, we had two medical offices that are held for sale, and we will use the proceeds from these sales and our existing cash flow to redeploy into industrial assets. We will leverage our proprietary in-house credit underwriting expertise to capitalize on sale leaseback opportunities. Again, the sale leaseback is a hallmark of our value proposition. We will keep a healthy and flexible balance sheet. As of June 30, we have liquidity of $52.5 million, including $42.1 million of availability under our credit facility and $10.4 million in cash. We remain below 50% leverage as of June 30, 2024. Successfully completing these goals will better position us for our next stage of growth, including obtaining rating and private placements and expanding our industrial portfolio in new and existing markets. I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and liquidity position.

Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the second quarter of 2024. 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 $0.36 per share for the quarter. FFO and core FFO available to common stockholders during the second quarter of 2023 were both $0.41 per share. FFO and core FFO for the six months ended June 30 were $0.69 and $0.70 per share, respectively. FFO and core FFO for the same period in 2023 were $0.77 and $0.78 per share, respectively. Over this — our same-store cash rent in the two quarters of 2024, first two quarters of 2024, decreased by 2.9% over the same period in 2023. This was due to accelerated rent from the lease termination in 2023. Our second-quarter results reflected total operating revenues of $37.1 million with operating expenses of $26 million, as compared to operating revenues of $38.7 million and operating expenses of $33.7 million for the same period in 2023. Expenses were higher in the 2023 period mainly due to impairment charges, offset by a waiver of the incentive fee. Looking at our debt profile, 37% is fixed rate, 51% is hedged floating rate, and 12% is floating rate, which is the amount drawn on a revolving credit facility and one mortgage note. As of June 30, our effective average SOFR is 5.33%. Our outstanding bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest rate caps. We continue to monitor interest rates closely and update our hedging strategy accordingly. As of today, we have no 2024 loan maturities and our 2025 loan maturities are manageable at $25.5 million. As of the end of the quarter, we had $81.2 million of revolver borrowings outstanding. During the six months ended June 30, 2024, we sold 756,214 shares of common stock under our ATM program, raising net proceeds of $10.6 million. We also received net proceeds of $600,000 from sales of our Series F preferred stock through June 30. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital reforms and new acquisitions. At present, we have two properties held for sale. As of today, we have approximately $4 million in cash and $60.3 million of availability under our credit facility. 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 $14.36, and our distribution yield on the stock is 8.36%. And now, I'll turn the program back to Dave.

Well, thank you. That was a good report, Gary, and good reports from Buzz and Michael, too. I think the team has performed very, very well. Overall, a very nice quarter. We've got to keep it up. So, we've got to do this again next quarter. If you heard today, in summary, during the second quarter, we acquired one industrial facility and we sold one non-core property. We also renewed leases on five of our properties, so we're doing great there. The commercial team is growing real estate, and a good part of the team is doing a great job managing the properties we own, especially in all of our areas that we're in. Our team of strong professionals continues to pursue the potential quality properties that we're looking for and listing acquisitions that they are reviewing. We've got a good backlog and strong personnel in this skilled analysis of these businesses. We underwrite the businesses as if we are lending them money because, in reality, we're letting them rent our real estate. Okay, operator, let's stop here and have the operator come in and help us with the listeners that want to ask us some questions. So, give us a lot of questions, please.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Gaurav Mehta from Alliance Global Partners. Please proceed.

Thank you. Good morning.

Good morning.

I wanted to ask on the transaction market, wanted to get some more color on your acquisition pipeline and what cap rates are you seeing in the market?

Thank you, Gaurav. As I mentioned, we do have one transaction that will close. It is on average north of 10 cap. We have also put out two LOIs, which were also above 10 on a straight-line basis on the cap. Additionally, we have about 20 or so under review. Obviously, we're not going to bid on them all, but we believe the pipeline will pick up here toward the end of the year as we anticipate credit becoming more available as interest rates drop and we definitely see a pickup going into '25. I'm sure as you're aware in the marketplace, everyone has referenced a slowdown in the first half of the year, but we're hopeful for a pickup going forward.

Okay, thank you. Second question I wanted to ask was regarding the incentive fee waiver. Do you expect the incentive fee waiver to continue for the next few quarters?

Hey, Gaurav, thanks for the question. We waived the incentive fee for the entire year of 2023, and we began a partial payment in Q1 of this year. So far, we've credited back 44% of the incentive fee. We intend to, in consultation with our Board, consider both our shareholders and our stakeholders to decide how much we're going to be paying. The intent is to pay at a reduced rate to ensure that we're rewarding our people while also giving back to the shareholders.

Okay, thank you. That's all I had.

Thank you. Operator, any other questions?

Our next question comes from Rob Stevenson from Janney. Please proceed.

Hi, good morning. Gary, in the release, there's a line about the core FFO increase primarily due to the accelerated rent related to a termination fee on a property sold during the quarter. Is that the $2.6 million property that was sold in the second quarter?

Yeah, that was the Egg Harbor property.

Okay. And then, what was the size of that termination fee? I didn't see that in the information provided.

That was about $570,000.

Okay, that's helpful. Thank you. And then, Buzz, there's a footnote about two properties classified as held for sale for $9.3 million and 26,000-square feet. Are those the medical office sales in Georgia that you alluded to?

Correct, sir.

Okay, perfect. And then, I guess, the other question for me winds up being, how aggressive should we expect you guys to be in the back half of the year on dispositions if and when rates come down? Is there a bunch of pent-up demand from 1031 buyers and other people who might be interested in your office assets and maybe some of the industrial assets that you don't want to own longer-term? Is that sort of needs to be matched with acquisitions? How should we be thinking about the dispositions?

Obviously, we're going to recycle that capital into new deals, and yes, we hope to be aggressive in doing that. Our team has done a great job, obviously, in the past year with over a total of nine office buildings sold since last July. We will continue that. However, we've only got a vacancy factor within that office portfolio of 6.4%, and, as I referenced, with only one small vacancy here till the end of the year. We will be aggressive in looking to sell them. We'll be opportunistic, and we are hopeful for a pickup as rates do come down.

Okay. And then, last one for me. You indicated that you had one tenant where you were seeing credit deteriorate. Is that an office or an industrial tenant? And is that likely to need to be re-tenanted or the asset sold? How are you guys thinking about that as that tenant sort of slides down the credit spectrum?

Yeah, it was a small industrial box for distribution of retail product. We anticipate it being sold, and in fact, we've traded paper on it currently. It represented less than 1% of straight-line rent, but we do anticipate that being off our books here relatively shortly.

Okay, that's helpful. Thanks, guys. Have a great day.

Thank you.

Thank you.

Thanks, Rob. Operator, do we have anybody else who wants to ask a question?

We do. Our next question comes from Dave Storms from Stonegate. Please proceed.

Good morning. Appreciate you taking my questions. Just as you continue divesting from non-core assets, is there any sort of profile of office assets that you would consider renewing?

We certainly would renew any that we can and have done so. And as a result, we've got longer term leases that allow us to garner more income from the rent off of those properties as we hope that the marketplace for office especially improves. Certainly, we have one or two in Florida that are a great example, but we're not ready to dispose of them at this point in time. However, we're looking to extend, as I referenced, the office property in Cincinnati, and we'll have discussions internally on possibly moving that asset off the books. So, we're looking to be opportunistic regarding dispositions of those.

Understood. That's very helpful. And then, just turning to the macro, you mentioned rate cuts that are expected later this year, but also with the recent economic data, we had unemployment tick up a bit. Does that change any of your thought process regarding underwriting, or is it still very much a tenant-by-tenant basis?

Our underwriting is not going to change as it relates to the credit profile. Obviously, we've shown that over the years, with both our occupancy and default rates, that underwriting of our tenant is our value add. As a result, we're going to stick to those disciplines. But as we do see, and believe we will see interest rate cuts, that should allow us to go after, for lack of a better word, more product.

Understood. Thank you for taking my questions, and good luck in 3Q.

Thank you.

We have one more question?

Yes. Our next question comes from John Massocca from B. Riley Securities. Please proceed.

Good morning.

Good morning.

Good morning.

I would like to know more about the leasing activity for the quarter, considering its scale. Were there any tenant improvements or significant concessions involved in that lease-up? Additionally, could you tell me how much of the leasing was related to lease expirations that occurred in the quarter and how much was just related to future maturities?

Certainly, there are leasing commissions and tenant improvements, not on all of the transactions that have been done in the past quarter, but certainly our very successful lease-up in Taylor, Pennsylvania had both TI and leasing commissions. From the standpoint of the plus up that resulted in that of approximately 95% rent, obviously, you have to do it and should do it, but you got to pay the piper as well, and we feel very confident about that. The majority of our assets that we do have leasing commissions. The team is working hard to keep tenant improvement dollars down. If we have to do that in reference to what the tenant needs and to the building improvements, we are not throwing dollars out there just to get the lease done. They’ve got to be, for lack of a better word, improvements to the building. They are associated, but we've done a great job keeping those down in these recent renewals.

Okay. And then maybe kind of just broad strokes, not with Taylor specifically, but how are you kind of seeing in terms of the tenant improvement needs to close new leases with industrial versus maybe some of the office leasing you've done in past quarters?

If you would explain that to me a little bit about what you're looking for?

It's like tenant improvements per square foot, I mean, how is that kind of trending? I mean, maybe how is that in the industrial space today versus what you were seeing with new leases or lease-ups in that space 12 months ago? And then maybe also with just office? I know, obviously, it's not as relevant to the current quarter, but I'm just intrigued how that's all trending.

Sure. And obviously, office is more expensive, which is obviously why we move toward industrial as it relates to the cost of re-tenanting the properties. We are, in fact, seeing a decrease in demand for office as it relates to concessions. So that's a good item. On the industrial side, it's basically remained the same from what we saw two or three years ago. Vacancy rates are down a little bit. Rental rates have remained steady, as well as up, but the tenant improvement dollars have not jumped as a percentage of what is needed in order to keep the tenant.

Okay. And then maybe just, in terms of leasing, what does the kind of office leasing environment look like today, both kind of broadly and maybe just specifically with Austin, just given the size of that one Austin office asset?

Of course, Austin is always top of mind for us, and we've made some progress there in terms of activity. We've had four tours in the last six weeks. We've seen an uptick in the overall office market for Austin. Sublease space has come down as the tech world seems to be stabilizing itself. On the deals that we're seeing there, the asking price on the tenant improvement side is also down for office. We are hopeful of getting something there in the not too distant future, but certainly by year-end. Overall, it would depend on which market you're looking at. Florida has been a very good market for us and not as expensive as one might think. We don't have any CBDs, so that is not a problem from the standpoint of cost to keep. We're going to do what we have to do to retain just as we did in an office building in Cincinnati, Ohio, but it was not an expensive transaction regarding tenant improvement cash dollars.

John, you got any more questions?

Operator?

Operator, has he disconnected?

I don't believe he has any more questions. It does look like he has disconnected. This does conclude our question-and-answer session. I would like to turn the floor back over to David Gladstone for closing comments.

Well, we thank you all for calling in and asking some good questions. That was fun to do, and we look forward to next quarter. So, we'll see you next quarter. That's the end of this call.

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