Greetings and welcome to Gladstone Commercial Corporation Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Gladstone, Chief Executive Officer. Thank you, Mr. Gladstone. You may begin.

Well, thank you for that nice introduction, and we thank all of you for calling in today. We certainly enjoy the time we have with you on the phone and wish there were more time to talk with you. Now we hear from Michael LiCalsi. He's our General Counsel and Secretary to give us legal and regulatory matters concerning this call this morning. Michael?

Thanks, David. 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. 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 in our Forms 10-Q, 10-K, and other documents that we file with the SEC, and you can find these on our website specifically go to 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. 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 is 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. We ask that you visit our website and sign up for our email notification service. You'll also find us on Facebook and Twitter. Now 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. Now with that, I'll turn it over to Gladstone Commercial's President, Buzz Cooper.

Thank you, Michael, and thank you all for joining today's call. We have several key updates regarding our operations and the broader economic environment. First, I'd like to share our concern for all those impacted by the recent hurricanes that swept through communities in the Southeast. Our thoughts are with all those affected. As it relates to our portfolio, we fortunately sustained minimal impact. Our team has been proactive in reaching out, supporting tenants and responding promptly to any needs. Turning to the broader economic environment, the Fed in September implemented its first rate cut, marking a change in policy since rate hikes began in 2022. They lowered the benchmark federal funds rate by 50 basis points to a range of 4.75% to 5%, down from its prior range of 5.25% to 5.5%, which had been the highest level in 23 years. This marks a significant reversal after a prolonged period of high rates that negatively impacted capital markets. We expect additional cuts to follow, though the timing and magnitude of those cuts depends on economic indicators. September US job growth surged with employers adding 254,000 jobs significantly surpassing expectations, while unemployment rate also dipped to 4.1 from 4.2. While this is positive for the overall economy, the strength of the labor market and the higher-than-expected inflation in September may push out any further rate cuts. Continued momentum could create challenges in balancing inflation concerns with market expectations for lower interest rates. Today's election is likely to bring further volatility to the markets as fiscal and regulatory policies are debated. We believe our portfolio is well positioned regardless of which party is in office. Despite broader economic uncertainties, our portfolio continues to perform well with industrial real estate being a key growth driver. According to Colliers Industrial Market Statistics for the third quarter, net absorption in the United States totaled 39 million square feet, bringing the year-to-date total to 115 million square feet. This compares to 180 million square feet of absorption recorded during the same period of time last year. This reflects a 36% decline due primarily to a particularly slow first quarter. Of the 77 markets tracked by Colliers, 19 saw net absorption over 1 million square feet in Q3, while 26 markets turned negative. We expect leasing to pick up in the fourth quarter, driven by increased economic activity. On the supply side, new construction slowed to 76 million square feet in Q3, which was 54% lower than last year. This has tempered the rise in vacancy rates, which increased by only 19 basis points, which points to 6.6%. However, a longer rate environment has discouraged new starts from last year and led to declining new completions, so we expect vacancies to begin to decline in 2025. Although the broader economic outlook has its challenges, we have not observed any significant decline in tenant credit quality across our portfolio. In the longer term, industrial real estate, specifically manufacturing-related real estate is poised for continued growth driven by reshoring and nearshoring. We are well-positioned to capitalize on new opportunities, utilizing our expertise in underwriting middle-market credits to grow our portfolio of well-located mission-critical industrial assets. Now moving on to a few company portfolio specifics for the third quarter. During the quarter we increased our industrial concentration as a percentage of annualized straight-line rent from 62% to 63% and we decreased our office from 34% to 33%. We successfully leased or extended more than 242,000 square feet across five assets for a weighted average of 7.2 years. These new leases and extensions resulted in a more than 100,000 straight-line rent increase. Through the third quarter, our portfolio management team has re-leased or renewed more than 2.6 million square feet across 10 assets for an aggregate 3.7 million straight-line rent increase. We have no remaining expiring leases in 2024. We acquired an industrial asset in Midland, Texas for $10 million with a weighted GAAP cap rate of 9.94% in a 15-year term. We successfully sold two medical office assets in Georgia, resulting in more than $10.3 million in gain on sale. We've collected 100% of cash base rents and portfolio occupancy remains at 98.5%. Before turning the call over to Gary Gerson, our CFO, I will highlight our plans and goals for the next 12 months. We are proud of our progress since COVID, particularly, our shift toward a higher concentration of industrial assets. Since 2018, all but two acquisitions have been industrial with almost $565 million invested in this property type. As capital markets open up, we will continue growing our industrial concentration, aiming to exceed 70% of annualized straight-line rent in the next 12 months. We are actively disposing of non-core office assets and currently have one new industrial opportunity under contract for $12.1 million set to close in the fourth quarter. We will continue disposing of non-core office assets. We will use office sale proceeds 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, a hallmark of our value proposition. Unlike many of our peers, we have the ability to closely monitor our tenants' financial health allowing us to proactively manage risk. Additionally, we will have the flexibility to structure our leases and covenants in ways that provide added protection, ensuring long-term stability for both us and our tenants. We will focus on keeping a healthy and flexible balance sheet. As of September 30, we had liquidity of $80.7 million, including $70.2 million of availability under our credit facility and $10.5 million in cash. We remain below a 50% levered level as of September 30, 2025. Successfully completing these goals will better position us for our next stage of growth, including obtaining a credit rating and a private placement and expanding our industrial portfolio in new and existing markets. I will now turn the call over to Gary 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 third 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 $0.38 per share for the quarter. FFO and core FFO available to common stockholders during the third quarter of 2023 were $0.33 per share and $0.34 per share, respectively. FFO and core FFO for the nine months ended September 30 were $1.07 per share and $1.08 per share, respectively. FFO and core FFO for the same period in 2023 were $1.10 per share and $1.11 per share, respectively. Same-store rents increased by 10.2% in the three months ended September 30 over the same period in 2023 due to a settlement received by one of our properties related to deferred maintenance. Our same-store rent in the first three quarters of 2024 increased by 1.4% over the same period in 2023 due to the previously mentioned 2024 settlement, partially offset by accelerated rent during the same period in 2023. Our third quarter results reflected total operating revenues of $39.2 million with operating expenses of $28.5 million as compared to operating revenues of $36.5 million and operating expenses of $29.6 million for the same period in 2023. Expenses were higher in 2023 mainly due to larger impairment charges offset by the waiver of the incentive fee. Looking at our debt profile, 38% is fixed rate, 53% is hedged floating rate, and 9% is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note. As of September 30, our effective average SOFR was 4.96%. 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 closely and update our hedging strategy as needed. As of today, we have no 2024 loan maturities and our 2025 maturities are manageable at $10.5 million. As of the end of the quarter, we had $53.3 million of revolver borrowings outstanding. During the nine months ended September 30, 2024, we sold 3.45 million shares of common stock under our ATM Program, raising net proceeds of $49.5 million. We also received net proceeds of $700,000 from sales of our Series F Preferred Stock through September 30. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. At present, we have three properties held for sale. As of today, we have approximately $5.4 million in cash and $73.3 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 stock closed yesterday at $16.01 and our distribution yield on our stock is 7.5%. And now I'll turn the program back to David.

Thank you. That was a good report, Gary, and one from Buzz and Michael were both good reports. The team has performed extremely well. Overall, it was a very nice quarter. You've heard a lot today. During the third quarter, we acquired one industrial facility in Midland, Texas for about $10 million. We sold two non-core properties. These were medical offices in Georgia. We also renewed and leased five of our properties. So this company has just continued to move along at a great pace. The commercial team is growing the real estate we own at a really good pace and the team is doing a great job managing the properties we own, especially during these times that I'm not sure what's going on sometimes, but they're challenging and they're managing through it. Our team is a strong professional group and they continue to pursue potential quality properties on the list of acquisitions they are reviewing, and our acquisition team is seeking strong credit tenants. That's what we're looking for. Okay. We'll stop here and take some questions from people on the phone.

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

Thank you. Good morning. I wanted to ask you about your 3Q results. You talked about a settlement at one of your properties. Can you provide some color on how much that settlement revenue was?

The total amount was $2 million.

Okay. Second question. I think in your remarks you said that three properties were held for sale. Any color on the expected timing of the sale of those three properties?

One of them we're looking to sell by the end of the year and the other one probably mid-next year.

Okay. And lastly, maybe big picture, can you provide some color on what you were seeing in the acquisition market?

Acquisitions are right now, toward the end of the year, we've seen quite a few and we're proceeding with underwriting. Currently, two. We expect to pick up into the first quarter of '25. As you know, Gaurav, there's lots of competition for such, but we are seeing our fair share of actionable deals.

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

Thank you.

Thank you. Next question.

Our next question is from Dave Storms with Stonegate. Please proceed.

Good morning.

Good morning.

Just wanted to start by touching on the one new property you mentioned you have under contract. Is there any more you can give us around the timing or the anticipated cap rate for this?

On the closing, it should occur here in the early fourth quarter, on a straight-line basis, the cap rate over the term is going to be over 9%.

Okay. So also high single-digits. Just curious, maybe your overall thoughts around the cap rates in the markets right now and maybe where you see them going?

We are hopeful, of course, with interest rates coming down will affect cap rates for us. Again, a very competitive market. The sellers, I think, have gotten a little bit of understanding as to where the market is today. We're seeing competition, but cap rates seem to be coming down a bit.

Understood. And then just one more for me. It looks like a couple of tenants dropped off quarter-over-quarter. Is that just the regular runnings of the business, the selling of the couple offices in Georgia or is there more to the story there?

No, that would be sales.

Understood. Thank you for taking my questions and good luck on the fourth quarter.

Thanks, Dave.

Thank you. Next question.

Our next question is from Barry Oxford with Colliers. Please proceed.

Great. Thanks, guys. To build on the cap rate question, you guys have been buying industrial and selling office. What do you see kind of going forward as you implement that plan as far as the cap rate spread between the two? Because it seems like you would probably be losing a little bit on the cap rate spread?

Barry, I would agree with you because of the competition within the market.

Right.

However, that being said, we also, with obviously the way our stock has performed, are looking to bring down our cost of capital. So we've had some success there as we recycle out of the office into industrial. So we are making ourselves more competitive as we are proceeding.

Great. That you touched on your stock price, that leads me to my second question. Are you guys going to continue over the next few quarters to have sort of an elevated level of tapping the ATM or not necessarily?

No, Barry, we'll probably continue to tap the ATM just to fund acquisitions and to maintain our leverage level and maybe to reduce leverage. We did a specifically large amount over the last quarter. Our leverage level had kind of tipped up during all the dispositions over the last year. So I think it was an unusual amount for us. But we will continue to sell under the ATM again to finance acquisitions and keep our leverage level and potentially lower it.

Great. All that makes sense. Thanks guys.

Thank you.

Next question.

Our next question is from John Massocca with B. Riley Securities. Please proceed.

Good morning, everyone.

Good morning.

Good morning.

So it looks like kind of CapEx and leasing commissions jumped up a little bit quarter-over-quarter. Was there something specific driving that? And maybe what's kind of a Rule of Thumb on expectations for those two kind of cash flow line items for the remainder of the year and into '25?

John, specifically, as you know, we had a large asset in Lehigh Valley that was fully tenanted. We re-tenanted with a new tenant at almost double income on the rent side. But that carried with it, obviously, a large lease commission as well as modest TI dollars going into that property. And so that was part of that tick-up, but we do not have any foreseen large CapEx items coming forward, but we do know obviously that, that is good accretive money being put out the door as it relates to the tenancy. So some of that CapEx is very profitable for us.

Okay. And then just to clarify, I think you may have mentioned it in the prepared remarks, but did you address the one remaining 2024 lease expiration and maybe what's kind of the outlook for some of the leases expiring in '25?

So relative to that transaction, we have agreement with a new tenant, which will take that property that does mature here in November with an option to buy. We've written a 7-year lease on that, but they have an option to exercise to purchase in the beginning of '25. Our expectation is that they will purchase. And relative to 2025, we have four properties that do have maturities in '25, of which, one is under sale to close in the first quarter of '25. Other one has a 5-year lease out for signature. One is a current tenant, we are discussing re-upping, and then another one is also in discussions, very preliminary. It has a nine-month lead to it as relates to notice that we'll begin discussions and we're very close with that tenant in the first quarter of '25. So I think we do stay in front of our tenants and try to get to discussions with them in renewals as early as possible.

And then just broad strokes in terms of the lease expirations over the next, call it, 15 months, are those kind of mostly office? Is that industrial? I mean, what's kind of the broad mix? I don't need an exact number.

Yes. No, I would say it's a mix between the two, more office than industrial, and some of those will be taken care of by dispositions.

Yeah. And then lastly, the competitive environment, are you seeing maybe with interest rates particularly on the short end of the curve tick down more competition from some of the buyers that were out there pre-2022, smaller PE funds, more finance-oriented buyers, or have they still been kind of cautious getting back into the market?

I believe somewhat cautious. We have seen, as you mentioned, the smaller PE shops, we have seen opportunities there for sale leasebacks that we've seen out there. Brokers are giving opinion of value. So we are seeing more as it relates to opportunities. But certainly, our marketplace is competitive.

Okay. I appreciate the color. That's it for me.

Thank you.

Thanks for the questions.

There are no more further questions. I would like to turn the conference back over to management for closing remarks.

Okay. Thank you very much all of you. Hope you've all gone out and voted, but only voted for people that are pro-industrial real estate. So thank you all for calling in. That's the end of this. We'll catch you next quarter.

Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.