Greetings, and welcome to the Gladstone Commercial Corporation Earnings Call for the quarter ended September 30, 2020. [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. Sir, you may begin.

Okay, thank you, Donna. Nice introduction for us and thank you all for calling in. We do enjoy this time we have with you on the phone, and wish we had more time to talk to you. Now let's hear first from Michael LiCalsi, our General Counsel and Secretary, to give us some legal and regulatory matters concerning the call report, Michael?

Yes, thanks, David, and good morning. 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, and 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 that we file with the SEC. These can be found on our website www.gladstonecommercial.com, specifically the Investor Relations page, 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. But today we will discuss FFO, which is funds from operations. Now 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 FFO as adjusted for comparability and core FFO, which are generally FFO adjusted for certain other nonrecurring 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. And please take the opportunity to visit our website, once again, that's gladstonecommercial.com, and sign up for our email notification service. You can also find us on Twitter. Keyword there is The Gladstone Companies, and our Twitter handle is @GladstoneComps. 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. Again, you can find them on the Investors page of our website. With that, I'll hand the baton over to Gladstone Commercial's President, Bob Cutlip. Bob?

Thank you, Michael, and good morning, everyone. During the third quarter, we acquired a 153,000 square foot industrial property in the Indianapolis MSA for $10.6 million; extended the leases for 4 tenants totaling 617,000 square feet, with revised lease expiration dates ranging from 2026 to 2032; executed an 8,000 square foot office lease in our partially vacant Fridley, Minnesota property; sold our 347,000 square foot industrial property in Maple Heights, Ohio for $11.4 million, resulting in a net gain of $1.2 million; and collected 99% of scheduled rental income in the third quarter without providing any abatements. Subsequent to the end of the quarter, we acquired a 241,000 square foot industrial property in Montgomery, Alabama; sold a 3-property, single-storey office portfolio in Champaign, Illinois for $13.4 million, resulting in a gain of $4.1 million; and collected 100% of scheduled rental income in October. As noted on earlier calls, our investment strategy is emphasizing an increase in our portfolio's industrial allocation, which we believe will improve our property operating efficiencies, reduce capital expenditure levels, and potentially result in improved valuation over time. During 2020, we've acquired 7 properties, all industrial, at a total investment of $96.5 million with a weighted average lease term of 13.1 years and an average GAAP cap rate of 7.3%. Since January of 2019, our total investment volume has been $225 million, all of which is industrial, providing further evidence of that commitment. Our industrial allocation has increased from 33% in January 2019 to 45% today, with an objective that Mike and I have of achieving a 60% allocation within the next 18 to 24 months. We will continue to overweight industrial acquisitions, market conditions permitting, of course, in the developed submarkets of our targeted locations. Our primary focus has been and will be acquisition candidates ranging in size from 50,000 to 300,000 square feet. Investment opportunities during the July through October time frame were limited due to the effects of COVID-19. We did, however, acquire 2 properties during this time period as I previously mentioned, a 153,000 square foot industrial property in the I-70 corridor of the Indianapolis MSA. The total investment was $10.6 million with a 10-year remaining lease term and a GAAP cap rate of 8%. And we acquired a 241,000 square foot industrial property along the I-55 corridor in Montgomery, Alabama. The total investment was $14.25 million with 7.2 years of remaining lease term and a GAAP cap rate of 7.3%. It's interesting to note that we are very interested and excited about the I-65 corridor that extends from the Port of Mobile up through Birmingham, with increased container volumes coming into the southern part of the country. Our asset management team continued to deliver on improving our same-store operations. During the third quarter, the team executed 4 lease extensions and one new lease: 2 office properties, 3 industrial. Our 42,000 square foot office tenant in Richmond, Virginia, extended their lease through 2026. The 67,000 square foot industrial tenant in our Chalfont, Pennsylvania property extended their lease through 2026 as well. Our 3,900 square foot industrial tenant in an Indianapolis property extended their lease through 2029. And our 504,000 square foot tenant at the Northwest Georgia inland port extended their lease through 2032. And we executed a 5-year 8,000 square foot lease in our Fridley, Minnesota office property with a lease start date of November 1. The tenant improvement allowance for the industrial properties averaged $0.95 per square foot and the office properties averaged $2.65 per square foot. Reflecting on the first 9 months of the year, the team completed 13 leasing transactions, totaling 987,000 square feet, 8 of which were office properties. The weighted average lease term was 7.9 years. The weighted average straight line rent increased by 3% and the overall tenant improvement allowance was approximately $3 per square foot, excuse me, which is very favorable with the large percentage of office versus industrial transactions. Our rent collection experience continues to be strong. 99% of third quarter cash rent collections were paid, and October collections were 100%. We're very pleased with our tenant performance during these challenging times for all industries. We continue to stay closely connected to our tenants' operations. There have been and we expect there will be requests from tenants for rent relief, and we will address them as we are notified by the respective tenant. There is no doubt that each agreement will have unique business terms, however, our key objectives are to offer rent deferrals, not rent abatement; to maintain or increase core FFO per share; and to return cash flow to the proper previous level as soon as possible. As noted on the second quarter call, the company granted rent deferrals to 3 tenants in April, representing approximately 2% of total monthly rental income throughout the second quarter and 1% in the 3rd quarter. With the ongoing presence of the COVID-19 virus, we expect to continue to have conversations with other tenants requesting short-term concession. Anticipating that many on the call are interested in lease expirations through 2020 and beyond, I wanted to summarize the team's thoughts in our current activities. We have no further lease expirations through year-end and we have $5.9 million of annualized rent expiring during 2021. And $3.7 million of that total expires at the end of the year, specifically $800,000 of annualized rent at the end of November and $2.9 million of annualized rent at the end of December. So future expirations are quite manageable. Our largest vacancy is in Austin, as most people on the call are aware, a property formerly leased to GM, who vacated at the end of August. Our active marketing of the property with assistance from the local chamber of commerce has resulted in 7 current prospects for the building, ranging from 65,000 square feet to 320,000 square feet. Our previous GAAP rent at the property of $14.50 per square foot compares quite favorably in the submarket, with current space offerings in the low to mid-$20 per square foot on a triple-net basis. And with considerable interest from the West Coast in Chicago as well as a large Austin prospect, Tesla's decision to build a Gigafactory there and BAE's commitment to build a campus in our property's submarket, we expect a positive outcome, but must remain patient and persistent with the ongoing virus impacts. Long term, we are positive about our same store performance as lease expirations for 2021 and 2022 average approximately 5% based on projected rental income. Therefore, overall cash flow should be stable with limited risk, enabling the team to focus on growth. Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus. Year-over-year through the 3rd quarter, Real Capital Analytics reports that investment sales volume across all property types is down 57%. National research reports also reflect office property sublease space is on the rise and Cushman & Wakefield has forecasted negative office absorption over the next 2 years. However, the continued interest in industrial properties, particularly those related to e-commerce, has resulted in no increase in cap rates for this product type in many markets and even some compressed cap rates in select locations. There is, however, some expansion of cap rates for smaller properties and those being, say, from 50,000 to 200,000 square feet in size that are more manufacturing in nature, particularly for sale-leaseback transactions in select markets, a product type that matches our interest in underwriting strength, particularly for middle market, non-rated companies, seeking capital to reinvest in their business. We will continue to monitor the evolving conditions and adjust our strategy accordingly. And as it relates to growth opportunities, investment sales listings have moderated, driven primarily by the effect of the virus. Our current pipeline of acquisition candidates is approximately $270 million in volume, representing 16 properties, all but one of which are industrial. Of the 16 properties, 2 properties are in due diligence, totaling approximately $24 million; 3 properties are already in the letter of intent stage, totaling approximately $40 million; and the balance are under initial review. Our team is staying actively engaged in the markets as we believe acquisition opportunities will arise that we can and we will pursue. So in summary, our third quarter activities reflected strong leasing and rental collection success, continued active engagement to identify industrial acquisition opportunities, and collectively positions us well to pursue growth opportunities. Now I'd like to turn it over to Mike for a report on the financial results, including our capital markets' activities.

Good morning. I'll start by reviewing our operating results for the third quarter of 2020. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were $0.39 and $0.40 per share for the quarter, respectively. FFO and core FFO available to common stockholders were a $1.19 and a $1.20 per share for the first 9 months of the year, respectively. This performance demonstrates the accretive yet prudent growth of the company as well as the performance of the in-place portfolio. In addition to these accretive deals, our same-store cash rent continues to grow at 2% on an annualized basis. Our third quarter results reflected stable total operating revenues of $33.1 million as compared to total operating expenses of $24.1 million for the period, excluding 2 property impairment charges. As Bob laid out, our team is actively engaged with every tenant of ours as we intend to maximize shareholder value through and beyond the COVID-19 pandemic. We're pleased with the teams and portfolio's performance through October and believe we've performed exceptionally, but these are unchartered times. We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage. We have reduced our debt to gross assets by nearly 15% to 46% over the past 5 years through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are 1% to 2% away from our target leverage level long term. We continue to primarily use long-term mortgage debt to make acquisitions. As we grow through disciplined investments, we'll also look to expand our unsecured property pool with additional high-quality assets. Over time, we expect this will increase our financing alternatives. Looking at our debt profile, as of today, our 2020 and 2021 loan maturities are very manageable with none due in 2020 and only $11 million coming due in 2021. We continue to minimize our exposure to rising interest rates with over 90% of our existing debt being fixed rate or hedged to fixed through interest rate swaps and caps. While entering the third quarter with sufficient liquidity, we've been modestly active in issuing our common stock and preferred Series E stock using our ATM programs. During the third quarter net of issuance costs, we opportunistically raised $4 million through common stock sales and $3.6 million through Preferred Series E stock sales. We also raised $1 million through our new Preferred Series F program. We continue to manage liquidity in the balance sheet to ensure that we have sufficient liquidity for upcoming capital requirements. As of today, we have approximately $3 million in cash and $30 million of availability under our line of credit. With our current availability, the strong performance of our portfolio and access to our ATM programs, we believe that we have significant incremental flexibility to fund our current operations near and long term. 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. Institutional ownership of our stock has increased by over 20% since the last -- since 2016 to 60%, as of September 30. Bob and I continue to be very active in meeting with current and potential investors, portfolio managers, coverage analysts, investment banks, and the like. We look forward to establishing new relationships as the company moves forward to its next chapter. Regarding the common stock dividend, we did increase it in the first quarter, and while the increase was small, we have also announced that we are leaving it as is. We have not cut or suspended the dividend since our IPO in 2003. Our stock closed yesterday at $16.60 per share. The dividend yield on our stock is around 9%. Many REITs are trading at significantly lower yields. Now I'll turn the program back to David.

Okay, thank you. That was a good report, Mike, and certainly a good one from Bob Cutlip and Michael LiCalsi. The team has performed very well, and we've not been hurt much by the various government reactions to the virus. It was a really nice quarter. You've heard a lot of the numbers today. Just to summarize again, as Mike said, the team collected all of the rents that were due from the tenants for the first quarter of the year and 98% in the second quarter. In the third quarter, we collected 99%. And to date, in October, we collected all of the rents 100%. So they've done a good job of collecting from each one of our tenants out there. The company bought an industrial asset in Indianapolis. We will see some more purchases as time goes on. And the team also executed 4 lease extensions and signed one lease for a vacant space during the quarter. Finally, the team sold a non-core asset. That's the building that we had in Maple Heights, Ohio. And we made money on that, we got a capital gain. The commercial team is growing. The real estate we own is in good situation, and the team is doing a great job of managing the properties that we own, especially during this pandemic. I just wanted to hit one item. We are now entering a time of designating management for the future. People ask me about that. And we elevated 3 members of the team to Executive Vice President in -- and they, in combination with our Chief Financial Officer and Michael LiCalsi, who heads up administration, the future of this fund is really in good hands. Working together, they all have profit and loss responsibilities today and they are the members of the senior leadership team, ensuring continued success and long term for -- and long-term growth for our shareholders. Now Bob and I are not leaving our positions, but we just want to show that we have a deep bench of talent within this fund to take us forward. The team is strong. It's good professional people, and they continue to pursue quality properties on the list of acquisitions they are reviewing. Our acquisition team is seeking strong credit tenants. They know the quality of the tenant, and the real estate make an excellent investment. And I think we are probably one of the few that places most emphasis on our tenant and second on our real estate. Your asset managers are actively managing the properties that the company owns in order to maximize their value. It's a different environment we are in, but the team is up for the challenge. Middle market businesses like our tenants are being challenged with the government restrictions related to the virus that's in the market now, but our tenants are paying their rents and committing to pay us in the past and deferred any deferred rent. So these are times that have never been seen before, but the first class team we have running this company is doing a fantastic job. Rather than continue on, let's stop here, and Donna, if you'll come on and help our listeners ask some questions.

[Operator Instructions] Our first question is coming from Rob Stevenson of Janney Montgomery Scott.

When you look forward on the funding for future acquisitions, does it look a lot like what you did in the third quarter, asset sale and 10 million-ish of combined, common, and preferred until the point where the common gets back up to a more acceptable level? Is that reasonable to be thinking about it in that direction or you guys have other thoughts on how to finance the business in a world where your stock price, as Mike said, is $16 and undervalued?

Very good question, Rob. I think you hit the nail on the head there. We are going to be selectively exiting what I consider to be non-core properties, and those being primarily single-storey office, which we just did out of Champaign, Illinois, and I think we'll continue to do that. I do believe, though, that Mike and I are kind of forecasting no more than $15 million to $20 million of dispositions in any given year, but we will take advantage of exiting some of these non-core properties. I am not a single-storey office lover, never have been. And although our tenants are doing extremely well from a payment standpoint, I think if we can roll out of those types of properties and into industrial properties to mass portfolios in our target markets, that's our objective.

Yes, and pivoting to the capital piece of it, Rob, and to your point, we're at $16.60 per share. If you are at $17, that's an 8-8 common dividend yield. We have modestly raised some preferred, predominantly at 6 5/8. You then get to a blended cost of equity in the low to mid-7s. Where we are seeing debt nowadays is really in the 3 to 3.5 range, but more so 3 to 3.25. The way we solve for our cost of capital is roughly a 50-50 debt to equity split. So all in, then you're looking at a low 5s cost of capital. Specific to the notional you mentioned in terms of a $10 million equity raise, that will pivot as a function of how the capital markets are positively or negatively receiving our stock in tandem with how pipeline is going. I would say, in a normalized environment and specific to 2021, we certainly have appetite to be more acquisitive. And that will call for more equity, but again, as we said and as we all know, these are exceptional times and we will pivot as we need to. But those would be the general commentary there. Long term, we continue to desire to modestly delever the portfolio, doing deals at roughly that leverage in tandem with the scheduled amortization that we have on our $400-plus million of mortgages. The amortization there is plus or minus $13 million a year. That's how we solve to do that modest deleveraging, and we would like to long term overweight to common when we get back to a better cost of common.

Okay. And then Bob, you've talked in the past about potentially exploring joint venture opportunities. I mean what do you -- how does the thinking today, the opportunities there to acquire properties such that that's still an avenue that you guys are exploring? Has that sort of been pushed to the back burner for now? How are you guys thinking about that at this point?

Mike and I are continuing to explore it. He has been in contact with a number of potential partners. We are looking at it from the standpoint of pursuing a product type that would not be in competition with our balance sheet. So it could be on the development side, whereby we partner with the developer and we do takeouts. And I think that can and will work, but we're just continuing to explore it, Rob. I think probably over the next 3 to 6 months, we'll either really go forward hard with it or elect to move on and just stay with our current balance sheet.

Okay. And the 5 properties that are classified as held for sale, is the expectation that that's 2021 business or some of those likely to close in the fourth quarter here?

I would say it's predominantly 2021. And just as a refresh, accounting guidance stipulates that a sale within a 12-month time period has to be probable to actually get the designation as a held for sale asset. So a vast majority of it, if not all, will be '21.

Our next question is coming from Gaurav Mehta of National Securities.

Question on the GM building. I was hoping that if you could provide some color on what you have been hearing from people that you're talking to, to run the buildings and what kind of feedback you're getting and what are some of the reasons for further prospects to not sign up for the property.

Certainly. As you know, Austin now has reopened. Up until probably 4 to 6 weeks ago, it was very quiet. We were only getting really virtual tours from our website on the building. But now with Austin reopening, and our asset management team actually has been in Austin this week, we're starting to see a pickup in activity. And as you indicated -- as I indicated there, we have like 7 prospects and I consider 3 to 4 of those really, really valid. In fact, we are sending out a proposal today to potentially a full building user. So I can't guarantee what's going to happen. All I can tell you is that when I look at our competition, and I look at our ability to lease that building at a very profitable position at $20 or even $19 a square foot triple-net as compared to what's going on in the marketplace where the majority of the leases are in the mid-20s, I think we're going to get our fair share of opportunities and pursuits. But COVID still has an impact in the State of Texas. And so what we're doing is staying very close to the Chamber of Commerce. The Chamber of Commerce is getting hits now on companies that are wanting to come visit, as compared to what they were not getting, let's say, 2 to 3 months ago.

Okay. And I guess before your 2021 lease expirations, are you speaking to tenants? Maybe provide some color on -- is it office or industrial that's expiring? And where are the expiring rents versus market rents?

It is office and industrial. And as I indicated, our experience this year has been an increase overall in straight line of about 3%. And I would anticipate that that's probably what we're looking at next year. Do I expect some tenants to come back to me and say we need to reconfigure our building, Bob, and do our layout differently, and I will encourage that as long as we can get some additional term from those tenants. And I think that will happen, Gaurav. I think it really will. And remember, as I indicated, of that $5 million of annualized rent, over $3 million of that really expires the last 2 months of the year. So we are not really forced in the first half of the year to have much, let's say, re-leasing or renewal activity.

[Operator Instructions] Our next question is coming from John Massocca of Ladenburg Thalmann.

Just going back maybe to the prepared remarks a little. There was some language in there about potential future deferrals. Is that just cautionary given the environment we're in? Or is there something specific within the portfolio you're seeing today that could cause additional deferral requests or newer deferral requests, I should say?

It is cautionary, but to be honest John, I do think that people are going to come to us. I mean if I were them, I would do it too. When I look at the occupancy in the buildings, which ranges anywhere from, let's say, on the office side, predominantly from 25% to 75%, you know that if you're a smart businessperson, you're going to go back to your landlord and ask for some help. What we do, though, is we have a very, very, very, very comprehensive checklist that we go through with them related to their financials. And everyone that we've done so far, we've really been able to arrive at a positive outcome. Most of them other than those 3 says, well, we're okay, we can continue to pay. But do I expect people to come back to me? Yes, I do. I mean I just think that's the market we're living in today. And as I indicated, our goal is not rent abatement. We want to defer the rent, but we also want to extend the leases so that we keep our core FFO the same as it has been.

And maybe you have these conversations with office tenants, I mean, what is the dynamic they are giving? These properties aren't really kind of directly tied off in the revenue that's being generated, but also that kind of cuts both ways, right? And maybe that makes it more likely for them just to kind of view it as a sunk cost. And at the same point in time, if they stop paying you and you locked the door on the them, worst-case scenario, you're not really cutting them up from revenues. I mean just how are those dynamics, maybe in those conversations you're having, has it been pretty receptive from people when you kind of point out that maybe they have the cash flow to pay rent?

Yes, I think it's been very positive. And the reason I think it is that when I look at our portfolio and I look at our office properties, most of these tenants have already renewed once and so they are somewhat mission critical and they're at locations that benefit their employees. So I am definitely recognizing that this is a partnership. And our asset managers connect with our tenants at least quarterly. So I mean, we have personal relationships with our counterparts. And so I take my hat off to our Senior Asset Managers who are staying engaged and have been engaged with our tenants. And at the end of the day, it's easier to negotiate a fair outcome when you know each other as compared to not having a relationship at all. So it's been positive, I would say, 90% to 95% of the time, John. But do I expect to get 1 or 2 that are not positive? Yes, but I'm hopeful that we're going to keep that to, let's say, 97% and 98% rent paying really for the long term, which I think is a good probability based on what we're seeing in our conversations with our tenants.

And then on the investment side, as we kind of think about industrial that there's been talk of cap rate compression in this space, I mean is that a trend that has continued through 3Q '20, specifically with the assets you tend to target which may be a little bit out of the kind of major coastal markets?

Yes, where I'm seeing the compression is in those gateway markets, in our secondary markets that we are -- have always pursued. And if we stay under 200,000 square feet, then we're still going to be able to have a 6 handle going in. And with Mike's comment on what our cost of capital, that still gets us 100 to 125 basis points over our cost of capital. And I think we'll be able to continue to do that going forward. When I look at our current pipeline and the properties that are in either due diligence or letter of intent, they are in that mid -- low to mid-6 going in and probably in the low 7s -- low to mid-7s for the straight line rent.

Are you seeing more competition now in those secondary markets versus pre-COVID or less?

I think we're going to see a lot, particularly with what may be happening with 1031s, because you know a lot of our competition is not the large peers, it's the private owners. So I anticipate that, that competition will continue. But I have been very, very pleased with what our team has found. I think a number of our markets are slow. There is no doubt about it. But we're seeing strength in some of our Midwest markets. And as I indicated to you, I'm a big fan of the I-65 corridor from the Port of Mobile going north. We're really, really very positive on that corridor from a distribution standpoint. And I think you'll hear more from us coming from Port of Mobile up through Birmingham and even the Huntsville area. So stay tuned on that. And I think that's going to be very positive for us.

At this time, we're showing no further questions in queue, I would like to turn the floor back over to Mr. Gladstone for closing comments.

Well, thank you all for calling in. We had a good time talking, but we will see you again in early February. Have a nice Christmas. That's the end of this call.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and log off the webcast. And have a wonderful weekend.