Greetings and welcome to the Gladstone Commercial Corporation First Quarter Earnings Call. [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.

Well, thank you, Latoya. This is a nice introduction that you do each time. Thanks to all of you for calling in this morning. It's a chilly day here in McLean, Virginia, just outside of Washington, D.C. and we'll warm you up with some good news in a minute. We enjoy this time, we have with you on the phone and wish we had more time to talk with you. Now we'll hear from Michael LiCalsi, our General Counsel and Secretary, give us legal and regulatory matters concerning our reports.

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 forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents that we filed with the SEC. You find these on our website, gladstonecommercial.com, specifically the Investors page or 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. 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 core FFO to 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. We ask everyone to visit our website, once again, gladstonecommercial.com, sign up for our e-mail notification service. You can also find us on Facebook. Keyword there is the Gladstone Companies and our Twitter handle is @gladstonecomps. Today's call is an overview of our results, so we had to review our press release and Form 10-Q, both issued yesterday for more detailed information and find them. Now I'll hand it over to Gladstone Commercial's President, Buzz Cooper.

Thank you, Michael and thank you all for calling in. Today, we will discuss economic and portfolio topics that are top of mind. Country is going through a rough patch economically which has affected the commercial property market. Although remote work and linger effects of the pandemic have weakened the office property market. The industrial property markets remain strong and we continue to pivot to a higher percentage of industrial assets by divesting from noncore assets and we are lowering our exposure to the office market and derisking our portfolio. I'd like to highlight several positive developments. Our overall portfolio remains stable and we continue to see attractive acquisition candidates. Further, we continue to have success with retenanting, capital recycling into industrial assets. With these facts in mind, let me move on to a discussion covering the results for last quarter and provide some comments on the state of the portfolio and market outlook before turning the call over to Gary Gerson, our CFO, to review our financial results for the period and our capital and liquidity positions. I would add that I've asked EJ Wislar, the company's CIO to join us here in the room today to address specific market questions. During the first quarter of 2023, we continued our focus on industrial acquisitions and improving operations. We collected 100% of cash-based rents during the first quarter, extended lease of 352,860 square feet industrial property in Ottumwa, Iowa for an additional 5 extended the lease on 3,546 square feet of office space for an additional 5 years. Our investments, dispositions and re-leasing activities further reinforce our strategy to increase our portfolio's industrial allocation and improve property operations. The acquisition volume since 2019 has exceeded $470 million and all assets have been industrial in nature. Our industrial allocation has increased from 32% to 59% during this period, while pure office allocation has been reduced to 37%. The team's near-term objective is to reach an industrial allocation of over 60% in the next 6 to 12 months. We have had success in acquisitions in the 50,000 to 300,000 square foot range with the predominance of long-term sale leasebacks and we expect this to continue. Now I'd like to comment on the portfolio. Our asset management team continued to deliver on improving our same-store operations. Q1 2023 over Q1 2022 same-store lease revenues increased by 5.8%. We are also continuing our capital recycling efforts in order to redeploy sales proceeds into industrial assets. Our rent collection experience continues to be strong. 100% of cash rents reflected through April. We are very pleased with our portfolio and with our tenant's performance during these challenging times for all industries. It is appropriate to mention that for the quarter, average GAAP cap rates on our $114.4 million of 2022 acquisitions was 7.12%. Our transactions in due diligence currently scheduled to close within the next 45 days, are above 7.5% which we expect will be very accretive to our shareholders of higher interest rates and the limited availability of credit, transient volumes are down by over 50% year-over-year and there continues to be a disconnect between buyers and sellers as it relates to pricing expectations. However, the industrial sector continues to outperform other asset classes with the sector accounting for roughly 25% of all commercial property sales. Furthermore, the increase in cost to high-yield debt leverage loans has made sale-leasebacks an attractive source of capital for private equity firms and an increasing number of firms are exploring it as a financing alternative. Return to office efforts are beginning to progress across the United States as the labor market softens and companies focus on efficiency and productivity. Major employers in key industries have announced reversals of rework policies or increased frequency of hybrid workers with most to take effect midyear. In April, the White House released new guidelines for federal employees, to substantial increase in office work. Although remote work remains elevated and the office market faces cyclical challenges, there are promising signs from corporate tenants pushing towards an increase of in-person work. As it relates to our acquisition opportunities, we see a reduction in sales listing activities and investment sales brokers are indicating that a number of acquisition candidates on a per property basis has been reduced. We have seen cap rate expansion in the market due to its continued rise in interest rates and cost of debt. And again, new sponsors exploring sale leasebacks. Our current pipeline of acquisition candidates is approximately $408 million in volume, representing 25 properties, all of which are industrial. Of the 25 properties, 3 properties are in due diligence, totaling $25.5 million. One property is 10 stage for another $8.5 million and the balance are under review. Our team is staying actively engaged in our markets as we believe acquisition opportunities will continue to arise and we can and will pursue. So in summary, our first quarter activities reflected continued strong leasing and rental collection success, continued active engagement to identify industrial acquisition opportunities and have collectively positioned us well to pursue growth opportunities. Now let's turn it over to Gary, our CFO, for a report on the financial results, including our capital market activities.

Thank you, Buzz. Good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first 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 both $0.37 per share for the quarter. FFO and core FFO available to common stockholders during the first quarter of 2022 were $0.39 and $0.40 per share, respectively. Our same-store cash rent in the first quarter of 2023 increased by 5.8% over the same period in 2022. Our first quarter results reflect the total operating revenues of $36.6 million with operating expenses of $25.4 million as compared to operating revenues of $35.5 million and operating expenses of $25.7 million for the same period in 2022. Moving on to the balance sheet. We had no acquisitions or dispositions this quarter. We continue to reduce our debt to gross assets are now down to 45. 2% as of the end of the quarter. Looking at our debt profile, 47.4% is fixed rate, 49.1% is hedged floating rate and 3.5 is floating rate which is the amount drawn on our revolving credit facility. We have seen increased expenses this quarter due to the rise in interest rates and the expensing of hedging costs. As of March 31, our effective average SOFR was 4.87%. Our outstanding bank term loans are hedged with $210 million of interest rate swaps and the remainder with interest rate caps. In addition, we have $100 million of forward starting swaps to replace maturing caps in mid-2023. We continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our 2023 and 2024 loan maturities are manageable with $54.8 million due in 2023 and $11.2 million coming due in 2024. As of the end of the quarter, we had $26.25 million of revolver borrowings outstanding. We've had minimal activity in issuing equity through our aftermarket or ATM program. During the first quarter of 2023 and net of issuance costs, we raised $4 million through common stock sales. We also raised net proceeds of $0.5 million 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. Presently, we have 3 office properties held for sale, 2 scheduled to close in June with signed PSAs and negotiations ongoing for a sale of our Columbia, South Carolina asset, with the current lessee. As of today, we have approximately $7.4 million in cash and $75 million of availability under our line of credit. We encourage you to also review our core 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. And now, I'll turn the back to David.

All right. Thank you very much. Wonderful yield on the stock at 10% or so. And so we are all happy that things are going well here. It was a really good report you did, Gary and good one from Buzz and Michael too. The team has performed very well and reacted admiral to the various challenges. Overall, it's been a nice quarter. Commercial's team is growing the real estate we own at a good pace and the team is doing a great job of managing the properties we own. Our team of strong professionals continues to pursue potential quality properties on the list of acquisitions that they are reviewing. Our acquisition team is seeking strong credit tenants. They know the quality of the tenant and the real estate make excellent investments. Our asset managers are actively managing the properties that the company owns in order to maximize the value. I'm going to stop here, Latoya, if you will come on and see if we have some questions from some of the good analysts that follow our company.

[Operator Instructions] Our first question comes from Gaurav Mehta with EF Hutton.

My first question is on the vacancy in the portfolio. Can you provide some color on your expectations to fill some of the vacancy that you have?

Certainly, Gaurav, thank you. We are aggressively obviously looking to sell the office assets that do have vacancies. And as referenced in the report, we have several that are either due to close under PSA and we had 1 that came about at the end of January that we also have been able to have a signed LOI upon larger transaction that we are -- have a PSA out on it. And from a square footage basis, was $165,000 all office. So we feel very good about those that are fortunately on the portfolio currently and we will continue that capital recycling. I hope that answers your question as it relates to that and happy to get deeper if need be.

No, that's helpful. Second question, I was hoping if you could address debt maturities for 2023 of $54.8 million. How do you plan to refinance that debt? And if you do, where do you think the rates are today to refinance it?

Well, those are all mortgage maturities and we are working on those; our treasurer is in contact with potential lenders. And it depends -- I mean, the majority of that is office. And so the rates on those are relatively high but we think we can get -- we'll get them all done. And that's -- I mean, I can't really say more than that. I think that you're looking at rates. Some of the spreads are higher than 200 to 300 basis points over the 10-year. So unfortunately, cost of those mortgages could be more than if they're fixed but we can also get variable rate mortgages and swap those out at probably a lower rate.

Our next question comes from Rob Stevenson with Janney Montgomery Scott.

Sorry if I missed it but what's the rough dollar amount on the 7.5 cap rate assets that you expect to acquire in the next 45 days. Is that the $25.5 million that you spoke of or does that 25.5 include deals that are further out than the next 45 days?

No, sir. That's the 25.5.

Okay, perfect. And then, how should we be thinking about dispositions over the remainder of '23 beyond the 3 office assets? And where is pricing for those type of office assets today?

Obviously, it depends on the location and we have good quality real estate in our office but they are in areas, obviously, that have been hit as they have all across the country. So giving you an idea of the value, we look to get out a whole, if I can call it that way, relative to both debt and/or value on our books. In some cases, we might be selling over our cost and acquisition price, some cases not. So I think we have it very manageable, especially with the 3 I mentioned that in a not-too-distant future are going to be off our books but we are continuing to address in other 1 specific office property that does mature at the end of the year, looking to dispose of that property because it's in a very tough market that somebody needs to come in and redevelop that property. And obviously, that is not our business model. So I think it's very manageable of the 3 properties that I referenced. It's about 1.85% of the portfolio rent that we're missing, if you will. So I think it's very manageable. And again, the team has really done a great job in moving properties and we continue to focus on that.

Okay. And then I guess given those commentaries and given how difficult the market is in valuing office assets and cash flows relative to industrial. Is there any compelling reason why you guys over the next 12 to 18 months would buy an office asset? Or is whatever capital you're going to deploy 100% going to be industrial?

I would say it's going to be 100% industrial. Office is just too unknown at this point in time for us to take that risk. So I would leave it at that. We are fully focused on our industrial acquisitions versus office.

Okay. And then last 1 for me. Can you just talk about the markets, given where interest rates are for the preferred right now that you guys have dribbled out a little bit of that in both the first quarter and thus far in the second quarter. Where is that having to price in order to go? Is that being priced at a discount to the $25 par? Or at the $25 par, is there a deep market for that given where rates are? Can you just talk a little bit about the environment there?

So the Series F preferred is a nontraded and it's being -- it's not sold through the public markets and we are not selling it at a discount.

Next question comes from John Massocca with Ladenburg Thalmann.

I know it's still early days and still very much ongoing but are you seeing any impacts, both in terms of maybe deal flow and then even financing on your end from some of the stress we've seen in the regional banking market?

And I'll let EJ have a shot at, obviously, from the deal standpoint. But certainly, with the rise in interest rates, some lenders have been less willing to lend than others, although our Treasurer and Gary have established a good stable of lenders that we can go to and we have commitments from on some of our acquisitions. So I would say it's a difficult market but it's a market that we are able to still acquire and place mortgages on if you want to have a shot at what the current purchase market, if you will, acquisition market looks like.

Yes, absolutely. And when I do on the debt as well as we operate with a lower leverage than many buyers in the private space which is advantageous for us when we look to place a mortgage on an asset. More generally, year-over-year, we have seen a material slowdown in active listings from the brokerage community as well as off-market transactions. There has been a slight slowdown in the sale-leaseback market, certainly not as much as the third-party space and that's driven by a weaker backdrop for the private equity M&A environment. That being said, we are seeing a number of attractive sale leaseback ones, as Buzz alluded to, it is an attractive source of capital for sponsor-backed businesses in a tightened credit condition environment. So I'd say more broadly you're probably looking between a 50% and 70% drop across the industry in transaction volume. You could look at the earnings of some of the major brokerage houses in their conversation around that. But for us, having a longer focus on the sale-leaseback world, we're seeing some lower, I'll say, drop in terms of active listings and some opportunities but we are being very discerning right now on what we're looking at.

And in terms of kind of cap rate expansion, I mean, -- what are you seeing today? Is that 9.7% that was kind of posted on the subsequent to quarter end acquisition typical, what's in the market? Or was that very bespoke to that particular transaction?

It's a mix. I would say that one was maybe a bit higher than some of what we're seeing given how we were able to find that deal. I'd say broadly marketed deals are going to be a bit inside that. We're also using some of our proprietary sources, where you'd be a little higher. But I'd say that's fairly revenue from what you might see maybe just a bit inside that.

And John, if I could, we also able to achieve a little higher cap rates. This company is known in the market of doing what they say we're going to do, what we say we're going to do. So as a result of that, the seller wants to have the comfort that it's going to execute and going to close. So that certainty of close is very important today in the marketplace.

Okay. And then maybe as we think about the incentive fee waiver, any update on if that would be potentially extended deeper into 2023? Or just your kind of thoughts there?

I would let Gary shot and David as well. Obviously, our Board makes that decision at the time when they will next meet and onwards. So I don't have a lot to say towards that at this point.

I really don't have anything to add to that. I mean, the first 2 quarters contractually waived and our Board will decide ongoing if that's -- they want to continue that or partially wave it or not waive it at all.

If you remember, the reason -- it's David Gladstone. You remember, the reason that we reduce that amount or stop that amount and maybe use the same logic going forward is that we want to make our dividend and we want to make sure that we're strong in that area. So the goal is to keep going. I've cut dividends twice in my life and I don't like either 1 of those periods. So we'll be fine. We'll do what's necessary to make sure that the dividend keeps going to shareholders.

Our next question comes from Timothy Hertz [ph], who a private investor.

Congratulations on the sale of some of the properties. How much capital do you expect to be able to recycle from the sale of those properties? And just roughly, I'm not looking for precision.

I would say approximately, as I look at it and what's on the potential on the horizon, somewhere in a $20 million range.

Okay, good. That be able to fund most of the acquisition that you have then. And you mentioned that one of the interest rate caps is going to expire midyear. What increase in interest expense might we see from the expiration of that cap?

All in, probably that cap obviously is at an older cap. It's at a lower rate than our swap. So you'll probably see interest rates increase. I think it's about 1 point over that for the $100 million. So it's about $1 million a year.

Okay. Are there any other caps expiring in 2023 or '24?

Yes. We have about $60 million in caps expiring in the first quarter of 2024. That's -- those are hedging the $60 million term B loan which matures in 2026. We are looking now at potentially swapping that out and we're going to watch the markets to see watch pricing on that swap rate as we go forward.

Okay. And then on the credit agreement, when will the properties that collateralize that agreement be next reevaluated?

So in terms of the valuation on that, if you look at what was publicly available, it's based on a trailing 12-month income for the valuation component. So it's done on a quarterly basis.

Okay. And it's done off of income rather than a property assessment value?

Yes.

Okay, that's terrific. And are there any provisions in the credit agreement that you're watching more carefully than others to make sure you don't violate?

No. We're in a pretty good position right now. I don't think there's anything we're really bumping up against. So I would answer no to that.

At this time, there are no further questions in queue. I'd like to turn the call back over to Mr. David Gladstone for closing comments.

Thank you very much. We appreciate all those nice questions. We like it when you give us questions. I think one of the things that didn't come up is that we saw some relief coming in this quick moving increase in the Fed's rate. So the Fed seems to be, although they don't say it the same way everyone is saying it now. They seem to be in a pause mode and maybe we can hold them at 5% in our projections going forward. If so, I think we'll be in very nice shape. So we do appreciate the Fed backing off where they were. And at this point in time, if there are no final questions, I'm going to say goodbye to you folks and see you next quarter.

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