Good morning, and welcome to the Gladstone Commercial Corporation Second Quarter Ended June 30, 2012, Shareholders' Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to David Gladstone. Please go ahead.

Well, thank you, Valerie, for that nice introduction, and thank you, all, for calling in. We enjoy this time we have with you on the phone and there's still more times to talk with you. By the way, if you're ever in the Washington, D.C. area, we're located in the suburb called McLean, Virginia and you have an open invitation to come by and see us here. You'll see a great team at work. There are 57 members of the team now and we're no longer a small company and oh, by the way, we have a couple of puppies that wander around the halls every day. Now I'm going to read our forward-looking statement. This report that we're about to give includes statements that constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements involve certain risks and uncertainties and based on our current plan, we believe that plan to be reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all those factors listed under the caption "Risk Factors" of our company's 10-K and 10-Q in the filings that we file with the Securities and Exchange Commission. Those 10-Ks and 10-Qs can be found on our website at www.gladstonecommercial.com and on the SEC website. The company undertakes no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise. In our talk today, we all plan to talk about funds from operation or FFO. And since FFO is a non-GAAP accounting term, I need to define FFO and that is net income, excluding gains or losses from the sale of real estate, but adding back depreciation and amortization of the real estate assets. The National Association of Real Estate Investment Trusts or NAREIT has endorsed FFO as one of those non-accounting standards that we can use in a discussion of our REIT. Please see our 10-Q filings yesterday with the SEC and our other financial statements for a detailed description of FFO. Now before I begin, we have here in the room, Bob Cutlip. He has recently been appointed the new President of Gladstone Commercial. And we're really excited to have Bob join us and he'll be available for questions at the end of the presentation. Going forward, Bob will be participating in the presentations next time and we'll begin the call today by hearing from our Vice Chairman and Chief Investment Officer, Chip Stelljes. Chip is the Chief Investment Officer of all the Gladstone companies. And today, he's calling in from Nashville, Tennessee, where he's looking for a new deal. Chip, take it away.

All right. Thank you, David. Good morning, everyone. During the quarter, we acquired 4 additional properties and issued long-term debt on 8 of our properties. Pipeline remains robust and we're hoping to announce additional acquisitions in the near future. As of today, all but 2 of our buildings continue to be occupied and all of the buildings that are occupied continue to pay as agreed. The 2 empty buildings constitute about 2% of our stabilized gross portfolio income and about 1.2% of the total square feet of space we own. We continue to take appropriate action to re-tenant these properties. The 4 new properties we acquired this quarter total about 505,000 square feet and were purchased for an aggregate of $31.8 million. 2 of these properties are located in the Columbus, Ohio area. 1 is in Iowa and the fourth property is located in Columbus, Georgia. The weighted average cap rate over the term of the leases for these 4 properties is 9.6%. The market for long-term mortgages has improved. We're seeing mid- to long-term mortgages become much more obtainable. The collateralized mortgage backed securities or CMBS market has made a comeback in recent months, but it's more conservative than it was prior to the credit crisis. And the market remains somewhat volatile. Consequently, we're looking to regional banks and insurance companies and other non-bank lenders as an alternative to finance our real estate activities. During the quarter, we issued 5 new mortgages for $33.7 million. 2 of these mortgages were issued through the CMBS market and totaled $21 million. The remaining 3 lenders were banks or insurance companies. The 5 new mortgages were collateralized by 8 of our properties at a weighted average interest rate of 5.8% and a weighted average loan-to-value obtained was 67%. Depending on several factors…

All right, thanks for that good presentation. And now, let's turn to our Chief Financial Officer and Treasurer, Danielle Jones, for a report on the financial results. Danielle?

Thanks. Good morning. Our quarterly results are positive and reflect our gross from our recent acquisitions. At quarter end, our total assets increased to $497 million, up 16.2% from 1 year ago. The amounts outstanding under long-term mortgages in our line of credit increased to $314.8 million, which was a 14.3% increase from last year. In addition, our stockholders' equity, including our newly issued term preferred stock, increased by 18.8% to $166.1 million from our preferred equity offering earlier this year. As discussed last quarter, we completed a public offering of the 1.54 million shares of our 7.125% Series C term preferred stock at a price of $25 per share, resulting in gross proceeds of $38.5 million in January. We used the proceeds in the offering to repay the outstanding balance on our line of credit. Due to its mandatory redemption feature, the preferred stock is classified as a liability on our balance sheet and the costs incurred related to this offering are recorded in deferred offering costs and will amortize over the redemption period ending in January 2017. We have mortgage debt in the aggregate principal amount of $2.4 million payable during the remainder of 2012 and $58.9 million payable during 2013. We have no mortgage maturities in 2012. The mortgage payments due in 2012 are only principal amortization payments and we have sufficient cash or borrowing capacity under our line of credit to pay these amounts. Of the $58.9 million of principal payable in 2013, $53.9 million are balloon principal payments not due until the fourth quarter of 2013. We are currently in discussions with those lenders and anticipate being able to extend the maturity dates or alternatively, refinance the mortgages with new lenders. The weighted average interest rate of our existing mortgages is 5.7%. Because we are…

That was a good report, Danielle. Thank you. We encourage all of the listeners to read our press release and our quarterly reports that was filed yesterday with the SEC and it's called Form 10-Q. And there's a lot of good information in there. I hope you all take a chance to read that, and you can find them all on our website at www.gladstonecommercial.com and also on the SEC website. To stay up-to-date in the latest news involving Gladstone Commercial and our other public companies, please follow us on Twitter, using the name, "GladstoneComps," C-O-M-P-S at the end, and also on Facebook, keyword, "The Gladstone Companies," and you can go to our general website and see more information about all the Gladstone Companies at www.gladstone.com. I think the main news report for this quarter is that we are able to acquire 4 more properties and issue some long-term debt to fund these acquisitions, and so a very positive news for our shareholders. We've built up a nice pipeline of potential properties that we're interested in acquiring and are in due diligence phase on those. And because of that pipeline, we hope to be able to grow the assets in the portfolio even more during the second half of 2012. And with the increase in the portfolio of properties comes greater diversification for all shareholders and we believe we will get better earnings as well. We're still selling some of our senior common stock and sold over $1 million worth today. Momentum is building there. We've made monthly dividend payments to those folks, and that program continues to get stronger. I think the company's in a great position to increase its assets and to increase the income on those assets during 2012. I think it's going to be a great…

[Operator Instructions] And the first question comes from John Roberts of Hilliard Lyons.

I got a few questions here. Due diligence expense rose pretty heavily in the quarter. A, what's your expected run rate on that going forward?

Well, what's happened to us, as you know, John, is we used to be able to amortize all of that expense. It was about $0.035 this quarter and some of that was expense that we have for deals that we're trying to close in future quarters. But the large amount of it was due to those deals that we purchased and had to write off all of that due diligence expense. We don't -- we're not able to amortize it anymore. And unfortunately, I think as we continue to ramp up and close deals, the due diligence expense will stay high. So it's directly related to the number of transactions we've closed and it goes right into the P&L and that's what dampened the P&L this time is a lot of due diligence expense.

Right. So that's the number you had in the current quarter, which was $519,000 or somewhere in that range -- we should look at that? Or $528,000, we should look at that going forward? As a run rate?

You should just say to yourself, if they close that many deals, as they did, and that's going to be the run rate. So you're making assumption of how many deals and then, let's see, maybe divide that number by -- that the number for this quarter by 4 or 5 and that would be sort of the average due diligence expense.

Okay. I mean, what's the return on investment you're getting on now? Are you guys looking at that? I assume that you feel pretty good about what you're spending versus what you're getting from an acquisition perspective?

Yes. It's unfortunate that it costs us that much to get a deal closed and it's a higher percentage, obviously, because these are smaller transactions and you just about spend the same amount of money for a small one as you do for a large one. So as a result, when you do the appraisal and you have lawyers and the research, that's all done. Some of it's done here but obviously, we hire outside people to do some things such as structural analysis, those kind of thing. It just happens to hit and it hits in 1 quarter. So if you close a lot of transactions in 1 quarter, it's going to damage that quarter's earnings.

All, right. Very good. Dividends, I mean obviously, you didn't cover it this quarter. You said that you'd declare it here for the next quarter. You still feel pretty good about it at this point? I'm obviously getting questions from financial consultants about that. So I'm just wanting to be able to go back to them and say, "Yes, David's still very positive on the dividend."

Well, add the $0.035 back. So if we just close down doing deals, you'd cover it very well. But we don't want to do that. So yes, we have plenty of money to cover this dividend. And from our perspective of growth, as you're going to weight(sic) down the earnings every time you close a deal, so -- again, we're going to make our dividend payments and obviously, we damage our incentive fee first, so you seen that be damaged first and I don't like to do that because that's something that everybody looks forward to here. So we're taking the first hit on that and you shouldn't worry about the dividend because you're covered in essence now.

Very good. The other line item looked like it jumped pretty significantly this quarter as a percent of revenue would be, the property operating expense. Is that a run rate that you -- has something happened where you got higher property operating expenses as a percentage of revenue? Are the properties you're purchasing more expensive to run? Are they non-triple net? What's the story there?

Danielle is going to answer that one. She's closer to the number.

There was a couple of properties we have acquired subsequent to June 30, 2012, that has ground leases on them. So we're actually subject to the ground lease payments, which fall into the property operating expense line item now. We're -- our rental income covers some of that. So you'll see some of that in rental income. But I would probably say that's a pretty accurate run rate. I mean, we also have expenses at our 2 vacant properties that we're now incurring. So if we re-lease those, we would expect those expenses to go down. But for now, I think that's a pretty accurate run rate.

Very good. Okay. And the final question is, David, can you discuss the acquisition pipeline a little more? I know you said you've got a lot of due diligence expense. So I assume that indicates you've got quite a few properties that may be on the hopper for looking at purchasing?

Well, Chip can probably better answer the pipeline question. He's closer to it than I am. Chip?

Yes. I mean, I don't -- we never release straight numbers on it, but the pipeline has remained good even though we've closed properties and those obviously come out of the pipeline, so they're on the books. But we have remained good. And I think with Bob Cutlip on board, we're pressing forward as aggressively as ever to put more deals into the funnel. So we're pretty optimistic that deals with cap rates that are attractive and accretive for us are out there and we're able to get them in. And I think we're doing a good job of processing the pipeline.

The next question is from Dan Donlan of Janney Capital Markets.

It's actually Elizabeth Bland here with Dan. Just wondering if you have any color on prospects for the 2 vacant properties?

We do. We're working that hard obviously. And it's -- we had one already lined up and something happened to them, I can't remember the exact story. But we're working. We've got, I'd say, 2 possibilities in Richmond and only 1 possibility in St. Louis right now looking of the properties. But again, the 1 in St. Louis is in much better rental capacity position, if you will. And I expect that one to go sometime in the next 6 to 8 months.

Okay. And then as you look out at your portfolio over the next few years, I know you're working on extending the remaining 2012 expiration, but do you see any other major vacancy risks, either through nonrenewals or any potential tenant bankruptcy?

I think the biggest problem we see on the horizon right now is the one we have in Minnesota. It's a building that we had for Unisys. Unisys vacated part of the building. They're still in a large part of the building. But we're going to have some vacancy there, come next year and unless we can find tenants. Now we've got a lot of tenants looking at it because it's a very attractive space. But at the end of the day, you don't know until a tenant actually signs a lease, whether you've got them or not. So that would be the next one to put on the worry list, if you will.

Our next question comes from Justing Meng of V3 Capital Management.

I have 2 questions for you, one related for leasing and one related to the balance sheet. With regard to your Roseville, Minnesota asset, there's been discussion about this being leased as a data center and I'm just curious, from your perspective, what kind of TI wouldn't be needed to put into that asset to bring it up for leasing standards?

Yes, there's 2 approaches to that. First of all, Unisys has a data center in there, so we already know what their costs are and what they're doing. So they're not moving out for that data center. But we are looking at it from a number of perspectives. One is, you can provide the shell, which includes the powers there that connective, all the things that you need to have a data center such as cooling are all in that location or can be set aside -- put in place for relatively ease for -- on our side. So we're trying to work that marketplace the same. We can provide the shell if you want to provide the buildup to put you in, obviously, get a lower rental rate. If you go the other end of the extreme where you're providing all of it, we've looked at it and we have a couple of consultants that's talked to us about it. You do it in suites in terms of carving up part of the building at a time. You don't convert the whole thing to data center overnight, obviously. That would be a horrendous expense. And it would cost you anywhere from $6 million to $8 million to do a suite in terms of a data center. And we may partner. We've talked to a couple of the data center managers and data center people about having them provide some of it. Now if we put $8 million in, the rents would be astronomical compared to where they are today. So it would cover it. It's just a question of how much money we want to have in any one building in any one's space with any one tenant. So a lot of consideration there but we are in the marketplace, marketing it as a data center. A lot of people are looking at it from that perspective as well a group that wants one of the -- one portion of the floor as a call center, which was obviously, a very different approach to that building. So we've got a number of tenants moving around and we've put out some -- we've answered some RFPs for some of them, but it's moving along.

Got it. And if you were to go with a high funding sort of scenario, how would you fund those leasing costs?

Well, first of all, we have a line of credit and we obviously can raise money in the capital marketplaces, neither of which I'm excited about doing because there's just a lot of money to invest in that location. So I'd rather do a partnership with someone or end up just selling the building to somebody, some of the real estate investment trust or in a data center business. If we landed one of the suites to some potential tenant, I'm sure it would be a attractive purchase to some of the people who are in that data center business.

Got it. The second question is probably for Danielle. With regard to the book value per share, I'm looking at your latest investor presentation. On Page 28, it states that net book value is roughly $19.37 a share. In prior presentations, it was closer to $14 or so. Can you just sort of walk me through how to calculate it and discuss what drove the $5 a share increase?

I don't have that sitting in front of me and I'll probably going to have to go back and look at it to see how exact we calculated that number. But if memory serves, we added back depreciation, if we get to the book value per share and I think with accumulated depreciation over the life of the portfolio. But let me take a look at it and I can post to the website or send you an e-mail afterward.

We have a Q&A on the website. And when we get questions that we can't answer on the phone. We usually post them. So we'll post your question and then answer to it on the website sometime today.

Got it. I haven't been able to attribute it exactly. But it looks there might be inclusion of preferred equity in that calculation? So I was just trying to confirm that.

We'll take a look.

[Operator Instructions]

Okay, Valerie. It sounds like it's no more questions.

That is correct.

All right. Well, we all thank you for calling in. We enjoyed this time. And if you have questions, just e-mail them or call Lindsay here. She's always very anxious to get your phone calls and get answers back to you. Thanks again, and that's the end of this call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.