Good day, ladies and gentlemen. And welcome to the Gladstone Commercial Corporation’s First Quarter Ending March 31, 2015 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Gladstone Chairman. Sir please go ahead.

All right, thank you Amanda for that nice introduction and we welcome you all to the call, we appreciate you calling in. I always enjoy the times that we have on our phone with you, I wish we had more time with you, but we only do this once a quarter. So please come visit us if you're ever in the Washington D.C. area we're located in a suburb called McLean Virginia and you have an open invitation to stop-by and say hello. You'll see a great team here about 60 members of the team now it's no longer a small business and we have some people here that even bring their dogs to work so we are very dog-friendly here. So now let's turn it over to Michael LiCalsi who is our General Counsel and Secretary, also serves as President of the Administrator regarding some of the legal and regulatory matters concerning this call today.

Good morning, everyone. The report that you are about to hear may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe 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 the factors listed under the caption Risk Factors of our Forms 10-K and 10-Q that we filed with the SEC and they can be found on our Web site at gladstonecommercial.com and on the SEC's Web site at sec.gov. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether they result as a new information, or future events or otherwise, except as required by law. And in our report today, we also plan to talk about funds from operations, or FFO. 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 from property, plus depreciation and amortization of real estate assets. And the National Association of REITs, or NAREIT, has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. And please see our Form 10-K, filed yesterday with the SEC, and our financial statements for a detailed description of FFO. We also plan to discuss core FFO today, which is generally FFO adjusted for property acquisition costs and other non-recurring expenses. We believe this is a better indication of the operating results of our portfolio and allows better comparability of period-over-period performance. And to stay up-to-date on our fund, as well as all of the other Gladstone publicly traded funds you can sign up on our Web site to get e-mail updates on the latest news and you can also follow us on Twitter, user name GladstoneComps and on Facebook, keyword, The Gladstone Companies. And finally you can visit our general Web site to see more information at www.gladstone.com. And the presentation today is an overview and we ask you to read our Press Release issued yesterday and also review our Form 10-Q, for the quarter ended March 31, 2015. You can find them both on our Web site www.gladstonecommercial.com. Our Shareholders Meeting will be held this Thursday May 07th at McLean Hilton and we invite you all to attend the meeting we ask that you please vote you shares, so that we can ensure a quorum at the meeting. And now we will begin the presentation today by hearing from our President, Bob Cutlip.

Thanks, Michael. Good morning, everyone. During the first quarter, we acquired two properties, by issuing new debt on one and funding the other property with equity, raised $15.1 million of common equity under the ATM program with Cantor Fitzgerald, extended three leases that were set to expire in 2015 and 2016 and selected three national property management firms as strategic partners for asset management execution. Subsequent to the end of the quarter we also issued a $300,000 interim financing loan, signed a financing term sheet to refinance debt totaling $22 million on three of our properties which have loan maturities this year, and in a recently acquired anchored multi-tenant building the larger tenant agreed to expand into the balance of the building and the smaller tenant’s lease expires in 2016. So as you can see our acquisitions, capital and asset management teams all contributed to our first quarter success. We had an excellent quarter to start 2015 as we continue to increase our asset base by acquiring new properties. This was our 14th consecutive quarter of closing at least one new acquisition. We're extremely pleased with our activity and the consistency over the last several years and we continue to have a strong pipeline of acquisitions. We expect to close more properties prior to the end of the second quarter. Now for some details, during the quarter ended March 31st we acquired two additional properties. The first property is 156,000 square foot office building located in Richardson, Texas in North Dallas suburb. The purchase price $24.7 million with an average cap rate of 8.3% over the life of the 10 year lease. We funded this acquisition with cash on-hand and issuance of $14.6 million of mortgage debt. The tenant operates the nation's largest private Medicare exchange and is wholly-owned by…

Thanks Bob. Good morning everybody. We continue to grow asset and equity base in the first quarter. Our total assets increased to 807 million from the two acquisitions completed during the quarter. We continue to focus on decreasing our leverage and have been issuing new equity under our ATM program to help achieve this goal. We expect to continue decreasing leverage over the next several years to the lower leverage on newly issued debt and refinancing some of our maturities with lower leverage. We announced outstanding under long-term mortgages and our line of credit was 510 million at the end of the quarter and is representative of funding both of our new acquisitions this quarter. In addition to today we have raised over $20 million in common equity under our ATM program during 2015. And we’d use these funds to acquire properties and to reduce the outstanding balance under our line of credit. Reviewing our upcoming long-term debt maturities, we have mortgage debt in the aggregate principal amount of 40 million payable during the remainder of 2015 and 97 million payable during 2016. The 2015 principal amount payable includes 34 million of balloon principal payments due on three mortgages that mature in the second half of this year. As Bob mentioned we have find a term sheet to refinance 22 million of this debt which will close this summer and expect to refinance the remaining mortgages with the combination of new mortgage debt and equity. We expect to achieve at least to 100 basis point interest rate reduction when we refinance these loans in 2015. The current weighted average rate on our 2015 debt maturities is 5.4% and market rates for these loans are below 4% today. The 2016 principal amount payable includes 90 million of balloon principal payments due…

Alright, Danielle, that was a good report and good report from Bob and Michael LiCalsi too. We encourage you all to read that Press Release and the quarterly report filed yesterday with the SEC called Form 10-Q, there is a lot of good material and a lot of good work that goes into producing that document, and you can find it on our Web site at gladstonecommercial.com, it's also on the SEC Web site. Main items again, are purchasing two new properties, $28 million for the mortgage on one of these properties at 14.6 million to lock-in the spread between the interest that we're paying and the rents that are coming in. We extended three leases that were originally scheduled to expire in 2015 and 2016 and also raised $15 million in common equity. As you have noticed we continue to add quality real estate to our portfolio and shore up the existing investments and we grew our asset base as we try to do it every quarter. As we continue to grow our market capitalization we hope with current trading volumes and greater liquidity in our stock and corresponding pick up in the stock price because the distribution rate is much higher than those compared to other REITs like us. As many of you know the Company didn’t cut its monthly cash distribution during the recession that was quite a success story, well like some of the other great companies and have to cut their distributions and most of them never have come back to their original level, so us staying at our same level through this period of time has been a great accomplishment. I do wish more of the analysts would pick up on the story of how strong we've been in the past and how strong…

Yes sir, thank you. [Operator Instruction] And our first question comes from the line of Rob Stevenson from Janney. Your line is open.

Bob can you talk about what the weighted average remaining lead term is in the portfolio today?

I think about -- we will look it up but I think it's close to 7.5 years.

Okay. And then…

[Multiple Speakers] But I think it's around 7.5.

And then how are you guys feeling about preferred stock today as a source of capital. You guys have been very active with the ATM but how you are feeling about preferred where do you think you can price and how much could you issue if you wanted to do a deal today?

Well my feeling about that and I don’t know Bob will chime in if you wants to is that I love preferred stock and I’d love to have permanent rather than term. I don’t think many people are buying as much permanent as they used to but my goal would be to issue a little more preferred stock. We don’t have anything on the agenda right now but that’s where we think we will one day issue some more preferred.

Your next question comes from the line of Dan Donlan from Ladenburg. Your line is open.

David I wanted to go back to your comment on when you compared your dividend yield to the triple net peers. You have to sensitize that for leverage and you have to sensitize it for covering your dividend with recurring cash flow, operating cash flow. So I guess I think that’s why your yield is a little bit higher is that you don’t have it what you got higher leverage and you're not covering it with recurring cash flow?

Well, if you say so, cash is cash, we have been consistent and have paid dividends forever in a day never cut the dividend, no likelihood we're going to cut it in the future and if you go back to some of those that you would rate higher because they do those things that you're mentioning and they all had a lot of problems during the last recession and they haven’t learned and they are still using a lot of short-term capital in order to finance their deals. So I don’t know you like them, not much better than us that's just everybody's choice.

Right, well, I guess what I am saying is that I am not sure it's a fair analysis to make given kind of those things in place but not necessarily when you compare yourself to the average REIT but I think some of your triple net peers that you know didn’t cut their dividends have raised them since the downturn, and are now much higher than they were kind of in call it a ’07, ’08. But just wanted to kind of talk a little bit about, you know you talked about the asset management fees bringing that down I mean what's holding you back from doing it now, you know because if, if I look at your G&A and I don’t, and I exclude the add back that you give to the advisor, your G&A when you put all the advisory expenses, diligence cost, the acquisition cost, all these different items which you know you're in the business of acquiring properties you know every quarter, you know that’s like 19% of your NOI and if you look at that again exclude the add back you know that you give to the, that your, for the advisor, that's 1.8% of gross assets, that’s the highest of any triple net REIT that I cover and I cover 12 of them. So I am just kind of curious as to how you're going to be able to reduce those expenses on a going forward basis?

Well as you get bigger you can absorb more of those in terms of the relationship to the earnings. And so that's where we think we are at $1 billion in assets. So who knows we'll see, we're going to go through the analysis now, we have just started that and we should be finished by the end of the year, I am not sure when the Board will take a look at it but we're going to come at you with something and hopefully we are in your range so Dan that you will approve it.

Right, well, what about the incentive fee, why not just permanently, why not just change that structure because that’s, you pay more in incentive fees than you do in base management fees, you know if I look at the hurdle rate, the initial hurdle is 7% and the second hurdle is I think 8.75, if you're buying properties in the low 8s, you know or you're almost in the money on any of those properties, why not increase that hurdle rate to you know somewhere around 10% to 12%. And then I think your earnings would start to go up because you wouldn’t have so much incentive fee?

Well that's what we're looking at. We're going through that analysis now in terms of how low should the incentive fee be and how to reward the people as well as our shareholders.

And then just looking at your G&A, well actually just to take one step back, is internalizing the Company on the table?

It's not right now because we still got a lot of things to do for all of the company, I think we want to rely on the individuals that have expertise in this area that we can't possibly bring into the company at this point in time.

Okay, is may be the fact that you're talking with or working with JLL and CBRE and some of those regional brokers, is that a step in that direction?

It's a step in the sense that we've gone away from having a lot of those people that are doing work for us but most of our tenants have told us that they don’t like the fact that they are supposed to manage their properties, they want somebody else to manage, they don’t mind paying, they just don’t want to have to do it themselves. So that's why we have rounded up these three and we had a bake off between all of them in different regions and we've come up with these three as our beginning number and I don’t think we will expand it from there but we might end up dropping one of them if they don’t perform as well, as the others. So this is an experiment to try to remove the tenant from taking care of their properties, to give some professionals the opportunity to take care of the properties and let them bill the tenant directly. I think that will take something off of our table because we've been doing a lot of that internally here and really haven’t been rewarded for that at all except through the fact that we have our incentive fee. So as we move that out of our shop and into the others that will help us remove some of the expenses out of the company.

Okay. But do you think I mean, do you think if you internalize the company though that assuming your expenses stayed the same which I think would be hard to argue given kind of where other internally managed REITs have their G&A loads relative to gross assets, but assuming it stayed the same, wouldn’t you get a pretty nice pop in the stock in terms of changing your corporate governance, I mean a lot has been discussed in the REIT plan recently about corporate governance and those REITs that are externally advised have really taken a hit over the last couple of years. So you know given that your net is REIT, you're constantly issuing equity to buy properties, you really need to have a better cost of capital to make things more creative. And if your stock, if you internalize the company, you would probably get a really nice business stock price which would allow you to issue stock at a more attractive rate and allow you to have things that are more creative, I mean why haven’t you looked at this in more detail, I mean what is holding you back from doing this?

Well what holds us back is that it's going to cost the company a lot more money to engage the legal and accounting people that are working at the advisors levels that are shared with other companies. So I don’t want to put that expense on top of what we already have. So we are going to work the other side of the ledger which is trying to make sure that we're charging a reasonable amount and we'll compare it for you. And I think there is a belief out in the marketplace that internally managed is so much cheaper than externally managed, that it's just a no [indiscernible]. Let us do our analysis and we're glad to show it to all of our shareholders of how we're approaching the problem.

Okay, well I think if you looked at several other REITs in your space that are similar in size, you would see that their G&A loads are significantly less than yours and they are internally managed. So I think the shareholders would be rewarded if you were to internalize versus stay the same. So anyways, just last from me on the CapEx, was there anything in the CapEx number Bob, it looks it was 1.7 million or so, is there some type of expansion dollars that are being spent there?

Dan?

Yes, we've got about one of our tenants we just removed and we've put about 1.3 million or 1.4 million of that into the renewal and extension. And so it's, and of course their rent is higher than it was before and that takes effect I think it's June 1 is when that takes effect. So yes that's what it was for Dan.

Okay. And then as far as the acquisition front, you know Bob since you've started it, you've really started to ramp it up you know, is this more or less you know you work on your relationships from prior firms, what else is kind of driving you know your acquisition momentum?

Well believe or not I think it's really more of the team members that we have out in the field than me, I mean I held some we have three great leaders out there who are very well connected to see everything and as you know our cost of capital is higher than most of our peer group and yet we are able to successfully invest in the markets that you know you and I've been spoken about, we need to be in the secondary growth market and Buzz and Matt and Andrew White I mean all three of them are doing I think a phenomenal job with their team uncovering opportunities that makes sense for us. So it's probably a minuscule amount of Bob and the majority of the guys who are out in the field.

Yes, and I look at your implied cap rate and it looks you know with today's stock price somewhere around 8.1% and when you look at some of your office and industrial peers in the single tenant world, you know they are closer to 7.3, 7.4. So I guess bridging that gap would be which is surprising to me to some degree because you have more industrial than those companies doing, that's a lower cap rate type of asset. So I guess given kind of that, you know you do have this disadvantage from a cost of capital standpoint, are you focusing more on you know one asset class versus the other or is it simply you know you are sticking with office and industrial and you know staying in more secondary markets and that's how you are able to you know give you know properties that are somewhat above or at least in line with your you know implied cap rate?

Well, it's interesting, we, if you look at what we had purchased, let's say in 2014, we had 10 assets that we purchased and six of those were office and four of those were industrial and of course then if you add the expansion on our industrial we had five of them, and our overall ratio in the company right now is just over 40% industrial and just over 50% office and the balance being the retail and the medical. I don’t see that changing, I think everybody knows and I just saw and listened to a webcast by CBRE, the industrial market is extremely, extremely competitive and most of the secondary and gateway markets are in the 6s they are certainly not going into the 7s. And if we have to have something in the 7s to start or to make sense and we're just sticking to our netting, staying within our envelope. And as I said you know, we, our pipeline right now, the two properties that are in due diligence, one is Columbus and one is in Salt Lake City, Salt Lake City is a city that we would love to be in long-term, we think that’s a great market and we've already invested in Columbus and we want to do more there. So it's difficult, yes it is and challenging but we're finding deals that do make sense and as David said you know we've got to be patient, we've got to be persistent, we got to stick to staying in the size acquisition that we are looking at right now and in the annual volume 120 to 150 is perfect for our size at this point. So we're just going to continue to do that.

[Operator Instructions] And sir at this time I'm showing no further questions.

All right. Well, thank you all for calling in. We appreciate all those nice questions and hope to see you this Thursday at the Annual Shareholders Meeting. That’s the end of the conference call.