Good day ladies and gentlemen and welcome to Gladstone Commercial Fourth Quarter Ended December 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host David Gladstone. Please go ahead.

All right. Thank you, Stephanie. We appreciate that nice introduction and boy, most of all, we thank all of for calling. We enjoy this time with you, on the phone and wish there were more time to talk about things. Please come and visit us if you're in the Washington DC area. We're located in the suburb called McLean Virginia and you have an open invitation to stop by and see us. If you're in this area. You'll see a great team at work. It's about 60 members here in the office and now, we'll hear from Michael LiCalsi. He is our General Counsel and Secretary. Michael is also the President of Gladstone Administrator, which serves as the administrator to all Gladstone Funds and the related companies as well. He will make a brief announcement regarding some of legal and regulatory matters concerning this call. Michael?

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 of the risk factors included in our Forms 10-K and 10-Q that we filed with the SEC. They can be found on our website www.gladstonecommercial.com and on the SEC's website www.sec.gov. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, 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 the 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. And 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 website to get e-mail updates on the latest news. You can also follow us on Twitter, username is GladstoneComps and on Facebook, the keyword, The Gladstone Companies. And finally you can visit our general website to see more information at www.gladstone.com. In the presentation today, is an overview and we ask you to read our Press Release issued yesterday and also review our Form 10-K, for the year ended December 31, 2015. We also prepared a financial supplement this quarter to provide further detail in our portfolio and results of operation and you can find all of these in our website gladstonecommercial.com. And now we will begin the presentation today by hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Michael. Good morning everyone. During the fourth quarter, we acquired $6.6 million property and financed it with a long-term mortgage of $3.8 million. Expanded our line of credit facility to $110 million, adding three banks and reducing the cost in the facility. Sold three properties for a total gain on sale of $1.5 million. Extended leases with existing tenants at five of our properties, executed a lease with a new tenant for the majority of our Maple Heights, Ohio property. Modified one lease such as the tenant will expand into the additional space than our Minneapolis property and repay $27.2 million of maturing debt on six properties. Subsequent to the end of the quarter. We also received repayment of $5.9 million development loan, plus a 22% return on this investment and signed a Letter of Intent for 13,000 square feet and in our partially vacant Chicago property. As you can see, our acquisitions capital and asset management teams were all very active and contributed to our success this quarter. We had another excellent quarter, as we continue to increase our asset base by acquiring new properties. While also selectively selling properties as part of our asset recycling program. This was our 17th consecutive quarter of closing at least one new acquisition. We're extremely pleased with our activity and the consistency over the last number of years and we continue to have a very good pipeline of acquisition candidates. Now, for some details. During the quarter ended December 31, we acquired a 90,000 square foot industrial facility in the Atlanta I-20 West Submarket. The purchase price was $6.6 million. The lease term 18 years and the average cap rate 9.2%. Universal Pasteurization, a market leading High Pressure Pasteurization food processor is the tenant. In addition, to this excellent cap rate.…

Good morning, everybody. As Bob referenced, we had a very active quarter. Our total assets at the end of the year were about $833 million, which is reflected of the one acquisition completed this quarter coupled with certain ongoing tenant improvement projects, partially offset by the asset sale. We continue to focus on decreasing our leverage and have been refinancing debt at lower leverage levels. We expect to continue decreasing leverage over the next several years through a combination of lower leverage on newly issued debt and refinancing our mortgage maturities with lower leverage. We've reduced our leverage in Q4 by repaying maturing mortgage debt, which reduced the amount outstanding under long-term mortgage in our line of credit to about $530 million, which is a 2% drop from the third quarter. In addition, we raised $10.5 million in common equity and used these funds to acquire property, refinance the debt and to fund capital improvement to certain of our properties. You may have seen, that we filed a new registration statement for $500 million in January. Our existing registration statement was set to expire in September, 2016. We decided to file a new registration statement now because our current ATM program needs to be renewed and we also have the $38.5 million of term preferred equity that matures in January, 2017. We currently plan to refinance this equity with another tranche of preferred in 2016. We do not anticipate raising large amounts of equity in the current market environment. We filed the registration statement because it is for a three-year term and we want to be in a position to access equity, when we needed and market conditions permit. We also amended our line of credit during the fourth quarter in order to position us for growth over the next…

Well, that was a good report Danielle and good reports from both Bob Cutlip and Michael LiCalsi. Good team in place today. The main news of course in 2015 is that, we renewed all of our 2016 leases leaving only 5% of forecast rents and expiring through 2019, that's a very solid base to work from now, with 97.4% occupancy. We refinance the maturing loans, at lower interest rates, saving about $1.8 million and we expanded our line of credit, added pretty strong lenders and that reduced our cost as well. So this diversification of lenders is always very secure for all of our shareholders. Revising our fee structure during the year, is much more in line with all the REIT marketplace. We've been very friendly to our shareholders in the past and now we've put it in place with complete new structure of that, is very favorable to shareholders. And we've of course been investing in more buildings, in growth marketplaces consistent with a strategy we're going after certain marketplaces that Bob and the team like. We've continued to add the quality real estate that we like in our portfolio and shore up any existing properties. We've continue to grow all of our market capitalization leases increases and we hope to see high trading volumes in the stock, in the corresponding uptake and the stock price because the distribution rate today is very, very high. As many of you know, the company did not cut its monthly cash distribution during the recession, that was quite a success story. We watched some very good companies cut their distributions and most of them never came back. They never recovered to the dividend level, they had during that period of time. So here's what we're doing today. We need to increase the…

[Operator Instructions] our first question comes from John Roberts with Hilliard Lyons. Your line is open.

Given the current share of price, obviously you're not going to issue any equity. Do you think, is that going to potentially constrain your ability to make acquisitions in a near term, do you think?

Well, it would, but John we're probably going to be able to raise more debt and hopefully, maybe even sell some preferred stock. We've considered both of those alternatives and are currently looking at it. So my guess is, during this year. We'll be using that more than the common stock, that's the plan right now.

Okay, would that be a convertible, do you think or a straight preferred?

We really haven't locked in on that yet. We're thinking about doing some straight preferred, if the price is right. We're working on that now, so little early to make any announcements.

Okay, thanks. David.

Our next question comes from Rob Stevenson with Janney. Your line is open.

Just a follow-up on that last question. I mean, where do you guys think that you can price preferred today?

Probably between 6.8% and 7.2% would be the range.

Okay, does that lead you to, in addition to possibly issuing preferred to fund future acquisitions. Does that have you at least one of your existing tranches of the preferred is, at an interest rate above that. I mean, are you thinking also about taking gotten refinancing, that one is well to give you a little bit extra cushion?

No, we haven't talked about that at all. We just want to add some additional preferred as you know next year, we have some of our preferred coming due and we'll have to pay that off. So the term preferred would probably replace with additional term preferred or some other form of preferred. But for us in that range, as you probably know we're not at a big buyer buildings that have tenants in it that are rated. And rated tenants mean that, the cap rate or the rate of return that you can get or historically very low today. So for us because we're able to underwrite, unrated tenants as you know we have teams here that do nothing but lend money to small and mid-sized businesses and doing buyouts to small businesses. So we understand that marketplace and because we understand that marketplace, we're able to do transactions in that area of - each of the companies that we're looking at are underwritten, as if we were going to make a loan or buy them. So that we get this long-term history that we have, of not having tenants fail on us. We continue to use that ability to pick good tenants and when you pick a good tenant and put them in for 10 years, when they stay for 10 years and you're able to leverage that, as we have been in the past. The spreads they are superior to the people who are buying the rated tenants and trying to finance those. So we'll be like, we're in a sweet spot with regard to what we do, we picked out some cities. We're now doubling and tripling down in some of those cities in terms of getting our teams together. We've cut our management team into teams that are related to areas of the country. So all of this is coming together as a very nice operation. So we think, using preferred at this point in time is probably the best way to pay for half of the buildings and the other half can be paid for by borrowing a long-term mortgages. So it's a good fit for us right now, Rob.

Okay, thanks guys.

Our next question comes from John Massocca with Ladenburg Thalmann. Your line is open.

You have no lease on 2016, how do you think your capital improvements and kind of leasing commissions are going to trend, this year?

Bob, Danielle?

Let me address it initially, we will have overhang through the first let's say six to eight months and then really, it tails off quite a bit because we're finishing up to 2015 and doing the 2016, during the first six months. So we'll have CapEx for commissions and for tenant improvements during that period, but as I said and Danielle confirms for me. The latter half of the year, we tail off and then of course. In 2017, I think we're already looking at our renewals at that point, we have very few as you know based on the expected expiration. So we're pretty confident that it's going to drop over the next six to eight months quite a bit.

Okay, but over the first kind of six months of this year, it will probably be maybe similar to what it was in four quarter of 2015 or?

Just to pipe in a little bit there. I think Bob was talking on a cash basis. We've accrued a lot of that TI and leasing commissions at the end of the year. We have to pay some of it out. In the first quarter, if you look at our cash flow statement. I think there was like $4.5 million that we have accrued, that yet to pay. So some of it is already baked in to our financial statements at the end of the year. We will have a little bit of additional.

John, it's not significant. It's not going undo the apple cart someway. It's relatively light.

Understood and then, for your dispositions, you guys did in the fourth quarter. Do you guys have a cap rate or even just a cap rate range for what do you sold those at?

I don't have that with me, but we can get that to you. I do know that, we sold them for $6.9 million and made $1.5 million, so a very good profit for us. But remember, these properties when we bought them, we bought them at a very high cap rate. Two of the properties are truck service maintenance faculties for Cummins and of course, they bought them from us. And then the other one is a, they've been industrial facility in the suburb of Columbus, Ohio and the existing tenant who is the subtenant in the building, bought that from us. So, we feel very good about it. But I will guarantee you, those cap rates are not going to be in the six's and seven's, but I think we bought them with double-digit cap rates, but we'll confirm that number to you.

Great, no problem and then. Bit more on the balance sheet side. With regards to term loan, is there any interest in swapping that out? I know, most of your floating, all of your floating rate mortgage debt is capped with volatility maybe in the interest rate markets. I mean, is there any interest in swapping out a term loan in what spread do you think you can get in the markets today.

I don't know the term loan is something we've been trying to do for a long time. As you know, we've got mortgages at long-term and then we've got our revolving line of credit and it was very nice to put up, a piece of debt in there, but we'll look at that. I don't know what the penalties are for paying that off, do you remember?

Are you talking about the $25 million term loan, we just put in place or term preferred stock?

The $25 million term loan, you put in place.

I don't think we have any plans to put that out this year because again, we just put in place that's got pretty solid price [indiscernible].

I was talking about swapping it out, so the interest rate was essentially fixed.

Oh, I see.

We can buy a cap.

Yes, we can buy a cap, we haven't had discussions on that internally right now.

Okay, all right. That's it from me. Thanks very much, everyone.

[Operator Instructions] our next question comes from Larry Raiman with LDR Capital. Your line is open.

Question for you on the core portfolio. I didn't go through the full filing yet, I just read your earnings release. Could you describe what the, quarterly same property, same store income was year-over-year and then maybe you could describe it for the full year, with the same property income and then maybe you could, maybe you set as a launch pad to say, based on your anticipation, given your lease structure, with the organic growth in the same property portfolio looks like over the course of the next 12 months.

Organic growth is going to be relatively small because of fixed rate pump [ph] up maybe 2% or 3% at the most in the core. So there's not much growth in that. The way we've been making a lot more money is by refinancing some of the mortgage that are coming due or when they can be and of course to mention the 1.8 savings last year. I suspect that this year will be very strong in savings there. So the growth will come from refinancing not redoing leases. When we do have a lease, we get a chance to increase the rate but we don't have that many, it's a blessing and a curse. We don't have that many coming due to [indiscernible], so there is not opportunities to renegotiate, but there is some built-in growth. I don't know what that is, Danielle, do you?

I mean, just to follow-up in your question, we had close to $81 million of rental income this year and over 95% of that is basically on our same-store property. So on our existing properties or properties we've acquired. Some of that additional, I can refer you Page 54 of our 10-K because we actually have table that breaks all of this out. Less than 2% of that is from our vacant properties. So we anticipate our same store revenue to be stable again in 2016, since we've renewed all of our 2016 leases.

Sure and do you straight line any stipulated rent increases and I presume, that's in there as well.

That's correct.

Okay, good. one another maybe just observation would be, I know you mentioned the quality of the management team, but certainly the structure of getting an outsider advice [ph] does turn up some investors and I know that, you've listened to them and change your advisory fee, the very recent past, but was their disclosure with regard to the analysis that, you may mention that we wanted to bring the cost of that structure in line kind of with the market and be more cognizant of existing investors. Was disclosure of that analysis made public to show similarly sized companies and their overhead cost and here we are, so you're not paying any more dollar-for-dollar? Is that [indiscernible]?

No, we didn't do that. There are maybe 10 externally managed REITs and only three or four of them are sort in our area. So we pretty much took their agreements and analyze them in terms of what it would do for us and felt like, that was a good marker, but we didn't go out and say, here is a research paper you can review. Trying to get data from those that are internally managed and compared them to ours. Is very difficult, since the internal managed groups don't really publish exactly what it would be like if it was externally managed. So it's hard to pull out all the cost and expenses. They're summarized to such a level that you can't get too the pieces that we pay to our management company. So there is no way to get that number out. I've guessed several times in talking to people and trying to piece those numbers out, that there is not a lot of difference between what the internal manager is paying, what the external manager pays.

Understood, so has there been any discussion about potentially internalizing, just while the management team can still be involved, with changing with the optics and maybe that would kind of bring in a new constituency of shareholders, as you want to grow the company and broaden out that base.

I think it will be hard to do that at this point in time. You need to be larger, we've considered that a couple of times and just felt like that, we would lose so much in terms of external versus internal because we have the sharing arrangement of legal and accounting and different. So it's very hard to be able to externalize that and internalize that. So we haven't gotten to that point, maybe one day but not today.

Great, thank you very much. Nice job and keep it up.

I'm showing no further questions. I will now turn the call back over to David Gladstone for closing remarks.

Okay, thank you all for calling in. we appreciate the questions and hope they're more of those, next time. We'll see you at the end of next quarter. That's the end of this call.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.