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

Okay, thank you Liz. Nice introduction and thank you all for calling in. We always enjoy these times we have together on the phone and wish there are more opportunities to do so. If you are in the area -- the Washington D.C. area, we're located in the suburb called McLean Virginia and have an open invitation to stop by and see us if you're here. It's a great team at work there over 50 of us now at this shop. Now, we'll hear from Michael LiCalsi, he is our General Counsel and Secretary. Michael is also the President of Gladstone Administration, which serves as the administrator to all of the Gladstone Funds including this one. He will make a brief announcement regarding some legal and regulatory matters concerning this call and report.

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. And these can be found on our website www.gladstonecommercial.com and 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 otherwise known as NAREIT, has endorsed FFO as one of the non-accounting standards that we can use in discussing REITs. And please see our Form 10-Q, filed yesterday with the SEC, and our financial statements for a detailed description of FFO. And today we also plan to discuss core FFO, 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. And you can also follow us on Twitter, username, GladstoneComps; and on Facebook, the keyword, The Gladstone Companies. And finally you can visit our general website for more information at www.gladstone.com. Our shareholders meeting will be held next Thursday, May 5, at our offices here in McLean, Virginia, and we invite everyone to attend. We ask that you please vote your share so that we can ensure decorum at the meeting. And the presentation today is an overview and we ask that you read our Press Release issued yesterday, and our Form 10-Q for the quarter ended March 31, 2016. We also prepared a financial supplement this quarter to provide further detail on our portfolio and results of operation and that can be found on our website at www.gladstonecommercial.com. And now we will begin the presentation hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Michael. Good morning everyone. During the first quarter we received repayment of $5.9 million development loan plus a 22% return on this investment, executed a lease with a new tenant for 14,000 square feet in our partially vacant Chicago property, refinance $21.2 million of a maturing debt on four properties with $18.5 million of new debt and expanded our common stock ATM program to $160 million and entered into it a preferred stock ATM program for $40 million. Subsequent to the end of the quarter we also negotiated the terms for another 13,000 square foot lease in our partially vacant office building in Minneapolis, refinanced $3.7 million of maturing mortgage debt, received an Energy Star Award for our 350,000 square foot office building in Austin, Texas, that's occupied by GM, and finalized the major upgrade to our website which we plan to rollout in May. We had another excellent quarter as we executed leases to increase the occupancy of our portfolio while also placing a non-core asset under contract for sale as part of our capital recycling program. We have slowed our acquisitions pace by design starting with our fourth quarter activity as a result of uncertain market conditions and a lower stock price. We continue to be pleased with our activity and have a healthy pipeline of acquisition candidates. Our acquisitions team has spent considerable time over the past six months connecting with our peers to determine the direction of the market. Interest rate volatility, global economic slowdown perceptions, and an energy glut raise our concerns. Our findings reflect that the largest net lease peers have noted that they may be reducing our acquisition volume this year or even parting, if you could believe that valuations appear to maybe be too high. These thoughts, as well as reduced…

Thanks, good morning to everybody. As Bob referenced, so we do not acquire any assets during the quarter, we were active in the capital market. We continue to focus on decreasing our leverage and have been refinancing debt at lower leverage levels and lower interest rates. We expect to continue the strategy over the next several years. We've reduced the amount outstanding under long-term mortgages in our line of credit, $523 million which is a 2% drop from the fourth quarter. In addition, we amended our common ATM program during the quarter to increase the program to $160 million and we also implemented a $40 million preferred ATM program for our two trenches of perpetual preferred stock. We access those programs during the quarter and raise an aggregate of $2.8 million under these programs. We use these funds for refinancing CapEx and tenant improvements at certain [ph]. We do not anticipate raising large amounts of common equity into the environment improves. We also have a $38.5 million term preferred equity that matures in January of 2017 and we are currently plan to refinance this equity over the next few months. We have currently today $54.6 million outstanding under both the line of credit term loan facility at a weighted average interest rate of approximately 2.9%. We continue to only use our line of credit to make acquisitions that we believe can be financed with longer term mortgage debt or that we believe are good additions to our unsecured property pool required under our line of credit. The market for long-term mortgages continues to be strong and the environment remains competitive but more credit driven. The CMBS market is less active than it was in 2015. Its underwriting terms have become more conservative and the spreads required have widened significantly. The…

Thank you, Danielle, that was a good report. And good report from Bob and Michael. So we're on the right road it seems like. Main news again is we were new to all the 2016 leases except for small office lease leaving about 4% of the forecasted grants to expire in 2019. Retained a 22% return on our $5.9 million development loan that we had and we refinance maturing loans at lower interest rates to tune of about $3.2 million and savings to the company and that goes right to the bottom-line. I think we've positioned ourselves for strong growth in the future. We've continue to add quality real estate to our portfolio and sure if existing properties continue to grow, there are market capitalization and we hope to see higher trading volumes in the stock and the corresponding uptick in the stock price because the distribution rate is very high today. As you all know, the company did not cut or miss its monthly cash distributions during the last recession. I think that was quite a success story, I keep saying it because it was so wonderful. We watched some very good companies cut their distributions and most of them have never recovered to bring their growth back to the original level. We are in a great position not to have a problem if the economy hits the skids again. Here is what we're doing today. We need to increase the common stock market capitalization in order to increase the trading volume and give institutional investors who want to buy the stock the ability to do so. These institutional buyers always want to know if there is a number of shares outstanding so that if they buy $10 million to $20 million of stock then they know they'll have…

[Operator Instructions] Our first question comes from the line of John Roberts with Hilliard Lyons. Your line is now open.

Good morning, David.

Good morning, John.

How much of the interesting come was from the -- in the first quarter was from the success fee?

I think we have one month of interest income. So it's probably about $300,000 was the actual success fee. We were accruing upto 19% throughout the terminal loan, so we just had the additional interest income was the difference between a 22% exit IR and the 19%.

Okay, very good and that line will go away going forward unless you get something else on that front?

That's correct.

Okay. On the leases -- are the leases you're signing on the vacant property, any guidance as to the amount that we're going to get there?

Bob, why don't you take that?

Are you talking about the actual amount of the dollars per square foot I guess.

Yes.

For the one that's in Chicago, of course that's an industrial building, 14,000 square feet, the rental rate was about $6 and that's on a net basis because they're paying the operating expenses.

All right, pretty good.

And then the one that we're doing in the one that we have negotiated terms with in Minneapolis, that is 13,000 square feet and it's about $11 to $11.50 a square foot.

All right, great. Good color. And then finally, the property which you have in the purchase agreement, any thoughts about cap rates size etcetera?

Well, I really can't say that. I can say is that it follows the strategy that David and I promote and that is, it will be accretive based on -- even our current stock price, so we're encouraged about it.

All right, great. And finally, on the ATM programs, you did what $2.5 million you said?

It's $2.8 million.

$2.8 million in Q1?

Yes.

Should we anticipate somewhat similar numbers going forward and you guys are going to target more of the preferred or the common and current prices?

Our common is actually up yesterday, so we might look to do a little bit more common in second quarter. We really only raised common equity I believe in January during the first quarter. We look at it on a daily basis and it's dependent upon our stock price and how we perceive it. David?

Whichever one gives us the lowest cost of capital is the one you should watch.

Super. All right, thanks guys.

Next question?

[Operator Instructions] Our next question comes to the line of John Massocca with Ladenburg. Your line is now open.

Good morning, everyone. So a quick question, given to the choppiness you were describing in the credit markets, are you seeing additional opportunities to kind of a construction mortgage note, similar to the Arizona transaction you guys just finished up?

We were investigating that very seriously right now based on the success that we had on this most recent one John. And the thing that a number of our peers are saying and we agree, the forward has compressed -- the forward on the yield, and so it's not as attractive as let's say it was maybe 18 to 24 months ago. But we think that we're going to be able to do a number of these going forward because they do make sense and they are really -- the ones that we're going to focus on are those developers that are not as let's say capital strong, and they need assistance. And since we've got a national platform, I think you'll see us do these in other regions of the country as well.

Okay, that makes sense. And then touching maybe on the balance sheet strategy, both of the -- the refinancing you did in the quarter and the one you did subsequent to quarter-end were floating rate with LIBOR caps. Is that something you guys are going to want to do more of in the future versus just straight up fixed rate debt or is this kind of just -- these are very attractive at the time?

Yes, I mean I think we're looking at it on a case by case basis. I mean it's very attractive at the time if we can get 2.8% rate today and cap it at 5% which is what we get in a fixed rate environment. We're saving ourselves money knowing interest rates will go up but any variable rate that we are putting on the book, we're always buying an interest rate cap to match it. So I think you might see some more of that but it really is a case by case basis.

Okay. And then how easy would it be to if you guys decided to simply swap it out. What would be the equivalent of fixed rate as opposed to a cap, is that something you can do with these two loans? And how kind of costly would that be from an interest rate perspective?

That's not something that I think that we -- I'm not positive that we can do that with these loans, and it's not something we've discussed internally and these loans are a little bit shorter term. So I think we're just planning to hold them on the books with various interest rate cap. But it's something we would maybe investigate down the road.

These wrong renewals that were renewals are typically five years. So it's really hard for you to go out and get a 10-year. So we've had to go five years on some of these. And I guess into 2020 timeframe and hopefully the world will be better by then but nonetheless, they are little bit shorter than we'd like to be.

That makes sense. That's it for me. Thank you very much.

Okay, next question, Liz.

Our next question comes from the line of Rob Stevenson with Janney.

Good morning. Danielle, how should I be thinking about the $61 million of debt in 2017, when does that become refinance without significant prepayment penalties?

Most of our debt that we put it -- that it is maturing in '17, we can't prepay it until at least three months prior. So there might -- I think there is some, there is a trance that's maturing in January that will probably look to refinance in October. I mean if you look at the maturities, it's usually we're doing it in a period two to three months before the maturity date.

Okay. And how much is the January of that $61 million?

About $20 million.

Okay. And then is the other $40 million spread fairly evenly throughout the year or is there another lump?

We've got $10 million in June and the other remainder is in December -- excuse me, $13 million as looking at 2016. We have about $13 million in March, $13 million in June, and $14 million in November.

Okay, all right. Perfect, thanks guys.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. David Gladstone for closing remarks.

Well, if we don't have any other questions you're going to have to until next quarter, so we'll move on. Thank you very much for calling in, and we appreciate it.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.