Good day, ladies and gentlemen and welcome to the Gladstone Commercial Third Quarter Earnings ended September 30, 2017 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, David Gladstone, Chairman. You may begin.

Well, thank you, Glenda. Very nice introduction and thank all of you for calling in. We always enjoy this time we have with you on the phone and which there were more times to report to you, but looks like it's just one a quarter. So, if you're ever in this area, the Washington, D.C. area, we're located on the suburb called McLean, Virginia and you have an open invitation to stop by and say hello in this area, you'll see a great team at work, although you'll see some of them here anytime, others are on the road looking at new transactions. We have over 60 people now working for the company and we'll first hear from Michael LiCalsi. He's our General Counsel and Secretary. Michael is also the President of Gladstone Administration, which serves as the administrator to all the Gladstone public fund and related companies as well. He will make a brief announcement, ready to go. He just walked out. He will make a brief announcement regarding some of the legal items and regulatory matters. Let me just start his report since he walked out. I am not sure what happened. Oh, you want to do it. Oh, good. Go ahead. We have two lawyers now. So, lawyer number two is going to do it. Thank you.

Thanks, David. Good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Exchange Act of 1934, including statements with regard to our future performance. Forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And 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 risk factors, included in our forms 10-K and 10-Q filings, which we file with the SEC. Those can be found on our website at www.gladstonecommercial.com and the SEC's website, www.sec.gov. We undertake 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. On today's report, we'll discuss FFO, which is funds from operations. 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. The National Association of REITs has endorsed FFO in discussion of REITs. Please see our form 10-Q filed yesterday with the SEC for a detailed description of FFO. We'll also discuss core FFO today which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe this is as a better indication of our operating results and allow us better comparability of our period-over-period performance. And to stay up to date on our fund and other Gladstone publicly traded funds, you can sign up on our website to receive e-mail updates on the latest news plus you can also follow us on Twitter, username GladstoneComps; and on Facebook, the keyword, The Gladstone Companies. Finally, you can visit our general website to see more information at www.gladstone.com. The presentation today's is an overview. So, we ask you to read our press release issued yesterday and also review our Form 10-Q for the quarter ended September 30, 2017, as well as our financial supplement which provides further detail of our portfolio and result of operations. You can find all of these documents on the Investor Relations page of our website www.gladstonecommercial.com. Now I'll turn it over to Gladstone Commercial's President, Bob Cutlip.

Thanks, Eric. Good morning, everyone. During the third quarter, we acquired a $26.4 million industrial property in Philadelphia, acquired a $51.4 million three building office complex in Orlando, extended the lease on 223,000 square foot industrial facility through 2031 in the Northeastern Pennsylvania distribution quarter, leased the balance of the 116,000 square foot industrial facility in Raleigh, leased a balance of our 12,000 square foot medical office facility in Houston, sold a freezer cooler facility in the non-core market of Newburyport, Massachusetts, issued $26.1 million of common equity through an overnight offering, including the underwriters' overallotment option and issued an additional $17.5 million of common and preferred stock under our ATM programs. Subsequent to the end of the quarter, we executed both our lease extension and purchase and sale agreement, which is subject to the tenant's option on the same property in Arlington, Texas and extended and expanded the line of credit and term loan, resulting in increased capacity, significantly extended maturities and a lower borrowing cost. One can conclude from the foregoing list, our acquisitions, asset management and capital teams have been extremely busy attending to add value to our operations. As you can see from this overview, we had another excellent quarter as we continue to add high-performing assets to our portfolio, leased vacant space and renew and extend leases, maintaining our consistent and stable cash flow and our high occupancy. We were 97.9% occupied at September 30. We continue to be pleased with our activity and have a healthy pipeline of acquisition candidates, which I'll describe further. As noted during our last quarterly call, overall investment sales volume through the second quarter of 2017 was nearly 10% below that reported during the same period in 2016 and initial forecast for the third quarter also indicated a year-over-year…

Good morning. I'll start by reviewing our third quarter operating results. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were $10.7 million or $0.38 per share for the quarter. On a core FFO basis, this is a 9% increase totaling approximately $925,000 over the prior quarter. As Bob mentioned we made one industrial property acquisition as well as a three-building office portfolio acquisition during the quarter. The rents from these deals in tandem with our office property acquisition in late June, contributed to the growth of both FFO and core FFO. In advance of these acquisitions, we did raise a good amount of equity, which I'll discuss further in a minute. Third quarter results reflected an increase in total operating revenues to $24.4 million as compared to total operating expenses of $15.9 million for the period. We continue to reduce our weighted average cost of debt to 4.37% as of quarter end from 4.5% as of the end of the second quarter. We've also continued our gradual deleveraging. As Bob mentioned, we did sell one non-core property during the quarter. This sale resulted in a small net gain as the property had been impaired in prior periods for GAAP purposes. Now let's look further into our debt activity and capital structure. We continue to have a strong balance sheet as we grow our assets and focus on decreasing our leverage. We've reduced our debt to gross assets to under 50% from nearly 60% at the beginning of 2016, generally through refinancing maturing mortgage debt at lower leverage levels. We expect to continue to gradually decrease our leverage over the next 18 to 24 months. As we've discussed this with various analysts, investors and lenders, we…

All right, Mike. That was an excellent report. Good one from Bob Cutlip and Eric stepping in for Michael LiCalsi. I can believe what a good quarter that was and everything is clicking right along. The economy is strong. During that quarter, we made some solid -- going forward with some common and preferred stock, we sold about $44 million to finance the acquisition, purchased the two buildings for almost $78 million in Philadelphia and Orlando, sole our building that was vacant in Newburyport, Massachusetts. Glad to get that off the books. It was a drag on the earnings, executed a lease extending the lease up to two of our industrial buildings that previously were 100% -- weren’t a 100% leased and now they are. Leased up the remaining space in our medical office building in Houston and financed the new acquisitions with some very cheap fixed long-term rate debt 3.5% to 3.9% and extended our line of credit. I want to emphasize how important that is because if the economy turned down and you had your lines of credit coming due, it's a pretty grizzly situation. So, having that extended, does protect shareholders from having that debt coming due at a time that you don't want it to come due. As many of you know, the company didn't cut its monthly cash distributions during the recession and that was primarily because we didn't have our debt coming due and we did have one small loan coming due and we paid that during the depths of the recession. So is was quite a story that we got through that recession without problems. We want some of our good friends in the business who had financed their long-term asset with short-term rates and they had to cut their distributions and we…

Thank you. [Operator instructions] And our first question comes from the line of Rob Stevenson form Janney. Your line is now open.

Good morning, guys. Bob, can you talk a little bit about what's the size of the acquisition pipeline today. Is it -- historically you guys have been more capital constrained than opportunity constraint. What your opportunity set look like today and given the lower cost of capital today, are you looking more at or harder at industrial assets today, relative to historically?

Sure. Yes. In fact, we are. As I the indicated of the 18 properties we're looking at, seven of them were industrial and of that $95 million that we're talking about being in the letter of intent stage that David said, two of them the Investment Committee approved yesterday to go to best and final on those three of the six in the $95 million are industrial properties and the size I think is important Rob. I think as you and I've talked, we play much better in let's say the $10 million to $20 million range because when we get up into the $30 million to $40 million than the much larger cap companies that we're competing against, do still have a lower cost of capital. But in the $10 million to $20 million it may be up to $25 million. We really can compete well and those six properties are all under $20 million and they're all in our target markets. So, I'm feeling very -- much more comfortable and confident about the opportunity to pursue these in the Midwest a little bit less so in the South and the West markets, but at 18 properties, I really feel very good about the pipeline at this point.

Okay. And then I guess the other question winds up being, it sounds David from your comments that 50% leverage is where we should expect the company to be moving forward and that includes, that 50% to you including the preferred or is that as debt or is equity?

Well, first of all I am going to say that I like debt and leverage much more than my CFO does and I am going to let my CFO answer that question.

Yes. So fair point Rob, because we have A, B and D outstanding, debt to gross assets on the books is about 48% today debt plus pref overgrowth assets is probably about 10 points north of that. Appreciating that some people measure it based on EV, but we don't have while we like to think we're doing the right things and it will show up and be indicative in the stock price. Obviously macro event is going to affect that. So, on a book basis, what we would say is debt to gross, we still think we need to get down from the 48% level in a pragmatic manner to probably three or four points lower than where that would be and to the extent we have the same preferreds outstanding at that point, time that would equate to debt plus preferred over gross to be in the mid-50s.

Okay. Thanks guys.

Next question please.

Thank you. And our next question comes from the line of Barry Oxford from D.A. Davidson. Your line is now open.

Great. Thanks guys. To build on Rob's question, when you're looking at the acquisition pipeline and the location of those assets, what might be some of the newer MSAs that you guys might end up going into?

Well what we've identified 20 markets that we think we really want to be in and those we're really staying in when I look at our pipeline today, if I could go from the South around the West, those assets that we're pursuing are in Miami, they're in the Greenville Spartanburg quarter, which is that industrial corridor between Atlanta and in Charlotte. The research triangle that I-81 in Northeast corridor of Pennsylvania, which I think everybody is familiar with. Philly, as you know, we acquired three assets there recently. We still have a couple that we're pursuing there. Columbus, Ohio, we have in Indianapolis opportunity, Nashville opportunity, Salt Lake City which we really like. We only have two assets there now, but we think that's a great long-term player for us. And I must bring up that one of the assets is at the Mercedes-Benz assembly plant in Alabama. If I had to pick another quote unquote “market” Mercedes-Benz has truly turned that into a new market. They're going to be building a $1 billion battery plant there and so we have one asset there now and we're pursuing another. I would not feel uncomfortable if we had another two or three there because I do believe that's just a great long-term play, but those markets are the ones that we identified in 2013. We still think they're the strongest for us to pursue and really that's where the teams and I take my hats off to them, that they have stayed in those markets and not gravitated to any tertiary markets.

Great. Thanks. Thanks for that color. Looking out when we think about equity, you guys -- we indicated that you guys seem to have ample equity at this particular point, but then you also indicated that want to continue to go to market cap through equity. As we move into 2018, what can we expect? I guess you guys are going to continue to use your ATM, but will that be enough to accomplish what you guys want to accomplish?

Yeah very -- some of that is going to be subject to the size of deals where we want to stall on. Our sweet spot deals $10 million to $25 million can pretty organically be funded through the ATM program, but appreciating inclusive of the ADP three office portfolio where they pick up 72% of the space. When you see $51 million coming that necessitated overnight. So, as we think about going forward and roughly doing plus or minus 50% leverage new acquisitions, I would say probably the majority of it will be taken care of through the ATM program, but it would be reasonable to think that overnight and plus or minus where the size of the deal we just previously did in July would be one to two time a year occurrence based upon how we're trying to grow today and obviously as we get into '19 and out years, that could be larger and larger.

Great. Great. And last question and I'll yield the floor. You indicated in your press release that you got decrease your admin fees in the quarter. Should I think about that more as a one-time event or should I think about that more as a new run rate?

Barry, it's not a $40,000 decline. I would carve that out as more of a one timer, but that type of fluctuation is going to happen plus or minus each way, quarter to quarter, just based upon usage of employees and other things internally.

Great. Thanks, so much guys. I’ll yield.

All right. One more question please.

Thank you. And our next question comes from the line of Laura Engel from Stonegate Capital. Your line is now open.

Good morning. Thank you for all the good detail and information. So, you talked a lot about the industrial segment and your waiting seems to stay fairly similar over the past couple of quarters. As far as looking forward those other two sectors, do you see strong opportunities there as well? Do you think this waiting is going to change significantly all in that coming year?

Can you -- I must have missed something, what's the other two sectors you're talking about besides industrial.

Versus office and retail. You talked a lot about the industrial sector looking forward opportunity, acquisitions you're considering. Do you see the same gross opportunities in those segments as far as keeping similar weight in your portfolio or is there one sector you're focusing on as far as looking forward in the strength of that sector?

Okay. Thank you. Retail, we're not pursuing any retail at all.

Bungy I am the only one that likes retail.

And debt right, retail and debt.

Exactly. So, Bob is go after any more retail. We only have the two drug stores in the portfolio.

I think right now we're at 60-40 office versus industrial and what we're trying to do now is shift that to get it closer to 50-50 and because of our lower cost of capital, we are -- we are more successful in identifying properties that work and having spent some time in Phoenix and Salt Lake City recently and a couple of other markets, I think if we stay in the 300,000 square feet to 400,000 square feet and lower -- and smaller size then we can compete. We're not to be buying in the five's or the four's, buy we can buy in the six's and we think there are opportunities there. So, the deals that we're pursuing right now, allow us to do that, but they are the smaller deals. They're not the large distribution facilities, which really, I would not be too excited about getting a 750 million to 1 million square-foot deal and at the end of the lease term who really has a leverage. So, we're going to stay under 500 for the most part in those markets and I think we can compete.

Okay. Okay. And my other questions have been answered. So, I appreciate it and I'll get back in the queue.

Thank you.

Okay. Glenda, anybody else?

[Operator instructions] And our next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is now open.

Good morning, everyone.

Good morning, John.

So just looking at your property operating expense ticked up in the quarter, was that a result of one of the assets you bought or the vacant in Northern Massachusetts. Just any color you can give on that would be great.

I believe we can give you a specific answer, but I believe it relates directly to a gross lease that we acquired and therefore we're getting paid up above in the rent in a gross lease but we identify the operating expenses below. So, the net return is really the same. Unfortunately, even though we're in the net lease business, we're finding that a lot of properties we're acquiring had either extend stops or base years and of course we carve out that operating expense to clearly identify it since we have to manage the property for some of those. So, I believe that's the majority of the issue, correct me Mike if I am wrong.

Yeah, I think it's just trends and the types of properties we're acquiring John. It's less triple net stuff that we're getting a look at. So, the three-building office portfolio in Orlando had some OpEx within it that we were well aware of from day one. The quarter performed as anticipated and it was priced into the cap rate that we ultimately got on the deal.

Yeah and to just add to that as well, these deals that we were buying, I would say 95% of the time the base year is already baked in like let's say we buy it in 2017 and has a 2016 base year. So, we have no exposure.

Okay. That makes sense. And then if I am going back to that asset in Northern Massachusetts, can you give some more color on what that is? I know you gave some detail on the prospects for your leasing, but what exactly the type of building is it and how plentiful you think that asset is?

It's a flex facility, flex building and as you know flex buildings typically have much higher office buildout and/or assembly than a true distribution building. I think it is going to be a challenge for us. I am just being openly honest that we are always transparent. We do have some prospects for it. The gentleman who is running that for us Andrew White, has been all over the brokers to ensure that we get to see every deal. We've had a number of walk-throughs. We had one buyer who walked away because he wanted to add more parking in it and it just didn't make sense on the site at any more parking. But with 50,000 square foot prospect and two other user buyers, we're hopeful that we can get this one taken care of in the next probably three to six months.

Understand. And lastly, it's not that kind of -- obviously you get a very limited lease roll next couple of years, but the two leases that are expiring in 2018, any color you can give on like timing and what those assets are, we appreciate it?

Well, one of them is an 8000-square foot lease in our Indianapolis multitenant buildings. It's an 8,000-square foot lease. It's going to be the end of January. I think the tenant will be moving out. So, we'll have to release that. The other one is a Sara Lee, a property in our Arlington property. It's an industrial building and we have already in escrowed two agreements on that deal, one of which would be a 10-year lease renewal or a sale of the property during the first quarter. So, we're pretty much taken care of four 2018 right now. We already renewed the 150,000-square foot South Hadley lease. So that one is taking care of. So '18 is pretty light and what I like about it is that the CapEx is going to be very, very low from a re-tenanting standpoint next year.

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

Thank you. Next question.

[Operator instructions] And I am showing no further question over the phone lines at this time. I would like to turn the call back over to David Gladstone for closing remarks.

All right. Thank you, Glenda. It was a nice meeting and a heck of a quarter and we think this quarter is going to be another strong quarter. I'll talk to you next quarter at the end of this call.

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