Good morning, ladies and gentlemen, and welcome to the Gladstone Commercial Corporation's Third Quarter Earnings Conference Call. [Operator Instructions] 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 like to turn the conference over to your host, Mr. David Gladwell, Gladstone. I am sorry, go ahead, sir.

Okay. Thank you, Stephanie. It was a nice introduction, and we are coming to you from the town that has the world-famous Washington Nationals Baseball team that just won the World Series in case you're wondering why we're still celebrating here. We do enjoy this time we have with you on the phone and wish that we had more time like this. We'll start off with Michael LiCalsi who is actually in his Washington Nationals host and baseball team uniform, so Michael go ahead.

Maybe not the full uniform, that kind of silly, but that's okay. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934 including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable and many factors 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 in our forms 10-Q, 10-K and other documents that we file with the SEC. Find all these on our website www.gladstonecommercial.com, specifically the Investor Relations page or on the SEC's website, which is www.sec.gov now. The Company undertakes no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except of course as required by law.Today, we will 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 on property plus depreciation and amortization of any real estate assets. We'll also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses, and we believe this is a better indication of our operating results and allows better comparability of our period-over-period performance and please take the opportunity to visit our website, once again gladstonecommercial.com. You can sign up for our email notification service online there, could also find us on Facebook. Keyword there is The Gladstone Companies, and we even have our own Twitter handle and that's @gladstonecomps.Today's call is simply an overview of our results. So, we ask that you review our press release and Form 10-Q, again both issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website. Up in the, and we have Bob Cutlip Gladstone Commercial's President who will take over from here.

Thank you Super Nat's fan. Good morning, everyone. During the third quarter, we acquired a 78,500 square foot industrial property in Denton, Texas, acquired a 211,000 square foot two-building industrial property in Temple, Texas, Recast the Company's line of credit in term loan and implemented energy savings improvements at three office properties to reduce operating costs.Subsequent to the end of the quarter, we entered due diligence for the acquisition of a 65,000 square foot industrial property in Indianapolis, entered due diligence for the acquisition of a 231,000 square foot industrial property in Indianapolis, entered due diligence for the acquisition of a 241,000 square foot industrial property in Jackson, Tennessee, have two lease amendments negotiated and out for signature, a 100,000 square foot office tenant in Denver, Colorado, and a 40,000 square foot office tenant in Mason, Ohio and completed a public offering of six and five-eighths percent Series E perpetual preferred stock.As I've noted in the second quarter, we are beginning to enjoy the benefits of our team's focused efforts across all functions to improve operating results. This has been accomplished through three major activities, acquired accretive assets. During the period from 2012 through 2018, the average GAAP cap rate on acquisitions was 8.7% with mortgage debt placed at a 4.6% interest rate, renewed expiring leases and released vacant space. We maintained occupancy greater than 96% during the highest lease expiration period in company history and refinanced maturing mortgages at lower leverage levels.We've lowered our leverage from a high of 63% in 2013 to 45.9% as of the end of the third quarter. The results of these efforts equate to increasing cash flow year-after-year, and an improved capital structure as we approach $1 billion in total assets after depreciation, and the outcome of the recent recast of our line of…

Good morning. I'll start by reviewing our operating results for the third quarter of 2019. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were both $0.39 per share for the 3rd quarter and $1.15 and $1.18 per share respectively for the first nine months of 2019. This performance demonstrates the accretive yet prudent growth that the Company has completed in recent years as well as the performance of the in-place portfolio inclusive of maintaining 99% occupancy. In addition to these accretive deals, our same-store cash rent growth continues to be 2% on an annual basis.Prior to 2018, core FFO hovered in the $1.50 to $1.54 per share range for the past number of years, as we de-levered the balance sheet and addressed lease rollover. 2018 results demonstrated our highest core FFO per share, and we intend to continue to grow profitability for our shareholders as well as increasing the industrial allocation of the portfolio. Our third quarter results reflect an increase in total operating revenues to 28.7 million including $100,000 in lease termination and contraction revenue as compared to total operating expenses of 19.4 million for the period.Now, let's take a look at our debt activity and capital structure. We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage. We've reduced our debt-to -gross assets by nearly 15% to 45.9% over the past five years through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are 1% to 2% away from our targeted leverage level, which means that nearly all raised equity will be allocated through accretive acquisitions.We believe that this will put us at the proper leverage level going…

All right, thank you very much, Mike. That was a good report and good report from Bob Cutlip and Michael LiCalsi as well. It was a very nice quarter, acquiring industrial properties in Denton, Texas and a two-building industrial property in Tempe as well -- Temple as well and that's near Austin, Texas. We've recast the Company's credit line in term loans, so that we're in good shape there and we did issue the Series E preferred on September 30.The team is growing the portfolio at a really good pace and doing a great job managing the balance sheet. Continue to believe that they have promising list of potential quality properties with good tenants and expect a number of acquisitions over the next two to three quarters. Middle market business area is still very strong. We are seeing our tenants being able to pay their rent and so as a result, we are cranking along and it's a good time to be in this business.In October, the board voted to maintain a monthly distribution of 12.5 cents per common share for October, November, and December. That's an annual run rate of $1.50 per year. This is a very attractive rate for a well-managed REIT like ours, which we believe is an excellent investment for individuals that want monthly income.I know you're asking us again when we're going to increase the distribution, our policy is not to discuss the strategy or board matters prior to adoption, but we're going to be focused heavily on it in January. However, we do hope to make some small increases. We don't like staying at $1.50. We want to increase it per year just to keep up with inflation.We've now paid 177 consecutive common stock cash distributions, and we went through the recession, as you know, without cutting the distributions, and we do not want to hurt that record. Stocks now are at $23.19 and distribution yields about 6.5%, and it's a really good rate considering that the whole net universe is trading at about 4.4% yield and if our stock was there, we'd be over $30 a share. So, we still have plenty of room to run. I think there is a lot of chance that the price could expand even further. Okay. I'm going to stop here and Stephanie if you'll come on board and help some of our good listeners ask some questions.

Thank you, [Operator Instructions] Your first question comes from the line of Rob Stevenson with Janney.

Good morning, guys. Bob, can you talk about where you've seen the most opportunity acquisition wise and what's the sort of pipeline for maybe later half of fourth quarter and into 2020 look like today? Is it still largely industrial? Are you still able to hit the yields that you've been achieving on recent transactions?

Yes, Rob, pretty good question. I mean, the team has made I think an excellent transition to focusing on industrial and I think because of the engagement of our regional teams from junior investment sales people to senior investment sales people, we're able to stay in what we call that sweet spot of somewhere between $5 million and $25 million per copy and where we're seeing the opportunities are in the Midwest.As I have indicated, Indy has been a very good player for us, Columbus is a very good player for us, Philadelphia is a very good player for us. Chicago now, we're seeing a couple because of our stock price where it is and where debt is, we're able to see some there. Even in the suburbs of Atlanta, and I must say the suburbs of Atlanta, I wouldn't. We did that Orgill acquisition, that's in Tifton, Georgia but, and David had commented, Bob, where in the heck are you going to buy this building, I go, listen, you know, look at this building.It's midway between the Port of Brunswick and the Port of Jacksonville on I-75 going south out of Atlanta, and there just happens to be a huge concentration of industrial players there and why not because they're utilizing the port. So, our team is really focused on those types of locations where we have access to ports, we have access to being, let's say, an asset that is the last mile, and as I've indicated and what really makes me feel very good about our opportunities here is our ability to underwrite credit.I mean, we can underwrite these middle market tenants which are predominantly those in the last mile, and we do a very good job of keeping highly -- those highly occupied. So, if we stay in those markets I'm talking about right there plus we can work also in and outside of, let's say, Dallas and in Austin as well, those will be good. Gateway markets, though, we're not going to be able to play because the cap rates are still too low for us, but we will be able to still stay in that going in cap rate, low-to-high sixes, mid-sevens to high sevens on the GAAP cap rates, so long as our stock price holds and the debt stays as it is.

Okay and then Bob or David. I mean -- given the comments on exploring some sort of inflationary dividend increase out there, does that impact your thoughts on selling assets? Obviously, there's not a tremendous cushion between earnings and the dividend. How much dilution would you be willing to take on a sale of office assets and redeploying into industrial if it meant hitting earnings by a penny or so, but improving NAV, how do you guys think about that with the Board in terms of the sort of triangulate of earnings growth, earnings cover or dividend coverage and dispositions.

I think from a disposition standpoint, we are not making a focused effort to exit office assets, as Mike, I, and David have said, we want to exit these non-core single property markets, but selectively and the reason that it is selectively is that the tenants are good rent payers and we've been through renewal with most of them, so you're probably going to only see us exit $10 million to $15 million a year, which I think is not going to create an issue for us as we look forward to increasing the dividend.And we've worked extremely hard now to get our AFFO payout ratio down to at par, which Mike can address a little bit more if he wishes and so I feel confident that we are going to be able to increase that dividend, in this David said earlier, when we start, we want to make sure that we can do it consistently on a year-over-year basis, and I believe with now our leverage coming in line, with the payout ratio coming in line, and with our pipeline really improving dramatically and with the shift to industrial where our re-tenanting costs, our tenant improvement costs are much less. I feel confident we're going to be able to do it.

Yes, Rob, but we've been debating this at every Board meeting probably for the last year, year and a half of beginning to move up the dividend by a little tiny smidgeons of increases but all total during the year would be enough to keep ahead of inflation and with inflation being as low as it is, you don't have to do a lot. We just don't want to be a sort of static bond fund with the same dividend forever in a day. So, I can't give you more information in that because it's on the agenda to talk about again in January.

Okay. And then Mike, given the various capital raises. How much dry powder do you have for acquisitions without raising additional capital or taking leverage levels out of whack?

Sure. So as of today, I made mention on the call, Rob I mean, we have about $4 million to $5 million of cash on hand, $30 plus million available on the credit facility. So, you're looking at $35 million without raising a dime and doing those deals. If you did not have access to the ATM program and you did those deals at 50% leverage, that would imply real time that you could fund $70 million of acquisitions, I would say that the ATM program has been active in every month of 2019. The expectations should be based upon a fairly robust pipeline that we will be active in the near term to incrementally increase that liquidity.

Okay, thanks guys.

Your next question [Operator Instructions] it is from the line of Henry Coffey with Wedbush.

Yes, good morning everyone. I don't know whether it's winning the World Series or putting out a phenomenal quarter, but you guys, the tone is more upbeat that it's been in a long time. So congratulations. Is this good news or bad news, everyone we talked to in the commercial real estate space tells us multifamily is really active. Industrial is really active. Our portfolio is changing hands at levels that you think are attractive or is all of this volume because there is there is sort of inflationary, the values are inflated or not -- I never know whether a good market is good news or bad news for someone whose primary goal is investing in new properties. So, what are your thoughts on the overall tone of the market? Given them, how active industrial is?

Henry, the market is very good. As you know, our background here has been lending and investing in small businesses for years and years and years. So when we see a tenant that's mid size business and has a good balance sheet and the P&L, we feel pretty comfortable with that. We're able to underwrite them and so the tone today in terms of what we're seeing in the industrial marketplace is good. The tenants are good, then say it's going to be that way for even a year, but at this point in time, we're not, we're not feeling the pain that some of the people are in other parts of the real estate marketplace.

The only thing I would add to that is our asset management team stays so very close to the tenants and just kind of it, it reinforces what David said. Our tenants are feeling very good about their future, there, and most of them are in a growth mode. So, that is encouraging to us, particularly with the type of asset. The smaller asset that we are focusing on.

So, and...

Things are positive

I think we get that part. The thought process in terms of outlook for 2020 is obviously going to be very solid, as you start thinking about a recession, how would the business adjust, is industrial a stronger asset class versus office versus other assets. I know, I mean, we know what you did last time was really good, so.

Henry, all of these assets are only as good as the tenants. If you look at our business, we're really buying, when we buy a building, we are buying a tenant and we are buying a leasing agreement. So we are investigating whether they can pay or not, probably more than most people in the business simply because many people rely on some kind of valuation by S&P or somebody like that, we don't rely on that.We rely on our own analysis of that business, the time and place that they are in at that point in time, and what's their outlook is going to be like, and I think we've chosen tenants that will survive nicely through any kind of normal recession. If we have some kind of off the kind of recession, we'll -- we'll have pain like everybody else, but at this point in time, we're feeling really good. The retail climate is very strong today and so many of our tenants are in that part of the world and I think we have a clear vision about the next six months and maybe even a year, but nobody knows much further than that.

Great, well, thank you, very solid quarter.

Thank you Henry.

Thank you.

Next question.

Your next question is from the line of Craig Kucera with B. Riley FBR.

Hey, good morning, Appreciate the color on the three leases expiring later this year. I know that Tulsa asset is in industrial, but what are the other two?

One is an industrial asset that is in, in kind of Northern Ohio and it, the other one is an office property in Columbus, Ohio. But it is not of one -- neither one of those are 100% of -- the one in Ohio, that is in the industrial, is 50% of the building and then the asset that is in Columbus, Ohio, it's less than 20% of the building. So, we have active prospects for those two assets, and for the Tulsa asset, we also have -- we've a long-term opportunity there. That is probably maybe two to three months off from a final decision and then we have a short-term opportunity that we're pursuing for that Tulsa asset as well. So, encouraging because the -- office asset in Columbus is -- is in an excellent mixed use environment, and we're somewhat partially encouraged about the industrial asset in Maple Heights, Ohio.

Got it. And do you have a sense of where the current rents are at those properties relative to market and kind of where the rents are rolling up or down?

The rents in the Maple Heights office are right at market and then if I talk about the asset that's in Columbus, Ohio, I think we are at or a little below market there and in the Tulsa market, we're probably to be brutally honest, we're probably 5% to 10% above market based on our current rent.

Right...

I mean that's, it's just when you get into a long-term lease with net leases and it's 2% to 3% escalations and you go through a correction, it's difficult to be at market, but I feel very good about the Maple Heights and the Columbus asset for sure.

Got it. And switching to acquisitions, I think last quarter you guys had thought maybe you'd hit 115, maybe upwards of 125 million of acquisitions for this year. I think after this quarter, and what you disclosed here that's sort of due diligence, you're probably a little closer maybe 90 million, 91 million. Are you far enough along in the remainder of your pipeline to maybe still hits in acquisition total in that range or is that maybe a bit of a stretch at this point?

I think that we're going to be somewhere between 110 million and 125 million.

Okay.

With us having a 140 million you know in the letter of intent stage and only 20 million to 22 million in due diligence, we have just recently been selected for two other items -- two other acquisitions, but I'm not identifying those in due diligence, because we have just begun the purchase and sale agreement negotiations, but because of the desire for a lot of these sellers to close by the end of the year, I feel very confident that we're going to be in that 110 to 125 range.

Got it. And just when we think about that $300 million pipeline that you guys discussed, conceptually is this going to be more or less what you've been doing, I understand it's tilted to industrial, but sort of mid-Western shall we say industrial sort of middle market type of properties or is there anything shifting in the pipeline?

I think Midwest has been a very good player for us, but we're starting to see opportunities -- continuing to see opportunities in Florida and in Georgia, and I think that we, you will hear us doing a bit more in Georgia and South Carolina going forward and surprisingly our South Central leader is finding assets in Dallas and Houston. So are we going to go out far West, only if it's a portfolio. If it's a portfolio of five to six properties where it makes sense to put them together, we will do that, but otherwise, we're really going to be focused more on the Midwest, Southeast, and South Central.

Okay, thank you.

Next.

Next question please.

Your next question is from the line of John Massocca with Ladenburg Thalmann.

Good morning.

Good morning, John.

So understanding that -- with the understanding that you're GM asset in Austin, is R&D focused and not manufacturing, even with that is there anything that maybe came out of the recently agreed to kind of labor contract with GM that gives you any kind of insight as to what do you think they're going to end up doing with that property. Was there anything in there that given what happens in that Austin facility you think, be continue to be a focus are not a focus going forward for them?

You know, we have not been given any direct information from them, but with this being an innovation facility and with the movement in the entire auto industry to continue to improve innovation, there's four of these assets in the country for GM. So you know, they may elect to leave, John. I mean if they do, as I indicated in the last quarter's call, I'm not overly concerned because our dog on our current GAAP rate is probably $5 to $6 below current asking lease rates and having walked the property myself and it really setting up really well as 260,000 square foot buildings with creative office and as being in the Palmer Technology quarter, we have already received interest from a couple of prospects, even though the notice period hasn't even -- notice period notification hasn't actually come to us. So I'm not overly concerned. Do I wish that they will renew? Oh, yes, there is no doubt about that, but, but if they don't being in Austin and that market being extremely hot, feel very encouraged long-term.

Okay, very helpful color. And then, can you maybe walk us through the impact of the clean energy improvement program that you've accomplished at some of your office properties. How big is maybe the opportunity set kind of utilize that within the existing portfolio and maybe how impactful is that to operating expenses?

Well, I can. You know I have a little knowledge, so I'm dangerous, but I can give you a summary of how the program is set up. It's really a combination of the state and of the local jurisdiction and of lenders who -- and companies who can provide these let's say improvements in HVAC systems, LED lighting, and analysis that is done indicates that the cost to replace this equipment enables the tenant at the end of the day to realize anywhere from 10% to maybe 20% reduction in utility costs, not overall operating cost, but in utility cost, and it also is a function of, a part of the payment is done by them, increasing their taxes, but then you'd have lower operating costs, and at the end of the day, everybody wins and sometime it's the state program, sometimes it is not a state program.

But is it being done at any kind of offices where you have a gross lease in place and therefore it flows through your to lower operating expenses?

It's going to -- It's going to benefit the tenant.

Okay.

It's going to benefit the tenant, because the way, we have most of our leases, when we actually acquire the property, if it's a gross lease for the most part, everything above that is paid for by the tenant and what happens John is that their taxes go up, but the utilities go down, and so at the end, our benefit is that we don't have to put any capital in the building, we get building improvements, and the tenant at the end of the day pays less which encourages them to renew.

Okay, understood. And then moving to the balance sheet. In light of the kind of term loan expansion, do you think the time is kind of right maybe to migrate the balance sheet to a more significant usage of unsecured debt going forward? I mean is that the strategy here in the near term?

Yes, good question, John. I think it's a dual track strategy appreciating we're in a great environment where the one month LIBOR is right on top of the 10 year, as I've made mention in the past, we're selectively financing our acquisitions twofold. There is very attractive long duration money when coupled with long leases. So, I would say roughly half of the acquisitions we're continuing to put mortgages on, generally in the mid-to-high 3% range, but to your point, as we have aspirations to continue to grow and we are approaching, net of depreciation, $1 billion of assets. We look at the balance sheet within the lens of where we will want to finance properties over the next 12 to 24 months even.And yes, we would like to continue to cultivate our unencumbered asset pool via the expanded credit facility. So, when we get to the time and place where we have a use of proceeds for larger corporate issuances such as private placement debt or ultimately getting to corporate unsecured, we've cultivated an unencumbered asset pool to a place at which it's palatable for us to borrow. Right now, our unencumbered asset pool sits in the, call it 25% to 27% range. We know to get to private placement, you need to be in the mid-to-high 30s and corporate unsecured/investment grade calls for roughly 50% with pro forma to 60. So, we're going to continue to put on the books fixed rate or swapped or hedged to fixed long duration debt while also improving that unencumbered percentage.

I'm showing no further questions at this time, I would now like to turn the call back to David Gladstone.

All right, thank you all. We had a good quarter. Everything is perking along as expected, and we will talk to you next quarter. That's the end of this call.

Ladies and gentlemen this concludes today's conference, thank you for your participation and have a wonderful day, you may now disconnect.