Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Commercial Corporation’s First Quarter Earnings Ended March 31, 2020 Earnings Call and Web Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today Mr. David Gladstone. Thank you. Please go ahead.

Thank you, Jimmy for that nice introduction and thanks to all of you for calling in. This is David Gladstone and we do enjoy this time we have with you on the phone. I wish we were doing it more than just once a quarter. All our people here are healthy. We’ve got some people working from home and some here in the office we designated as an essential in business, so we do have people working here in the office and everything seems to be going fine.So, at this point then, I’ll turn it over to Michael LiCalsi, he is our General Counsel and Secretary. He is going to give you a legal and regulatory matters concerning call in and the report. Michael?

Thanks David and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and 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 that we include in our Forms 10-Q, 10-K, and other documents that we file with the SEC. You can find these on our website which is gladstonecommercial.com specifically it’s on the Investor Relations page or on the SEC's website which is www.sec.gov.And we undertake 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 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 real estate assets.We'll also discuss FFO as adjusted for comparability and core FFO, which are generally FFO adjusted for certain other non-recurring revenue and expenses. And we believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance.We ask everyone to take the opportunity to visit our website once again gladstonecommercial.com, please sign up for our e-mail notification service there. You can also find us on Facebook. The keyword there is The Gladstone Companies. And our Twitter handle is @GladstoneComps.Today's call is simply an overview of our results so we ask that you review our press release and Form 10-Q issued yesterday for more detailed information. Again, you can find them on the Investor Relations page of our website.With that, I'll hand the baton back to Gladstone Commercial's President, Bob Cutlip.

Thanks Michael. Good morning everyone. During the first quarter, we acquired 65,000 square foot industrial property in Indianapolis; acquired a 321,000 square foot three-building industrial portfolio in Houston, St. Louis, and Charlotte; acquired a 504,000 square foot industrial building in Chatsworth, Georgia; executed a lease amendment to extend a 100,000 square foot tenant in Denver Colorado; extended the lease for a 78,000 square foot tenant in Springfield Missouri; extended the lease for a 54,000 square foot tenant in Delaware, Ohio and sold a non-core office property in North Carolina.As noted on our fourth quarter call, our investment strategy is emphasizing an increase in our portfolio's industrial allocation, which we believe will improve our property operating efficiencies, reduce capital expenditure levels, and potentially result in improved valuation over time. To that end, our industrial allocation was 33% on January 1, 2019 and has increased to 41% as of March 31, 2020.From January 2019 through March 2020, our investment volume was $201 million all of which were industrial properties providing further evidence of this commitment and our intent is to continue to overweight industrial acquisitions, market conditions permitting, of course, in the developed submarkets of our targeted locations. Our primary focus has been and will be acquisition candidates ranging in size from 50,000 to 300,000 square feet.During the quarter, our investment in asset management activities continue to generate positive momentum for our operations. We acquired five properties, all industrial equating to $72 million in investment volume. The transactions included a 65,000 square foot property in Indianapolis for $5.2 million with an average remaining lease term of approximately 7 years and a GAAP cap rate of 7.2%; a 321,000 square foot three-building portfolio in Houston, St. Louis, and Charlotte for $34.6 million with a lease expiration date of January 31. 2040 and a…

Good morning. I’ll start by reviewing our operating results for the first quarter of 2020. 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 and $0.40 per share respectively. This performance demonstrates the accretive yet prudent growth that the company has completed in recent years, as well as the performance of the portfolio in-place.In addition to these accretive deals, our same-store cash rent continues to grow at 2% on the annualized basis. With the number of years of improving the balance sheet behind us, including deleveraging the portfolio and substantial acquisitions both at the end of 2019 and early part of 2020 we’re excited about the prospects to grow profitability for our shareholders, as well as increasing the industrial allocation of the portfolio.As Bob laid-out, our team is actively engaged with every tenant of ours to the intent to maximize shareholder value through and beyond the COVID-19 pandemic. We’re pleased with the team's and portfolio's performance through April, but these are unchartered times which we will continue to navigate together.Our first quarter results reflect an increase in total operating revenues to 33.6 million as compared to total operating expense of 24.1 million for the period. We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage. We have reduced our debt to gross assets by nearly 15% to 46% 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 target leverage level, which means that nearly all raised equity will go toward accretive acquisitions. We continue to primarily use long-term mortgage debt to make acquisitions as we grow…

Okay. Thank you, Mike. It was a good report and Bob – you and Michael LiCalsi did good report to. I think we have not been hurt much by all the government regulations on this new virus that’s out there. We had a nice quarter after all and I think the quarter ending June 30 would be a good quarter as well. Heard a lot today, the team is hard at work and acquired five industrial properties with good credit tenants that collected all of the rents that were due in the first quarter and 98% of the April rents are in.We’re got a few negotiated short-term rental deferrals. I think we will collect those and we’ve executed on several leasing initiatives which I think will be strength going forward because they are good for us. The commercial team is growing the real estate assets in the company at a really good pace. As you saw, we did a lot in this quarter just ending. The team is doing a great job of managing the properties that the company owns.Our team has some very strong professionals and they continue to pursue [indiscernible] properties on the list of acquisitions that they’re reviewing. Acquisition team is seeking strong credit tenants; I know great tenants make excellent investments. Our asset managers are actively managing. We’re developing a good group of asset managers and it’s just a different environment now, but quite frankly this seems like an excellent buying opportunity.So, we're looking at everything that we see with the idea that in six months we’ll be all looking back and wish we’ve done this or that. So, we're making our statements now. The middle market businesses like many of our tenants and our buildings, they’re challenged with the government restrictions related to the new virus that we have, but the tenants are paying their rents or committing to pay us. If we deferred a little bit of it, these are times that have never been seen before, but our team is just first-class and I think they will do our good job for us.So, I'm going to stop here and Jimmy, would you come on and moderate so we can get some questions from the people out there listening to this.

Certainly. [Operator Instructions] Our first question comes from Gaurav Mehta with National Securities. Your line is now open.

Yes, good morning. Thanks for taking my question. First question on your tenants, I was hoping if you could break down what you're seeing or hearing from your office versus industrial tenants?

We’re – I mean the comments and the receipt of requests have been more from the office side. What’s interesting is that we’re receiving requests that, I think, are valid requests from some of our more middle-market companies who are needing request, but we’re also receiving what I would call opportunistic request from very, very strong tenants. One of them told us that they’ve sent this letter, this formal letter up to 90 landlords, and of course a multi-billion dollar company with over $1 billion in cash, we’re not going to address those, but, Gaurav, we have received more from office as compared to industrial. I don’t know if that’s going to change going forward, but we really have had received nominal requests at this point.

Okay.

Another question, Gaurav?

No, that’s – I had follow-up on the GM, I think you talked about having multiple prospects for that building, are those the same prospects that you were talking to – that you talked about on the last earnings call? Or are these new guys that you’re talking to?

There’s – two of them are the same and two of them are new. We did have a couple of, let’s say, smaller tenants that were interested. They’ve gone quite on us. One of the larger tenants is they’re in Austin and the other one is in California, well known name. In talking with the chamber and with our investment sales broker, if Governor Abbott does open up the state here soon, they expect to see activity pick up.

Okay, thank you. That’s all I had.

Okay, next question?

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

Good morning, guys. Bob, are you getting any additional term or rate or something else from the tenants in exchange for the deferrals not only the couple that you’ve done thus far, but any as going forward?

We have been in negotiations with people who have wanted rent abatement and for those we have required extensions. Fortunately, the request was withdrawn. What we prefer if we can is to maintain the core FFO per share and to get the cash back as soon as possible. Many of the tenants are not really interested in doing extensions at this time, but if in fact, any rent abatement is requested, there will be an extension so that we will maintain our FFO per share.I may have had loved to do extensions. We have asked on each case, but, you know, with the three that we've done so far, they’re just – you know they’re repaying within six to nine months and that is acceptable to us and we’ll see how it goes forward, Rob.

Is there an interest charge on that six to nine months?

No.

Okay. Mike, when you look at the cash and debt capacity, what’s the liquidity today, you know, a month after the balance sheet numbers and how much of that are you guys willing to deploy into acquisitions in the next quarter or two given the likely state of the U.S. economy?

Sure. Rob, with respect to liquidity, as I may have mentioned, on our revolver we have $29.5 million of availability. We also typically carry $2 million to $5 million of cash. Today, we have [$3 million] so we’re in excess of $30 million of availability. As we think about obligations specific to the cash back. As I may have mentioned, we did repay mortgage subsequent to quarter-end. So the only – we only had $7 million of mortgages coming due in 2020, so we certainly can cover that. As to deploying capital into potential acquisitions, that’s largely subject on cost of capital.Today, with our stocks trading north of [indiscernible] as you know, we are generally doing deals at roughly 50% LTV. There are pockets of debt capital that are still free, but with the [indiscernible] that’s challenging. So, you know, what we’ve been guiding to is with optimism that we get to the back half of second quarter with much more normalized environment from a personal and professional basis, as well as the stock market basis. So, we – you know we real time [indiscernible] correct for what makes sense for us from an investment strategy perspective really on a daily basis.

Okay. And then, the covenant page in the supplemental was very helpful. So, the tightest one looks to be the dividend payout, is that covenant on a trailing 12 months measurement?

That’s correct. Trailing 12 [indiscernible] back the last couple of quarters have been slightly below the 95, so, you know, as we look at Q2 and Q3, we will have the benefit of six months of activity south of 95%, but, you know, our operations are good. We continue to [dial that] number that’s down over time.

And how challenging – you know, in your conversations with the lender, is it to get a temporary way around that if it was needed for a quarter or something like that or two?

Sure. We are very fortunate to have through April a highly performing office and industrial portfolio, so I would not say those are top of mind discussions, but I will say that we are talking to the entire lending group made up of six banks that have now went from four to six just last year, that refinance, you know, as we look back in the rear view was a fantastic way for us to avoid any time of [indiscernible]. I – you know I can’t ever promise the future, but I think our lending group have been supportive in very challenging times in the past at higher leverage level and as buyers do continue to be supportive if we ever needed any type of modification, but to be fair, they’re doing a hell of a lot more hand-to-hand combat with, you know, retail hospitality etcetera.

Okay. And then, last one from me, have you guys issued anything under the Series F at this point?

Not to-date. I think – I would say, Rob, from a long-term perspective, we have – do not have significant desire to massively overweight on preferreds although we will issue preferred traded, as well as potentially non-traded. You know, as you think about today, the common [asset did] yield of [9.4%], the Series F comps did yield [8.1%], so if there was need for incremental capital, you know, we could [indiscernible] do it, but we have not to-date.

Okay, thanks guy. Appreciate it.

Okay, next question?

Thank you. Our next question comes from Barry Oxford with D.A. Davidson. Your line is now open.

Great, thanks guys. Just to build on Rob's question regarding the dividend, you know, especially if you’re pushing up against covenants and you have a high payout ratio and you have a high, you know, yield at 9%, arguably, you know, maybe you’re not getting full credit in the marketplace, why not make an adjustment to that dividend, and David, if you want to comment too that would be great?

We don’t cut the dividend. I own a lot of stock and I like my dividend.

Barry, see, specific covenant package as well as getting a credit in the marketplace, to be fair, we are not really any tighter than we have been during my 3.5-year tenure period. So, these numbers do not reflect anything that has been adversely impacted based upon the portfolio performance because again we’ve been highly performing. You know I think, again, we can never predict the future, but the aspirations are when we all get out from underneath this pandemic that in a normalized environment, people will appreciate that we continue to be trading at a relatively significant discount even as compared to [net need] peer set and we will see a recovery in the share price.So, you know, today, we are pleased with the performance. It was just a matter of few weeks ago where we had Board meetings and concur to leave the dividend as is. You’ve heard David’s comments as well. So, understanding there are other people out there that out of need or strategically that are making cuts, that is not top of mind to us.

You know, and to add to another comment to that, in conversations with some of my colleagues in Tier 1 banks who have been with me since I joined the company in 2012 and have seen how we have evolved through the years. They said, based on your history and what you have done, we don't think it’s wise at this point for you to lower the dividend. And they said if the economy completely falls apart then you’ll go with other people as they lower their dividend you’ll do the same, but they’re telling me, Bob, you know, you guys have come a long way. You're in a great position. The next couple years ahead if you look very, very good, why would you do that? So, as David has said, and Mike has reconfirmed, that's why at the last Board meeting, we said we're just holding the dividend.

Right. No, I can appreciate all that. Bob, switching gears just a little bit to acquisitions, you mentioned or you feel like that cap rate, you know, kind of have backed up a little bit. Do – you know are you – is it more in the 25 basis points or 50 basis points range?

What we're hearing from investment salespeople is that industrial is anywhere from [15 basis point to maybe 25 basis point], and offices anywhere from [30 basis point to 50 basis point] and that is predominantly more in the Midwest as compared to some of the Southern markets. And of course, we're not actively pursuing the – you know the West Coast acquisition, so they don't – those expansions don't apply to the West Coast.

Got you. Appreciate it, guys. Thanks [indiscernible].

Thanks Barry.

Yes.

Okay, next question please?

Thank you. Our next question comes from Henry Coffey with Wedbush. Your line is now open.

Yes. Good morning, everyone and thank you for taking my question. You know what are the bright spots and the dark spots inside this equation? You know are there other areas of your portfolio where because of shop-at-home as opposed to stay-at-home and the like and potential shortening of the supply chain, we're seeing some big positive moves? Other areas, obviously, of your portfolio where there may be some clients that are going to suffer permanent impairment here?

You know, I think the ones that I would be most concerned with and – are probably the retail, which is very small, small percentage, but we have some daycare centers that – you know those people can't work. I mean, you know, and they are in states where they're shut down right now. So, if I had to think about a dark spot, I think it would be that. I think maybe a great spot that is not really dark, but we've got to watch the automotive industry. We got to see where that goes forward.Fortunately, one of our tenants is connected to the auto industry is doing the PPE equipment as well. And so, that's encouraging and two of the tenants are very large and they're stable, but we've got to watch that very closely because if it extends for the next two to three months on the auto industry not coming back, then I would be concerned there. On the bright spot, I think, you know, it sounds crazy, but this – our middle market approach to the business, companies have been in business a long time. They're not really huge assets; they’re assets on the industrial side that are primarily under 300,000 square feet.Those are good going concerns and I do believe with now some of the on-shoring of manufacturing, it's not going to happen tomorrow, but we're starting to see some of these clients pick up more work in the future that is programmed. It's not there now because things have slowed down for everyone. But I'm just cautiously optimistic that for the most part that is going to be a bright spot for us and we think although it's not a bright spot today, as I've indicated in the past, and I indicated in the call today, we are very interested in the inland port expansion program that is taking place between the ports and the Class 1 railroads with all the deepening of the ports on the East Coast and the shifting of some of the manufacturing from China to Singapore, Vietnam and India and with the ability to do larger TEU ships up to 14,000.We think that we're going to be able to partner with these ports and Class 1 railroads at these Inland Port locations to acquire properties that are in our size. They're not going to be the large size; they’re going to be [trans load] facilities. There are going to be sale leaseback opportunities, but there's – that's kind of a silver lining that I'm looking at, Henry, right now.

Is there anyone in your portfolio who's benefiting from all this, you know, shop-at-home – distribution?

Yes, I think it’s – Henry, it's a mixed bag, but some of the people that are in our warehouses are last mile people as well as on the retail side where stuff comes in and then goes back out to the grocery store or wherever it's going. We've got some that are – if you go to the hardware store today, and it's an independent, it's probably our group that's doing that. So – you – you know when you do an underwriting, you trace all the way back where the dollars are going to come from and why they're going to come, so whether you're doing an underwriting for a retail shop, we have, what do we have, two or three – we have two or three…

Walgreens.

I mean Walgreens is [cranking] along, they're not having a big problem because they're selling. And we have, as Bob mentioned, a couple of daycare centers, they're closed, so they've got no revenue coming in. And one of the reasons they're closed is because the state has closed them, but when they come back up, I don't know exactly that but my guess is most families are getting a little tired of work and living together and the daycares will fill up again, no guarantee of that, of course, but these are temporary things that are going on.You know, we do six weeks or eight weeks of this kind of stuff and then start to open up. I think people are getting bullish enough so that those will come back pretty quick. I can't predict the future and neither can anybody, but when we do an underwriting, if it has some question about where the money is coming from, we just don't do it. We're always looking for strength. So, I think we're in good shape and time will tell. We'll see you, you know, next quarter and we'll have gone through the most difficult period that is the reopening period that we're going through now and I think it's going to be pretty good.

Well thank you for your comments and it’s nice being with a company that has your history.

Well, we've been around for a while and we've paid our dividend forever in a day and there's no desire to cut the dividend even if it would make our financial numbers look stronger in a temporary way. We want to stay with our shareholders and pay them dividends. Next question?

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

Good morning.

Good morning, John.

As you look at kind of the balance of properties that kind of aren’t leased at quarter-end, I mean has the current kind of pandemic and also maybe the, you know, volatility in commodities impacted some of your potential re-leasing operations there?

On the re-leasing side, John, is what you're talking about?

Yes, from a releasing side.

Yes I think – when I think of what we have vacant right now, you know, Central to Northern Ohio has absolutely shut down and we have two properties there that are – you know are partially leased because they're multi-tenant buildings, but they're not fully leased and we've seen that activity drop. Minneapolis has come back, and in fact, as I indicated, we’ve re-leased 50% of the building that went vacant at the end of March and with two more prospects for that facility. And then there's another facility there in Minneapolis that the tenants can be vacating in the next, I think, two months, or excuse me, next month, but we have two prospects.One is a charter school, which we're seeing a lot more interest in charter schools in some of these single story offices that we have, but I think Central and Northern Ohio is going to be a difficult play for us. There's no doubt about it. We, on the other side of it, have a property in Easton Commons, in Columbus and the anchor tenants there – a tenant moved out at the end of last year and the anchor tenant has agreed to take the balance of the building. So, I'm encouraged there.So, it's kind of a mixed bag. It depends upon, I think, the specific location of the property. If it's not in a location where you have more of an urban mixed used area on the office side, we have – we will have difficulties, but as you can see from the ones who are now getting larger activities, if they're in stronger markets, we're seeing activity and I don't believe we're going to have difficulty. As you know, my big elephant on – you know in this room is GM, and you know, we've got to press that to get that to conclusion here over the next several months.

Okay. Just as a reminder, is this – that Tulsa asset still in your hedged portfolio and still vacant?

Yes. We have – that’s the one in Port of Catoosa in Tulsa. Yes, it’s still in our portfolio and we do have a prospect for the entire building. It’s on a shorter-term lease, but we’re expecting RFP for that in the next week or so.

Is that in – no single asset that makes up a big percentage of the vacancy that stands today, right, obviously it depends on [indiscernible] that would be a significant portion of it?

Exactly. Every other one is around 1% or so or less.

Okay. Digging a little deeper on the kind of portfolio it stands today on the industrial side, I mean have you seen kind of a difference in impacts within your industrial assets with regards to say manufacturing properties versus what will be kind of categorized distribution assets, had that been reflected in maybe deferral requests or just kind of overall sentiment as you reached out to tenants? And then roughly what is maybe the breakdown between those two categories as it pertains to like the size of your portfolio?

I would say one of our deferrals is the manufacture just in time for an assembly plant. And as I indicated, I, depending upon how the auto industry goes we have one, two, three assets up in the Detroit area is that service General Motors and Ford. Those could be question marks for us, but I would say that if I had to split between distribution and manufacturing, I would say that we are probably 40% manufacturing and 60% distribution, and quite frankly we’ve not received much you know very few calls. I mean most of the calls have been more on the office sides then on the industrial side.

Make sense. And then switching gears to the balance sheet, sorry if I may have missed this in the prepared remarks, but what is kind of the availability and maybe pricing on property level of debt today that you are seeing?

Yes. Sure. So single asset financing, you know we have seen as low as the high-two’s to the high-three’s. So, about 100 basis points [indiscernible] [275 to 375] on the type of assets that we have been pursuing. Obviously there are challenges today from a timing perspective, if not in other ways in terms of giving that type of financing John, I mean practically speaking it’s a challenge to get an appraiser do well and look at our property, but single asset financing is very efficient, the dislocation on the equity side is more of the roadblock. I mean, obviously we have our credit facility as well, which is very efficiently priced with material availability, as well as the [indiscernible] feature that we can go back to [indiscernible] our lenders about.

Okay, it sounds a bit like the – any kind of restrictions on property level financing almost more operational rather than a willingness for banks to lend, is that a fair characterization?

CMBS has been shut, but single asset financing does a good that is out there, and we’ve those conversations it is not our world today, but obviously the investment-grade bond market has been open and been the most efficiently priced market high yield is there, it is a little expensive, but yes the short answer is there are alternatives and opportunities to borrow [indiscernible].

Alright. Thank you very much. That's it from me.

Thanks John.

Thanks, John.

Next question.

Thank you. And I’m showing no further questions in the queue at this time. I would like to turn the call back to David Gladstone for any closing remarks.

Well thank you all for calling. I think we’re in good shape today. Hopefully our tenants continue to pay. We’ve had good luck with them so far and I think this is a short-term problem, but we will turn around strong as we get into the summer months at the end of this, and thank you all for calling in.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.