Greetings and welcome to the Gladstone Commercial Corporation Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, CEO. Thank you, David. You may begin.

Thank you, Paul and thanks to all of these nice people who are coming into this call. Enjoy the time that we have with all of you and I wish we had many more times to spend with you. We are going to start off, of course, with Michael LiCalsi. He is our General Counsel and Secretary. He gives us a legal warning. So Michael, go ahead.

Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. Some of these statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable. 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 listed on our Forms 10-Q, 10-K, other documents we file with the SEC and you can find them on our website at gladstonecommercial.com, specifically the Investors page. You can always go to the SEC’s website as well and that’s sec.gov. Now 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. And today, we will discuss FFO, which is funds from operations. Now, 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 will also discuss core FFO, which generally adjust FFO for certain other non-recurring revenues 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 visit our website once again, gladstonecommercial.com, and sign-up for e-mail notification service. You also find us on Facebook, keyword there is The Gladstone Companies and our Twitter handle is @GladstoneComps. Today’s call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, go to the Investors page of our website, you can find them there. Now, I will hand the presentation over to Gladstone Commercial’s President, Buzz Cooper. Buzz?

Thank you, Michael. Good morning everyone and thank you for dialing in. I will cover the highlights for last quarter and provide some comment on the state of the portfolio and market outlook before turning the call over to Gary Gerson, Gladstone Commercial’s CFO, to review our financial results for the period and our capital and liquidity positions. During the second quarter of 2022, we continued our focus on industrial acquisitions and improving operations. We acquired a 260,719 square foot industrial portfolio with locations in Fort Payne, Alabama and Cleveland, Ohio for $19.3 million, acquired a 345,584 square foot industrial manufacturing distribution facility in Wilmington, North Carolina for $18.8 million. Leased and renewed 34,732 square feet weighted average lease term of 5.3 years. Subsequent to the end of the quarter, we sold our Jupiter, Florida office property for $19 million, resulting in a gain on sale of $8 million and a levered IRR of approximately 18%. We also leased 41,225 square feet at our Parmer, Austin, Texas office building to Cognizant Technology Solutions for a 5.7-year term at market rates. These investments, dispositions and releasing activities further reinforce our strategy to increase our portfolio’s industrial allocation and improve property operations. Acquisition activity since July of 2021 has been steady and consistent in spite of the uncertain market conditions driven by rising inflation, a war in Europe and pandemic challenges. Our team averaged $11 million of investments per month, the strong average GAAP cap rate of 6.99%. The acquisition volume since 2019 has exceeded $400 million and all assets have been industrial in nature. Our industrial allocation has increased from 32% to 52% during this period, while pure office allocation has been reduced to 44%. Team’s near-term objective is to reach an industrial allocation of 60% within the next 12 to…

Thank you, Buzz, and good morning, everyone. I’ll start my remarks regarding our financial results this morning by reviewing our operating results for the second quarter of 2022. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common shareholders were both $0.39 per share from quarter, respectively. FFO adjusted for comparability and core FFO available to common stockholders during the second quarter of 2021 were $0.36 and $0.37 per share, respectively. FFO and core FFO available to common stock shareholders for the two quarters ended June 30, 2022, or $0.78, respectively. FFO adjusted for comparability and core FFO for the two quarters ended June 30, 2021, were $0.76 and $0.78, respectively. Our same-store cash rent in the two quarters of 2022 increased by 2.5% over the first two quarters of 2021, exclusive of accelerated rent recognized during the 6 months of 2021 – the first 6 months of 2021 from early lease trans terminations. Our second quarter results reflected total operating revenues of $36.4 million, operating expenses of $27.8 million as compared to operating revenues of $33.3 million and operating expenses of $25 million for the same period in 2021. Moving on to the balance sheet. We continue to grow our assets and focus on reducing our leverage. In the second quarter, we increased total assets by approximately $39 million, primarily due to the two acquisitions Buzz described earlier. We continue to reduce our debt to gross assets and are now down to 44.9% as of the end of the quarter. We believe that we are 1% to 2% away from our target leverage level. We continue to use long-term mortgage debt to make acquisitions. As we grow through disciplined investments, we also continue to expand our unsecured…

Okay. Thank you, Gary. That was a good report, and it’s also a good one from Buzz and Michael. The team has performed very well and reacted admirably to the various challenges presented during the slower economy that we are in today. Overall, very nice quarter. You have heard a lot today in terms of the numbers of transactions, as Gary said, and I think Buzz said the same thing that we have collected 100% of the cash-based rents during the second quarter. We acquired two industrial assets during the quarter for total investments of $38.1 million, and we also leased and renewed a total of 34,732 square feet, which is part of 293,000 of total leases renewals to-date Subsequent to the end of the quarter, we sold our wonderful Florida location that had been vacated by one of the large technology companies, and we sold it to a group that was willing to take the risk of leasing it up again, and we got about $8 million in capital gains out of that. We leased over 41,000 square feet in Austin, Texas. That one was a drag on us for so many years and now, of course, it’s almost leased up. We are in very good shape there. The commercial team is – the real estate we own is in good place. The team is doing a great job of managing the properties we own, especially during the pandemic and now, of course, doing this very slow economy. Our team of strong professionals continues to pursue quality properties on the list of acquisitions. They are reviewing – our acquisition team is seeking strong credit tenants, quality tenants and real estate make excellent investments. Our asset managers are actively managing the properties that we own in order to maximize their value to us. It’s a different environment out there today, but the team is up to the challenge. The middle market business, like many of our tenants are in – have been challenged with previous government restrictions related to the pandemic, the inflation, the rise in interest rates and supply chain disruptions, but our tenants continue to pay their rent. This is wonderful for us. These are times that have never been seen before, and there will be future challenges, but our first-class team, I know they are going to do a fantastic job. Advisors who follow the economy say that you should buy hard assets, and believe me, these buildings and real estate, they are hard assets. So, if you buy our stock, you are getting a piece of what we own. I am going to stop here and ask anyone and I will have the operator to tell people how they can ask questions that we can answer for you. So Paul, if you will come on, that would be great.

Our first question is from Gaurav Mehta with EF Hutton. Please proceed with your question.

Thank you. Good morning. First question on the transaction market, in your prepared remarks, you talked about a decline in investment sales listing in the market. I was wondering if you could touch upon the cap rates, what kind of impact have you seen on the CapEx yet?

Thank you, Gaurav. We have seen cap rates push out. We don’t have enough information at this point that they are out to what the rise in interest rate is at this point in time. But what we have seen is that they indeed have pushed out, which works to our benefit as well as a few opportunities that we looked at in the past have come back to life, so to speak. So, it is having an effect on the numbers that we look at, but what I was referring to is, the competition on those is also still very intense, albeit fewer shops are – some are pencils down until Labor Day.

Okay. Second question on your lease expirations. Can you provide some color on the three leases that you are expiring in 2022?

With leases expiring, see – yes, we have only got three of which we are working hard upon South Carolina, Ohio, which actually the building is under consideration for sale as well as another one in Ohio that is up for sale. So, quite manageable here in ‘22, and then, of course, the team is also focused on ‘23.

Okay. And then lastly, can you provide some color on the $1.3 million impairment charge that you had in this quarter?

Yes, that has to do with a building that we have that is held for sale and that we will be – as one of the three buildings that Buzz referred to earlier, we will probably be consummating that sale here shortly. And that has to do with a – basically just the structuring of the accounting on that, but generally, the building will be sold for overall a slight gain. We just had to impair the property because of the accounting treatment.

Okay. Thank you.

Next question.

Thank you. Our next question is from Craig Kucera with B. Riley. Please proceed with your question.

Yes. Hi. Good morning guys. Can you give us some additional color on the new lease with Cognizant in Austin? Was the rent comparable to GM? Did you have to spend meaningful dollars on tenant improvements? Any color there would be helpful.

On the TI dollars, meaningful, yes, because anything out of pocket to us is meaningful. However, well below market down there on TI dollars for 50 to 70, even higher for some of the properties. At a 5.7-year deal, we could be aggressive on the TI side. We kept those under $30 a square foot. And as it relates to rental rate, it’s north of where it was when GM exited at approximately it was at 14.5 when they exited. We are north of 20, but I don’t want to get too specific relative to that for Cognizant sake.

Fair enough. And as far as the asset sales, you sold the building earlier this month in Jupiter, Florida. You have got another couple in New Jersey and Ohio. Can you give us a sense of kind of what initial cap rates you are selling those buildings at?

Again, the gain on the opportunity down in Florida, was an ‘18 IRR. I would have to go back and look up the cap rate for those sales, but they are north of where – their benefit as to where we purchased them.

Okay. Alright. And I think you had – last quarter, you mentioned you had one tenant that was vacating in Utah, I think at the end of the second quarter. Is that building been leased up, or did I miss that maybe?

We did not lease it. We are working it hard or miss it. We are working it hard. It has not been leased up. We also were entertaining an interesting transaction on that. That again, I can’t get too specific upon, but could be a very positive outcome, but we are looking to re-lease it and/or sell it.

And the remaining lease terminations are those – alright not termination, expirations. Are those fourth quarter events, or are those sort of right away through the rest of the year?

They are going to be either at the end of the third quarter or into the fourth quarter, yes.

Okay. Thanks. Appreciate it.

Thank you. Our next question is from James Allen Villard with Ladenburg Thalmann. Please proceed with your question.

Good morning guys.

Good morning.

Yes. It’s just kind of two big picture questions for me. Is – I mean has the recent oscillation or volatility in long-term interest rates impacted the mortgage financing market at all? And are there any changes that you have seen over the past – in second half 2022?

Now we are seeing the mortgage market is still there. There is plenty of mortgage, money still available. Obviously, the rates have gone up. We have so – but we haven’t had any trouble in procuring mortgage debt right now. And it has been – and to your point, I mean it’s been kind of volatile. I mean we are actually seeing rates come in now. We have seen the 10-year has come in. I mean almost more than 30 basis points over the last month. So, I would expect that mortgages would follow. And so we should hopefully see mortgage debt go down over the next quarter.

Yes, that’s helpful. And kind of, I guess looking back towards the remainder of the year, I guess can you give us any color on remaining CapEx for the Austin property and maybe there is a portfolio as a whole?

On the portfolio as a whole, we do not have a lot of CapEx need at this point. We might have committed to some. I would have to look to be exact for you. And on the Cognizant transaction, as I referenced, that’s approximately $1.5 million that we will do CapEx in that building. We are looking to reposition that building. We are decommissioning the cafeteria. So, those dollars will be spent here before the end of the year.

Okay. That’s helpful. That’s it for me. Thank you.

Paul, do we have any more questions?

At this time, there are no further questions.

Well, we appreciate everybody calling in and asking questions, and hopefully, we will give you another good quarter this quarter we are in now based on where we think we are going to be at the end of this one. So, thank you all again, and we will see you next quarter at the end of this...

Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.