Greetings. Welcome to the Gladstone Commercial Year-End and Fourth Quarter Earnings Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I'll now turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, you may now begin your presentation.

Okay, thank you, Rob. That's a nice introduction, and thank all of you for calling in this morning. It's nice of you. We enjoy the time that you take away from your day to come listen to our phone presentation. Wish I had more time to talk to you. We only get this sort of once a quarter. Now we’ll hear from Michael LiCalsi, our General Counsel and Secretary, give us legal and regulatory matters concerning the call today. Michael?

Thanks, David. Good morning everybody. 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. 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 the risk factors in our Forms 10-Q,10-K and other documents we file with the SEC, you can find them on our website, gladstonecommercial.com, specifically the Investors 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. Now, today we'll 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'll also discuss core FFO, which is generally FFO adjusted 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. Now, please visit our website once again, gladstonecommercial.com, sign-up for our email notification service. You can also find us on Facebook, key word there is The Gladstone Companies. And on Twitter, @gladstonecomps. Today's call is an overview of our results. So we ask that you review our press release and Form 10-K, again, both issued yesterday for more detailed information. And with that, I'll hand the baton over to Gladstone Commercial’s President, Buzz Cooper. Buzz?

Thank you, Michael, and thank you all for calling in. Today, we will discuss our operations and topics that are top of mind. Interest rates continue to have outsized impacts on capital markets and real estate. In October 2023, the benchmark 10-year treasury yield peaked above 5% for the first time since 2007. Rates remained volatile through the end of the year with the 10-year yield finishing below 4% and increasing to 4.32% as of yesterday. This volatility translated directly to capital markets and investment volumes as sellers' pricing expectations lagged real-time changes in rates. According to CBRE, the net lease investment volume fell 55% year-over-year through Q3 of 2023. Despite volatile capital markets, industrial real estate, which now accounts for more than 60% of our annualized straight line rent, continues to perform. According to CBRE, average industrial asking rents in Q4 of 2023 rose 6% year-over-year, and the industrial vacancy rates at the end of the year were just 4.8% despite record annual completions of 612 million square feet. Moving on to office, the broader market continued to struggle in 2023. According to Cushman Wakefield, office net absorption in Q4 of 2023 was negative for the eighth consecutive quarter. We made tremendous progress throughout the year of delivering on our current core strategies, divesting non-core office assets, acquiring mission-critical industrial assets in the path of growth markets, and diligently underwriting our tenants' credits. We exited seven non-core markets and properties, completed nearly $30 million in new acquisitions and increased portfolio industrial concentration from 56% of annualized straight-line rent as of December 2022 to 60% as of December 2023. All of our acquisitions throughout the year were completed in established growing markets including Chicago, Dallas-Fort Worth, Indianapolis, and the Lehigh Valley in Pennsylvania. Furthermore, the acquisitions improved portfolio WALT with…

Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the fourth quarter of 2023. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common stockholders were both $0.36 per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2022 were both $0.34 per share. FFO and core FFO for the 12 months ended December 31st were $1.46 and $1.47 respectively. FFO and core FFO for the same period in 2022 were $1.54 and $1.56 per share respectively. Our same store cash rent in the [four quarters] (ph) of 2023 increased by 6.5% over the same period in 2022. This was due to a one-time accelerated rent and increased recovery. Fourth quarter results reflected total operating revenues of $35.9 million with operating expenses of $28.1 million as compared to operating revenues of $37.2 million and operating expenses of $25.7 million for the same period in 2022. Expenses were higher in this period mainly due to impairment charges offset by the waiver of the incentive fee in 2023. Looking at our debt profile, 40.1% is fixed rate, 49.7% is hedge floating rate, and 10.2% is floating rate, which is the amount drawn on our revolving credit facility. As of December 31st, our effective average SOFR was 5.38%. Our outstanding bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest rate caps. We continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our 2024 loan maturities are manageable with $15.6 million due, which encumbered two properties held for sale. As of the end of the quarter, we had $75.8 million dollars of revolver borrowings outstanding. We sold 1,776 shares of common stock this quarter, resulting in net proceeds of $24,000 through our at-the-market program or ATM. We received net proceeds of $400,000 from sales of our Series F Preferred Stock. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. Presently, we have four properties held for sale. As of today, we have approximately $3.4 million in cash and $51.5 million of availability under our line of credit. We encourage you to also review our quarterly financial supplement posted on our website which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is $0.30 per share per quarter or $1.20 per year. Our common stock closed yesterday at $12.51. The distribution yield is about 9.59%. And now I'll turn the program back to David.

Well, thank you, Gary. That was a good report, and Buzz and Michael did good reports as well. This team has performed very well and reacted admirably to the various changes presented by the lasting impact of the pandemic changes in the economy. Overall, I just have to tell you, it's a very nice quarter. So you heard today of some of the things that they've been doing. In summary, during the fourth quarter, they acquired two new industrial facilities, again, manufacturing-oriented. They sold two non-core properties. These were both office properties. We also, during the last quarter, leased six of our properties. Subsequent to the end of the quarter, we sold an additional non-core [Technical Difficulty]. The commercial team is growing the real estate that we own at a good pace and the team is doing a great job of managing the existing properties. We have a quite a good team of people that are working those deals that come up and very proud of them. Our team of strong professional continue to pursue the potential quality projects on the list of acquisitions that they are reviewing. They've got quite a list to go through now. Our acquisition team is seeking only strong credit tenants, not going after the marginal ones. Well, that's really enough from me. Let's stop here and, Rob, if you'll come on and ask and show them how to ask questions, we'll take some questions from those who are listening.

Thank you, Mr. Gladstone. [Operator Instructions] Our first question today will be coming from the line of John Massocca with B Riley Securities. Please proceed with your questions.

Good morning.

Good morning.

Good morning.

So maybe a quick question, sorry if you touched on it somewhere in the call and I missed it. But have you made any decision yet on the incentive fee going forward into 2024? Is that something you are still considering spending, or is that going to be essentially back in kind of operating expense this year?

Hey, John. Good morning. It's Buzz. We are having internal discussions. We have not met with the Board and had any formal recommendations at this point. So I cannot give you a definitive answer. But we are obviously looking at all our alternatives as we did waive it last year. As we look going into 2024, we obviously want to be cognizant of doing the right thing.

Okay. That's understood. And then in terms of kind of the existing vacancy, can you provide some updates on either potential, the disposition potential or lease up, just given the number kind of stayed state flat quarter-over-quarter in terms of both partially vacant assets and fully vacant assets?

Sure. And I'll hit first, obviously, an asset we have discussed previously, our asset in Austin on Parmer. We have had some interest there. We continue to work with the tenancy, trying to attract new tenancy or expansion. There are some [requirements] (ph) in the market that are of good size. Can't disclose who they are that we are certainly running down and trying to work with. Our hope there is to get tenancy and then within that building look to see what is best for us, for the stockholders as it relates to hold or sell. But at this point, Tom, I don't have anything from the standpoint being able that I can report from leasing activity there. Other than that, and I have my CIO here, EJ Wislar, I can have him comment on some activity, positive activity that we have on our leasing front within the portfolio. I do want to state that it's all very positive. And I think, as you know, we stay in front of our tenants on a quarterly and certainly annual basis. So we're ahead of the curve as it relates to our vacancy. EJ?

Thanks, Buzz. John, as we kind of look at where things stand today and our current held for sale as of 12/31 and obviously was mentioned that there's an additional asset held for sale currently. A few of those are vacant office assets. So as we kind of look at our capital allocation strategy, making sure we're being the most efficient, whether we want to break those buildings or sell them and redeploy those proceeds, I would expect we'd see that vacancy rate improve over the next few quarters as we dispose of a few vacant office assets.

Okay, understood. And then maybe just on a line item basis, property operating expense was kind of down in the quarter, and you called out some successful real estate tax appeals. Can you maybe just provide some more color on that, and is that something that's sustainable on a go-forward basis, or is that kind of a one-time true-up in 4Q?

I'll let Gary handle that, if I may. I will tell you that we are aggressive where we can be as it relates to appeals, and we've had successes there. Gary?

John, just to mention as a one-time, I think these were appeals, so they lowered the taxes on some of these buildings. I believe one of them was in Texas, which was significant, or two in Texas were significant. And I think that's a going forward. So these are basically reappraisals from a tax perspective.

Okay, so it's not just a true up for what was budgeted in ‘23. It's a lower base tax rate, essentially.

Yeah.

Okay. I will cede the floor. Thank you very much. That's it for me.

Thank you.

Is there a next question?

Yes. The next question is from the line of Dave Storms with Stonegate. Please proceed with your questions.

Good morning.

Good morning, Dave.

I just want to start, occupancy had a really nice jump subsequent to the end of the quarter. Is that a product of a couple real good wins, one giant win? Kind of what's the story there?

As mentioned, we do stay in front of the tenants and obviously work with them. We're well ahead of our lease expirations and discussions. So we have had some successes there as I referenced in my notes of several exactly on 1.4 million square feet and [$1.2 million] (ph) in net operating increase on the same-store GAAP rent. So we are again actively engaged there and had good success. We will continue that as we go into 2024. And I’ll also ask EJ to give a comment here on a couple that he's been working as well specific because our concentration for lack of a better word is light relative to one asset that we are in good stead with.

Yeah, thanks. The occupancy increase was also related to the sale of one vacant office asset in South Carolina. So that was an improvement there. And as I mentioned before, we've got a few more vacant office assets that will be sold here in the next quarter or so.

Very helpful. Thank you. And then you mentioned in the comments that you're focusing more on higher quality credit tenants. Is that a comment on just demand being strong enough that you can focus on those higher quality tenants or is that more of a comment on spread shrinking between high grade and low grade tenants? Kind of, what's driving that increased focus?

Obviously, with the market and with our company history, we've always been focused on credit of our tenancy. I'll let EJ take that specific to market from the standpoint of what the market is also providing to us in the way of tenancies. EJ?

Yeah. And, Dave, when we say high-quality tenants, it doesn't necessarily mean a rated investment grade tenants. What we mean is when we look to acquire mission-critical industrial assets where the underlying tenancy has strong fixed coverage ratios, moderate to low leverage, strong EBITDA margins, and operates in a counter-cyclical or defensible industry with a strong moat. And so what we like to do is acquire those mission-critical assets that are generating an outsized portion of corporate revenue and EBITDA and free cash flow at the asset level. And so we certainly do like to acquire assets leased to rated investment grade tenants, but there's also something to be said for acquiring an asset that is very important to the underlying tenants. So when we say credit tenants, it's not just investment grade, but also those kind of upper middle market tenants that we get additional granular information into their operations that helps us underwrite them.

Understood. That's very helpful. And then just one more for me. Do you have a sense of what your geographic focus is going to be in 2024, one way or another?

We have obviously seen as it relates to the health of the country from the standpoint of growth has been Southeast, South Central in nature. So we have had good success there and certainly at the concentration the more we do the more that also comes our way. I'll let EJ get more specific on those markets, but that's where we are -- as well as the Midwest, seeing a focus. It's not on the West, and it's not certainly in the Northeast at this point in time. And we've had good success.

Yeah, obviously, Dave, when we look at our markets, what we like to see is business-friendly environments with strong demographic inflows as well as business formation. And so that leads us to be focusing on places like the Sunbelt as well as some select Midwest markets. We like those markets as well. They've got a strong manufacturing base, and we like the light manufacturing space, and that the tenants are very sticky, meaning they've got significant capital invested into the assets, which increases the renewal probability. So I would expect you'll see us continue to focus on those markets over the next few years.

That's all very helpful. Thank you for taking my questions.

Thanks, Dave.

Okay. Rob, any more questions?

There are no additional questions at this time, Mr. Gladstone.

That's terrible. We need more questions. We like it when you ask questions. So now you're going to have to hold your question until next quarter. So we'll see you next quarter. That's the end of this conference call.

Thank you. This will conclude today's call. You may disconnect your lines at this time. We thank you for your participation.