Greetings, and welcome to the Gladstone Commercial Corporation Second Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to turn the conference over to David Gladstone, Chief Executive Officer. Thank you. You may begin.

Well, thank you for that nice introduction. You always do such a good job when you're heading up hours. We enjoy this time that we have with all of the people on the phone and wish we had more time to talk with all of you. Now we'll hear from Catherine Gerkis. She's our Director of Investor Relations and ESG, and she will provide a brief disclosure regarding certain regulatory matters concerning this call today. Catherine, go ahead.

Thank you, David, and good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release, both issued yesterday for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X @GladstoneComps as well as Facebook and LinkedIn. Keyword for both is The Gladstone Companies. Today, we'll discuss FFO, which is funds from operations, 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 may also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's President.

Thank you, Catherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending June 30, 2025, our current portfolio and our 2025 outlook. Starting with the broader economic environment, the second quarter of 2025 was shaped by continued uncertainty. While the April 2 tariff announcements created initial volatility, the focus has since shifted toward a slower pace of decision-making across the market. Businesses continue to evaluate how policy changes, financing conditions and global supply chain dynamics may impact their long- term plans. Larger businesses with enough scale have turned to build-to-suit opportunities, reducing any tariff noise for the foreseeable future. The 10-year treasury yields fell briefly below 4% following the tariff announcements, but mostly hovered in the mid-4s for the remainder of the quarter as markets adjusted to mixed signals around inflation, interest rates and future policy direction. Despite a more cautious environment, the industrial real estate sector, which our company is a part of, remains steady. According to Cushman & Wakefield, net absorption reached 29.6 million square feet in the second quarter of 2025, reflecting moderate growth quarter-over-quarter. For the industry, vacancy rate rose modestly to 7.1%, driven by speculative deliveries but remains in line with historical averages. This suggests the market is approaching a more balanced state. New construction completions during the quarter declined to the lowest level since the first quarter of 2019, reflecting higher capital costs and a slowdown in the development pipeline. Cushman expects the construction pipeline to continue declining given market uncertainty, and we expect this slowdown will place upward pressure on industrial rental rates and gradually reduce vacancies as industrial users compete for additional square footage to grow their businesses. Moving on to our company's portfolio. We remain confident headed into our…

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 2025. 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 $0.33 and $0.35 per share, respectively, for the quarter. FFO and core FFO available to the common stockholders during the second quarter of 2024 were both $0.36. FFO and core FFO for the 6 months ended June 30, 2025, were $0.67 and $0.69 per share, respectively. FFO and core FFO for the same period in 2024 were $0.69 and $0.70 per share, respectively. Same-store rents increased by 6.4% in the 6 months ended June 30 over the same period in 2024 due to increased property expense recovery revenue and increased rental rates from leasing activity subsequent to the first 6 months of 2024. Our second quarter results reflected total operating revenues of $39.5 million with operating expenses of $25.1 million as compared to operating revenues of $37.1 million and operating expenses of $26.0 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates. Expenses were lower in the second quarter of 2025 versus the same period in 2024, mainly due to the crediting back of all the incentive fee in 2025 and lower depreciation and amortization expense, offset by higher property operating expenses. In Q2, we increased net assets from $1.16 billion to $1.2 billion, which was mainly a result of the 2 acquisitions this quarter. Looking at our debt profile, 42% is fixed rate, 39% is hedged floating rate and 19% is floating rate, which is the amount drawn on our revolving credit facility and…

Well, thank you, Gary. That was a good report, and that was a good one from Buzz and Catherine, too. The team has performed very well overall, just a very nice quarter. As you heard today, in summary, during the second quarter, we acquired two industrial facilities for a total of just under $79 million. We sold one of our office properties. One more is gone, so that's good. And so we had a gain of about $377,000 on that one. We previously had recognized selling profit of about $3.9 million from a sales-type leases, and that's gone as well. I think the commercial team is really good at real estate. We are on a good pace. We're growing at a good pace, and the team is doing a great job managing the properties we own. Now we own a lot of properties. So we're going to have a lot of people going out and making sure they're getting paid. Our team is a strong group of professionals that continue to pursue potential quality properties on -- we've got a good list of acquisitions that they're reviewing now. Our acquisition team is seeking strong credit tenants. That's the first thing we look for. So why don't I stop here, and we'll have the operator come back on and tell people how they can call in.

[Operator Instructions] Our first question comes from the line of Gaurav Mehta with Alliance Global Partners.

Can you guys talk about the acquisition pipeline? What are you guys seeing in the market? And how is the volume?

Thanks, Gaurav. We currently have 6 LOIs out. We are active in the market looking at, at this point in time, some 20 transactions. Of the 6 LOIs that are out, hoping to hear on awarding of said transactions next week or the week thereafter. As you know, we've hit the summer period, so it does slow down a bit, but we are hopeful of one of those transactions in the neighborhood of approximately $50 million will come our way next week. And then behind that, we've got some '18, '19 in initial review, and we will work those diligently and as mentioned previously, subject to our credit requirements as well as returns and hopefully land a few of those as well. But we anticipate also seeing an uptick as is generally the case coming out of the summer period heading back into school, if you will, with people back in the office.

Okay. Second question, can you remind us the background of the sales transaction of the industrial property that you guys sold?

If I understood your question, information on the industrial property we did sell?

Yes.

Yes. So that was a property down in Georgia, and they had a purchase option within the lease. So we -- obviously, they exercised that and purchased.

Okay. Understood. And then lastly, on the incentive fee waiver, it looks like incentive fee was waived this quarter. Can you maybe talk about how you guys decide how much incentive fee is going to get waived? And how should we think about the waiver going forward?

Well, we certainly have discussions with our management. As you know, the company is very aligned with the stockholder. So as a result of that, we take that into consideration on a quarterly basis and discuss with management. We obviously want to reward our employee base and retain them. And so we look at that again on a quarterly basis to do what's right for all parties concerned.

Our next question comes from the line of Craig Kucera with Lucid Capital Markets.

You had a pretty healthy increase in your G&A. I'm guessing that's related to a few core FFO adjustments such as prepaid offering cost write-offs and the closing costs on sales. Is that the correct way to read through on that?

Yes, that's correct. And also in the second quarter, we have some additional expenses due to our annual meetings.

Got it. Okay. So you've been very aggressive here in the first half of the year as far as the acquisition market. Your leverage has ticked up, but it's still flat year-over-year. Are you looking to maybe press leverage a little further in the back half of the year to close that $50 million transaction or in excess of that? Or how are you thinking about funding growth going forward?

Rather not press leverage. I mean, if we had to a little bit, we would, but I think we're trying to -- our goal here is to try to get that leverage down again. I mean we did, again, as you said, go up a little bit, but that was to digest all of those acquisitions.

Got it. And changing gears, can you give some lease -- some color on the lease renewal you completed this quarter, maybe the spread relative to the prior rents and what the term is on this the lease that you did get done this quarter?

Sure. The uptick on it was, I believe, it's 2.5% an extended term. And as it relates to our renewals that are coming up, we have one left here in 2025 that actually we are working on a lease of a 10-plus year lease on it at an uptick within that of approximately 2%, I believe it is, and that will take the building out for another 10-plus years. And then looking at '26, we have some 10 expirations. And as David referenced, our portfolio management team is actively in front of these expirations, both '26 and '27. In '26 of the 10, they've all been contacted. We're confident that at a minimum, 6 out of the 10 are going to renew as they have renewal options. And of the other 4, one is going to be signed up, we feel very confident on a lease to buy. We have had tours specific at our GM building down in Austin, looking for a 45,000 plus or minus square foot occupant there. And looking at '27, we've got 13 of which they've all been contacted and confident, honestly, that 12 of those are going to renew and they have renewal options, but we are in discussions getting ahead of that curve, if you will, with all of them.

Our next question comes from the line of Dave Storms with Stonegate.

I just want to start, it looks like cap rates are starting to maybe climb up into the high 8s. Just curious if you could give us a sense of what you're seeing in the market, if they could get into the 9s this year, anything like that?

I don't see them getting into the 9s. Obviously, on the average cap rate basis, too many. There is a lot of competition out there, David, as I'm sure you're aware. And so as we look at it, we are not purchasing in what I will call in the downtown/very hot industrial pockets of the West Coast and some others. We look to be in the path of growth. And so our cap rates, I think, will be 8.5% plus on an average basis.

That's very helpful. And then just given some of the macro uncertainties, are you having to make any changes to your underwriting process to make sure you're still getting the tenant quality that you need? Are you seeing any meaningful impacts from the macro environment on your tenants, anything like that?

We are not seeing any meaningful impact at this point. Again, 100% collections of our rent. We will not change our underwriting criteria and qualifications, if you will, relevant to the tenancy. We certainly are focused on what impact, again, the macro may have, obviously, tariffs and otherwise, but we are not going to change our underwriting criteria.

[Operator Instructions] Our next question comes from the line of John Massocca with B. Riley.

So maybe as we think about the amount outstanding on the revolver, what's kind of potential plans there to either term that out or kind of repay it with some other form of debt or other capital?

Well, we have a number of options. And one of them in the most immediate will probably be sales on the ATM, paying it down with equity. We are in talks with our lender group to refinance our credit facility. So there's a potential of transferring some of that to a term loan as well. And then obviously, we've done one private placement. And if rates cooperate, we could potentially do another.

Okay. And then in terms of -- you talked a little bit about office on the leasing front, but maybe in terms of the capital recycling front, are you seeing any change in kind of cap rates there just given some of the macro narratives, maybe a little more interest rate uncertainty, return to office, et cetera?

Relative to cap rates, again, as mentioned previously, our average cap, I think, is moving up a bit. We certainly are not looking to buy any office, and I don't think you're implying that. But we have recycled capital out of and then into industrial, and we'll continue to deploy capital into the properties we do own, provided that, that capital is going to be accretive to our shareholders to the company.

I guess the question is, are you seeing them tightening or maybe even widen as you look to potentially sell office assets to kind of redeploy into industrial?

Our recent sales show, I wouldn't say tightening, but cap rates that work for us as it relates to the exit of those to be able to recycle into industrial.

Okay. And then it was kind of the same case in 1Q, a little bit more elevated kind of variable rental revenue offsetting kind of elevated expenses. Is there something specific kind of driving that?

Not really. I mean sometimes it's seasonal. There's nothing.

Is there anything kind of maybe onetime in 2Q that wouldn't flow through to 3Q in either a reimbursement perspective or maybe even a top line rental revenue perspective?

I mean the variable rents, if you look at, they do vary at variable. And again, a lot of it is due to the expenses that, that are being incurred. So I wouldn't say that you can kind of track those on an apples-for-apples basis on a going-forward basis.

And anything kind of onetime in rental revenue, either lease termination fees or...

That's not going to go into the variable rents, no. That's not recovered.

No, no, I understand just in general in the rental revenue in 2Q.

Say it again?

Anything in total rental revenue in 2Q '25 that was onetime?

There's nothing in there that was elevated or onetime, no.

Operator, do we have a fifth question?

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Okay. Thank you very much. Nice list of questions. We hope next quarter, we'll get twice that many. This is very good when you guys start following us and asking questions. That's the end of this. We had a good quarter, and we're looking forward to the rest of the year being good. That's the end of this conversation.

This concludes today's teleconference. Thank you for your participation, and have a wonderful day.

Thank you.