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Edited Transcript of GOOD earnings conference call or presentation 1-May-19 12:30pm GMT

Q1 2019 Gladstone Commercial Corp Earnings Call

McLean May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Gladstone Commercial Corp earnings conference call or presentation Wednesday, May 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David John Gladstone

Gladstone Commercial Corporation - Founder, Chairman & CEO

* Michael B. LiCalsi

Gladstone Commercial Corporation - General Counsel & Secretary

* Michael J. Sodo

Gladstone Commercial Corporation - CFO

* Robert G. Cutlip

Gladstone Commercial Corporation - President

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Conference Call Participants

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* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Brandon Phillip Travis

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Craig Gerald Kucera

B. Riley FBR, Inc., Research Division - Analyst

* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Equities Research

* Merrill Ross

Boenning and Scattergood, Inc., Research Division - Senior Research Analyst of REITs

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Gladstone Commercial Corporations First Quarter 2019 Earnings Conference Call and webcast. (Operator Instructions) as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you may begin.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [2]

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All right. Thank you, Lauren. That was a nice introduction. Thank you all for tuning in and listening to us. I was with a group of brokers yesterday, and it's so nice to talk to people and get questions back. Hope we have a lot of good questions today. We really do enjoy this time we have with you on the phone and wish there were more times to talk. Please come and visit us, if you're ever in the Washington DC area, we are in a suburb called McLean, Virginia. And you have an open invitation stop by and see us here at the office. Now I'm going to hear from Michael LiCalsi, General counsel and Secretary, he's also the President of Gladstone Administration, which serves as the administrator to all the Gladstone public traded funds, he'll make a brief announcement regarding some of the legal and regulatory matters concerning this report. Michael?

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Michael B. LiCalsi, Gladstone Commercial Corporation - General Counsel & Secretary [3]

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Thanks, David, and good morning. 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. 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 risk factors in our forms 10-Q, 10-K, and other documents that we file with the SEC. You can 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.

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.

And 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 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. We ask that you take the opportunity to visit our website, once again, gladstonecommercial.com, and sign up for our e-mail notification service.

We could also be found on Facebook, keyword there is The Gladstone Companies, and on Twitter and the handle there 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, both issued yesterday for more detailed information those can be found on the Investor Relations Page of our website.

Now, I'll turn the presentation back over to, Bob Cutlip, Gladstone Commercial's President.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [4]

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Thanks, Michael. Good morning, everyone, during the first quarter, we acquired a 26,000 square foot industrial property in the Philadelphia submarket, acquired a 34,800 square foot freezer cooler industrial property in Indianapolis, renewed a 72,000 square foot tenant whose lease was scheduled to expire in 2020, renewed a 58,000 square foot tenant whose lease was also scheduled to expire in 2020, sold a noncore single-story office property in Maitland, Florida, conducted a nondeal roadshow in Chicago and Milwaukee, and lowered our book leverage to 45.3%.

Subsequent to the end of the quarter, we acquired a 2 building 383,000-square-foot industrial portfolio in Ocala, Florida, acquired a 54,430-square-foot industrial property in Columbus, Ohio, and entered due diligence for the acquisition of an industrial property in Tifton, Georgia. As noted on our year-end call, we're beginning to enjoy the benefits of our team's focused efforts to improve operating results.

We invested significant equity and personnel resources from 2013 to 2018, to renew tenants and re-lease vacant space, to fund operating deficits on vacant space, to improve our balance sheet and to acquire accretive assets. The good news is that our occupancy remained high throughout this period. We significantly lowered our book leverage from 63% in 2013. We maintain FFO per share of $1.50 to $1.54, and are now on a path of earnings growth that commenced in 2018.

We also improved our cash payout ratio year-over-year. We're able to consistently improve our financial metrics because we acquired accretive assets each and every year in our target growth markets. The combination of the positive characteristics of those investments and the capital structure enhancements validate the strength of our growth trajectory and balance sheet security and I think are worthy of some note. From 2012 to 2018, the average annual acquisition volume was just under $105 million with lease terms ranging from 7 to 10-plus years with annual lease rate escalations. The average GAAP cap rate on these assets 8.7%, the average interest rate on fixed rate mortgage debt 4.6%. These characteristics equate to increasing cash flow year-after-year. We're also approaching the time period at which these leases' cash returns are going to be exceeding the straight line GAAP returns as the 7 to 10 year leases are at or are approaching the inflection point from a straight line rent perspective. This should continue to improve the payout ratio to the benefit of shareholders and our working capital position.

Our investment in asset management activities continued to generate positive momentum for our operations during the quarter. We acquired a 26,000 square foot industrial property in a Philadelphia suburb, the transaction is a 15-year sale leaseback. The acquisition price $2.7 million, the going in and GAAP cap rates are 7.6% and 8.8%, respectively, and the property can be doubled in size to accommodate the tenant's expansion requirements in the future. We also acquired a 34,800 square foot freezer-cooler facility in Indianapolis for $3.6 million, which can also be expanded by approximately 50%. The unexpired lease term was 10-year acquisition and the going in and GAAP cap rates are 7% and 7.7%, respectively. Our asset management team continued our renewal efforts and extended the leases for 2 of our tenants for 5 years beyond the current lease expirations in 2020. The tenant sizes are 71,880 square feet and 58,360 square feet and the properties are located in Syracuse, New York and Akron, Ohio, respectively. No tenant improvements were required for these lease extensions.

Our capital recycling efforts continued, during the first quarter with the sale of 50,000 square foot single story office property in Maitland, Florida. The sales price was $6.9 million and the realized capital gain was $3 million. This asset was not critical to our strategic holdings and the proceeds from the sale were used to fund first quarter acquisitions.

Subsequent to quarter end, we acquired a 2 building 383,000 square foot industrial portfolio for $19.2 million in Ocala, Florida, along the I-75 corridor that connects Jacksonville and Orlando. The transition -- excuse me, the transaction is a 20-year sale leaseback with going in and GAAP cap rates of 7% and 7.7%, respectively.

We also acquired a 54,430 square foot industrial property in Columbus, Ohio for $3.1 million.

The unexpired lease term, 7 years, and the property can be nearly doubled in size to accommodate the tenant's expansion needs. The going in and GAAP cap rates are 7.5% and 7.9%, respectively.

Market conditions I think are worthy of some comment. As noted on our last report, national research firms reported that overall investment sales volume for 2018 exceeded 2017 volumes.

A critical characteristic however, is that large portfolio and entity transactions were in excess of 2017 levels and are the major contributor to the higher volume.

Reports also stated the individual property sales for the last 2 months of 2018 were down compared to the prior year.

And Real Capital Analytics reports that investment sales volume is down 11% for the first quarter of 2019 compared to that of the first quarter of 2018.

In addition, we noticed there's an apparent buyer-seller disconnect in the office sector as evidenced by several notable properties returning to market after being under contract.

And our experience with mortgage debt reflects that even with the recently reported slow down by the Fed in raising the federal funds interest rate, long-term interest rates have risen approximately, 50 basis points over the past 12 months.

Now with that information in mind, significant capital is available on the sidelines with considerable interest in U.S. real estate. The expectation is for the 2109 investment sales volume to be similar to that of 2018, which is really still quite healthy for the industry. Our team is going to continue to monitor market conditions and actively investigate accretive opportunities that promote our measured growth strategy.

As it relates to our growth opportunities and strategy, we have noted an increase in activity and sales listings as of late. Our current pipeline of acquisition candidates is approximately $260 million in volume, representing 17 properties, 13 of which are industrial, of this total $55 million is either in the letter of intent or due diligence stage and the balance is under initial review.

As I mentioned during our year-end call, we're making a conscious effort to increase our industrial allocation. With the heated competition for larger properties, our focus is in fully-developed industrial parks with properties that are predominantly in the size of 50,000 to 300,000 square feet, 24- to 28-foot clear heights in the warehouse, ample trailer parking and occupied by middle market nonrated tenants, a tenant profile which we believe we can underwrite with our proven credit underwriting capabilities. The larger properties, they are well above replacement cost in several markets, and we don't believe that is an appropriate strategy for us.

To show evidence of this strategy from the last week of September to the first week of April just over 6 months, we've acquired $74 million of properties.

75% of this volume or $56 million were industrial properties, and they're located in our target locations of Indianapolis, Detroit, Columbus, Ohio, Philadelphia and Central Florida. And the average GAAP cap rate -- excuse me, GAAP cap rate is 8.3%, we believe this shift to increasing industrial allocation of our portfolio will result in the long term benefits of lowering tenant improvement costs for renewal and releasing efforts reducing the intensity of our property management activities and improving operating efficiencies.

So in summary, our first quarter activities continued our acquisition and leasing success, refinanced maturing loans, issued equity to our ATM programs and positioned us well to pursue growth opportunities.

Now let's turn it over to Mike for a report on the financial results.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [5]

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Good morning. I'll start by reviewing our operating results for the first 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 first quarter.

This performance demonstrates the accretive, yet prudent, growth that the company has completed in recent years, as well the performance of the in-place portfolio, inclusive of maintaining 99% occupancy. In addition, to these accretive deals our same store cash rent growth was 2% first quarter of 2019 as compared to the first quarter of 2018.

As Bob mentioned, prior to 2018 core FFO hovered in the $1.50 and $1.54 range for the past number of years. As we delevered the balance sheet and addressed lease rollover.

2018 results demonstrated our highest core FFO per share in the company's history, and we intend to continue to grow profitability for our shareholders in 2019 and beyond.

With no near term meaningful lease expirations and only fractional deleveraging to do, we're excited about the prospects of continuing to increase earnings going forward.

Our first quarter results reflects an increase in total operating revenues to $28.1 million as compared to total operating expenses of $19.3 million for the period. Let's now 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 45.3% over the past 5 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 going forward will be allocated to accretive acquisitions. As we discussed this with analysts, investors and lenders, we believe there is agreement that this will put us at the proper leverage level going forward.

We continue to primarily use long term mortgage debt to make acquisitions, as we grow through disciplined investments, we also look to expand our unsecured property pool with additional high quality assets. Over time we expect this to increase our financing alternatives.

As we continue to manage our balance sheet, we've repaid $34 million of debt over the past 24 months often with new long term variable rate mortgages at interest rates equal to the 1-month LIBOR plus a spread ranging from 2.5% to 2.75%. We have placed interest rate caps on all new variable rate loans. We also added some of these properties to our unencumbered pool under our line of credit, whether in advance of permanent debt placement disposition or an effort to provide more flexibility in the future by increasing the size of our total unencumbered assets.

In order to improve our balance sheet, we have often put additional equity into the refinanced properties. As previously discussed, this has helped significantly reduce leverage and generally enabled us to obtain improved interest rates on our mortgages, thereby reducing the related interest expense by an excess of $500,000 annually.

Looking at our debt profile, 2019 loan maturities are very manageable with only $49 million coming due and a number of these loans have extension options. Further, we have less than $30 million of mortgages maturing in each of 2020 and '21.

We have continued to proactively manage and improve our liquidity and maturity profile over time.

Depending on several factors, including the tenant's credit, property type, location, terms of the lease, leverage and the amount of term of loan were generally seeing all-in rates on refinances and new acquisition debt ranging from the mid-to high 4% range. We continue to minimize our exposure to rising interest rates with 92% of our existing debt being fixed rate or hedged to fixed through interest rate swaps and caps.

We've remained active in issuing our common stock using our ATM program. During the first quarter and net of issuance cost, we opportunistically raised $14.1 million through common stock sales. While we continue to view the ATM as an extremely efficient way to raise equity, we continually keep our assessment of the relative value of our common stock as compared to trading prices in mind as we determine when to raise capital. As of today, we have $2 million in cash and $33 million of availability under our line of credit. With our current availability and access to our ATM programs, we believe that we have significant incremental flexibility to fund our current operations, properties we are underwriting and any known upcoming improvements at our properties. 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.

We feel good about continuing to execute our business plan during the remainder of 2019 and beyond, as we continue to increase our high quality asset base and continue to improve our metrics, including core FFO and leverage. We're focused on maintaining our high occupancy with strong credit in real estate with minimal near term lease expirations along with manageable loan maturities are deployment of capital or heavily be focused on high quality real estate acquisitions with strong credit tenants.

Institutional ownership of our stock increased by 13% since the beginning of 2016 to 53% as of March 31. Bob and I continue to be very active in meeting with current and potential institutional investors, portfolio managers, investment banks and the like.

We look forward to further engaging with not only our existing investor base lenders and coverage analysts, but also establishing new relationships as the company moves forward to its next chapter.

Now I'll turn it back to David.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [6]

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Thank you. I think that was a good report, it was good reports from Bob and Michael LiCalsi as well. This is a very nice quarter, very straightforward. The main news here is to report that the quarter end through April. Company's very good position to keep paying consistent dividends and to grow those dividends. The company also continues to grow its assets to the point that we'll soon reach $1 billion in assets, and that will be a milestone for us.

We continue to have a promising list of potential quality properties that we're interested in acquiring during the remainder of 2019 and with the increase of the portfolio the property comes with great diversification, we believe that protects their earnings as a company and also your dividend.

The middle market businesses like many of our tenants is doing very fine today, our tenants are paying their rents that's what counts for us.

While I'm optimistic that our company will be in good hands in the future, Bob and his team will continue to be cautious in their acquisitions as they've done in the past.

In April, the board voted to maintain the monthly distribution of $0.125 per common share per month for April, May and June, that's an annual run rate of $1.50 a year, this is an 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 all know that we will increase the distribution amount at some point in time. All I can say is we're not quite there yet but hopefully at this next meeting of the Board, Bob and the Board will get together and talk that one through.

If you want to put some pressure on Bob just email him and tell him when you want the increase. And we've now paid 171 consecutive common stock cash distributions, and we went through the recent recession without cutting our distributions, and we don't want to hurt that record, it's a good record.

And another point because the real estate can be depreciated we're able to shelter most of the income that's coming in for you, taxpayers don't pay any taxes on those dividends that are return of capital and last year ending December 31, the return to capital 76% of the money paid out.

The return of capital is mainly due to that depreciation shield of depreciation real estate and the deduction from earnings has caused earnings to remain low but at the same time cash flow is strong. Stock closed Wednesday, let's see, $21.75. And distribution yield on our stock, right around 6.9% now in terms of yield, so that's a great yield for a strong company like this.

And triple-net REITs, generally trade at about 4.45% yield, and if we could reach that yield we'd be trading at $33 per share. It's just a lot of room for expansion of the stock price and to closer to the real, real estate industrial stock price.

I know the analysts always beat us up a little bit that we're externally managed. And I want you all to just to ignore that simply because trillions of dollars of mutual funds are managed externally and it doesn't seem to harm them at all and our high occupancy level is a testament to the underwriting skills of the team and our emphasis on tenant first and real estate second.

We're a REIT that looks first always at the tenant to make sure they can pay the rent that's where it all began.

Now we have some questions from our shareholders, so Lauren, if you'll come on and tell them how they can ask a few questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Rob Stevenson with Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [2]

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Bob, you talked earlier about the targeting industrial assets, I mean how are you guys thinking about office acquisitions these days? Is it -- are you still willing to do them and it just have to meet a higher return than it historically had relative to industrial? You guys are still sort of 65% office, where do you guys expect that to trend down to over the next year or two?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [3]

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Good questions. I think from the standpoint of the office themselves, the teams really are looking to be sure that wherever we acquire we're close to amenities, a la like the Morgan Stanley acquisition. That was in Easton Commons in Columbus and in Salt Lake City. And CentralSquare, which is in Lake Mary, which is a nice mixed use community in North Orlando.

We are not going to walk away from office, I mean if it's sticky real estate and it's really mission critical, we will do office. But I really believe going forward we'll be at a 60/40, 70/30 split industrial versus office from an acquisition standpoint. I think, it's going to take us probably 2 to 3 years to get to a point where Mike and I and David think we're comfortable at maybe let's say a 55/45 or 60/40 split between industrial and office. I just think that long term, when we look at free cash flow, raising the dividend, tenant improvement cost, capital improvements, industrial plays really well in that because of the lesser cost you pay. And plus you look at the market conditions, e-commerce is not going away, home delivery is going to continue to grow as you read in almost every research report. And I think we play extremely well in these developed submarkets where it is last mile or it is a manufacturer. I think -- and David hit the nail on the head, our ability to underwrite credit is better than, I believe, anyone else out there and therefore, we can attack these middle market tenants who are manufacturers or who are let's say the last mile delivers.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [4]

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Okay. And then what are you guys thinking about in terms of dispositions, currently? I mean, is it -- anything that's on your radar screen, where you want to get rid of it sooner rather than later or it doesn't really fit the portfolio or maybe you've had attractive offer type of thing. I mean, how should we be thinking about dispositions over the reminder of the year?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [5]

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Well, it's like the disposition we did in January. We had such an attractive offer from a user and, as the team knows, I am not a proponent of single-story office because of the releasing cost involved there. And so when we bought that 3-building portfolio, although, we weren't thinking of exiting the property, one of the tenants elect -- was going to elect to leave, it's two 25,000-square-foot tenants in a 50,000-square-foot building, and then a user who has a campus nearby offered to acquire the property at a very, very nice price, and so we exited that property and were able to redeploy the capital. Going forward, I think Mike and I believe, we'll probably be somewhere between maybe $10 million to $15 million a year. And once again these will be in what I think are like single-property noncore markets that -- you know, they're good tenants so I'm not in a big rush for them to exit, but if we can sell coincidentally with acquiring in our target markets, I think that's how the team's going to emphasize, identifying dispositions, getting them on the list and then as we're acquiring we'll exit, but it won't be a high number from a volume standpoint per year.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [6]

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Okay. And then one for Mike. We've seen a bounce-back here in the preferred market. How are you guys thinking about the balance sheet mix going here, going forward here, I mean, you're about 11% preferred equity, those -- where some of these deals have priced recently have you guys thinking about opening up the Series D via the ATM or a marketed offering and issuing there rather than common at this point.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [7]

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Fair question Rob. I mean as I've stated in the past, and to your point, with it being 11% to 12% of the total balance sheet it is still a bit -- a couple points overweighted as compared to peer set. I saw the print last week at 6 3/4%, there's been some wider deals in the low- to mid-7s, I would say. The strip yield on our series B as of this morning, 6.92%. If there's a sub-7 execution that may work for us but as we've stated throughout, I mean our only real interest here is to do a preferred-for-preferred trade. We don't want to go above that 11 to 12 points of preferred that we have. So, with the series A being at 7.75% and the series B at 7.5%, we do the traditional math as well -- as our peers would, where we roughly need to save about 75 basis points, so I'm cautiously optimistic we're seeing execution in that marketplace, and we saw the sub-7% print last week. It's just close right now.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [8]

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And just remind me, the A and the -- are the A and the B redeemable at this point?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [9]

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They are.

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Operator [10]

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Our next question comes from Barry Oxford with D.A. Davidson.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Just building off of some of Rob's questions. When we look at your ATM and your need for equity and given the fact that you're at your, I guess, target leverage metrics. If your stock price were to retreat back and you couldn't go to the ATM or you just didn't want to because of where the stock price is. Can you continue to act on your 2019 plan without raising leverage again going forward?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [12]

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I'll start with it Barry. Trading at $21.75. I mean over the last couple of years, we've been active in the ATM market and able to source deal at minimums up north of $19 a share, so I mean there's a good bit of push in there, obviously if macro events or otherwise, there's a massive raise -- rise in the 10-year that causes REITs to trade off, I mean that will impact our underwritten cost of capital and would impact what deals that we chase but in a normalized environment we feel pretty good about our way to efficiently execute -- access the ATM market and raise the requisite equity capital to complete the 2019 business plan.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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Great, great, great. And then just one last question. When you guys are in the marketplace, you talk about that pipeline, are there small, for lack of a better word, small industrial portfolios out there for sale, are there a lot of them or not so much?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [14]

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We're trying -- we're chasing one right now that is a 5-property industrial portfolio which is going to trade, and I'll just give you the average, because who knows where it's going to end up, with somewhere between $28 million and $32 million. We're starting to see a few more of these that are in let's say within our window of opportunity at this point. But most of the deals that we're seeing Barry, are -- let's say anywhere from 7 to -- let's say $15 million to $18 million in the developed submarkets because they're ranging anywhere from 50,000 to close to 200,000 square feet.

And we've -- I really like that size based on where I think the market is because I think there's really upside in the rents.

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Operator [15]

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Our next question comes from Henry Coffey with Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [16]

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Really just 2 questions. When you look to buy a property, what's the ideal mix that you have in the back of your mind, and even though maybe you don't get it the day you close the property but are you able to kind of queue up likely term debt going into the deal or is that more of a challenge?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [17]

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No, not a challenge in today's normalized environment, Henry. I would say, at book equity -- book debt-to-gross assets of 45.3% and appreciating, we have about $14 million of scheduled amortization on the annual basis, we're underwriting deal plus or minus 50% debt, 50% equity. So your point, I mean in typical environments we have day 1 long term debt. If it's an accelerated closed process, we could on an interim basis tap into our credit facility and then raise -- execute the debt after the fact. And the ATM we just programmatically issue either prior or a combination of prior/afterwards to get that 50% of equity.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [18]

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Are your sellers open to UPREITs or they're more institutional parties looking for cash?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [19]

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We -- Henry, a good question. We did our first UPREIT transaction last fall, and we're starting to see more interested sellers in the UPREIT transaction for estate planning purposes, these are primarily private owners, developers that are just thinking long term, so I think there's going to be an increase in that opportunity and, of course, that's a less costly transaction for us, and I think it will just continue to expand over the next several months.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [20]

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And then I -- it looks like you've got a good handle on $35 million to $50 million of additional properties by year-end, is that a fair way to read your pipeline or.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [21]

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No. I think it's going to be higher than that. As I indicated, the last 6 six months, we closed about $75 million with a $260 million pipeline right now with $55 million in the letter of intent or due diligence stage. I would be very surprised -- our goal has been somewhere around $120 million this year, and I think that is achievable unless the bottom falls out of the market. I mean as David and I've always said, as long as we've got our margin of 100 and 150 basis points over our WACC, our weighted average cost of capital, we're going to buy in those markets with our credit tenants. And I don't see an issue, at least near term, with the velocity dropping.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [22]

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Other questions?

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Operator [23]

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Yes. Our next question comes from Craig Kucera with B. Riley FBR.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [24]

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I saw you had a lease termination this quarter. Can you give us some color on where that building was? And do you anticipate trying to sell it or potentially release that asset.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [25]

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That was the tenant that was going to leave that single-story office property, which we also sold. So that's the only termination, yes.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [26]

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And you mentioned in your commentary that you had the potential to double the space at the Columbus acquisition. Has the tenant indicated that they eventually might need to expand on that kind of order?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [27]

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Of the 3 tenants that we'd have expansion capabilities, one has indicated they may. With the long-term lease, I mean David and I like long-term relationships and having that extra land and really it turns out to be free land because if we expand it we've already paid for the land. It gives us an opportunity to extend that relationship. So I'm really excited about what the team has done in finding properties that do have expansion land as part of the deal, and we're going to continue to look for those but only 1 of the 3 right now has mentioned it right now. But they're long-term leases and if they're in growth situation, it's good to have the ability to say, yes, we can expand that. It happened with our Lear facility in Vance, Alabama, the Mercedes Benz assembly plant, when we bought that back in 13, Buzz Cooper, our leader down there said to the developer, "If I'm going to buy this deal, I'd really like to have some additional land." Well as it turned out, they came to us at the end of '16 saying Mercedes Benz is doubling their doggone investment in their plant there, and we need to expand the building, and we expanded by 75,000 K.

So we're going to continue to look at those types of acquisitions.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [28]

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And one more for me, appreciate the color on the pipeline but as far as the assets that are currently under LOI contract, what is their composition? I mean are they heavily geared towards industrial and are they in your target markets?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [29]

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They are all industrial. The only one that is not one of our original target markets, which David has talked with me about is Tifton, Georgia, and I will tell you that being an Atlanta boy for a long part of my career, it is south of Atlanta, but I think the positive aspect of Tifton, Georgia is it's along I-75 and it's equidistant from the Port of Brunswick and the Port of Jacksonville, in fact, our tenant there when we close this deal in probably 6 weeks is exporting product out of the Port of Jacksonville with the port lowering the depth of the channel. And so I think we're going to see more opportunities along that 75 corridor in that Tifton area, but every other one was in Chicago, Jacksonville, Columbus, Ohio and they were all industrial.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [30]

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And are the -- what is the typical terms for the assets that are under LOI? I mean the initial cap rates, or? Can you kind of give us some color there?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [31]

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They're ranging anywhere from the high 6s to the low 7s going in, that's what we're seeing right now. And I think Rob, brought it up before about the split of cap rates. Our spread between, let's say, industrial and office is about 50 to 75 basis points higher. So if I'm at a 6.75% on the industrial, I'm at 7.25% to a 7.5% on the office but the deals that we have now are anywhere from the high 6s to kind of low to mid-7s, going in.

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Operator [32]

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Our next question comes from Merrill Ross with Boenning Inc.

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Merrill Ross, Boenning and Scattergood, Inc., Research Division - Senior Research Analyst of REITs [33]

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Well, I see the amount of lease expirations in 2020

has declined with some success in renewals. But can you

talk about particularly the GM renewal since that's your biggest property.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [34]

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Merrill, I will talk about all of them, I won't get into specifics because, of course we're in negotiations with the number of them already.

Right now, as you know, as I indicated we -- we had 11 leases scheduled to expire next year in 2020. And quite frankly our team is already talking with people in the 2021 timeframe because we like to start 2 years out. Right now, we have the 2 done, we have proposals out on 5 others, and we've begun discussions with GM. I think when I talk about and think about the GM program, it was brought to my attention with -- and a lot of questions, "Whoa, GM is closing a lot of plants, what's going to happen here?" Our property is one of their 4 innovation centers and when they began to cut back at their plants

in interest of transparency, they actually cut people in our building by 100, into their staff, but lo and behold, they have just recently increased their staff by 80 in the building and then Buzz Cooper and his partner E.J. who are really leading that effort to re-lease that property or renew that property have collected a lot of good market intel, and what we're finding is Austin is really on fire. The current rental rates compared to our building for, let's say, nominal TI are at least $4 to $5 higher than what GM is paying now and if you go to the $25 to $30 for TI, it's $6 to $7. So we bought that property at going in cap rate at 7.4%, so our return is extremely good right now, since we bought it in 2013. So I am pretty encouraged, the brokers and even our colleagues, Buzz's counterparts there, who are owners of properties, are saying they really have very limited places to go particularly with that size, so I'm encouraged that up we're going to get something done, I'm hopeful, let's say, at least 12 months before their lease expiration. And their lease expires in August of 2020.

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Operator [35]

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Our next question comes from John Massocca with Ladenburg Thalmann.

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Brandon Phillip Travis, Ladenburg Thalmann & Co. Inc., Research Division - Associate [36]

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This is Brandon Travis on with John. Two questions for you. First on the Orlando portfolio, can you give any additional color on how the acquisition was sourced?

And can you give us some general color on what to expect timing wise for acquisitions this year.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [37]

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You talking about the 2-building industrial?

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Brandon Phillip Travis, Ladenburg Thalmann & Co. Inc., Research Division - Associate [38]

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Yes.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [39]

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It was sourced third party through one of our broker contacts and relationships, which is pretty typical. I mean, we probably are able to go direct on sale-leasebacks on maybe 10% to 15% of our product, but it's evolved to where even in most cases people say, "Listen, I need to go to market just because I'm going to get a better price." So this is one -- it was broker relationship with Brandon Flickinger, who runs our southeast region.

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [40]

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And to the second piece of your question having about $30 million of deals in the barn year-to-date and guiding to about $120 million, I would say the remaining $90 million would probably be for -- from a modeling perspective, Brandon, just doing it pro rata throughout the year.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [41]

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Yes. I would say pro rata, yes.

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Operator [42]

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And I'm not showing any further questions at this time. I would now like to turn the call back Mr. Gladstone for any closing remarks.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [43]

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All right, thank you for calling in. You had a nice list of questions, we really appreciate it when you ask us questions and get us off track and let us talk about the business, so anyway we will see you in about 90 days. Thank you for calling and that's the end of this call.

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Operator [44]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.