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Edited Transcript of GOOD earnings conference call or presentation 31-Jul-18 12:30pm GMT

Q2 2018 Gladstone Commercial Corp Earnings Call

McLean Aug 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Gladstone Commercial Corp earnings conference call or presentation Tuesday, July 31, 2018 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 Travis

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

* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Specialty Finance

* 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 Corporation's Second Quarter Earnings Conference Call and webcast. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to 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, and welcome, everybody. We enjoy these times we have together with you on the phone and wish we had more time to talk with you. But if you're ever in this area, in the Washington, D.C. area, we're located in the suburb called McLean, Virginia, just outside Washington, D.C. So you have an open invitation to stop by and say hello and see the people that are working on all of your things, and we've got about 65 people here. We'll hear from Michael LiCalsi first, he's our General Counsel and Secretary and Michael is also the President of Gladstone Administration, which serves as the administrator to all the Gladstone public funds, especially this one. And he'll make a brief announcement regarding some legal and regulatory matters. 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 and the Securities Exchange Act of 1934, including those regarding our future performance, and these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. 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 and 10-K, and other documents that we filed with the SEC. Those can be found on our website, which is www.gladstonecommercial.com. Specifically, the Investor Relations page or on the SEC's website, which is www.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, of course, as required by law.

But today we will discuss FFO, which is funds from operations. The 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 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. Please sign up for our e-mail notification location service. You can also find us on Facebook. Keyword there is the Gladstone Companies. And we're also on Twitter, the handle there 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 of which were issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website.

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

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

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Thanks, Mike. Good morning, everyone. During the second quarter and through July, we entered into contract negotiations to acquire a 156,000 square-foot industrial property in the Columbus, Ohio market, agreed to lease modifications to construct additional parking for our tenant in Springfield, Missouri, entered negotiations with our industrial tenant in Vance, Alabama to expand a 127,000 square-foot facility by 15,000 square feet, and held 15 meetings at REIT Week with analysts, investors and lenders and completed a non-deal roadshow in Tampa and Orlando, Florida. The past 12 months have witnessed significant activity across our investment, asset management and capital raising functions resulting in improved operations. These events are noteworthy and include the following: we invested $130 million in 7 property acquisitions during this time frame at an average cap rate over the term of 8%. These acquisitions were in our growth markets of Philadelphia, Columbus, Ohio, Salt Lake City, Orlando, and as you know, a recent favorite of mine, the Mercedes-Benz assembly plant location in Vance, Alabama. And 80% of this acquisition volume is with rated, investment-grade tenants or tenants with investment-grade parent companies. We exited 3 noncore properties as part of our capital recycling program, completed the lease-up of an industrial property in Raleigh, North Carolina and an office property in Houston; renewed, extended our expanded the leases of 4 tenants at a GAAP rental rate per square foot increase of 7.6%, recast expanded and extended our revolver and term loan at lower cost, and refinanced over $30 million of maturing mortgages at lower leverage and lower interest rates. We expect each of these items to have positive impacts on our FFO per share, cash available for distribution, capital availability and leverage.

And one can also conclude that every team member across all of our functions were contributors to these achievements. As noted on our first quarter call, we have been focused on improving our financial metrics since 2013, during a period of significant lease expirations and over $200 million of mortgage maturities. This activity has required considerable personnel resources as well as significant amounts of equity capital to fund tenant improvements, leasing commissions, operating expenses on vacant space and, of course, to lower our leverage. The good news is that our occupancy remained high throughout this period. We lowered our leverage from 63% to 47%, and we improved our cash payout ratio year-over-year. We were able to improve upon that payout ratio and maintain $1.50 to $1.54 FFO per share because we acquired accretive assets each and every year while improving the credit profile of the balance sheet through significant deleveraging. The characteristics of those investments and debt really validate the strength of our growth trajectory and balance sheet security and are worthy of a few notes. Since the beginning of 2012, the average annual investment volume has been approximately $110 million with lease terms ranging from 7 to 10 plus years with annual lease rate escalations. The average GAAP cap rate on these assets is 8.7%. And during this period, we actually doubled the size of our portfolio. These characteristics equate to increasing cash flow year after year. We're also approaching the time period at which these leases' cash rents will be exceeding the straight-line GAAP rents 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 our shareholders and our working capital position. Looking at the second quarter of 2018, as compared to the second quarter of '17, same-store GAAP rents increased by 0.3%, whereas cash basis same-store rents increased by approximately 2%. Our investment and asset management activities continued to generate positive momentum for our operations. We are currently in final contract negotiations to acquire a 156,000 square-foot industrial property in the Columbus, Ohio market for $8.3 million. The going in and GAAP cap rates are estimated at 7.6% and 9.2% respectively. The lease term, 15 years. We are also in negotiations to expand our 127,000 square-foot industrial property in Vance, Alabama by approximately 15,000 square feet. As you may recall, we purchased this property in March. Our tenant is now planning to add a production line to their current operations, and we are fortunate to have acquired the property with expansion land, which creates benefits for our tenant and for our shareholders. We are also finalizing plans and just received jurisdictional approval to add approximately 160 additional car parking spaces for our tenant in Springfield, Missouri, thus solidifying their commitment to our property and increasing rental income.

Market conditions are worthy of some comment. The first 4 months of the year witnessed reduced listing opportunities compared to 2017 as reported and communicated to our team by our national broker relationships. National research firms reported investment sales volume was lower for net lease properties during the first quarter of 2018 versus the first quarter of 2017, and nominally higher for all property types. And there's an apparent buyer-seller disconnect in several markets. Green Street Advisors, the noted real estate advisory and research firm suggested that nominal cap rates in most property sectors with the exception of industrial, of course, appear to be moving up slowly. And our experience with debt reflects that interest rates have risen approximately 50 to 75 basis points over the past 12 months. Now with that information in my mind, significant capital is still available on the sidelines with considerable interest in U.S. real estate and the expectations are for 2018 investment sales volume to be similar to that in 2017, which is still really quite healthy for the industry. Our team will continue to monitor market conditions and actively investigate accretive opportunities that promote our measured growth strategy.

Before I address our current pipeline and the opportunities we are pursuing, a few comments about our operating characteristics over the next 18 months, which help set the stage for our execution strategy. We have no lease expirations for the balance of the year, and we are currently 99% occupied. For 2019, we have but 3.5% of forecasted rents expiring. In addition, our loan maturities for both 2018 and 2019 average just $26 million per year, a very manageable level. Therefore, we should have stable and growing cash flow on our same-store properties, and our capital will be available for pursuing growth of our portfolio. As it relates to the growth opportunities in our strategy, we have noted an increase in activity and sales listings as of late. Our current pipeline of acquisition candidates exceeds $300 million in volume, 19 properties, 11 of which are industrial. Of this total, $26 million is either in the letter of intent or due diligence stage and the balance is under initial review. The property locations of these candidates include Central Florida, Louisville, Philadelphia, Columbus, Ohio, Kansas City, Houston, Denver, Salt Lake City and Phoenix, all of which are target markets. We are today 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 50,000 to 300,000 square feet in size, 24 to 28-foot clear heights in the warehouse, ample trailer parking and occupied by middle-market non-rated tenants, a tenant profile that we believe we can underwrite with our proven credit underwriting capabilities. The larger properties with higher clear heights and larger trailer parking capabilities are trading well above replacement cost in several markets, and we do not believe that is an appropriate strategy for us.

So in summary, our second quarter and last 12 months activities continued our acquisition and leasing success, extended our credit facility, refinanced maturing loans 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 second quarter and for 6 months of the year. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were $0.40 per share for the second quarter. On a core FFO basis, this equates to 2 additional cents per share as compared to the second quarter of 2017, which is over a 5% increase. For the 6 months ended June 30, FFO and core FFO available to common stockholders were $0.80 per share and $0.81 per share respectively. On a core FFO basis, this equates to 6 additional cents per share compared to the first 6 months of 2017, which is over a 7% increase. This performance demonstrates the accretive yet prudent growth that the company had recently completed as well as the performance of the in-place portfolio. Coupled with no near-term meaningful lease expirations, this is anticipated to help us continue to increase profitability going forward. Our second quarter results reflected an increase in total operating revenues to $26.6 million as compared to total operating expenses of $17.5 million for the period.

Now let's 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 have reduced our debt-to-gross assets by 10% to under 47%, since the beginning of 2016 generally through refinancing, maturing debt and financing new acquisitions at lower leverage levels. We expect to continue to gradually decrease our leverage over the next 18 to 24 months. As we've discussed this with analysts, investors and lenders, we believe this will put us at the proper leverage level going forward long term. We continue to primarily use long-term mortgage debt to make acquisitions. As we grow through disciplined investments, we'll look to expand our own unsecured property pool with additional high-quality assets as well. Over time, this will increase our financing alternatives. As we manage our balance sheet, we've repaid $97.4 million of debt over the past 24 months, primarily 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 placed interest rate caps on all new variable rate mortgages. 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 in an effort to provide more flexibility in the future by increasing the size of our total unencumbered asset pool. In addition -- in order to improve our balance sheet, we have often put additional equity into the refinanced properties. As previously discussed, this has helped to significantly reduce leverage and generally enabled us to obtain improved interest rates on our mortgages, thereby reducing the related interest expense by -- in excess of $1.2 million annually. Looking at our debt profile, 2018 loan maturities are very manageable with only $11.6 million coming due after extending the maturing dates on 2 loans from 2018 to 2020 during the quarter, and 1 from 2018 to 2019 subsequent to quarter end.

Further, we have less than $40 million of mortgages maturing in any single year until 2022. We've 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 lease, leverage and the amount and term of the loan, we're 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 94% of our existing debt being fixed rate or hedged-to-fix through interest rate swaps and caps. We've remained somewhat active at issuing both our common stock and our series D preferred stock using our ATM programs. During the second quarter and net of issuance cost, we raised $2.9 million of common stock and $1.2 million of Series D preferred stock. While we continue to view the ATM as an extremely efficient way to raise equity, we entered the year with significant liquidity and continuing to 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 $3 million in cash and $52 million of availability under our line of credit. With our current availability and access to our ATM programs, we believe that we have enough liquidity 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 executing our business plan during the remainder of 2018, as we continue to increase our high-quality asset base and continue to improve our metrics, including 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, our deployment of capital will be heavily focused on high-quality real estate acquisitions with strong credit tenants. Institutional ownership of our stock has increased by over 15% since the beginning of 2016 to over 56% as of June 30.

Bob and I have been very active in meeting with the 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 over to David.

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

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Thank you, Mike, good report. That was a good one from Bob Cutlip and Michael LiCalsi. Both of them gave good reports and everything's clicking along here at the company. We've spent a lot of time working on our tenant base. As was mentioned, we do have some deals in the stream that are coming in. Hopefully, the one in Columbus, Ohio, will get closed. And we're doing a lot of lease modifications, one in Springfield, Missouri, that Bob mentioned, and also in Vance, Alabama. Folks, there's some pundits out there that are saying that many of the banks are going to have financial problems with all their real estate loans because they've been making such easy loans to people out there and in real estate world. In the last recession, we made every payment to our banks and this REIT didn't stop or cut its monthly cash distribution to stockholders during that recession. And we've not lowered our dividends since inception in 2003, that's quite a success story. So if there's another recession, I think you can count on us and expect us to go through any troubled times in a good way. We're in a good position today. We don't have many leases coming due through 2018 and less than 4% in 2019, so we expect low risk and low spending on new tenant improvements. We continue to refinance loans that are coming due and doing a good job of getting good rates or similar rates to what we have. We have been raising more preferred stock in the Series D, which is a 7% yield. We're able to put that to work in a way that comes in and helps us pay our common shareholders. We had some large institutions buying the preferred stock in the past. We have interest in our company, and it's not very long, I believe before they will be buying more of the common stock. Many of the larger REITs are pretty much owned by the institutional marketplace. Continue to have a promising list of potential quality properties that we're interested in acquiring. We'll hit some in '18 and '19 and increase the portfolio of properties that comes to greater diversification and diversification is good for us all.

Much of the industrial base and business today that rents industrial and office properties like the ones that we have remain very steady and most of them are paying their rents. As you know, we have a terrific credit underwriting group that underwrites our tenants. And considering the track record of our tenants paying their rents, I think the future is bright. It is a strong underwriting team that we have here that kept the company out and more than 96% occupied for the -- since 2003, and today, we're at 99%. I'm very optimistic that our company will be fine in the future. Bob and his team will continue to be cautious in their acquisitions. And as you all know, in July, the board voted to maintain the monthly distribution of $0.125 per July, August and September, and that's an annual rate of $1.50 per year. This is a very attractive rate for a well-managed REIT like ours. I think we've got excellent investments and the individuals that are running it are just superb. And yes, I know, you all want to know when we're going to increase the distribution and I hope you all noticed that we were about $0.40 a share in earnings, and we paid out $0.375, so -- and getting closer and closer to making a decision. And I think as the FFO increases, we'll have to look at making some small increases in the dividend. I feel like we have a solid prospect for growing FFO now and much of the balance sheet is improved and expirations are behind us. We've now paid 162 consecutive common stock cash distributions, and we went through the recession without cutting any of those. Because real estate can be depreciated, we're able to shelter the income of the company, and return of capital was about 60% last year, not sure where we'll come out this year, but this is a very tax-friendly stock, in my opinion, for those who want to put it in their personal account, especially if you're seeking income that's tax free. This return of capital is mainly due to the depreciation of real estate and other items and has caused earnings to remain low after you put in the depreciation, and that's why we talk about FFO and core FFO because this is adding back the real estate depreciation. Depreciation of a building has always been a bit of a fiction in the sense that the depreciation period doesn't do much to the building and it's still standing at the end of the depreciation period.

So if you own the stock in a nonretirement account as opposed to having it in an IRA or retirement plan, you don't pay the tax on that part that's sheltered by the depreciation. However, you are supposed to increase your capital base and -- reduce your capital base so that you have to pay a higher tax when the day comes that you want to sell the stock. But as we all know, no one out there is going to sell the stock in this great company. Currently, we have a price of about 1946, the distribution yield on the stock is now 7.7%. Many of the REITs that are trading are at much lower yields and -- trading in the 5% or 6% range, so if our stock was trading there, the stock would be about $27 per share. That was noted by Henry Coffey at Wedbush. He just picked up a pencil and wrote a nice report on us. Henry knows us from our business development company area. Henry follows those, and he knows how we underwrite those loans and investments we make. And I'm assuming he is looking at our portfolio of tenants and saying, we must be doing a good job there. My guess is that as investors continue to discover this company, they'll buy more shares and the price of the stock will increase and the yield will go down to where the other REITs like us are. Turnover and forecast for the next 4 years, I think, is going to be a wonderful track record. So I know a lot of people are betting on that. And I want to touch on one thing that I hit on every time because I've got some new data. You always are hammering at us about external management. There's a study out that looks at G&A of REITs in the U.S. and of the 189 REITs, we're almost the lowest in terms of G&A compared to total revenues. We're number 11 on the list. So we are the 11th lowest cost of operating when you look at G&A of all the 189 REITs out there. Also, G&A compared to average assets, we are #6, meaning, we are the sixth lowest cost to operate for G&A of all the 189 REITs out there. So I think that should put to bed this discussion about being externally managed. Yes, in the past there were some bad boys there, but we've demonstrated we're not part of that crowd. And we've been decreasing our leverage. We're currently, I don't know, down around, what are we at now? 40...

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Unidentified Company Representative, [7]

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Just under 47 on a book base.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [8]

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47%. We've been putting up equity, we refinance our mortgages, but we're near the end of that now. We want to use the equity to lower the debt amount of course, but our current level of leverage is quite conservative compared to the risk if you look at our portfolio. So regarding our debt, I want to make sure everyone knows that the mortgages we have are exculpatory. That means that most of the lenders do not have a shot at our balance sheet. They just have to look to their property. So not only is our company strong in terms of debt ratio to equity, we have a safety feature for our stockholders.

Well now let's have the operator come on and ask some questions, and we'll try to answer those questions for everyone out there.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, we'll come 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 [2]

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Real quick, when you look at the acquisitions out there and given the fact that you don't have many leases expiring in '18 or in 2019, would you guys look at doing more kind of value-added opportunities where a building might be, let's say, 50% leased and then you come in and you kind of add value and maybe have a 6 or 6.5 going in, but it equivalates to 9, 9.5 once you lease it up, something like that?

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

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Very good question. We are a net lease operator. We don't want to change that model. What we have done that is a bit of a variation, is we have done anchored multi-tenant properties, both in the industrial and the office side. And what we would typically do, we would buy the property, and it could be as low as 90% occupied, but we're buying it on the cash in place. But for us to go below 90% really doesn't make sense, because we don't want to send a signal that we're not a measured growth, slow-growing year-over-year model for our investors.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [4]

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Next question, please.

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Operator [5]

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Our next 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 [6]

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A couple from me. David, in your comments about the dividend, given the trends that the earnings are moving to now, how is the board thinking about that? Is borrowing anything unforeseen? Is a modest dividend increase on the table for '19? Is that the sort of thought process at this point?

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [7]

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Yes.

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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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One for you, Bob. In terms of the pipeline on the acquisition side, what's the sort of mix today roughly between industrial and office assets?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [9]

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I would say, as I indicated on the call, we're probably -- we're seeing more industrial, but I must admit these are not the large boxes. When I look through our pipeline, really over the last several days, we're ranging anywhere from about 40,000 square feet to about 200,000 square feet. They're rear loaders that are probably 300 feet deep, 24 to 28 feet clear, good trailer courts, but they're not the 500 million to million square footers, because so many of those are really trading at well above replacement cost. Last week, I was in Salt Lake City with our west region leader, Andrew White, and one of his broker relationships and friends got us, put us together at like 8 properties that we went and toured and most of those are exactly what I'm talking about. They're rear load facilities. They're under 300,000 square feet. They're at a, let's say, a margin and a cap rate where we can compete at this time. Quite frankly, we're not going to be competing in the 5s. We're going to be competing, as you know, in the mid-to-high 6s and low 7s. That's where we can do damage, and we can be accretive.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [10]

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Michael, what's the ratio now of industrial to office in our portfolio?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [11]

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It's 32% industrial and...

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [12]

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High level of 2/3, 1/3, I mean, candidly, it's about 5% of retail and medical office.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [13]

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Yes, good number. I'd like to see more industrial, too.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [14]

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So we're seeing more?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [15]

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We are seeing more, Rob. And that's through the effort of recognizing that we're going to be staying in our target markets, but they're going to be smaller properties just to be perfectly honest.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [16]

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Okay. Given your sort of focus on investor grade, does that really keep you out of the flex space like the PSB type of assets?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [17]

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No. I mean we -- I don't like flex space. I will tell you that right now, because the releasing cost on flex space is really, really very high. I lived that in the prior life. So we're going to stay with industrial properties that are probably 10% to 15% office, no more. But we're going to go with middle-market non-rated tenants. The tenant that we've underwritten in Columbus just fits this perfectly. They've been in business for many, many years. This is their corporate headquarters. They have 29 production lines in the building, 15-year lease. I mean, we're going to see, I think, more and more of these as the -- the corporate tax change comes into effect, and people continue to grow their businesses. And that's where we play better and because of the history of never been -- never being below 96% occupied and the ability to underwrite the credit, we can go into those markets with that tenant profile and be successful long-term.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [18]

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Okay. And then last one from me. Can you talk a little bit about the market for the preferred ATM? How much of that stuff could you or would you issue? How -- is it you guys that's sort of limiting the quarterly issuance of that? Or is it the market? And then what, Mike, do you might think about in terms of the max that you would want to see preferred be in terms of the cap structure?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [19]

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Sure, appreciate that, Rob. So the Series D trades in the neighborhood of 25, 47 today. It's an implied 6.9%. Dividend yield, I would say, we are the gating item in terms of issuing that in a meaningful way. The $2.2 million we've done year-to-date certainly could have been a more meaningful number in 2017. We issued approximately $14 million of the Series D. As I look at from an aggregate and capital structure perspective, preferreds make up about 12% of our total assets today. That is an overweight, I would say, as compared to the peer set, which would be typically more in the 5% to 10% range. So we continue look at the Series D as an indicator as to where we could do a new issue of preferreds. As we said in the past, our appetite is fully in a material way to do a preferred for preferred trade if there ever was an attractive dividend yield on that. As you know, our Series A and Series B, which make up $56 million are perpetual vehicles but are redeemable at our election given 30 days' notice. So we'll continue to watch that. Obviously, there's headwinds there within the preferred market during 2018 as well as with having a 10-year at 296. So I think from an expectation perspective, we will issue some Series D on the margin. Our hope and aspiration is to continue to improve shareholder value in the common, thereby driving down that piece of the cap stack's cost of capital.

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Operator [20]

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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 Specialty Finance [21]

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I was wondering if you could kind of run through the, well I guess I'd call it, the portfolio roll forward, I know you gave some numbers, I just didn't get them all down, in terms of property acquisitions, property sales and how that affected balances?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [22]

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Henry, you're talking about, let's say, the last 12 months and then going forward, let's say, the next...

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [23]

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No just -- well, both for the last 12 months and going forward, but also just for the specifics of the first 6 months of the year.

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Robert G. Cutlip, Gladstone Commercial Corporation - President [24]

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Okay. Well, over the past 12 months, we acquired like $130 million worth of properties at about an 8% cap rate. Those were office and industrial. Of those, 80% of the tenants were investment grade or their parents are investment grade. We've only acquired like [$14.3] million, [$14.4] million this year and that was an industrial property in Alabama. That's -- we have -- already have another property there next to the Mercedes-Benz assembly plant. And quite frankly, the listing volume for the first quarter is very slow. It has picked up quite a bit now. And so -- now I feel much more confident and comfortable that we're going to be closing some transactions over the next 90 to 120 days. That includes both industrial and office properties. If I had to tell you, and I will tell you the markets that I think we could be very successful in, it's going to be Columbus, Ohio, it's going to be Philadelphia, it's going to be Central Florida, it's going to be potentially Denver where I think we can operate, and maybe even Phoenix industrial on a smaller square footage basis, under 100,000 square feet. So I see that as probably the strongest markets for us going forward. We will not be very successful, in my opinion, in Chicago, Dallas-Ft. Worth, Atlanta; the cap rates there are in the 5s. And I think that is just too low for us to -- well, it doesn't make sense, it's not accretive for us at our cost of capital. And we think we can be successful in these secondary markets that we think are growth markets. And we think long term, they're even going to be better for us from the standpoint of protecting our shareholders and growing on a measured basis.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [25]

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So in terms of new investments for every, say, $100 of new property put on the books, can you give us some sense of what the ideal way to fund that would be? How much is from sales of existing properties? How much would be some form of mortgage or term debt? And how much actual new equity would you have to put into the transaction?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [26]

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I'll tell you what, let me start and then I'll will turn it over to Mike because Mike can add to that as well. We, over the past 3 or 4 years, were using capital recycling. We were selling assets that really were what we considered to be long -- noncore long term. But that really has fallen off. I think if I look forward over the next 24 months, it will be probably well under $20 million per year that we would be selling and redeploying. And the reason for that, Henry, is, we've already being through renewals with most of these tenants. They're excellent, they got excellent balance sheets. Their credit is great. Their payments are very good. They don't want to leave their mission critical facilities. And so, I'm just as happy to keep those tenants in our portfolio. And I'll turn it over to Mike to talk about how we are, in fact, underwriting most of our acquisitions now.

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

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Yes, Henry from that -- to that end, from a leverage perspective, I would say, using plus or minus long-term mortgage being a 50% component of capital required to buy properties and the other piece of it, by and large, will be sourced through a common equity. That is generically how we underwrite. As we speak to leverage targets, we are at 46.8% book leverage. And again, we use that as our indicator because on an enterprise value basis, you're subject to fluctuations and stock volatility. Our long-term target on that is 2 to 4 points below where we sit today. So by originating deals that plus or minus 50% leverage as well as having scheduled amortization on the -- in excess of $400 million of mortgage debt in place, we think, we can accomplish our target in that 18 to 24-month time period.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [28]

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And then on the dividend issue. I know a dividend increase is always a great thing, but what is the thought process in terms of making sure your FFO gets way ahead of what the dividend is? And perhaps that results in a more attractive or -- well less attractive, I guess -- a lower yield and a higher share price. I mean, there are 2 different levers there, obviously.

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

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Just giving you the benefit of -- we don't disclose the FFO, but we're very cognizant of cash available for distribution. If you saw to that off of our statement of cash flow looking at operating activity cash flow as compared to dividends paid, in 2017, the first 6 months of 2017, that quantified to 113% payout ratio. In the first quarter of 2018, that quantified to approximately 107% payout ratio. In the second quarter of 2018, I believe it's 103% of the payout ratio. So as we're looking at this, we expect to be on a run-rate basis by the end of '18 on a cash available for distribution perspective. All things remaining constant and without any adverse macro events, fully covering the dividends. So appreciating there's been substantial work done by the team in the last 5 years to really meaningfully improve that ratio, we want to get to a point where we can actually be in the 90s on the payout ratio basis. We have 2 to 4% of incremental growth in earnings on an annual basis, and we can show rateable dividend increases whereby the difference between the dividend increase and the increase in earnings is there to support lease roll, CapEx and TI requirements.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [30]

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And If I go, obviously...

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Robert G. Cutlip, Gladstone Commercial Corporation - President [31]

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If I could add one more comment to that, Henry. As I indicated on the call, from 2013 to 2017, we actually doubled the size of the portfolio and I think the cap rate was at 8.7% and with those being 7 to 10-year leases, what I'm very encouraged about is that now we're hitting the inflection point on each of those leases that the cash rent is going to be greater than the GAAP rent. And that goes directly to the bottom line and continues to add to what Mike was talking about, which is improved cash position and that's what we're looking for.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [32]

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We have another question?

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Operator [33]

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(Operator Instructions) Our next question comes from Brandon Travis with Ladenburg Thalmann.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [34]

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Brandon, are you there? We can hear you. Go ahead.

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Brandon Travis, Ladenburg Thalmann & Co. Inc., Research Division - Research Analyst [35]

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Can you hear me? Is your ATM issuance weighted towards the back half of the quarter, just given how pricings changed?

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [36]

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Yes, exactly. The vast majority of the common issuance happen in June.

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Brandon Travis, Ladenburg Thalmann & Co. Inc., Research Division - Research Analyst [37]

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Can you provide update on South Hadley property held-for-sale?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [38]

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Yes, that's still held for sale. We have one prospect for that property at this point, that is it. They are, of course, Yankee is in there, and they have been doing 1-year renewals year after year, but we think it's in our best interest to just go ahead and sell that property and redeploy the capital.

All right. Do we have another question?

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Operator [39]

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I'm not showing any other questions at this time. I'd now like to turn the call back to David Gladstone for closing remarks.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [40]

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All right. Thank you all for your questions. They were good ones this time. Hope next time we get some more good ones, and that's the end of this conference call.

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Operator [41]

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