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Edited Transcript of GOOD earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 Gladstone Commercial Corp Earnings Call

McLean Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Gladstone Commercial Corp earnings conference call or presentation Wednesday, July 31, 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

* Craig Gerald Kucera

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

* Henry Joseph Coffey

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

* John James Massocca

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

* 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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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [1]

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Hello, this is David Gladstone and we don't have an introduction because they're having some kind of fire at the place that's handling this but Sydney (PH) was on and she's very good at giving introductions and we always enjoy this time that we have with you guys and wish there were more times to talk like this.

We're going to start out with Michael LiCalsi, our General Counsel and Secretary to give the legal and regulatory matters concerning this call. Michael?

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Michael B. LiCalsi, Gladstone Commercial Corporation - General Counsel & Secretary [2]

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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. 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 you can find in our Forms 10-Q, 10-K and other documents that we file with the SEC.

Those can be found on our Website, specifically the Investor Relations page, www.gladstonecommercial.com. 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 adjusts FFO for certain other nonrecurring revenues and expenses. We believe this is a better indication of our operating results and allows better comparability of our period-over-period performance

Please take the opportunity to visit our Website, once again, gladstonecommercial.com, and sign up for email notification service. It can also be found on Facebook at keyword, the Gladstone Companies, and on Twitter. 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-K, both of which were issued yesterday for more detailed information. Again, you can find those on the Investor Relations page of our Website.

With that, I'll hand the presentation back over to Gladstone Commercial's President, Bob Cutlip. Bob?

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

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Thanks, Michael, and good morning everyone. During the second quarter we acquired a two-building, 383,000 square foot industrial portfolio in Ocala, Florida, acquired a 54,400 square foot industrial property in Columbus, Ohio, acquired a 676,000 square foot industrial property in Tifton, Georgia, executed a lease amendment to expand our anchor tenant in an Indianapolis office property resulting in a fully leased building, executed both a lease amendment with our existing tenant and a new lease in Salt Lake City, increasing the occupancy of the office property of 100%, held 16 meetings at REIT Week with investors, coverage analysts and lenders, refinanced $21.5 million in mortgage debt and approached our long-term leverage target with our book leverage totaling 45.6%.

Subsequent to the end of the quarter, we acquired a 78,500 square foot industrial property in Denton, Texas, recast the

company's line of credit and term loan and entered due diligence for the acquisition of a 211,000 square foot industrial property in Temple, Texas. As these activities reflect, our team had a very busy second quarter.

As noted on our first quarter call, we're beginning to enjoy the benefits of our teams focused efforts across all functions to improve operating results. This has been accomplished through three major activities; number one, we acquired accretive assets. During the period from 2012 through 2018, the average GAAP cap rate on acquisitions of approximately $105 million per year, was 8.7%. With mortgage debt placed at a 4.6% interest rate. Number two, we renewed expiring leases and we released vacant space. We maintained occupancy greater than 96% during the highest lease expiration period in company history. And number three, we refinanced maturing mortgages at lower leverage levels.

We've lowered our leverage from a high of 63% in 2013 to 45.6% as of the end of the second quarter. The results of these efforts equate to increasing cash flow year-after-year and an improved capital structure as we approach $1 billion in total assets and the outcome of the recent recast of our line of credit and term loan inclusive of adding additional syndicate partners further demonstrates the improvement in our operating position which we believe will create opportunities for growth. Mike is going to expand upon the characteristics of this recast shortly.

Our investment in asset management activities continued to generate positive momentum for our operations during the quarter. We acquired a 383,000 square foot two-building industrial portfolio along the I-75 corridor in Ocala, Florida. The transaction is a 20-year sale leaseback. The acquisition price was $19.1 million and the going in and GAAP cap rates are 7% and 7.7% respectively. We also acquired a 54,400 square foot industrial property in Columbus, Ohio. The acquisition price was $3.1 million, the going in and GAAP cap rates are 7.5% and 7.9% respectively and the remaining lease term is seven years.

The size of the land parcel enables us to nearly double the size of the building offering long-term flexibility for our tenant. We concluded the quarter by acquiring a 676,000 square foot industrial property in Tifton, Georgia. The acquisition price was $17.7 million and the going in and GAAP cap rates are 8.5% and 8.9% respectively; the remaining lease term, 8.5 years.

The tenant chose this location along the I-75 corridor due to its proximity to the Port at Jacksonville where it imports inventory and exports product to international customers. In addition, the tenant was able to get the property designated as a foreign trade zone to gain beneficial tax treatment of its operations and streamline the customs process. All of these characteristics serve to solidify their commitment to the property. Subsequent to quarter end, we acquired a 78,500 square foot industrial building in Denton, Texas. The acquisition price was $6.5 million and the going in and GAAP cap rates are 6.4% and 7.1% respectively. There are 12 years remaining on the existing lease and we did just close this property yesterday.

We have also entered due diligence for a 211,000 square foot industrial property along the I-35 corridor North of Austin, Texas. This transaction is expected to be structured as a 20-year sale leaseback. Our asset management team continued to deliver on renewal and releasing efforts. With our Midwest team expanding the anchor tenant in an Indianapolis office property by 9000 square feet to increase their position to 89% of the 87,000 square foot building. The tenant also extended their entire lease through 2031. This transaction also brought the total occupancy in the building to 100%. This success reinforces the viability of our anchored multitenant strategy that we initiated five years ago. Our Mountain West team leased 24,000 square feet in a Salt Lake City office property increasing the occupancy to 100%. The existing tenant expanded by 17,000 square feet and the balance of this space was leased to a third-party.

The tenant improvement costs for the entire 24,000 square feet totaled just $3.00 per square foot. Anticipating that many on the call are interested in lease expirations through 2020, I wanted to offer the teams thoughts for your information. During the remainder of 2019, we have three leases expiring representing $2.4 million of annual GAAP rent; $2.1 million of this total expires on December 31. One tenant has formally notified us that they are vacating at the end of the year and we are actively marketing the space and have prospects at the property which is located at Tulsa's inland port.

During 2020, we have eight leases expiring representing $8.8 million of annual rent. $6.9 million of this total expires the second half of the year. Two tenants have formally notified us that they are vacating the premise and we are marketing those spaces now; each of which have active prospects. We're in conversation with the balance of the tenants and are hopeful of positive incomes with renewals.

For GM, with a lease expiration date of August 31, 2020, we are pursuing two separate scenarios; they renew their lease or they vacate all or a portion of the space. They're not required to provide notice to us until December of this year. Therefore, we have begun to actively plan a re-lease scenario by preparing space design concept for a multitenant or full building user and are engaging the market to identify potential tenant prospects and to validate current market rents and tenant improvement requirements.

This information is going to be helpful for either renewal negotiations or a new lease scenario. I think it's interesting to note that our GAAP rent at the property of $14.50 per square foot compares favorably in the submarket with current space offerings in the low to mid-$20.00 per square foot on a triple net basis. As it relates to growth opportunities in our strategy, we have noted an increase in activity in 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, approximately $55 million is either in the letter of intent or due diligence stage and the balance is under initial review.

As noted previously, we have made a conscious effort to increase our industrial allocation. Our focus is in fully developed industrial parks with properties that are 50,000 to 300,000 square foot in size, 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, and our history represents, we can underwrite with our proven credit underwriting capabilities.

The larger properties are trading well above replacement costs in several markets and we do not believe that is an appropriate strategy for us. To show evidence of this strategy, from the last week of September through the end of June, just over nine months, we have acquired $95 million of properties. Eighty percent of this volume, or $76 million, were industrial properties and in the second quarter alone, our investment volume was $40 million, all of which are industrial. The properties are located in our target locations and the average GAAP cap rate over the nine-month acquisition period is 8.2%.

We believe this shift to increase in the industrial allocation of our portfolio will result in the long-term benefits of lowering tenant improvement costs, reducing the intensity of our property management activities and improving operating efficiencies.

So in summary, our second quarter activities continued our acquisition and leasing success, refinance maturing loans, issued equity through our ATM program and is positioning 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 [4]

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Good morning, I'll start by reviewing our operating results for the second 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 $0.38 per share for the second quarter and $0.77 and $0.78 per share respectively for the first half of 2019. This performance demonstrates the accretive yet prudent growth that the company has completed in recent years as well as 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% in the second quarter of 2019 as compared to the second quarter of 2018. As Bob mentioned, prior to 2018 core FFO hovered in the $1.50 to $1.54 per share range for the past number of years as we de-levered the balanced 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 as well as increasing the industrial allocation of the portfolio. Our second quarter results reflected an increase in total operating revenues to $28.2 million as compared to total operating expenses of $19.1 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 reduced our debt to gross assets by nearly 15% to 45.6% over the past five years to 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's 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'll 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 $55 million of debt over the past 24 months often with new long-term variable rate mortgages at interest rates equal to the one-month LIBOR plus a spread ranging from 2.5% to 2.75%.

We 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 an advanced or permanent debt placement, disposition or in an effort to provide more flexibility in the future by increasing the size of our total unencumbered assets.

As Bob mentioned, we amended extended and upsized our existing revolving credit facility in term loan on July 2. This highly efficient execution was well supported by not only our existing lending group but also with the additions of Goldman Sachs and Wells Fargo. We believe this continues to speak to the growth of the company and balance sheet enhancements that have been achieved as well as the long-term prospects for further prosperity with incremental bank backing going forward.

The combined facility was increased by $100 million to $260 million with the term loan being the majority of the facility at $160 million including a delayed draw component. The entire facility was extended for nearly two years with a ten-basis point rate improvement. All term loan borrowings continue to be hedged with LIBOR cap rates or rate caps in the 2.5% to 2.75% range.

Looking at our debt profile, and with the credit facility recast complete, 2019 loan maturities are very manageable with only $18 million coming due and a number of these loans having extension options. Further, we have less than $25 million in mortgages maturing in [each] of 2020 and 2021. We have continued to proactively manage and improve our liquidity in maturity profile over time. Depending on several factors, including the tenants credit, property type, location, terms of the 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 high 3% to mid-4% range. We continue to minimize our exposure to rising interest rates with over 90% 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 second quarter and net of issuance costs, we opportunistically raised $19.2 million through common stock sales. On a year-to-date basis, we raised an excess of $35 million. 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 $41 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're 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 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 increased by more than 15% since the beginning of 2016 to 56% as of June 30. Bob and I continue to be 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 over to David.

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David John Gladstone, Gladstone Commercial Corporation - Founder, Chairman & CEO [5]

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Thank you, Mike, that was a good report and good report from Bob and Michael LiCalsi as well so we've informed our shareholders very well. It's -- it was a very, very nice quarter; a lot of things going on. We acquired a portfolio in Ocala, Florida and got a nice industrial property in Columbus, Ohio and another one in Tifton, Georgia and I think all of the lease amendments that are going on now, Indianapolis for example, has resulted in a fully leased building and both of -- executing both of these lease amendments with our tenants and new leases in Salt Lake City, that means that one is now fully leased. We financed $21.5 million in mortgage debt and I think very important event happened this quarter. We have a new line of credit for the business now and the significance here is not so much the rates, it's the strength of liquidity that we have in place. As all of you know, when a recession hits, liquidity is the key topic so now we have some protection there.

We continue to believe that we have a good list of quality properties, good tenants, expected number of acquisitions over the next two to three quarters. We've reached a point which is a significant one that we've now reduced the leverage in the portfolio to a point that we don't need to use new money or money coming in to reduce our leverage further. So we're in a position to put all of our new equity into new tenants and new properties and I think that's a significant change in the marketplace.

Middle market businesses today, as many of you know, the tenants are doing fine. The tenants are paying their rents and the middle market of the United States is very strong. In July the Board voted to maintain a monthly distribution of twelve and a half cents per common share for July, August and September. That's an annual run rate of $1.50 per year. It's a very attractive rate for well managed REIT like ours. We believe an excellent investment for individuals that want monthly income.

I know you want to know when we're going to increase the distributions and I hope we can discuss a small increase in the next two board meetings. We've now paid 174 consecutive common stock cash distributions and we went through the past recession ten years ago without cutting any distributions. We want to maintain that record.

For the stock closing Wednesday at [2136], the distribution yields about 7%. Many REIT's are trading at much lower yields, the general trading area today for REIT's is about 4.45% and if we were trading at that, that would mean the stock would be at $33.00 per share. I think we've got a lot of room for expansion of the stock price to be closer to the REIT industry stock average.

Okay. Let's stop here and have some questions. If, operator, I don't know, Sydney, whether the fire alarm has stopped in your place, but if it has, would you come on and tell them how to ask 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 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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You guys were moving along at a -- from an acquisition play, very slow paced but then this quarter, you know, again a very nice pace, and then when you guys talk about the future, again, you know, what you guys have done subsequent to the quarter and what's in the pipeline. So I guess my question really revolves, kind of what -- what's changed kind of in the last 90 days that you guys are seeing in the marketplace?

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

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Well, the year started off, Barry, very slow. We could not find deals that made any sense at all. The buyer/seller disconnect was pretty strong. The second quarter -- beginning -- at the end of the first quarter into the beginning of the second quarter, we saw a lot more listings. I think it was just a delay from just the listing standpoint. As you saw there, you know, we -- we think we've got a pretty strong pipeline right now but it's still very competitive. I mean in reading from RCA, Real Capital Analytics, they -- they've indicated that during the first six months of this year the industrial listings are down compared to the same period last year but they still say that, you know, overall 2019 should be like 2018. So we're just cautiously encouraged that we're going to continue to see these deals. And, as you know, you know, our deals really run more from $5 million to $20 million, not the larger deals, we think we can compete so much better there in our markets. So hopefully this will continue.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Great, great. And then with the ATM and the pipeline of $250 million that you alluded to, is the ATM enough to keep you guys at a leverage-neutral basis?

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

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Yes, Barry. I think for the normal ones and twos and those acquisitions that are sub-$25 million to $30 million, the ATM is sufficient that I have visibility as they come down the pike to source the requisite equity to fund those deals, you know, to the extent we contemplate any acquisitions north of that level or if we have multiple acquisitions that hit within a 30 to 45-day window then, you know, subject to where the share price is, we would contemplate optionality via overnight or follow-on but, you know, we can course correct as we go in terms of whether that's fully ATM or bifurcated between ATM and any type of offering activity.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Got you. Perfect. I appreciate that, Mike. I'll yield the floor. Thanks so much.

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Operator [7]

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And our following 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 [8]

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Can you talk a little bit about the -- where for the 11 leases that you have expiring over the next 18 months, where the expiring rent is versus market and is there any of those leases that the triple net lease on an ending basis is going to be materially above market?

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

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Let me -- let me address the largest one first. GM, as I indicated, our current GAAP cap -- our current rent, GAAP rent, is $14.50 a square foot and deals have been done in the market in the mid-20s on a net basis and so I think, you know, we're -- we're still going to be waiting until we will hear from GM but in that case I think without a doubt we would have an uptick in the rental rate. When I think about the others, it -- it's interesting, this year so far, we have had a flat renewal. All of our renewals stayed at the same kind of GAAP rental rate. Last year we had a 6% increase over -- over the expiring rents so you know, if I had to -- if I had to handicap this, I would say that we're probably looking at no more than probably, let's say, minus three to plus 3% on the GAAP rent over the next 12 to 18 months. We do have one lease though that I think, and I will address that one, that's the one at the end of the year which is at that Tulsa inland port where I think we may have as much as an 8% to 10% reduction in the cash rent which will probably turn out to be, you know, a 3% to 4%, maybe 5%, reduction in the GAAP rent.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [10]

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Okay. And then how are you guys thinking about the -- the office portfolio as a potential source of capital going forward? I mean is it your intent at this point to, you know, sell selectively, sell in greater chunks, maintain it? I mean how should we be thinking about that and how are you guys sort of evaluating the potential of asset sales versus raises under the ATM?

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

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I think any -- any dispositions at this point are going to be really selective and they're going to be focused as much as we've talked in the past on single property markets that are more, let's say, tertiary in nature; whether it's office or industrial. We've not going to abandon the office market. You know, our intent is to increase the allocation to industrials so that we get actually a swap to where we are today, you know, we're at maybe 65/35 and we'd like to change that around and it's going to take us probably, you know, three years or so but I think in the markets where we attack and we acquire, which are in those fully developed submarkets, I think we'll be successful.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [12]

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Okay. And then lastly on the Austin industrial deal that you have under due diligence, I mean that's a pretty hot industrial market. I mean was this something that you guys sourced through relationships or something that's allowing you to get to a cap rate that makes sense for you guys versus what one of the bigger players or a private equity could wind up paying?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [13]

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It was -- it was through a broker relationship with Buzz Cooper who runs our South Central region and this is a manufacturing facility and it just so happens, and I think this goes back to our history of working with PE companies, we came to know this PE company quite well and even through our other sister funds and talking with our other people, we got very comfortable with the owner as well as with the tenant and the long-term viability of the deal. And so in manufacturing, it probably also moves a little bit towards a higher cap rate, fewer distribution plays.

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Operator [14]

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And our following question comes from Henry Coffey with Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [15]

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With that potential headwind in terms of the impact on GAAP rents that you discussed, what's -- what are the real drivers to getting FFO up over $0.40 which obviously would be a big part of being able to increase the dividend. Is it -- is it going to be more properties and better leverage and essentially accretive acquisitions? Are there aspects on the property management cost that you can better leverage and improve efficiency there or is there, you know, contrary to what you said, are the new assets going to have room for rental increases? What are the -- what's the equation that gets us over $0.40?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [16]

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I think it's accretive acquisitions just is what transpired during this quarter, you know, the acquisitions that we did equate to about $3.3 million in annual rent but a lot of that occurred near the end of the quarter and with the pipeline the way it's set up, and I think if interest rates continue to stay in, as Mike indicated, the high 3's to mid-4's on margin, and we can continue to do 8% to 8.3%, 8.4% GAAP rent, that's what's going to deliver the increased FFO per share. I think one of the -- one of the characteristics of the net lease business is when you're doing seven to ten-year leases you typically are going to be going through a recession and if you have contractual rent increases, as we do which is 2% to 3%, if you go through a recession, there's going to be some discount to the market rent in some markets but that's why we're focusing right now all of our acquisitions in growth markets because with growth markets you still have a much more stabilized situation. So I think the focus primarily is accretive acquisitions at our lower debt costs which I think improve our margins.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [17]

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Just one other question, when we read real capital analytics as well as we did actually did a virtual conference call on this with a couple of -- of -- commercial real estate broker originators, everybody sees industrial as just the hot, hot area. Lots of transaction, lots of activity, is that an opportunity for you all or do you see that more as a problem the supposed enthusiasm over industrial properties?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [18]

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We've made a commitment that our size range for industrial properties is going to be somewhere between 50,000 and 300,000 square feet and if you look at a lot of the national brokerage firms as to what has been the largest amount of transaction velocity, it has been in the under 200,000 square foot range. The big boxes have kind of slowed a bit and because of our ability to go into these developed submarkets whereby there's very limited land, most of these properties are 24 to 28-foot clear, they're rear-load, some of them are cross-dock and front-loader, but a lot of them are middle market tenants and that's where our strength plays and I think in reading a lot of research about what's going to happen with home delivery, I mean one research report indicated that home delivery could increase as much as 50% to 70% over the next three to four years. That only means more interest in that last mile type of industrial property and that's where we can play. We're not going to be playing in the 600 to a million square-footers for the most part. We're going to be playing in those more developed markets where we have the credit underwriting capability and now also the real estate knowledge to buy in the right locations with the right configurations. I -- I'm encouraged about it. I think we have a great long-term play in that size of the industrial market.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [19]

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Well, keep telling David you want to stay conservative on the dividend and, David, keep telling the guys you want to see them grow the FFO and we'll all succeed. So great quarter, thank you.

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Operator [20]

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And our following question comes from Craig Kucera with B. Riley FBR.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [21]

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I wanted to circle back to get a little more detail on the lease expirations that you're aware of over the next couple of years. Is the building in Tulsa, I guess, first, what is the square footage of the rent currently at that building and is that an office building or some other type of building?

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

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It's -- it's at the port there in Tulsa, it's an industrial building and we're working with the port authority there. In fact, we have two very strong prospects for the entire building. It's over 300,000 square feet. I don't have the market rent right now but I believe it's about -- it's north -- [Anthony], you might correct me, it's a little over $7.00 a square foot but since there are very, very few -- there's no other building at the port that has 100,000 square feet of availability and so that's encourage to Buzz Cooper who's leading that region as well as Perry Finney, who's his senior asset manager on the deal. So we're -- we're cautiously encouraged that we're going to be able to lease that. But, as I indicated, I think -- I think the rents could drop 5% to 10%. I mean I'm just being transparent about what I think the market conditions are.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [23]

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Got it. And who is the -- who is the current tenant there that is vacating?

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

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[Huck Wellman].

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [25]

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And just so I understand, based on your commentary on renewals, the lease expansions you had this quarter, were those effectively at -- at flat rents with where the existing tenants were at?

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

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Yes, yes. The new lease at Morgan Stanley that Morgan Stanley is building in Salt Lake City, that new lease is at about a dollar and a half below where the original rent was. What transpired is that, which is amazing, is that Morgan Stanley came to us, they had a right to terminate part of their lease. They vacated 24,000 square feet so we then put it on the market and then when we started getting walkthroughs in the building they came back and said that they wanted to take back 17,000 square feet.

And so they took their 17,000 square feet back and but then the other tenant, which was 6000 square feet, their rent is about $1.50 to $2.00 per square foot less on 6000 square feet.

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

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But I think the real takeaway there Craig is that 23,000 square feet did not participate in core FFO during the second quarter. So 17,000 of that is going back online and being released in the third quarter in July and then the remaining 6000 that Bob made mention to, they're occupying in September.

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

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Got it. And as far as the leases expiring next year, I think you mentioned two of -- two of eight you've already been notified excluding GM. Can you give us a sense of the size of those, you know, whether it's the rents or the square footage that you're aware of that's expiring next year?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [29]

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I can give you the building size. I can probably also give you the rent on -- they're both office buildings. The rent on a 90,000 square foot office building is $16.00 a square foot and then on a 74,000 square foot building the rent is $10.95.

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

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Okay. About…

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

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Yes. And we now…

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Michael J. Sodo, Gladstone Commercial Corporation - CFO [32]

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About [160,000].

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Robert G. Cutlip, Gladstone Commercial Corporation - President [33]

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Yes. So we're pretty encouraged. We're starting to see a number of prospects for both of these properties and they're both in Minneapolis.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [34]

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Right. And one more for me, I think we were looking for you guys to close on about $115 million of acquisitions for the year, you had a pretty nice step up here in the second quarter. Are you feeling like that's a pretty reasonable assumption for the year or is that, given the size of your pipeline, make you feel differently about what you might close in the second half of the year?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [35]

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No. I think, Mike, and I truly believe, we're going to be in the $110 million to $120 million range, maybe peaking at $125 million depending on what happens over the next 60 days. But I'm encouraged a bit about the listings. We'll just have to see how it plays out over the next 60 to 90 days.

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Operator [36]

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Our following question comes from the line of John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [37]

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Just one kind of quick follow-up on the tenant move-outs. What's kind of the maybe expected downtime on the 2019 move-outs that you already know about?

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

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On the 2019 or the 2020? 2019, the only -- the move-outs that we have are one that just took place on June 30 which is a 64,000 office property in Charlotte. And then the other move out is the one at the end of the year with that property in Tulsa which is the 300,000 square foot industrial property at the port.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [39]

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And just kind of -- as you look at that, maybe what do you think the downtime could potentially be on both of these assets?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [40]

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Well, on the -- on the office property, you know, it's -- if knew that I probably would be doing something else but it -- it -- I think on the office property, we're probably looking at a fourth quarter. We have two very strong prospects for the entire building and then one prospect for half of the building; that's the office property. And we're waiting on feedback from a proposal that we have sent on that property and then the property at the end of the year, Buzz Cooper and his team believes that we really will have limited, and maybe no downtime, on that property at the end of the year. Right now we're forecasting that that property will be leased during the first quarter of 2020.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [41]

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Okay. And then in terms of kind of maybe just the top-line rent number, I was a little surprised that rent only increased 60,000 quarter over quarter given the kind of amount of acquisition activity that you guys completed in both 1Q and 2Q and the timing particularly of the Ocala acquisition. Was this something that's maybe within that rent number that we're not seeing today because of the accounting changes that caused 2Q 2019 to be lower or versus run rate or 1Q 2019 to maybe be elevated versus run rate? You know, how should we view kind of that rent on a go-forward basis?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [42]

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Well, speaking specifically to the only $60,000 top-line increase, John, you know, taking your point obviously the Signature Brands acquisition in April, you know, materially contributed to it, you know, being a $380,000 two-property portfolio but that was offset by the interim contraction at Morgan Stanley, again, that's not participating in the top-line revenue at the end of February. So you know, on that total square footage, the 23,000 square foot lost for the quarter, call it $160,000 or $170,000 on rent, of rent, and again, that will come back on in Q3 in two different stages. That was also you know, the increase from Signature Brands was also mitigated by the disposition of our noncore single-story office building in Maitland, Florida that took place in the first quarter.

So I would say it was more so you know, specific to some acute events and one-time events but (inaudible) going away; appreciating now Morgan Stanley will be back, Signature Brands will continue to participate in the full quarter and the [Oreo] acquisition we closed on June 18 just didn't have enough time to participate in that top-line revenue but when we get into a full three-month cycle in Q3, that $17.5 million acquisition will materially participate in it with a quarterly rent of, call it, about $400,000.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [43]

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Very helpful. And then lastly, on the acquisition side of things, within kind of your industrial kind of targeted acquisitions, how are you looking at maybe manufacturing versus warehouse and distribution and are you seeing any kind of -- kind of additional cap rate you can get on manufacturing assets that might make them look relatively attractive?

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Robert G. Cutlip, Gladstone Commercial Corporation - President [44]

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Yes. I truly believe, John, that we are receiving, you know, a higher -- higher cap rate on the manufacturing and it's stickier real estate so we really like that because typically they have invested a lot of money into the property and with their workforce right around that area, it's unlikely for them to leave. So we -- you know, if I look at what we have acquired in the last nine months, over two-thirds of that is primarily manufacturing and I like that. I think it's -- in our business, if I were in the multitenant business where I'm value add, I might like distribution more but I think in our business where we are a long-term holder, we like the manufacturing play. And we -- we do. We will get -- we do get higher cap rates in manufacturing.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [45]

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Understood. Thank you, that's it for me.

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Operator [46]

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I'm showing no further questions at this time. I would 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 [47]

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Okay. Thank you all for tuning in. I hope you see what a good quarter we've put for this last quarter. I think the quarter ending September 30 will be another good quarter. So that's the end of this call, I'll turn it back to Sydney.

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Operator [48]

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