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Gladstone Commercial Corp (GOOD) Q4 2018 Earnings Conference Call Transcript

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Gladstone Commercial Corp  (NASDAQ: GOOD)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to the Gladstone Commercial Corporation's Fourth Quarter and Year End 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you may begin.

David Gladstone -- Chairman and Chief Executive Officer

Okay, thank you Ashley, that was a nice introduction and thank you all for calling in. We always enjoy this time with you on the phone and wish we had more time to talk with you, but this is the time that we report to you. Please come by and visit us, we're here in the Washington DC area in the suburb called McLean, Virginia and you have an open invitation to stop by and say hello.

Now, we'll hear from Michael LiCalsi. He is our General Counsel, Secretary, he is also the President of Gladstone Administration, which serves as the administrator to all the public funds and related companies. He will give you some announcements with regarding to some legal and regulatory matters. Michael?

Michael LiCalsi -- General Counsel and Secretary

Thanks, David and good morning. Today's report may include forward-looking statements under the Securities Act 1933, 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. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements including all risk factors in our Forms 10-Q, 10-K and other documents that we file with the SEC. You can find all these documents on our website, www.gladstonecommercial.com. Specifically the Investor Relations page or even on the SEC's website, which is www.sec.gov and we undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

And today we will discuss FFO, which is funds from operations, FFO is a non-GAAP accounting term defined as net income excluding the gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which is generally FFO adjusted for certain other 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. Please take the opportunity to visit our website once again gladstonecommercial.com and sign up for email notification service, you could also find us on Facebook keyword there is the Gladstone Companies and you could also find us on Twitter and our handle there is @gladstonecomps. And today's call is simply an overview of our results. So we ask that you review our press release and Form 10-K both issued yesterday for more detailed information, again those can be found on Investor Relations page of our website.

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

Robert Cutlip -- President

Thanks, Mike. Good morning, everyone. During the fourth quarter, we acquired two industrial properties totaling 218,000 square feet for $21.3 million in Detroit under a single UPREIT transaction, acquired an 87,000 square foot multi-storey office building in Orlando for $18.5 million, completed the expansion of our tenants parking facility in Springfield, Missouri, sold our non-core 150,000 square foot asset in South Hadley, Massachusetts, renewed a 60,000 square foot tenant whose lease was scheduled to expire in 2020 and participated in a non-deal road show in Portland, Oregon.

Subsequent to the end of the quarter, we acquired a 26,000 square foot industrial property in Philadelphia sub-market, sold a single-storey non-core office property in the Orlando sub-market, resulting in a capital gain and entered due diligence for the acquisition of an industrial property in Indianapolis. 2018 was a noteworthy year for the Company as our core FFO per share operating performance reflected an excellent increase over 2017 results. Mike will expand upon this accomplishment in a few minutes. We also made progress toward our stated objective to increase our industrial allocation, we exited three non-core properties, refinanced maturing mortgages, and continued our engagement of investors, lenders and analysts.

Specifically, we acquired five properties totaling $63 million in our target markets, 70% of which were industrial. Sold three non-core assets, two of which were in single property non-core markets, resulting in an overall capital gain, extended a tenants parking facility resulting in increased rental income, renewed two tenants whose leases were expiring, refinanced $16.2 million of maturing mortgages and conducted non-deal roadshows and held meetings throughout the year with 33 investors, lenders, and analysts.

We expect each of these items to have positive impacts on our core FFO per share, cash available for distribution, capital availability and leverage. And all team members across all of our functions were contributors to these achievements. As noted on our third quarter call we've been focused on improving our financial metrics since 2013, during a period of significant lease expirations and maturing mortgages. This activity has required considerable personnel resources, as well as sizable amounts of equity capital to fund tenant improvements, leasing commissions, paying operating expenses on vacant space and to lower our leverage. The good news is that our occupancy remained high throughout this period, we lowered our leverage from 63% to below 47%. We maintained FFO per share of $1.50 and up to $1.54 during this period and we are now on a path of earnings growth that commenced in 2018.

We also improved our cash payout ratio year-over-year. We were able to consistently improve our financial metrics because we acquired accretive assets each and every year in our target growth markets. The combination of the positive characteristics of those investments and the capital structure enhancements validate the strength of our growth trajectory and our balance sheet security and I think are worthy of some note.

From 2012 through 2018 the average annual acquisition volume has been approximately $104 million with lease terms ranging from 7 to 10 plus years and each of the leases with annual lease rate escalations. The average GAAP cap rate on these assets is currently 8.7% and the average interest rate on mortgage debt placed on these acquisitions was just over 4.5%. These characteristics equate to increasing cash flow year after year. We are also approaching the time period at which these leases, cash returns will be exceeding the straight line GAAP returns as the 7 year to 10 year leases are at or are approaching the inflection point from a straight-line rent perspective. This should continue to improve the payout ratio to the benefit of shareholders and our working capital position.

Mike's report on our 2018 operating results will reinforce this belief. Our investment and asset management activities continue to generate positive momentum for our operations during the quarter. We acquired two industrial properties in Detroit for $21.3 million, the two properties totaled 218,000 square feet with unexpired lease terms of 10 years and the going in and GAAP cap rates are estimated at 7.5% and 8% respectively. We acquired these buildings under an UPREIT format and issued operating partnership units or OP units for the equity component of the transaction. This was our first OP unit deal and it really provides us with further optimism that we may do more of these efficiently in the future and thereby maybe also providing incremental value and attractiveness to prospective sellers of real estate. We also acquired an 87,000 square foot multi-storey office property in Orlando for $18.5 million. The unexpired lease term 11 years and the going in and GAAP cap rates are 7.6% and 9.2% respectively.

We also completed the expansion of our Springfield, Missouri tenants parking facility by 160 spaces, increasing the parking ratio to approximately 10 spaces per thousand and we think solidifying their commitment to our property. We also increased the rental income at a 9% return on our invested capital for this project. Subsequent to quarter end, we acquired a 26,000 square foot industrial property in the Philadelphia sub-market for $2.7 million. This 15 year triple net sale leaseback transaction has an average cap rate of 8.8% and the property can be doubled in size thereby offering long-term flexibility for our tenants.

From an asset management perspective, we have begun renewal discussions with tenants whose leases are expiring in 2020. To that end, we renewed our 60,000 square foot office tenant in Hickory, North Carolina through March of 2025. Their lease had been scheduled to expire in March of 2020. The tenant improvement allowance was $6 per square foot, which is significantly below what I believe is typical for single-storey office properties and the GAAP rents increased by 5.6%. We continued our capital recycling efforts and sold two non-core assets in December and January, 150,000 square foot industrial property in South Hadley, Massachusetts and a class B single-storey office building in Orlando, Florida.

The gross proceeds were $9.2 million resulting in a net gain of $3.9 million and leverage internal rates of return of 12% and 24% respectively. The proceeds were used in part to fund our December office acquisition in Orlando, and our February industrial acquisition in the Philadelphia sub-market. The sale of these non-core assets is consistent with our ongoing efforts to continuously improve our portfolio. These assets were not strategic to our holdings, which consists of owning mission critical, releasable properties in secondary growth markets.

Market conditions are worthy of some comment. National research firms are reporting the overall investment sales volume for 2018 exceeded 2017's numbers. The critical characteristic however is that large portfolio and entity transactions were in excess of 2017 levels and are the major contributor to the higher volume. On the single property listings in sales category, we have noticed there an apparent buyer-seller disconnect in several markets, as evidenced by several properties returning to market after being under contract. And our experience with mortgage debt reflects that even with the recently reported slowdown by the Fed in raising the federal funds interest rate, long-term interest rates have risen approximately 50 basis points to 75 basis points over the past 12 months.

Now with that information in mind significant capital is still available on the sidelines with considerable interest in US real estate and the expectation is for the 2019 investment sales volume to be similar to that of 2018, 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.

As it relates to these growth opportunities and our strategy, we have noted an increase in activity and sales listings as of late. Our current pipeline of acquisition candidates is approximately $280 million in volume, representing 19 properties, 13 of which are industrial. Of this total $53 million is either in the letter of intent or due diligence state and the balance is under initial review.

As I've noted in the past, we're making a conscious effort to increase our industrial allocation. With a heated competition for larger properties, our focus is in fully developed industrial parks with properties that are 50,000 square feet to 300,000 square feet in size, 24 foot to 28 foot clear heights in the warehouse, ample trailer parking and occupied by middle market non-rated tenants. A tenant profile, which we believe we can underwrite with proven credit underwriting capabilities. The larger properties with higher clear heights and larger trailer parking capabilities are trading well above replacement costs in several markets and we do not believe that's an appropriate strategy for us.

Our 2018 acquisitions confirmed our focus on this strategy as the sizes range from 74,000 square feet to 157,000 square feet, all were developed in sub-markets of our targeted locations and the GAAP cap rates range from 7.6% to 9% which are very accretive for our shareholders.

So in summary, our fourth quarter and last 12 months activities continued our acquisition and leasing success, refinance 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.

Mike Sodo -- Chief Financial Officer

Good morning. I'll start by reviewing our operating results for the fourth quarter and full year of 2018. All per share numbers I reference are based on fully diluted weighted average common shares and units. FFO and core FFO available to common stockholders were $0.38 and $0.39 per share for the fourth quarter respectively. For the full year of 2018, FFO and core FFO available to common stockholders were $1.58 and $1.59 per share respectively.

On a core FFO basis at $1.59 per share for 2018 and nearly rounding upward to $1.60 per share, this equate to seven additional cents as compared to 2017, which is a 5% increase. This performance demonstrates the accretive yet prudent growth that the Company has completed in 2017 and '18 and as well as the performance of the in-place portfolio. In addition to these accretive deals, our same-store cash rent growth was 2.1% in 2018, as compared to 2017. As Bob mentioned, core FFO hovered in $1.50 to $1.54 range for the past few years as we de-levered the balance sheet and addressed lease rollover. 2018 results have now demonstrated our highest core FFO per share in the Company's history. No near-term meaningful lease expirations and only a fractional deleveraging to do, we're excited about the prospects of continuing to increase earnings going forward.

Our fourth quarter results reflected an increase in total operating revenues to $27.3 million, as compared to total operating expenses of $18.8 million for the period. It's also important to note that other expenses for the quarter included $131,000 of non-cash interest expense related to declines in mark-to-market valuations on certain of our interest rate hedges. While wholly non-cash in nature, this did adversely impact core FFO for the quarter.

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've reduced our debt to gross assets by over 10% to 46.8% since the beginning of 2016 through refinancing maturing debt and financing new acquisitions at lower leverage levels. We continue to expect to gradually decrease our leverage over the next 18 months to 24 months.

As we 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 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 have repaid $65 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 have placed interest rate caps on all new variable-rate loans.

We also added some of these properties to our unencumbered pool under our line of credit, whether in advance of permanent debt placement disposition or in an effort to provide more flexibility in the future by increasing the size of our total unencumbered assets. In order to improve our balance sheet, we have often put additional equity into our 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 $1 million annually.

Looking at our debt profile, 2019 loan maturities are very manageable with only $49 million coming due, and number of these loans have extension options. Further, we have less than $30 million of mortgages maturing in each of 2020 and '21. We have continued to proactively manage and improve our liquidity and maturity profile over time. Depending on several factors including the tenant's credit, property type, location, terms of lease, leverage and the amount and term of the loan, we're generally seeing all-in rates on refi's and new acquisition debt ranging from the mid to high 4% range.

We continue to minimize our exposure to rising interest rates with 91% of our existing debt being fixed rate or hedged to fixed through interest rate swaps and caps. We'd remained somewhat active in issuing our common stock using our ATM program. During the fourth quarter in net of issuance costs, we raised $6 million through common stock sales. While we continue to view the ATM as an extremely efficient way to raise equity, we continually keep our assessment of the relative value of our common stock as compared to trading prices in mind as we determine when to raise capital.

As of today we have $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 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.

It feels good about executing our business plan throughout 2019 and beyond as we continue to increase our high-quality asset base and continue to improve our metrics, including core FFO and leverage. We're focused on maintaining our high occupancy with strong credit at 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 15% since the beginning of 2016 to over 55% as of December 31st. Bob and I continue to be very active in meeting with current and potential institutional investors, portfolio managers, investment banks and the like. We look forward to further engaging with not only our existing investor base lenders and coverage analysts, but also establishing new relationships as the Company moves forward to its next chapter.

Now I'll turn the program back to David.

David Gladstone -- Chairman and Chief Executive Officer

All right. That was a good report, Mike, and certainly a good one from Bob Cutlip and Michael LiCalsi. We'd like to keep you guys informed it's a very nice quarter, the main news to report of course is that the quarter, February is -- this Company is in very good position to keep paying dividends. The Company also continues to grow its assets to the point that we will soon reach -- I'm hopeful soon $1 billion in assets. We continue to have promising list of potential quality properties and we're interested in acquiring during this calendar year 2019.

With an increase in the portfolio of properties comes greater diversification and that certainly makes for better and safer earnings. The middle market for businesses like the ones that the tenants that we're working with do fine today as the tenants are paying their rents, while I'm optimistic that our Company will be in good in the future Bob and his team continue to be cautious in their acquisitions as they've done in past years.

In January, the Board voted to maintain the monthly distribution of $0.125 per common share for January, February and March, and that's an annual runway of $1.50. This is a very attractive rate for a well managed REIT like ours, which we believe is an excellent investment for individuals that want monthly income.

Next meeting of the Board is late April, early May for the second quarter dividends. I know you all want to know when we're going to increase the distribution amount. And all I can say is, at this point that FFO increases as it has this year, it makes us look for opportunities for some small increases in dividends. But the warning is that, when we start the increase, it will be a very small amount, and begin to rise after that hopefully.

We now paid a 168 consecutive common stock cash distributions and we went through the recession without ever cutting our distributions. We don't want to hurt that record certainly because that's a great record to hold out that we went through the worst recession that we've seen in the last 50 years. And another point, because the real estate can be depreciated, we are able to shelter the income of the Company from taxes, taxpayers don't pay taxes on the dividends that are return of capital.

Return of capital was 76% of the common stock for 2018. This is a very tax-friendly stock and in my opinion a good one for personal accounts that are seeking income because of the lack of taxes that you have to pay on the income that's coming in. We do of course have to raise the cost of your stock so that when you sell it, you'd be in a little bit different situation. Our stock closed Wednesday at $20.39, the distribution yield is about 7.25%, that's a wonderful yield for this good company.

Just by way of analysis, the REITs generally trade at about 4.45% yield, that's a 190 different REITs and gosh, if we could get ourselves to 4.45%, that would be a $33 stock price. There's a lot of room for expansion in the stock price as we get stronger and stronger and become more like the REIT industry. I know analysts always give us some kind of push back, but by saying that we're externally managed, but most of the mutual funds in the world are externally managed don't seem to bother anybody on that side. And the high occupancy level is a testament to the underwriting skills of the team and our emphasis on the tenant first. We are a REIT that looks first at the tenant to make sure they can pay their rent and then of course we do the standard analysis of the real estate.

But I'll stop at this point and operator, if you'll come on please and we'll see how we can get some good questions from people that are on the phone.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Barry Oxford with DA Davidson. Your line is now open.

Barry Oxford -- DA Davidson -- Analyst

Great, thanks guys. Could you talk bigger picture what you're seeing from the acquisition market, as you look out as far as the number of properties that are coming up for sale versus what was happening in '18. I know you guys kind of commented, generally it should look roughly the same. But do you think there will be more property types that you guys target here in '19?

Robert Cutlip -- President

Great question, Barry. If I go back to '18, one of the statistics that really hit me between the eyes was Real Capital Analytics in October and November said that, the individual property listings, which is where we play, not on the mega deals, the big portfolios were down 20% and 26% October and November. So there was a dearth of times plus, as I've indicated, our team saw a number of properties come back to market after they had been placed under contract.

So if I now go fast forward to where we are right now, we've noticed a much, much larger number of listings coming to market. And kind of typical at the beginning of the year with people getting ready to really offload properties. But I am more encouraged that the individual property listings are going to be greater. And with us kind of gravitating into these developed industrial markets where we are and the team is doing a great job penetrating into what I would call the brokerage communities. We're not just talking to the senior brokers, our more junior professionals are talking at the lower end where, let's say, the smaller deals, the deals that are from, let's say $5 million to let's say $10 million to $15 million are going to be advertised that we may not have seen in the past.

So I'm very encouraged. I think that, as I indicated, when we have 19 properties in our pipeline, and 13 of them are industrial in our target markets, I'm encouraged. But you know, that as David has said, it's a conscious op, being consciously optimistic because we look at that credit and we look at that real estate. And if they both don't work, we move on.

Barry Oxford -- DA Davidson -- Analyst

Right, right. Great, great. Just kind of building on that, you guys did an OP unit transaction more of a kind of run-off opportunistic or look very -- I think we can use this as a source of capital kind of going forward in, that in 2019, I wouldn't be surprised if we did three or four deals using OP units.

Robert Cutlip -- President

Well, this was an opportunity because of the seller who had been a multi-generational developer owner in the Midwest. And our Midwest leader, Matt Tucker forged a good relationship with them and through his relationship and then discussions with Mike Sodo here recognized that it was a very efficient way for them to, let's say, move on the capital gains and not have to declare capital gains. And the silver lining for us on this is that, because of that relationship, we believe we're going to be able to pursue other opportunities with this group. And our intent is to expand that with other entities, let's say, across the Midwest and the south.

Mike, you want to add on that?

Mike Sodo -- Chief Financial Officer

Yeah, I think that's all right. I mean, Barry obviously all the larger REITs have OP programs. I've had that in my prior two lives. I think there will be opportunities. We have seen a rise and some in-bounds and then to Bob's point, I mean, with the tax advantageous, transactional nature of it as well as the 76% and we've been ranging between 60% and 76% from a return of capital perspective, there is some real appeal there from the seller community.

Barry Oxford -- DA Davidson -- Analyst

Great, great. Thanks. And last question (inaudible), cap rate, as you see them today versus a year ago, relatively flat or have we have -- have they drifted maybe even downward slightly?

Robert Cutlip -- President

Well in some of the industrial markets they drifted down a little. But I think overall, they are flat. We are seeing a little bit of expansion in some of the Midwest markets. But, you know, Barry, that it's still flat even and which means margins are squeezed even more than they were last year because of the increased cost of debt.

Barry Oxford -- DA Davidson -- Analyst

Right, right. Okay, great guys, thanks for the information and I'll yield (ph).

David Gladstone -- Chairman and Chief Executive Officer

Thanks, Barry.

Robert Cutlip -- President

Thanks, Barry.

Operator

Thank you. And our next question comes from the line of Rob Stevenson with Janney. Your line is now open.

Rob Stevenson -- Janney -- Analyst

Good morning guys.

Robert Cutlip -- President

Good morning.

Rob Stevenson -- Janney -- Analyst

Mike, the ATM sufficient to fund the current acquisition pipeline at this point you think?

Mike Sodo -- Chief Financial Officer

Yeah absolutely, I mean, the ATM program, Rob in 2017, I mean, you have two different stories here, you have 2017 and a more normalized borrowing rate environment and normalized cap rate environment where we are able to do $140 million worth of product. During that year, we raised $86 million of equity, $60 million was on the ATM side, $26 million was on an overnight side. In that circumstance, we were opportunistically able to acquire a $50 million deal in the suburbs of Orlando in July of '17. Those sized deals will generally require us to contemplate overnights, we have plenty of availability under our ATM program. It will be more so a question of timing of acquisitions on the calendar. To be fair, if two or three of real size come up in a short window, depending upon where our stock price is trading, they may be funded with debt in tandem with ATM proceeds and potentially in overnight.

Rob Stevenson -- Janney -- Analyst

Okay. How strongly is the demand for the preferred on the ATM program. It's been a while since there has been a major preferred issuance in the REIT space. Yours are mostly targeted retail, I believe, but can you talk about the demand there versus what you're seeing for the common?

Robert Cutlip -- President

I would say it's muted. I would say it's more so that there is not significant demand, first and foremost at the company level, with $145 million of preferred outstanding, but for some massive shift in our cost of capital or trade-off in our common, we don't have significant appetite to materially increase our preferreds as a percentage of our total asset base. You are right that, to the extent we wanted to issue preferred, it is more retail based, the preferred market as you know has been weak since January 1st of 2018. We haven't seen any massive shift on that, although perhaps with a more balanced tenure coming back down to where it sit today at 268, there could potentially be more appetite for preferred yield, but I think that's more a time will tell situation.

Rob Stevenson -- Janney -- Analyst

Okay. Bob, you've only have leases covering 3.6 of your revenue rolling this year, but you have 11 leases covering 10.3 of revenue rolling in 2020. Any known move-outs in either '19 or '20 at this point and any of your top five tenants in that 2020 move-outs, or the 2020 rollover?

Robert Cutlip -- President

I'll address the 2020 rollover. We have 11 leases expiring during that period. We sold one of those properties, that was the property at South Hadley, Massachusetts. One is already renewed. We do have two move-outs next year. One is in the middle of the year and the other is in the third quarter. We are already actively leasing -- trying to lease those properties, and the existing tenant who is relocating one down into the CBD, and both of them down into the CBD from suburban locations are really helping us with that releasing effort. Then we have all other seven in discussion.

We do have one, our GM lease in Austin, Buzz Cooper, who runs our South is already has been in conversation with them quite extensively and has met with them. So I think those other seven are going to be really strong candidates for renewal. But as you know, market conditions can change. But what's really great about our team is, we get way out in front of these with the tenants and because, we really consider this business to be in active relationship with the tenant, we are with them all the time, they know us and if -- that's why we know that the two move-outs are going to take place and we are actively trying to get those two properties released.

Rob Stevenson -- Janney -- Analyst

How material is the revenue percentage on those two move-outs?

Robert Cutlip -- President

I am going to have to get that to you. I don't have that with me right now, do you have that, Mike? I don't think so. I'll get that to you and we'll post it so that we -- so that everybody knows who's on the call.

Rob Stevenson -- Janney -- Analyst

Okay.

Robert Cutlip -- President

It's not material, it's not material. The big material one is the GM lease.

Rob Stevenson -- Janney -- Analyst

Okay. I just want to make sure it wasn't 5%, 6% or whatever or (multiple speakers) out of those two leases or anything like that.

Robert Cutlip -- President

Certainly below that Rob.

Rob Stevenson -- Janney -- Analyst

Okay. The investment grade in similar mix ticked down from -- to 64% this quarter from about 66% last quarter. Was that strategic or happenstance, how are you thinking about, you know, underwriting investment grade guys versus guys with strong financials who don't have a rating or a little bit more challenging to underwrite, but still have a strong business and strong financials, how is that, when you are acquiring new assets how is that sort of factoring into your mix?

Robert Cutlip -- President

Well, I mean, as David has indicated, our really first look at every one of our assets is what does the -- can a tenant pay in downtimes? And as I've told you in October, I think a number of people on the line here, I joined this Company in 2012 and what surprised me having come from Central Northern Ohio, there we had 17 properties there and all the tenants paid through the recession.

I remember my mom and dad telling me that everybody was closing their doors. And when I talk with David, David said hey, it's all about the credit, it's all about basic industries, they don't have to be public, but we do not do any deal without being able to see the financial statements so that we feel comfortable, whether it's public or whether it's private. And so, I am kind of neutral about whether it being investment grade or what we would consider to be non-rated, but investment grade equivalent because of the confidence I have in our ability to underwrite the credit.

Rob Stevenson -- Janney -- Analyst

Okay.

Robert Cutlip -- President

David, you want to add to that?

David Gladstone -- Chairman and Chief Executive Officer

Well, that's not much of a move when you move from 66% to 64% in terms of movement of a portfolio this big. So I'm not saying that we are getting higher risk, it just is a small move. But I think the interesting thing about this Company is that, we look at probability of default, just as you would as a lender and do that calculation as carefully as you can, in order to ensure ourselves that, if sales on that business that's in that location goes down by 20%, what are they going to do and how will that affect the location there in. A lot of these are mid-sized businesses that are in the middle market and the middle market today is relatively strong. So I'm feeling pretty good about that.

Rob Stevenson -- Janney -- Analyst

Okay. And then last one, David, you guys don't report an AFFO or a CAD or a FAD number. What metrics is the Board looking at in deciding whether or not to increase the dividend. What you guys think is the most important metric that would give you comfort in raising that?

David Gladstone -- Chairman and Chief Executive Officer

I just tried to beat up Bob as much as I can to have him increase the dividend by ever so small amount just to get on the track of increasing. So we're getting pretty close. I don't know if we'll make it this time, but we are working on it really hard. And I'd say, we're at a $1.59 for core now.

Robert Cutlip -- President

Correct.

David Gladstone -- Chairman and Chief Executive Officer

Yeah, so $1.59 is a good coverage ratio for small increase. So, we'll have to see what the Board will agree to when we have our next meeting.

Robert Cutlip -- President

Rob just to expand on that and appreciating we don't put out AFFO number on prior calls, some investors have pointed to our statement of cash flows and have done the analysis of distributions paid as compared to cash flow from operations, which would be similar to AFFO, it would not be spot on AFFO for sure, but if you compare 2017 to 2018, that ratio of distributions paid as compared to cash flow from operating activities in '17 was a 107%, in 2018 it was 98%.

So, I mean we're making real headway here across the board on disclosed core FFO as well as interpolated AFFO, in terms of improving those ratios to where we can get to that point where we will have those incremental dividend increases.

Rob Stevenson -- Janney -- Analyst

Okay. Thanks guys.

David Gladstone -- Chairman and Chief Executive Officer

Next question.

Operator

Thank you. And our next question comes from the line of Craig Kucera with B Riley FBR. Your line is now open.

Craig Kucera -- B. Riley FBR -- Analyst

Hey, good morning. I know last quarter you had $49 million pipeline and you closed the Orlando asset out of that, but did you have any other assets fall out of that pipeline or is it -- have you just added to what you already had at that point in time?

David Gladstone -- Chairman and Chief Executive Officer

We've added to it, we've added to it. We did lose one of those deals to another, let's say, competitor, but that's business, but we have added to it since then.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And at the -- I may have missed this, but at the existing pipeline you're discussing today that's under LOI or contract what is the range of cap rates there?

David Gladstone -- Chairman and Chief Executive Officer

Those ranges are anywhere from (inaudible) make sure -- average cap rates are going to range on those deals from the low sevens to the low eights.

Craig Kucera -- B. Riley FBR -- Analyst

Okay, great. And I know you discussed a large transaction in Minneapolis in the past, is that still -- is that still in the works. Is that part of your total $280 million pipeline or has that deal gotten away from you?

David Gladstone -- Chairman and Chief Executive Officer

That deal has gotten away from us. We still have a $280 million pipeline, but that deal Craig, we were considering on another UPREIT transaction. And for our shareholders, we just -- it just didn't make sense based on the pricing.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And as far as asset sales, I know you completed sale in the fourth quarter and earlier this year, what are your expectations for 2019 for asset sales?

Robert Cutlip -- President

Mike and I have talked about this pretty extensively and talked with my regional leaders who really have the best feel for if an asset has gotten to its highest and best value. I think we're looking at anywhere from maybe $10 million to $15 million additional this year, but the -- what we try to make sure we do is, let's look at those assets that are in these single property non-core markets, most of them, Craig, are anywhere from $3 million to $7 million or $8 million in size. And if we can redeploy that capital, we will do so. But from the standpoint of projections where Mike and I are looking, it's $10 million to $15 million additional this year.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And with the asset that you sold this quarter down in Maitland, you had a very good gain there. Do you have a sense of what the -- was it occupied and what the cap rate was?

Robert Cutlip -- President

I don't have the cap rate, I do have the levered return there. It was -- levered return was like 26% on our hold period. It was occupied by two tenants, one of the tenants was planning to move out, it's 50,000 square feet, so two 25,000 square foot tenant. I am not a big fan of single-storey office properties because of the cost to retenant them. And fortunately Brandon Flickinger who runs the South was able to find a user, ultimately a user because the two tenant, the other tenant who is in there is planning to move out the end of the year, I believe. That user who has other spaces there in the Maitland area came in and bought it and they're going to occupy it. So, that was one reason why I think, you know, when a user purchase an asset, you typically get a little bit better pricing than the typical third party buyer.

Craig Kucera -- B. Riley FBR -- Analyst

Right, right. And just circling back to the, I know you mentioned went into detail on the 2020 lease expirations, but as far as '19 I think you got five leases, are you handicapping sort of what you think you're going to renew versus where you see move-outs, are they all likely renewal candidates?

Robert Cutlip -- President

Again I apologize to Rob because I didn't cover 2019. We have two tenants moving out, one is moving out at the end of June. It's a 60,000 square foot office property in Charlotte. So it's a good, very good location, good suburb. We've had a number of really walk-throughs and are expecting an RFP on it. And then the other property, is at the Port of Catoosa in Tulsa. And they don't move out until December 31st. And we have three very, very strong prospects with the Port assisting us on that opportunity, Buzz Cooper runs our South has been all over it and we feel very confident about that one getting to closure before the end of the year, the others all will be renewing.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. Thanks for your time.

Robert Cutlip -- President

Thank you.

David Gladstone -- Chairman and Chief Executive Officer

Next question.

Operator

Thank you. And our next question comes from the line of Henry Coffey with Wedbush. Your line is now open.

Henry Coffey -- Wedbush Securities -- Analyst

Good morning everyone and thank you for taking my call. You're obviously a shade within $0.40 as I think we all noted. When you look at the most recent activity and anything that's sort of likely to close or has closed how many properties do you think away from $0.40 do you think we are?

Robert Cutlip -- President

That's pretty difficult, but I would say, one of the thing to think about Henry is, of the $63 million that we acquired last year, like $42 million to $44 million of that was in the last four months of the year. So we didn't get total let's say contribution by those. So coming out of the year, and starting the year, we really have that going directly to the bottom line. I mean, I think we have to consistently acquire, you know, approximately $30 million of assets on a quarterly basis at our accretive deal size, which is a 150 basis points over our cost of capital, which David and I stick to religiously.

So I think, if we achieve that and we are between let's say $25 million to $30 million a quarter, we're going to be there because one of the things I keep saying is that, remember what we bought from '13 to '18 is now passing that inflection point and our cash returns are exceeding 8.7% on those deals. So that's dropping directly to the bottom line. And it also fuels David's pressure on me to raise the dividend because our cash available for distribution is getting to be much better. So, I feel confident that the team with the pipeline we have now, unless something happens out in that marketplace geopolitically, we're going to be at that number, Mike and I both believe unless some hiccup occurs in the market and we suddenly take a drastic drop again in our stock price, because at that point, if it's not accretive, we don't buy. And that's why we didn't buy through the first really seven months to eight months of last year, because our stock price was lower and interest rates were rising on debt.

Mike Sodo -- Chief Financial Officer

Yeah numerically, Henry, it's hard just looking at the fourth quarter activity with $40 million of acquisitions. Those acquisitions contributed weighted less than a month and a half of the entire year. And they have an average GAAP cap rate of $8.14. So there is some real tail to that as we enter 2019.

Henry Coffey -- Wedbush Securities -- Analyst

Yeah, that's what I'm thinking, I mean that, maybe it's not March but it could be June. And just based on the math that you suggested, on the dividend front, I'm just looking at your 10-K and your FFO was $55.6 million and your distributions, which include the preferred I believe were $54.6 million. So I know David is impatient to see the dividend go higher, but a couple of more quarters of that kind of positive coverage would be encouraging and a good time to be up, I'm on the patient side, David, if you're collecting votes...

David Gladstone -- Chairman and Chief Executive Officer

You know me, Henry.

Henry Coffey -- Wedbush Securities -- Analyst

Yes, sir. That's why we're here. On the leverage issue, leverage has stayed about the same as a percentage of property cost, which is obviously not the perfect way to do the analysis. But what are your thoughts on an optimal mix. When you buy a property, you're going to put in X, Y, Z debt and how much equity or cash to make the transaction work?

Mike Sodo -- Chief Financial Officer

So I think the general way to think about that, appreciating we were at. And so, Henry, (inaudible) but obviously the reason we used book leverages, enterprise value can fluctuate so dramatically. When we look at closing the year-end at a common stock price of I think $17.91 or $17.92 and today trading north of $20. So book becomes a constant that we can control. So on a deal by deal basis, as we buy properties in 2019, I think the easiest math is to figure out that roughly it's going to be 50-50 debt to common equity in terms of proceeds to buy the properties themselves. That in tandem with about $3 million to $3.5 million of scheduled mortgage amortization per quarter keeps us very minorly deleveraging over time to the extent that there is more favorable treatment to our stock and the dividend yield, compresses more. You could see us be more active on the capital markets front. Our long-term target on a book debt to total assets as compared to the 46.8% today is deleveraging by an incremental, call it 2.5% to 4%.

Robert Cutlip -- President

And that's been our message pretty consistently for the last 2.5 years and I think that's been favorably received by the investment community.

Henry Coffey -- Wedbush Securities -- Analyst

And then in terms of the UPREIT program, do you have a sort of a set price that you're happy to issue UPREIT units at or is that a negotiated item or...

Mike Sodo -- Chief Financial Officer

I think it's negotiated item, I think we generally try to underwrite deals not only looking at where the common has traded over a near-term timeline, call it 30 days to 60 days of close, but also real time where we sit. So there's not an exact number that we peg, but within my commentary made mention that we're really sensitive to that. Consensus NAV, pre-call, I believe was just hovering at $20, management has its own perception of what NAV is. But there is a real interplay there in terms of what price at which we would not only issue OP units, but where we would issue on the ATM.

The nice thing on the OP side now is having one deal out there is that has been sprung to life, there are virtually no incremental cost to us to issue new OP units as compared to the fractional costs in terms of issuing common through our ATM program or the more material costs of contemplating an overnight.

Henry Coffey -- Wedbush Securities -- Analyst

Excellent, well thank you and the annual improvements are notable, so lots of good work done on your part.

Mike Sodo -- Chief Financial Officer

Appreciate it.

Robert Cutlip -- President

Thanks. Thanks, Craig.

David Gladstone -- Chairman and Chief Executive Officer

Any other questions?

Operator

And our next question comes from the line of a Merrill Ross with Boenning.

Merrill Ross -- Merrill Ross -- Analyst

Good morning. I wondered, looking at your 10-K I noted that there were two small lease contractions, middle market companies, one in Salt Lake and one in Champaign. And I wonder if you see this as signs of fraying, I'm sure you didn't underwrite for lease contractions. But they're willing to pay a fee to get a space kind of -- doesn't suggest good things about their run rate. So I wondered if you'd comment on that. And offsetting that, if you have upcoming opportunities for expansion, I know you mentioned it about the Philli asset that you just purchased. But is there anything really on the calendar?

Robert Cutlip -- President

Okay, as it relate to those two deals Merrill, yes, we have termination fees on both of those deals, the one in Salt Lake City and then the one that's at Champaign Urbana, the tenant actually pays through the end of this year, plus an additional nine months I believe termination fees, so we will be hot on releasing that space right away and we already have prospects for the Salt Lake City deal that reduced by about 20% I believe. And it's interesting the people who are local did not want to reduce the space, but the people in New York wanted to do it, so there is an argument going on and we'll see as we bring a prospect to the space as to whether or not the existing tenant wants to go ahead and retain the space. So they are still paying on that space right now.

And on -- we have no specific expansion being considered right now other than we are considering one at one of our assets next to the Mercedes-Benz assembly plant that Buzz Cooper who runs the South is working. He is in discussions with that tenant to expand that property. We can expand the property I think by about 20,000 square feet. But their request is much smaller than that, but it's to just improve their processes inside the building.

Merrill Ross -- Merrill Ross -- Analyst

Good. Thank you.

Michael LiCalsi -- General Counsel and Secretary

Thank you.

David Gladstone -- Chairman and Chief Executive Officer

Other question?

Operator

Thank you. (Operator Instructions) And our next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is now open.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Robert Cutlip -- President

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So touching on GM again, is the full 5% exposure in terms of your portfolio rents to GM just the Austin property?

Robert Cutlip -- President

That is correct.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And that's the Innovation Center building if I'm (multiple speakers)

Robert Cutlip -- President

That is -- that's one of the four innovation centers that they have in the country.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe just more for Mike, as you kind of look at -- look at maybe some color on how you're thinking about the debt market with regards to capped variable rate debt versus long-term fixed just kind of are spreads so wide, the long end of the curve versus treasuries that even with the interest rate curve kind of flattening, it continues to make sense to do kind of that variable rate debt with caps or do you maybe -- given potential concern to longing (ph) starts to push up a bit, you maybe kind of lock-in some long-term fixed. And what's kind of your strategy as you blend the mortgages here, particularly with the debt that needs to be refinanced in '19?

Mike Sodo -- Chief Financial Officer

Sure. So we're just looking for efficient execution, your commentary in terms of rate efficiency is spot on, that of the variable rate size and then capping those instruments has been much more efficient from a rate perspective, candidly from an appetite perspective, from a lending community perspective, there's a lot more appetite to do that type -- form of loan than doing long-term fixed rate. We'll continue to look at both in terms of duration of debt.

It's our job to continue to de-risk the portfolio with longer-dated paper, but also to be conscientious to not have certain blips within our maturity profile that will be years that could put incremental onus on us to refinance debt not knowing in out years what economic conditions would be. That's why for me as CFO, if look at '19 with only $49 million of debt coming due, 2020 and '21 combined I think having about $40 million coming due, we've got done a good job proactively staggering those maturities and we'll continue to do so.

John Massocca -- Ladenburg Thalmann -- Analyst

Makes sense. And then when I think about caps, I mean, just kind of roughly speaking what's maybe the typical ceiling from an interest rate perspective?

Robert Cutlip -- President

For us, almost all of our interest rate caps are at LIBOR at 275. So we have not done these to perform -- provide a style over substance and done them in hyper-inflation scenario. These are real meaningful caps that could potentially be in the money depending upon moves in LIBOR having it sit well north of two today.

David Gladstone -- Chairman and Chief Executive Officer

John, most of the caps are done by the lender that's doing the variable rate as well. They're just picking up some extra money.

John Massocca -- Ladenburg Thalmann -- Analyst

Makes sense.

David Gladstone -- Chairman and Chief Executive Officer

But you're right. You're right, it's really hard to get anything beyond five years from anybody these days. So the question is, where can you get long term cheap money and we don't know many places. We talked to the ones who will do it, but it's really hard to get a 10 year note some place.

John Massocca -- Ladenburg Thalmann -- Analyst

Now, I definitely heard the spreads have seem to move (inaudible) pretty flat. Makes sense. That's it from me. Thank you very much.

Robert Cutlip -- President

Thanks John.

Operator

Thank you. And ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to David Gladstone for any closing remarks.

David Gladstone -- Chairman and Chief Executive Officer

All right, thank you all for tuning in and we'll see you next quarter. That's the end of this.

Operator

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

Duration: 56 minutes

Call participants:

David Gladstone -- Chairman and Chief Executive Officer

Michael LiCalsi -- General Counsel and Secretary

Robert Cutlip -- President

Mike Sodo -- Chief Financial Officer

Barry Oxford -- DA Davidson -- Analyst

Rob Stevenson -- Janney -- Analyst

Craig Kucera -- B. Riley FBR -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Merrill Ross -- Merrill Ross -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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