Gladstone Commercial Corp (GOOD) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Commercial Corporation Second Quarter Ending June 30, 2020, Earnings Call and Webcast (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

Well, thank you, Sarah. That was a nice introduction, and thank you all for calling in. It's an interesting time to talk about real estate, but we still enjoy these times we have with you on the phone and wish we had more time to talk with you and certainly enjoy the questions at the end.

Now we'll hear from Michael LiCalsi. He's our General Counsel and Secretary. He'll give us legal and regulatory matters concerning the call and the report that we've given in yesterday. Michael?

Thanks, David, and good morning.

Today's report may include forward-looking statements under the Securities Act of 1933, 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 the risk factors listed in our forms 10-Q and 10-K and other documents we file with the SEC. You can find them on our website, which is www.gladstonecommercial.com or on the SEC's website at www.sec.gov. Now the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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 FFO as adjusted for comparability; and core FFO, which are generally FFO adjusted for certain other nonrecurring revenue and expenses. We believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance.

Please take the opportunity to visit our website, once again, gladstonecommercial.com. Sign up for our e-mail notification service. You can also find us on Facebook. The keyword there is The Gladstone Companies. We even have our own Twitter handle, and that's @GladstoneComps.

Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, those can be found on the Investor Relations page of our website.

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

Thank you, Michael. Good morning, everyone. During the second quarter, we executed a lease amendment to extend a 59,000 square foot office tenant in Raleigh, North Carolina through 2025; extended a 22,000 square foot industrial tenant in Raleigh through 2021; extended a 5,000 square foot office tenant in Minneapolis through 2023; executed a lease to expand a tenant by 17,000 square feet in Columbus, Ohio with a lease expiration date of December 2025; extended a 26,000 square foot office tenant in Green Tree, Pennsylvania through 2031; and collected 98% of scheduled rental income for the months of April, May and June.

Subsequent to quarter end, we executed a lease amendment to extend a 42,000 square foot office tenant in Richmond through 2026; sold our 347,000 square foot industrial property in Maple Heights, Ohio for $11.4 million, resulting in a net capital gain of $1.2 million; and collected 99% of scheduled rental income in July.

As noted on our first quarter call, our investment strategy is emphasizing an increase in our portfolio's industrial allocation, which we believe will improve our property operating efficiencies, reduce capital expenditure levels and potentially result in improved valuation over time. From January 2019 through June of 2020, our investment volume was $201 million, all of which were industrial properties, providing further evidence of this commitment. Our industrial allocation has increased from 33% in January 2019 to 43% today with an objective of achieving a 60% allocation within the next 18 to 24 months.

During the second quarter, our investment opportunities were limited due to the effects of COVID-19. We didn't acquire any properties during the quarter. However, sales listings have, in fact, increased in numbers recently. And at this time, we have a 153,000 square foot industrial property in the I-70 corridor of Indianapolis that's in the due diligence process. The total cost is approximately $10.6 million with a 10-year remaining lease term and a GAAP cap rate of 8%. The expected closing date, September 1.

Our asset management team continued to deliver on improving our same-store operations. During the second quarter, the team executed 4 lease extensions, 3 office properties and 1 industrial property totaling approximately 113,000 square feet. These extensions required no tenant improvements.

The team also expanded our anchor tenant by 17,000 square feet in a Columbus, Ohio office property, and they now occupy the entire building, reconfirming the objective of our anchored multi-tenant program. And subsequent to the end of the quarter, our 42,000 square foot office tenant in Richmond, Virginia extended their lease through 2026 with no tenant improvement requirements.

In combination, all of these transactions increased the straight-line rent associated with these properties by approximately 14% over the extended lease terms. And reflecting on the first 6 months of the year, the team completed 8 leasing transactions, 7 of which were office properties, totaling 362,000 square feet with a weighted average lease term of 6.6 years. The weighted average straight-line rent increased by 5%, and the overall tenant improvement allowance was approximately $6 per square foot, which in our opinion, is a very favorable number with a larger percentage of office versus industrial transactions that were completed.

The onset of the COVID-19 virus has required increased emphasis on portfolio management. The company has successfully implemented a work-from-home arrangement for our employees. However, our active tenant engagement program continues and is delivering positive results. With an emphasis on tenant credit, we have always engaged our tenants quarterly to discuss their recent financial performance, and this strategy has established strong ties with each of them.

During this pandemic, we have appropriately increased our connections with our tenants. Some interesting and favorable characteristics of our tenant profile were included in our business update press releases. 84% of tenant revenue is from tenants who, on average, contribute 1% or less of company revenue. And the hospitality, oil and gas and airline industries only comprise 2.5% of annual revenue.

The challenges arising as a result of the virus prompted us to immediately connect with all of our tenants at the onset, which we have completed and will continue to do. There have been, and we expect there will be, requests from tenants for rent deferral, and we will address them as we are notified by the respective tenant. Our strategy is to offer rent deferral, not rent abatement; to limit the deferral to a 1- to 3-month period, if at all possible; to have tenants continue to pay a portion of their rent during the deferral period; and to require repayment of the deferred rent over a 6- to 12-month period.

There is no doubt that each agreement will have unique business terms. However, the key objectives are to maintain or increase core FFO per share and to return cash flow to the proper previous level as soon as possible. The company granted rent deferrals to 3 tenants in April, representing approximately 2% of total monthly rental income throughout the second quarter. These tenants continued to pay partial rent. The deferrals ranged from 1.5 to 3 months, and the payback period ranges from 6 to 9 months, currently scheduled to end in March 2021.

We expect to continue to have conversations with other tenants requesting short-term concessions and will report the results of those conversations as they take place. And a number of our tenants are taking advantage of the federal programs available to them, and we are hopeful of positive outcomes on their applications.

Anticipating that many on the call are interested in lease expirations through 2020 and beyond, I wanted to summarize the team's thoughts and our current activities. We have 1 lease expiring between now and year-end that has not been negotiated. That lease is with GM. And as I indicated in our first quarter call, they will vacate our Austin, Texas property at the end of August. Our active marketing of the property with assistance from the local Chamber of Commerce has resulted in 11 current prospects for the building, ranging from 65,000 square feet to 320,000 square feet, which of course, is the entire building.

It continues to be interesting to note and report that our GAAP rent at the property of $14.50 per square foot triple-net compares favorably in the submarket with current space offerings in the low to mid-$20 per square foot on a triple-net basis.

Unfortunately, COVID-19 has nearly eliminated property tours in Austin unless they are virtual. We have, in fact, created a virtual tour for our property and are using it through our connection with the Chamber and with our brokers' prospects. With considerable interest from the West Coast and Chicago as well as a large Austin prospect and Tesla's recent decision to build a Gigafactory there, we expect a positive outcome but must remain patient and persistent with the ongoing virus impacts.

Long term, we are positive about our same-store performance as lease expirations for 2021 and 2022 average approximately 5% based on projected rental income. Therefore, overall cash flow should be stable with limited risk, enabling the team to focus on growth.

Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus. Economic forecasters are estimating that both second and third quarter GDP may be negative, and of course, their estimates do vary. This slowdown in economic activity will certainly impact our industry and has had a dampening effect on investment sales volume as April and May and, I believe, June volumes were down compared to 2019. And port authorities reported drops in container volume ranging from 10% to 30% compared to the same periods last year.

However, the continued interest in industrial properties, particularly those related to e-commerce, has resulted in no increase in cap rates for this product type in several markets. There is, however, some expansion of cap rates for smaller properties that are more manufacturing in nature and particularly for sale-leaseback transactions in select markets, and the sizes here are anywhere from 50,000 to 200,000 square feet. And this is a product type that matches our interest in our underwriting strength, particularly for middle-market nonrated companies seeking capital to reinvest in their business. We will continue to monitor the evolving conditions and adjust our strategy accordingly.

And as it relates to growth opportunities, investment sales listings have moderated, driven primarily by the effect of the virus. Our current pipeline of acquisition candidates is approximately $265 million in volume, representing 16 properties, all of which are industrial. Of the 16 properties, 1 property is in due diligence, 2 are in the letter of intent stage and the balance are under initial review. Because of the stay-at-home directives in many states, several of the properties in the pipeline are what I would call a hold position. Our team is staying actively engaged, however, in these markets as we believe acquisition opportunities will arise that we can and we will pursue.

So in summary, our second quarter activities reflected strong leasing and rental collection success, continued active engagement to identify industrial acquisition opportunities and collectively positions us well to pursue growth opportunities.

Now let's turn it over to my partner, Mike, for a report on the financial results, including our capital markets activities.

Thanks, Bob, and good morning, everyone. I'll start by reviewing our operating results for the second quarter of 2020. All per share numbers I reference are based on fully diluted weighted average common shares.

FFO and core FFO available to common stockholders were $0.40 and $0.41 per share for the quarter, respectively. Specifically, core FFO was $0.405 per share, rounding up to $0.41. FFO and core FFO available to common stockholders were both $0.80 per share for the first 6 months of the year. 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. In addition to these accretive deals, our same-store cash rent continues to grow at 2% on an annualized basis.

Our second quarter results reflected stable total operating revenues of $33.5 million as compared to total operating expenses of $24.1 million for the period, excluding 1 property impairment charge. As Bob laid out, our team is actively engaged with every tenant of ours as we intend to maximize shareholder value through and beyond the COVID-19 pandemic. We're pleased with the team's and portfolio's performance through July and believe we've performed exceptionally, but these are uncharted times, which we will continue to navigate together.

We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage. We've reduced our debt to gross assets by nearly 15% to 46.5% over the past 5 years through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are 1% to 2% away from our target leverage level long term, which means that nearly all raised equity will go toward accretive acquisitions.

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 that this will increase our financing alternatives.

Looking at our debt profile. As of today, our 2020 and '21 loan maturities are very manageable with only $3 million and $21 million coming due, respectively. We have continued to proactively manage and improve our liquidity and maturity profile over time. 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 rates, swaps and caps.

While entering the second quarter with sufficient liquidity, we've been modestly active in issuing our common stock and preferred Series E stock, utilizing our ATM programs.

During the second quarter, net of issuance costs, we opportunistically raised $500,000 through common stock sales and $1.9 million through preferred stock sales. We continue to manage liquidity and the balance sheet to ensure that we have sufficient liquidity for upcoming capital requirements.

As of today, we have $3 million in cash and $36 million of availability under our line of credit. With our current availability, the strong performance of the portfolio and access to our ATM programs, we believe that we have significant incremental flexibility to fund our current operations, near and long term, properties that we are underwriting and any known upcoming improvements at our properties. We encourage you to also review our quarterly financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter.

We feel good about continuing to execute our business plan as we continue to manage our existing portfolio, increase our high-quality asset base and continue to improve our metrics. We're focused on maintaining our high occupancy with strong credit and real estate. Institutional ownership of our stock has increased over time to 60% as of June 30, nearly a 20% increase over the past 4 years. Bob and I continue to be very active in meeting with current and potential investors, portfolio managers, coverage analysts, investment banks and the like. We look forward to establishing new relationships as the company moves forward to its next chapter.

Regarding the common stock dividend, we did increase it in the first quarter. And while the increase was small, we have also announced that we are leaving the dividend as is again in the third quarter. We have not cut nor suspended the dividend since our IPO in 2003. Our stock closed on Monday at $18.54. The distribution yield on our stock is about 8.1%. Many REITs are trading at much lower dividend yields and higher multiples.

Now I'll turn it back to David.

Okay. Thank you, Mike. That was a good one. And Bob Cutlip did a good job, so did Michael. I think the team has performed very well, and while we are hurt a little bit by the virus and the government's reaction, the real problem today is we have no idea how either part of the U.S. government or the local governments will react to the virus. So there's just a big unknown out there. We've heard a lot today about the numbers of new transactions and leases and all that's impressive. We've collected rents that were due during the first and second quarter, so we're in good shape there. We've executed lease extensions, strong there. We got rid of 1 building we owned in Maple Heights, Ohio. We may sell a few more during the next quarter. But our goal is to keep ourselves above all of the problems that are going on here.

The team is strong. We have a good professional team and are pursuing quality properties and the list of acquisitions. But most of these, we're looking at the strong credit tenants. They're great tenants and excellent investments if you can get somebody with some financial strength and not in a part of the economy that's going to collapse. The middle-market businesses, like the many tenants we're in, is a place that almost all of us here -- yours truly has been at it for his whole career of financing and working with middle-market tenants. We're not up in the stratosphere of the big tenants. We've got a few of those, but most of them are middle-market companies that we underwrite as if we were making a loan to them from a bank. These are times that have never been seen before. We're in the middle of a pretty strong recession at this point in time. But we're doing a fantastic job, I think.

And I'm going to stop here and let the people that are smarter than I am ask some questions, and we'll do the best we can to answer them. Operator, if you'll come on, please, and let's get some questions from those smart people out there.

(Operator Instructions) Our first question comes from the line of Gaurav Mehta with National Securities.

The first question I have is on the disposition. I was hoping that you could provide some color on the property that you sold. And I think you also made some comment on your expectation, maybe sell a few more in the next quarter. So maybe provide some color on your view on dispositions and how should we think about it.

Certainly. This property, we acquired a number of years ago, and it was occupied by Pennzoil. They elected to move out of that property. And so we converted to a multi-tenant building. It's not in a high, let's say, transaction velocity location, and the configuration is a bit irregular, Gaurav. And so we felt the best thing for us to do, since we did not want to expand our portfolio in this part of Ohio, was to exit that property and use those proceeds to really reinvest in industrial but in the markets that we have been targeting recently.

And fortunately, we came out of this with a capital gain. And if I'm looking at us going forward, we are looking at a few properties that are, what I call, single-story, noncore office properties that, over time, we have wanted to believe -- to move out of anyhow, and we're getting the opportunity to do so. I do not see any other industrial properties short term that would be on the disposition list. But we will selectively continue to look at these noncore, single-property markets, particularly single-story office that we can exit and redeploy the proceeds.

Mike and I really believe, and we've said it a number of times, we're trying to exit properties, but try to stay under, let's say, $15 million to $20 million a year in our exiting of our product and then redeploy that capital as opportunistically as we can as our teams identify new industrial properties primarily.

As a follow-up, there was a property impairment charge in second quarter. Can you provide some color on that charge?

Sure, Gaurav. Legacy asset, office asset that is currently vacant, it would be one of the prospects to potentially fill up the remainder of that target of $15 million to $20 million of dispositions. And it's something that we will have -- we're having discussions on both leasing and sales scenarios, but that would be something that, again, we would view as one of our handful of noncore assets that we are contemplating a disposition. It was bought 7 years ago.

Our next question comes from the line of Rob Stevenson with Janney.

Bob, what's the level of TIs that the GM property needs in order to re-tenant?

Let me look at it and approach it 2 ways. As I've indicated, our current GAAP rent is like at $14.50. If -- we really can be and will be probably a low-cost provider out there. So if, in fact, the rents are in the $18 to, let's say, $20 to $22 range, I anticipate that our TI will be somewhere between -- close to around $25. However, as you get further and further into the longer-term leases with a lot more TI, it could go as high as between $30 and $35, but then the rents are going to be in the mid- to upper $20 per square foot. That's what we're looking at right now. That's the guidance we've received from our brokers and kind of from the Chamber and the development authority as to what people are seeking.

When you look at other locations like the CBD and the domain, they're in the mid- to high 30s and even low 40s from a rental rate standpoint. So I feel very good about where we believe we'll be going over the next number of months, once this -- once the virus kind of enables us to open up that city a little bit more and get some more property tours.

And what's the sort of time frame? I mean you're going to have GM moving out at the end of August. How long of a process is it to deploy that sort of $25 or even $30 or $35 of TIs? Is that a few months? Is that six months? I mean how extensive is that work that you're going to need to do in parts of the building? Is it a situation where you're not going to be ready to occupy until sometime mid-first quarter of 2021? Or are you going to be able to be able to start occupancy by year-end of this year, if you get a tenant in there?

I think it depends on the specific tenant. GM did a great job of creating, really designing and constructing creative office space in that building. Having walked it, I mean, that building has raised floor, has 10-foot ceilings. It has -- it's really column-free. When you look at it and having, actually having walked it after it was completed, right after early 2000s, the Dell -- Michael Dell's team allowed us to walk through that building as we were developing similar properties in the Research Triangle. You have 2 40,000 square foot floor plates. You enter the building and immediately, you have access to elevators, but each of the wings that are 40,000 square feet have their own private elevator. They have their own service elevator. So the flexibility that Michael Dell and his team put into that building is really great for social distancing.

And as I indicated, column-free floor plates are really very positive. Now I would say that with the backlog that we have, as I've indicated, and we have 3 to 4 that are very, very interested, once we can get actual tours of the building, we're probably looking at a 6- to 8-month period for the entire building. We have pro forma that we're going to do either multi-tenant or single tenant. Right now, the tenants range, as I indicated there from 65,000 to 320,000 square feet. But our really strong prospects are from 150,000 to the full size of the building.

So I still think it's going to be probably 6 to 8 months from the time that we really can actively get into that building, which hopefully is going to be within the next 30 to 60 days. That's the hope.

Okay. Sounds like it.

But I can't drive what's going to go on with this virus.

Okay. But to your point, Bob, in a multi-tenant scenario, if that's the way we were to go, it would take 6 to 8 months to have the building fully occupied. But there would be staggered occupancy subject to TI and square footage requirements, fourth quarter and first quarter.

Good point, good point.

Okay. Okay. So at this point, it sounds like that the $25 to $35 range for TIs doesn't include a substantial amount for taking a single-tenant property and converting it to multi-tenant. But it's already more or less set up that way, there may be some costs, but it's not huge in terms of what it's going to cost you to multi-tenant that asset.

I don't think so, Rob, because the size of the tenants that we're seeing really would either occupy one side or the other of a full floor plate or multiple stories. So -- and the way the building is designed, you can really secure each of the floors, and that's what's very positive from my perspective. It makes me a bit optimistic because we can show tenants that maybe both in the tech business or in the health care business or the financial institutions is that we can secure your area very simply and very efficiently.

Okay. Mike, given your comments about the common stock valuation and also trying to stick with a $15 million to $20 million target for dispositions, how are you thinking about the relative attractiveness of common versus preferred? And is there really an opportunity here to increase dispositions to fund acquisitions at bigger percentage of that $265 million pipeline actually pencils for you guys?

Sure. So I guess, I would start with the backdrop of we have almost $40 million of liquidity today. As a refresh for everyone, in terms of where our equity desires have been over the last 24 months, since July 1, 2018, we've done something in the neighborhood of $150 million of common issuances via overnight but predominantly through ATM as well. On the preferred side, net of redemptions, we've only done $20 million. But Rob, to your point, and obviously demonstrated during the second quarter with us only doing $500,000 on the common side and doing $1.9 million on the pref side. And the common, by the way, was done at $19.71, and the pref was done at an average share price of $22.52 as compared to its par value of $25.

But in this exceptional time period with the pandemic, I mean, we are sensitive to the div yield and issuing the preferred at a weighted $22.52 implies doing that at a 7.35% dividend yield as compared to our current common dividend yield of 8.1%. And it would be as if we issued common at $20.40. So the long lens here is we continue to heavily overweight toward common, but we need to get more stability because we don't love the share price where it is. So we will contemplate tapping minorly into the pref. But from an aggregate pref load as compared to enterprise value, we're probably in the 11% to 12% range. And Rob, as you know, and we've consistently messaged and demonstrated, there isn't a massive appetite to overweight on pref, even if perpetual in nature.

So I think with our existing liquidity, not being able to predict share prices but having access to those ATM programs as well as some modest dispositions, speaking freely, I'm not going to get caught short, and we will be able to support the pipeline of industrial acquisitions that Bob laid out.

Okay. And with that as the backdrop, I know that you've historically done a moderate amount of dispositions in order to cover the dividend and not have the variability. But there's been a lot of talk out of one of the political parties on potential changes to the 1031 program as a way to raise revenue. Are you thinking about putting in any potential strategies like selling even more noncore assets into the year-end, depending on how the election is leaning and sort of turns out to get ahead of that? How -- is that entering the Board's thought, David, at this point in time? How are you guys thinking about any of that as it pertains to the business model?

I think the big problem, Rob, is trying to figure out which way the winds are blowing in the political area because one side seems to want to close down the entire economy at once and the other side wants to open it wide open. So trying to figure out who's got the upper hand is always going to be difficult.

I look at this as a different way. You can hide money today. Hide is the wrong term, but you can put your money in something like treasury bills. But now you're actually paying to keep it in treasury bills. You're not making any money. Or you can buy a stock like ours. And I just think for people who are trying to avoid the big problems out there in the COVID marketplace today, this is a good place to go and stay in something that pays you a different -- a decent yield and at the same time has a way of getting your money back.

As everybody knows, we are very focused on making the dividend payment, and that's our -- almost our sole reason for living every day. And so I don't think that the Board or I or any of the team members want to convert this into something else. I think we're right on where we are today, and we're just going to keep going but going slower and more deliberate. And yes, we'll sell some buildings, but it's not to meet the dividend. It's because it's out there in a space that we don't want.

And one of the big problems of selling something is we've got a lot of good buildings that we are not favorable toward in terms of long term. But you hate to sell them because they're paying as agreed. And so it's really hard to say to somebody, I want to get out of this one because they're paying and then you got to go find something, a place to put the money. So there's a balance that we're looking for here. And my goal is for this company just to continue to hold on tight. My own belief is that there will be something that will turn the corner on this COVID-19. I am personally a believer in hydroxychloroquine as one of the ways to stop this thing. But I know that's against most everybody that's out there on the government medical profession. But I've just seen it in action. I have 2 doctors, one loves it, gives me long stories, and the other one doesn't like it. And so I don't know whether this is a political matter or whether this is just something that is ingrained in people's mind, is that hydroxychloroquine doesn't work, period. And then the other side says, but we've got thousands and thousands of people on hydroxychloroquine for other than this, and there's no setback.

So somewhere along here, the -- I don't know, clouds will open and the sunshine will come through. And I know the American medical profession is really strong on finding solutions to these kind of problems, though. I don't know if that's answering any of your questions, but that's where we are today. And the goal is not to change what we're doing, but to do more of the things that we're doing at just a slower, more methodical pace.

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

So sorry to bring you back to GM again in Austin, but can you remind us or maybe provide some color on what the carrying cost of the Austin property would be in terms of tax expense, security, utilities, et cetera? Just any kind of color there. I mean I know it's 4% of straight-line rent, but -- and maybe what the additional impact is going to be during the period where GM is not there and a tenant hasn't moved in.

I can address what I think the OpEx is going to be. I don't have the interest for the debt with me right now, John. But the OpEx is going to be somewhere between $6 and $8 a square foot. It will definitely be less than it is currently just because without occupancy, you're not spending as much money on a lot of the common area cost that you typically would internal to the building. But we can get that interest information to you, and we'll e-mail it to you after the call.

Oh, no, I was looking for the OpEx. That was perfect. And then with regards to some of the re-leasing in the quarter, you provided some very helpful detail on kind of the straight-line rent increases. But could you provide some color maybe broadly or specifically on movements in cash rent?

Well, at the 14% raise, you're probably looking at a 2% to 3% because most of those renewals are 5 to 6 years. So you're probably looking at a cash increase of anywhere from 2% to maybe 3% or 4%, no more than that.

Okay. And then broadly speaking, outside of GM, how is the office leasing market looking? Has COVID been an impediment to leasing? Or maybe are you seeing more interest in suburban office given kind of the space you can offer, the parking you can offer, all of that?

I'll tell you, I have just been so impressed and encouraged with what our team has done on these office properties. We -- right now, the 1 property in Minneapolis that we leased 50% of it in the first quarter, we now are down to the final strokes for another 10,000 square feet there, and that is a suburban office property. And we competed, believe it or not, with a CBD property. And I think one of the reasons is that there is, not a large migration, but I think there's more of an interest of getting outside of the CBD, particularly for our types of tenants. I mean our types of tenants are in buildings that are under 5 to 6 stories. So we're not the urban-type tenant, attractor of that type of company.

So I believe when I look at where we are going, going forward, we probably next year have, oh, it's going to be about 4 office properties that we're going to have lease expirations and wanted -- and we started off with between -- almost with 9. We've renewed some of those already. But I think there'll be a challenge. I mean I'm just being honest. There's going to be a challenge on the renewal of office tenants. But I think because of the mission-critical nature of those properties and the tenants that I see before me here on this sheet, I think we're going to be in very good shape to at least probably maintain the straight-line rent. That means that probably, we may have a little bit of a drawdown but not significant.

Okay. And I mean, have you seen -- I know it's kind of early days, but have you seen any of the tenants, who may traditionally be looking at kind of urban infill or CBD office, be interested in some of your properties? Or is it still maybe too early in the outlook in the pandemic world?

It's a really good question, John. I think it's just a little bit early because people just can't get out and tour properties. We're getting a lot of hits on telephone calls. But we're not getting any, really, tours on those that we currently have that are vacant. And we have vacancies in Ohio and in Illinois and, of course, in Minneapolis. Yes, are we getting calls? For sure, but we're not getting tours because most of these cities are shut down.

Okay. And then one last kind of quick one. Can you provide some color on the decision to change the base management fee calculation to be based on assets versus total equity? Essentially, what kind of drove that signal -- kind of your, you guys' reasoning there?

Sure. Well, it's something we've kicked around for many, many years, John. And we talked through it with people like yourself as well as, as Bob and I are out doing nondeal road shows or road shows. I think we all -- as we think about it, there has been some noise in terms of the concept of being able to issue equity just to increase the base management fee. I mean we are truly in the business of running our -- and managing our portfolio. We did a very detailed analysis. I would say, but for COVID, we probably would have made this change a quarter earlier. But at that point, it was all hands on deck to ensure that we collected the rents that we did, which was, we believe, pretty exceptional for a company of our size.

But if you go back 5 years, on average, the base management fee under this new calculation was somewhere in the 43 basis points to 43.3 basis points average. So the concept here was to keep things either neutral or shareholder-friendly on the margin on the go-forward and to make it all just really based upon what the heck does our portfolio look like at a particular point in time. And obviously, being externally advised and while I only work for this company, Bob only works for this company. Our sister, a land agricultural REIT, had gone to this type of concept a couple of quarters ago, and my understanding is that was favorably received.

Our next question comes from the line of Craig Kucera with B. Riley FBR.

Appreciate the color on vacancy being in Ohio and Illinois and Minneapolis. But sort of specifically, can you talk about sort of the sequential increase in vacancy from first quarter to second quarter? Were those smaller tenants? Or were there any larger tenants? What types of tenants, et cetera?

We had a single-story, 92,000 square foot office property in Minneapolis go vacant at the end of the first quarter. That was our biggest hit, Craig. And that's one of the single stories that Mike just related that we've impaired that property. It's interesting, in the same park, Blackstone has just acquired 3 other properties in that same park that are single-story office. And so we are going to exit that property, but it's somewhat encouraging to me that Blackstone's come into that park, and now we're starting to get some interest on people who may want to acquire the property.

So I think looking at your supplements, I think that, that was included at first quarter. So there was no incremental increase in vacancy from March 30 to the end of June?

There was a -- I'm failing to recall which parcel it was that got us down to below the 96%. The sale of the Maple Heights asset in July, real-time today, we are north of 97% occupancy. So there might have been a couple of square footage, Craig, but that would have been it.

Okay. That's helpful. And as far as your revenue, were there any contra items expensed against rental revenue this quarter, maybe tenant receivable write-offs or anything else like that?

No write-offs. I would say that under the new GAAP guidance and obviously, for folks like yourself that have covered us for a number of years, you'll see on the P&L, the lease revenue numbers are -- as well as the operating expenses have dramatically gone up. I would advocate for every analyst to look at those on a net basis being your lease revenue less property and operating expenses for comparability. Again, some of that is a GAAP exercise and modification in guidance.

Also, we've had some integration projects internally that have now enabled us to track even triple-net expenses, some even at tenant-managed properties. So we are grossing up our income statement there. As a function of that and now that recovery revenues, the amounts that the tenants are obligated to pay as lessee, they have some lumpiness in nature. So from period to period, they may fluctuate. And that may cause a little bit less of a trend. I would say from an absolute cash rent perspective, cash rent in the first quarter was $28.5 million. And in the second quarter, it was $28.8 million. So trending the right way, benefiting from the first quarter acquisitions that we executed.

We have no further questions in the queue at this time.

All right. Well, we thank you very much, all of you, for the good questions that you gave us, and we enjoyed talking with you. Again, Michael and certainly, Bob, are always available to try to answer any questions that come up. That's the end of this call. Thank you all for calling in.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.