Gladstone Commercial Corp (GOOD) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Gladstone Commercial year-end 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Gladstone, Chairman and CEO for Gladstone Commercial. Thank you Mr. Gladstone, you may now begin.

Well, thank you Jackie, that's -- for that nice introduction, and thank all of you for calling in. We enjoy these times with you on the phone and wish we had more time. Please come visit us if you're ever in the Washington DC area. We are located in a suburb of Washington DC called McLean, Virginia, and you have an open invitation to stop by and see us if you are here in this area. I think you will see a great team at work if you stop by here.

You have to excuse me this morning, I've got a little bit of a cold, so my voice is a little bit froggy today.

I'm going to read now the statement that we read at the beginning of these reports. This report that we are about to give may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, and we believe those plans to be reasonable.

There are many factors that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements, including those factors listed under the caption Risk Factors of our company's 10-K and 10-Q filings that are filed with the Securities and Exchange Commission. Those 10-K's and 10-Q's can be found on our website at www.GladstoneCommercial.com, and they are also on the SEC website.

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.

In our talk today we plan to talk about funds from operation, or FFO. Since FFO is a non-GAAP accounting term, I need to define FFO for you as the net income excluding the gains or losses from the sale of real estate, plus all the depreciation and amortization of the real estate assets. The National Association of Real Estate Investment Trusts, or NAREIT, has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. Please see our 10-K filed yesterday with the SEC and our financial statements for a detailed description of FFO.

Well, let's begin today to hear from our President, Chip Stelljes. To show you how dedicated he is, he is calling in from his vacation. He is down in the islands. And Chip is also our Investment Officer, Chief Investment Officer of all the Gladstone companies. And Chip, take it away.

Thank you David. Our December 2009 quarter-end and year-end results reflect the continuing positive performance of our portfolio, despite the difficult economic environment in which we find ourselves. As of December 31, 2009, all of our tenants are current with their rent payments.

We did not buy any new properties during the last quarter. We are hopeful the existing portfolio will continue to perform well in the future.

However, we do have two properties that we have to find new tenants for this summer, because both tenants are moving out when their leases expire. These two tenants collectively represent about 2.6% of our total rent. Therefore our occupancy would drop to 97.4% if we don't find tenants to replace them. We are working hard with several prospective new tenants to rent these two locations.

While the equity and debt markets may have shown some signs of life, the overall disruption in these markets is -- makes it continually difficult to obtain new debt or equity capital in terms that we believe are attractive.

Our stock price has remained stable during the quarter, and we continue to review options to raise equity to keep growing the company.

On the debt side, the current credit market is still very difficult, and the long-term mortgage markets including the CMBS market where we traditionally source our long-term mortgage, financing remains unavailable. We are seeing some banks willing to issue medium-term mortgages between say three and five years, albeit on less favorable terms. As a result we tend to focus on these medium-term mortgages to finance our real estate until the market for longer-term mortgages returns.

We remain committed not to use our line of credit to any great degree to make acquisitions that we do not believe we can -- we can be refinanced with longer-term mortgage debt.

As you recall, our model called for us to initially borrow from the line of credit to buy properties and then obtain long-term fixed-rate mortgages as soon as we could, and we were able to secure a spread between the rent coming in and the mortgage payments going out. By doing this we were able to lock in profit for five to 10 years and in some cases longer. The proceeds from the mortgages would then pay down our line of credit, thus making the line available for the purchase of our next property.

With the turmoil in the credit and equity markets, the model has to adjust to medium-term mortgages, so we're not financing long-term leases with short-term credit.

Without an attractive debt, we think it's going to be -- much of 2010 will be a difficult period to raise and build the assets of the company, so our near-term strategy will be to enhance the value of our existing portfolio of properties by reviewing and extending existing leases, performing improvements on the properties, and selling certain of our noncore assets.

That being said, we continue to selectively review potential acquisitions which are consistent with our conservative investment approach and properties that are likely to, one, produce attractive long-term returns for our stockholders; two, have existing assumable financing where we can find attractive bank financing; and three, where the tenants are weathering the current recession well.

On the funding side we have about $33 million outstanding on our $50 million line of credit, funded by a group of banks. That line of credit matures in December of this year, and we intend to renegotiate the terms of the current facility or obtain replacement financing prior to its maturity.

We are also working with several mortgage brokers to mortgage the $80 million of unmortgaged properties, providing us some debt reduction and additional liquidity and perhaps some capital for new acquisitions. We believe we will find some mortgages to finance some of these properties.

So we think we are in very good shape with our short-term credit.

At quarter end we had approximately $253 million in long-term mortgages borrowed against the properties we own, with a weighted average fixed rate of about 6%. The first of these mortgages in the amount of $48 million matures in October of this year. However, this mortgage has three annual extension options that we intend to exercise as we need them. So we are not under the near-term refinancing pressure some other REITs are experiencing.

Going forward, rates on mortgages, if they are available, will be higher, and the actual mortgage maturities will be shorter. Again, the lack of the CMBS financing option, we are viewing medium-term options between three and five years. Rates on these medium-term mortgages are approximately 7%, and all the other terms are tighter as well, including lower loan-to-value advances and some recourse to our company, where in the past there was only recourse to the properties.

The market for financing is not consistent, so we'll have to see what mortgage lenders can offer us.

At quarter end we had approximately $286 million in mortgages and short-term borrowings. This means we have about $2.40 in debt to every $1.00 in equity. Thus we still have a conservative balance sheet with reasonable leverage today.

We plan to restrict our borrowings to $2.50 of debt for every $1.00 of equity. Therefore we plan to raise equity in connection with any new acquisitions. We believe this is a reasonable debt to equity target.

Quality of the assets remains very good. Again, all of our properties are leased currently, and all of our tenants were current in their rent payments as of December 31, 2009.

As I stated earlier during the call, we are currently working with our tenants to renegotiate lease terms for those leases that are expiring in 2010. For 2010 we have a total of three leases expiring, which have total annualized rent revenue of approximately $1.4 million or 3.4% of our total rental income. So this is rather insignificant when compared to other REITs.

We were able to renegotiate the leases for a few of our tenants during the year. The tenant in our Eatontown, New Jersey property extended the term of their lease, which was originally set to expire in 2011, to 2024. In addition we renegotiated the term of the lease for one of our tenants in our Akron, Ohio property to extend the lease -- the terms of their lease from 2010 to 2015.

Overall we feel pretty good about the portfolio and remain pleased that so many of our tenants seem to be weathering a poor economy.

We reported last quarter that we signed an agreement to be repaid on the only mortgage loan we have in the portfolio, because the building securing the loan was under contract to be sold. That contract was terminated in the fourth quarter, and thus we are no longer expecting early repayment on the loan. The loan matures in 2017, and the borrower remains current with us.

With that, I'll turn it back over to David.

All right, thank you Chip. That's a good presentation. Now let's turn it over to our Chief Financial Officer, Danielle Jones, for a report on the financial results.

As Chip highlighted in his talk, our balance sheet continues to remain strong. We have a total of $118 million in the common and preferred equity, and a total of $286 million in mortgages and short-term borrowings. So our debt to equity ratio is approximately 2.4 to 1.0. This is still considered a conservative balance sheet.

At the end of the quarter we had access to approximately $8.3 million on our line of credit. The borrowing capacity on our line of credit is limited to a percentage of the value of properties pledged as collateral to the line, [less] both the amount outstanding under the line and our outstanding letters of credit.

In connection with the extension of the line of credit in 2009, we were required to obtain updated appraisals on those properties pledged under the line, and as a result, our borrowing capacity was reduced by approximately $5 million. Thus, with the current assets pledged to the borrowing base, we have access to approximate $45 million of the line.

However, we have remained confident that with the remaining capacity under our line of credit and our current cash flows from operation, we have ample liquidity to fund our operations, service our debt, perform necessary capital improvements to our properties, and maintain our current distribution to shareholders.

In addition during 2009 we sold our property located in Norfolk, Virginia for approximately $1.1 million for a gain on the sale of approximately $160,000. The proceeds were used to pay down the line of credit.

Now I will review the results for the period.

As I talk about per-share numbers, please know that I am talking about fully diluted, weighted average common shares.

Funds from operations available to common stockholders, or FFO, for the quarter were approximately $3.4 million or $0.39 per share. FFO for the year ended December 31 was $13.5 million or $1.58 per share. These results remained flat from the same period last year.

These results were affected by the increase in our portfolio of investments during 2008 which were held for the full period in 2009, and the corresponding 4.4% increase in revenues for the full year '09 over the same period last year, partially offset by the reduction in interest income on our mortgage loan as a result of the decrease in LIBOR.

We also saw an increase in legal and other professional fees relating to ongoing lease renegotiations and reviews of legal work with existing tenants, coupled with the fact that we financed all of our acquisitions during 2008 using fixed-rate long-term debt, which resulted in increased interest expense, as rates on our long-term debt were higher than on our short-term debt.

The current rate on our short-term line of credit is approximately 2.2% compared to the weighted average interest rate on our long-term debt of approximately 6.0%.

The overall increase in revenues during 2009 allowed us to increase the amount of the net incentive fee paid during 2009.

In addition we had to write off over $1 million of due diligence expenses related to a large potential acquisition that ultimately did not close during 2008, which greatly reduced the incentive fee paid in 2008. We were able to pay approximately 78% of the incentive fee during 2009, as compared to approximately 22% last year.

Once we are in a position where we can pay out 100% of the incentive fee earned, we will be able to continue to grow our FFO. We are hopeful that we will be able to achieve this in 2010.

Now I'll turn the program back over to David.

All right. Thank you Danielle.

Our team has maintained the FFO and allowed us to sustain our distributions to shareholders, and we are very happy about that. Please know that all of the team here is working very hard to achieve similar results during this challenging times, and I think 2010 will be a good year for.

The prices for commercial real estate and the marketplace in general have changed largely because the mortgage marketplace has changed, and there are no longer low-cost mortgage lenders that will finance commercial real estate. Since buyers can't find low-cost mortgages, they can't pay much for the real estate. This is causing more sellers to be realistic in their sales price, or the property just doesn't sell at all.

If we have some lower-cost mortgages or even just some standard mortgages or -- and some equity financing to go along with it, we can make a good number of acquisitions, as there is a lot of opportunity out there. Over the next -- I'm thinking about over the next five years, we've got something like $1 trillion of mortgages coming due under the CMBS programs, and that will provide a lot of our opportunity for us.

We are reviewing today several good purchases that come with mortgages in place. They are already on the property, so all we have to do is provide the equity, and we may move forward on some of these during the next couple of quarters.

The market for properties in -- is still divided into these three classical segments.

First of all, there are tenants that have AAA or even BBB ratings that are well-located, they're in high-quality real estate, and all of these are being sought by the large real estate investment trusts, the insurance companies, the pension funds. And cap rates there continue to rise. I don't know where they will stop, but they continue to come up, and they are much too low for us to consider in this category, plus they are very large transactions.

At the other end of this spectrum are some small real estate properties like fast food locations and pharmacy chains that are being purchased by individual investors, and there are a couple of REITs that specialize in this area as well. But much of this -- much of these transactions has become slower these days, and the yields are higher. Yields today are running properly 7.5% or higher, and this section is in a great deal of flux right now. The market is -- seemed to be coming our way. I'm not sure we will jump into this marketplace, but we are seeing some out-of-the-way locations that are in the 9 cap rate area, which would indicate that they are getting close to some of our numbers. I'm not sure we will jump into this anytime soon, but it's just an indication of how that marketplace is changing.

As all of you know who listen to these calls, our investment space is the middle market, where we see non-rated tenants, small and medium-sized businesses that is, and using commercial and office and industrial properties. We like the medical and retail area also but have not put much of our money in that part of the world.

Our competitive advantage at the end of the day is the expertise we have at underwriting the small and medium-sized tenants, in conjunction with underwriting the real estate.

We are in a good position to see a lot of opportunity here. Cap rates are beginning to really move up. We've seen cap rates in the 9% to 13% range, and that begins to make things all the more interesting for us.

Now, we are busy looking at real estate that's leased by some medium-sized and large companies. Some of our tenants, as you know, that we have in our portfolio today are people like Sara Lee and Waste Management and Unisys. All of them are good, strong tenants, and we look forward to working on some more of those kind of transactions.

But we are focusing our efforts on finding good properties and long-term financing that match our long-term leases. So we want to lock in those long-term financings in places with long-term leases and capture that spread for our shareholders.

But it is currently challenging because we don't know when the economy is going to begin to stabilize, and we see about half of the indicators that we watch are positive, and about half of them are still negative. So we are worrying that we are not quite through this recession yet.

So we are going slowly, and we are watching what is happening to the mortgage marketplace and are hopeful that mortgages will become more plentiful in the future.

Much of the industrial base that we look at, the rents are -- on the industrial and commercial properties remain okay. Prices of real estate have declined, which means yields have gone up.

My best guess as to the real estate that we own, has declined in value by some amount. But it's really hard to know. I don't think it's a lot. Might be 6% or 7%, maybe as much as 10%. But I just doubt that there is a big depreciation in our portfolio, primarily because we have so many properties that are already mortgaged so that the mortgage goes along with the property.

I just think the value that we've created by locking in these cash flows that are coming off of these small properties are going to be good for us over the long term, and hopefully the properties will appreciate. But all of this is just a guess.

Most of our tenants are doing okay. Some have a few problems, but they are all paying is agreed and I think will keep paying because the buildings they occupy are so critical to their operations. However, we don't expect any significant growth in the base in 2010. Now, perhaps in 2011 -- and it all depends on the mortgage marketplace and the equity marketplace.

So it's so hard to guess at this point in time where the economy is going and where these small businesses are going that we are just sure that we want to be very conservative and remain in the bunker, so to speak, making sure we don't make any false moves.

At this point in the process I am optimistic that this company will be fine in the future. We don't have to really worry about this one. We just have to be cautious on adding new acquisitions.

The stimulus and the funds invested by -- in the banks by the government will help. I don't see it making a big difference in 2010. All this spending and the announced tax increases will have a major change in the fabric of our country, of course, and certainly inflation is on the way.

To me, I think it's a good time to own real estate because real estate values usually go up in inflationary times. That's why I always tell people that this is a great REIT in that case because it has long-term mortgages and long-term leases, and so you're protected over the long term, and you should come out the other end, if there's an inflationary period, very well as the properties continue to appreciate.

We are looking at a number of ways to grow the business.

First, we are talking to some local banks to provide mortgages on our properties. We have about $80 million that -- of properties that don't have mortgages on them. So we are working on getting some mortgages on these.

We've seen a number of term sheets and discussed them with the banks but just found that the term sheets weren't good for us, so we continue to hunt for the right kind of mortgages.

And if we can find those mortgages, it will free up some money for us to pay down our line of credit, and then once the new line of credit is in place, use that line to purchase some additional good real estate and begin to grow the asset base, and of course as we grow the asset base, that should increase the dividend.

We are looking for ways to raise some equity too, although we haven't done so with this period of time, the stock price is kind of low. We've seen an increase in the stock price over the past six months, so we may be able to consider selling a small amount of stock and buying say one or two pieces of real estate as time goes on.

We are looking for ways to do this without disrupting the marketplace, and do it to the extent that they are attractive opportunities. We are not just going to raise money for the sake of raising money. We are going to raise money if we have a good opportunity to invest it in.

If we could raise money at a 10% yield and invest it at a 14% yield, that would be a good deal for us.

We are looking for other ways to raise money. It's hard to tell you about them now. We are hopeful we can sell some of the senior common stock that we have. It's a great opportunity for us to bring on some new investors.

In January 2010 the Board declared a monthly distribution of $0.125 per common share for January, February and March. So that's $1.50 a year run rate, and I think we can continue that certainly through 2010 and much likely through 2011 as well. A very nice rate for such a good REIT.

Because the real estate can be depreciated, of course, and it shelters the income, the distribution in 2009 was about 94% of return of capital, and that of course is tax-free. It should be similar this year.

This stock can be a good one to hold in your regular account because it's so tax-friendly. After all, if you buy the stock at around $14 a share, where it's been trading these days, the yield is about 10.7%, but if you are in a 40% tax bracket, then your tax yield -- after-tax yield is around 10.4%, and I tell you, how many times can you get a yield of 10.4% after paying the government? I think that's a great opportunity.

Just to mention this, because there was some confusion, some folks called me afterwards, this 94% return of capital is due to the depreciation of a real estate asset and other items on the balance sheet. And it causes earnings to remain extremely low after you apply the depreciation. That's why we talk about FFO, because that adds back the depreciation on the real estate.

Depreciations of the -- on the real estate and on the buildings are a bit of a fiction, since at the end of the depreciation period the building is still standing and still can be used. It's a great thing, and if you own the stock personally, you don't pay taxes on that part. That's sheltered by the depreciation and -- because it's considered a return of capital.

However, of course, return of capital does reduce the cost basis on the stock, which may result in a larger capital gain when the stock is sold.

At any rate, the stock is trading at about $14 now, so that's a yield of 10.7% with 94% of that sheltered. Many REITs are trading at much lower yields. I am expecting ours to begin to trade at more like their yields. Their yields are 6% and 8%, so if we go there, there will be a lot of appreciation as well.

We will declare the next monthly distribution early in April, for the months of April, May and June.

Now let's have some questions from those folks out there that are listening to us and follow us, and would the operator please come on and tell our listeners how they can ask some questions.

(Operator Instructions). James Altschul, Aviation Advisory Service.

A couple of small questions relating to the income statement. First, I noticed that there were a -- there was a decline year on year, both in the base management fee and the Directors' fee, albeit the Directors' fee was a small decline, but why is that?

The Directors' fee declined because one of our independent Directors actually came onboard in 2008, and so we didn't have to pay an annual stipend in 2009. So that's where you are seeing the drop.

And the base management fee is actually based off our total stockholders' equity, so as our stockholders' equity is dropping -- as David highlighted earlier, our distributions are in excess of earnings because of the depreciation shield -- your base management fee is dropping.

Oh.

You understand that we charge the fee based on the equity, and as we depreciate the asset, the equity goes down, and so as a result the fee goes down as well.

And how do you determine how much of the incentive fee to waive? Is this just at your discretion? Or --?

It is at our discretion, but we've made a commitment to waive enough to pay -- make sure that the dividend is covered.

Okay. Great, thank you.

Another question?

(Operator Instructions). Chris Lucas, Robert W. Baird.

I just -- a quick question. I noticed in the K that you've had some -- it sounded like a broadening of your investment footprint to include looking at retail, and -- single-tenant retail and single-tenant healthcare assets, as well as looking at mortgage loan investments that you would purchase from either banks or out of CMBS pools. Is that a new or broader investment footprint than you guys have looked at previously?

We have been in the health care area. We like it, we just haven't spread our wings quite as much as we have in other areas obviously.

Retail is something that we have done over the years in other companies and understand it well. Unfortunately for us, retail has been so competitive and the yields so low that we have not played in the retail space. But we know that extremely well.

So retail and health care would be places that we do enjoy.

As I mentioned sort of as a footnote, there's trillions of dollars of CMBS mortgages coming due over the next three years, maybe as long as five years, but certainly in the next three years it's going to be an awesome amount coming due. And we don't believe that there is any banks or other financial institutions big enough to take on all of that. And as a result there's going to be some opportunities to either buy mortgages and convert them into ownership through foreclosure, or working with the individuals that own the real estate, or perhaps just recasting the mortgage at a much nicer rate and perhaps compromising some of it.

For example, during the 1990s we and another REIT would buy mortgages at say $0.50 on the dollar and then approach the owner of the real estate with a deal to convert part of the note to equity and keep the remaining note in place, and got some great deals out of that. So we're looking forward that that might be an opportunity for us.

But we are not out doing straight mortgages today and making mortgages on new properties. That's not the intent. The intent would be to buy some discounted mortgages on properties that perhaps are right in our sweet spot, which are small and medium-sized companies that most people don't like. We are one of the few REITs that really love that area.

And then on the capital formation side, the senior common, what's the status? Is that available for sale now? Or is there still -- and when was it available for sale? Did you -- do you have all the paperwork and agreements lined up in the fourth quarter? Is that this quarter? What is the status there?

Yes. In the fourth quarter we did not have it available. We do have it available now, and we've just started out in the marketplace talking to people. So my guess is that you won't see much action in this quarter on the senior common, and it will probably occur more in the quarter ending June 30.

Great. And the purpose of the capital would be used to pay down debt? Or investments? Or what's the goal?

Well it's both. You obviously need to pay down the debt when you get money in to keep it working, but the goal is to put it to work right away, and assuming that we get it done, it would bounce up the income statement pretty nicely.

Then on the credit facility, it was mentioned that the value of the assets was not high enough at this point to carry the full availability (inaudible) your availability was decreased. What's the metric that the bank uses to determine that value? Is it cost? Or is it some cap rate on an NOI stream?

No, they did some appraisals. We did -- I don't think they were full-blown appraisals, and I don't think they were as light as a drive-by appraisal that some people get, but they went back in, we got appraisals updated for them. I think the depreciation on the property is due to the crazy marketplace. It was about 6% on that one.

Thanks.

Next question please?

(Operator Instructions). John Roberts, Hilliard Lyons.

Just a couple of housekeeping things. I missed -- when are the two tenants leaving? When are the leases up?

One in June and one in July of this year.

How do you feel on that? Do you feel like (multiple speakers)

Well, one of them, we are moving along very nicely with a number of different alternative tenants, and my guess is, we may not make it by June, but I guess we'll make it sometime this year.

The other one is a lot harder, it's a more difficult property to lease because there's a lot of vacancy around it. So it may take us a while. We have a couple of alternative ways of turning it into a different property, which would cost us quite a bit of tenant improvements. But they would be well worth it if we can make it work. And we are working through that as quickly as we can now.

So one of them will probably get re-leased in this year, and the other one will be a little more difficult, and I'm not sure when that will occur, but probably by the end of 2010.

And are those two tenants that are leaving included in the three leases that are expiring this year?

That's right. Of the three, the other one comes due in December of 2010, and it's a medical property. And I would give that a 90% probability, maybe even closer, that that be re-leased because it's tied into a medical situation.

Right. Okay. Thanks David, that's it.

At this time there are no further questions. (Operator Instructions). Jeff Rudner, UBS.

You mentioned that for the rest of 2010 you feel comfortable with the $0.125 a month dividend. Was I correct in hearing you on that?

Yes, that's correct.

Do you anticipate any possible growth into 2011 such that the dividend might go up? I think (multiple speakers) I'm sorry. Go on.

The way that it will grow is if we raise equity, whether that's senior common equity or regular common equity, that we can use to buy into some of these properties. It also is dependent on us being able to find properties with mortgages already on them that are at attractive rates for us, or buying properties in which we believe strongly that we can find mortgages that would be beneficial to us on those.

So it's still an open issue today, but if you see that we've raised a substantial amount of money in senior common stock or regular common stock, then you'll know that we have opportunities to invest this money that will be very nicely accretive to our common shareholders.

Do you feel the landscape going forward in 2010 will become more positive for these types of deals?

My guess is that it will become highly dependent on what happens to a lot of these mortgages that are coming due. There's $1 trillion of CMBS -- maybe even more than that -- of CMBS that's coming due this year, next year, and the year after. I think 2013 is the landslide year. There's literally a tsunami building now of all of these that are coming due, and those have to be financed.

They are not owned by banks, they are owned by investors. The AAA tranche of those funds are saying, sell the properties and give me my money, or do something to get those notes paid off.

Of course the guy who's holding the B tranche, the last out piece, is saying, please hold on, the market is turning around, don't sell the property.

So there's a big discussion on what's going to happen in these CMBS pools that are out there. My guess is they're going to start selling them off this year, next year, and there will be a landslide, maybe not in 2011 but certainly 2012 and 2013.

So whatever is going to happen to those will have a big impact on the pricing, just like in the residential home marketplace so many properties were for sale that the prices got depressed pretty dramatically. If that happens, this fund will make a fortune.

We all went through this -- I say we all -- many of the folks here that are with me today were with me during the early 1990s when we did exactly that, buying up properties and mortgages at bargain basement rates because there was so much on the marketplace. And we just made a fortune for our shareholders.

I don't know if that will happen this time, but it sure looks like it's going to happen.

Is it fair for me to say that it appears the outlook for the company going forward over the next two to three years is as bright as it's been since the company went public?

I think it's brighter, because the opportunities -- we brought this company public in a time when it was highly competitive, we had to work really hard to make it -- make our numbers, and we turned down literally hundreds of deals because the terms and conditions wouldn't yield the kind of returns we wanted.

We looked at the marketplace at the time -- and I'll just back you up on the history. The cap rates have averaged about 8.3% over the last 15 years, and they've gone way under that and way above that, depending on the cycle in the economy.

When we came into the marketplace, they were probably running 6.5% or 7.0%, and so we weren't doing those deals. There were a lot of people that were doing those, but we were always about 8.0%, and many times about 8.5%. So as a result, we didn't get the hammer of this downturn where cap rates are coming back up and leaving people with no equity in their buildings. So we survived that very nicely, and we had long-term debt to finance our long-term leases, so we didn't run into that problem as well.

As a result, we are in great shape today, and I think the next three years will be a wonderful time. Now, I don't know what's going to happen, whether the Obama administration will allocate another trillion dollars to buy up all of these so the accidents won't happen that we think are going to happen, but if no one touches it and they just -- comes to marketplace, it will be a boon for us.

Thank you David.

Lee Carter, private investor.

David, is the issue of borrowing $100 million from the government (inaudible) for any one of the companies?

Yes. Well, let's talk about commercial. We've never had a shot at borrowing any money from the government in commercial. It's been one of those areas that we've tried talking with all the people who are running the stimulus money, and we just don't fit into any of their categories. We are not a bank, we are not this, we are not that. So as a result we've never gotten any traction there.

In our other companies we are still working on things there to try to work with the government, primarily the Small Business Administration. But at the end of the day, I don't know how that will come out. We just have to wait and see when our applications go in.

But you are right to focus on borrowing, because that's a key in any real estate investment trust is being able to leverage your real estate, being able to borrow 50%, 60%, 75% of the purchase price at reasonable rates is the only way to make real estate work. So we are hopeful the mortgage marketplace will come back.

We are talking with some of the smaller banks that still seem to be strong, and we are seeing some of the other people come into the marketplace that had gone away. We talked with the folks at some of the large financial institutions, non-bank financial institutions, and they are back in the marketplace. Now, their rates are a lot higher than they were two years ago, and so it takes a special piece of property and transaction to make it work. But nonetheless, they're back in the marketplace, which is a good sign.

It sounds like there's a little bit breaking up once in a while anyway. (multiple speakers)

I think so.

If you add in the depreciation, what would your book be? About?

Book value today is -- we have to subtract out the preferred stock -- probably, what?

$8.00.

$8.00, $8.50? -- would be my guess. I -- you can do the math, and we could do it here, I guess.

Why don't you put a pencil to paper (technical difficulty). Go ahead Lee with your next question. We'll do the math.

I got a [senior and don't know if you're sorry I canceled it].

I had one other question. (multiple speakers)

A senior moment?

I was going to ask you two.

You're too young to have a senior moment.

(laughter) That's why I regarded January 31.

Anyway, it's looking good, and where else can you get that kind of a yield? So (multiple speakers) done a good job.

The book value is really an erroneous number because the depreciation goes much quicker than the value of the building goes down. So as a result, your book value is not going to be what you could actually get out of this. So I don't know. We'll do a little math and try to come up with that number. But it's lower than the current purchase price.

Okay. All right. Thanks Dave. Keep the good work going.

Other questions please?

Chris Lucas, Robert W. Baird.

Just one follow-up question related to the health of your tenants. What are you hearing from them? I know when you go and underwrite a building you are able to do a pretty reasonable amount of due diligence on their financials. Are you still able to do that? What are you seeing in their performance? What are you hearing from them?

Yes, we do a write-up every quarter. With some of them we get quarterly statements. Some of the big ones like Sara Lee, of course, are public companies, and those we can pull down. Generally speaking they have all gone through -- and when I say all, I'm talking about really a majority -- have gone through some diminution of sales and earnings during this period of time, but none of them have reached the point of flunking the test of making their rent payments, so we haven't had any bankruptcies.

As you know, we had -- I think it's now three years ago -- we had one company that did go bankrupt. We were able to move in, and the buyer of the business out of the bankruptcy rented our property, and we did not miss any payments at all in terms of our income there.

We don't have anybody that's teetering on bankruptcy now, or even close to it as far as I can tell. All of them are in reasonably good shape, but they all have suffered. This isn't a recession that didn't touch our portfolio. It touched everybody. We are just lucky enough that these are key pieces in their -- key real estate in their companies, and they need to keep it, so we have not had any problems with that.

So we do spread the financials every quarter, when we get them on a quarterly basis, and every -- and certainly annually. We are in contact with them. We go visit the properties and visit the folks that are renting them and make sure that we keep in constant contact. So we are watching them just about the same way we watch a company that we have loaned money to in one of our other funds. We do the same kind of due diligence and following that we do in those other borrowing situations.

Great, thank you.

Other questions please?

At this time there are no further questions over the phone, so I would like to hand the floor back over to you for any closing comments.

Thank you all for calling in. We will see you next quarter, and again, I think this is going to be a good year for us. I hope all of you get a chance to buy some shares. Thank you very much for calling in.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.