Gladstone Commercial Corp (GOOD) 2010 Q1 法說會逐字稿

Greetings and welcome to the Gladstone Commercial first-quarter 2010 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, CEO for Gladstone Commercial. Thank you, Mr. Gladstone, you may now begin.

Thank you, Jackie. That was a nice introduction and thank all of you for calling in. As I mentioned so many times, we enjoy this time that we have with you on the phone. I wish we had more time to talk; wish we could do it every month. But unfortunately we just do it once a quarter so we will give you as much information as we can during this quarter call.

Please come visit us if you are ever in the Washington, DC area. We are located in a suburb called McLean, Virginia, and you have an open invitation from all of us here to stop by and see us. You will see a great team at work. If I am here, I will come by and say hello and we can spend a few minutes if you are here. But anyway the invitation is open to come by and say hello to us.

Hope you are all reading the press releases and the Form 10-Q that we filed yesterday. There is a lot of good information in there. Let me just read the forward-looking statement before we get started.

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 risk and uncertainties that are based on our current plan and we believe that plan 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 all those factors listed under the caption Risk Factors in the Company's 10-K and 10-Q filings that are filed with the Securities and Exchange Commission. Those 10-Ks and 10-Qs, by the way, can be found on our website at Gladstonecommercial.com and on the SEC website.

Just a reminder the Company undertakes no obligation to publicly update or revise any forward-looking statements whether the result of new information, future events, or otherwise.

In our talk today we plan to talk about funds from operations or as we refer to it, FFO. And since FFO is a non-GAAP accounting term I need to define FFO for you. It's net income excluding the gains and losses from the sale of real estate plus the depreciation and amortization of real estate assets. That is what the National Association of Real Estate Investment Trusts defines as FFO and NAREIT have endorsed FFO as one of the non-accounting standards that we can use in the discussion of our REIT.

Please see our 10-Q filed yesterday with the SEC and our financial statements for detailed information about FFO.

We begin the call today by hearing from our President, Chip Stellies. Chip is also the Chief Investment Officer of all the Gladstone companies and plays a key role here at the group. Chip, take it away.

Thanks, David. We had another good quarter as we moved into our 2010 fiscal year. While we did not make any new investments during the quarter, our first quarter results reflect continuing positive performance of our portfolio. Despite the difficult economic environment, as of March 31 all tenants are current with their rent payments and we are hopeful that the portfolio will continue to perform well in the future.

As I have mentioned in the past, we do have two properties that we have to find new tenants for this summer because neither tenant is revealing. These two tenants represent about 2.6% of our total rent so our occupancy will drop to 97.4% if we do not find new tenants. We are working hard with several new tenants and are also researching some alternative uses for these properties.

Equity and debt markets are improving. However, the disruption in these markets that we have experienced over the last two years has it made it more difficult to obtain new debt or equity capital in terms that are overly attractive.

Our stock price continues to increase, although the yield continues to be above that of many of our competitors. That being said, we continue to review options to raise equity to keep growing the Company including the issuance of senior common shares we will discuss later.

On the debt side, while improving, the current credit market is still difficult and the long-term mortgage markets, including the CMBS market where we traditionally sourced our long-term mortgage financing, remain largely unavailable. We are now seeing some banks willing to issue medium-term mortgages up to five years, albeit on less favorable terms.

As a result we intend to focus on these medium-term mortgages to finance our real estate until the market for long-term mortgages returns. We have one of these mortgages in the works today and we are hoping we can close one in the next quarter.

We remain committed not to use our line of credit to any great degree to make acquisitions that we don't believe can be refinanced with longer-term mortgage debt. If you recall, our model called for us to initially borrow from the line of credit to buy properties. We then obtained long-term fixed rate mortgages as soon as we could.

We were able to secure a spread between the rent coming in and the mortgage payments going out, and by doing this we were able to lock in a profit for five to 10 years or 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 in the last two years the model had to adjust to medium-term mortgages so that we are not financing long-term leases with short-term credit. We do believe we will find mortgage debt. If we don't it will be difficult to build the assets of the Company this year.

Thus our near-term strategy remains to enhance the value of our existing portfolio of properties by reviewing and extending existing leases, performing improvements at the properties, and selling certain of our non-core assets. We are reviewing potential acquisitions which are consistent with our conservative investment approach in properties that are more than likely to produce attractive long-term terms for our stockholders; two, have existing assumable financing or where we can find attractive financing; and three, where the tenants are weathering the current recession well.

On the funding side we have about $35 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. We are in the process of renegotiating the terms of the current facility and simultaneously searching for replacement financing prior to maturity.

We have $80 million of unmortgaged properties that we can pledge toward additional financings that would provide short-term debt reduction, some additional liquidity, and perhaps some capital for new acquisitions. So we are in very good shape with our short-term credit.

At quarter end we had approximately $252 million in long-term mortgages borrowed against the properties we own with a weighted average fixed interest rate of 6%. The first of these mortgages in the amount of $48 million matures in October of this year. However, this mortgage has three annual extensions that we intend to exercise as we need them. So we are not under the near-term refinancing pressure some other REITs are experiencing.

Rates on the medium-term mortgages I mentioned will likely be higher than we have experienced in the past, closer to 7%. All the other terms are less attractive as well including lower loan-to-value advances and some recourse to our company. Our existing mortgage debt is really only recourse to the properties. The market for financing is not consistent so we will just have to see what mortgage lenders can offer us.

At quarter end we have approximately $287 million in mortgages and short-term borrowings. This means we have about $2.50 in debt to every $1 in equity. We plan to keep our borrowings at that level and as such we plan to raise equity in connection with any new acquisitions. We think this is a reasonable debt-to-equity level.

Quality of the assets remains very good. All the properties are leased and all of our tenants are current in their rent payments as of March 31.

As stated earlier, we are currently working on those properties with leases that are expiring in 2010. For 2010 we have a total of three leases expiring which have total annualized revenue of approximately $1.4 million or 3.4% of our total rental income. So this is rather insignificant when compared to other REITs.

Feel pretty good about the portfolio, remain pleased that so many of our tenants seem to be weathering the poor economy, and am hopeful we can acquire some more properties this year. With that I will turn it back over to David.

All right, thank you, Chip. That was a great presentation and now we will turn it over to our Chief Financial Officer, Danielle Jones, for a report on the financial results. Danielle?

Thanks, David. I will begin by covering our balance sheet which continues to remain strong. We have a total of $115 million in both common and preferred equity and a total of $287 million in mortgages and short-term borrowings so our debt-to-equity ratio remains approximately 2.5 to 1.

At the end of the quarter we had approximately $6.6 million of remaining borrowing capacity under 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 left both the amount outstanding under the line and our outstanding letters of credit.

In connection with the extension of our line 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 approximately $45 million of the line.

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

We are also hopeful that we will be able to raise additional equity in the near term in order to improve our liquidity. To this end, we had our first sale of senior common stock last week and though it was a small amount we are hopeful we will sell additional shares and be able to use the funds to grow our portfolio.

Now I will discuss the results for the quarter. 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 $0.40 per share. These results remained relatively flat from last year. Our results were affected by a decrease in our professional fees, stockholder-related expenses, and interest expense which allowed us to pay out the entire incentive fee during the quarter resulting in net income remaining flat quarter over quarter.

Professional fees decreased because of reduction in legal fees incurred during the current quarter. We incurred more legal fees during 2009 related to lease renegotiations and reviews of legal documents with our existing tenants. Stockholder-related expenses decreased significantly during the quarter because of a reduction in the amount of cost incurred for printing and filing our proxy and annual report.

Interest expense also decreased because of the decrease in LIBOR from the first quarter of 2009 which reduced our interest expense under our line of credit coupled with reduced interest expense in our long-term financings from amortizing principal payments made during 2009.

We are happy to report that we were able to pay out the entire incentive fee during the quarter and are hopeful that we can continue paying out the full fee so our FFO can continue to grow. However, if we are unable to find replacement tenants for the two buildings that are going dark this summer we may have to credit a portion of the incentive fee in order to maintain current distributions to our shareholders.

Now I will turn the program back over to David.

Okay, Danielle. Thank you so much. I think the great news about this company for this quarter and really for the past year has been that the team has been able to maintain the FFO and allow us to continue our distribution to shareholders.

As you all know we have all gone through a recession and this recession that we have gone through we haven't had to cut the dividend or miss any payments to our lenders. Given the general problems in the real estate marketplace as well as the REIT marketplace, I think that was quite an accomplishment.

I want you to know that this team is still working hard to achieve similar results during the challenging times that we think are in the future but at the same time we are optimistic about the chance of this company finding some good opportunities to put on the balance sheet and hopefully increase the income.

Prices for commercial real estate in the marketplace in general have changed largely because the mortgage marketplace as changed. There is no longer low-cost mortgage lenders that will finance our commercial real estate or anybody else's and since buyers can't find low-cost mortgages obviously they can't pay as much for the real estate. This is causing a lot of the sellers to be much more realistic in the sale price of their property or the property just doesn't sell.

If we could find some mortgages, as we think we have found -- we have got three, actually three commitment letters and working on one really hard -- but if we are able to start putting some mortgages on the books and free up some cash, we can make a good number of acquisitions. So that is what we are betting on in the short term.

We have reviewed several purchases that have come with mortgages in place, that is the property and the mortgage is -- the mortgage is assumable when you buy the property and all we have to do is provide the equity. We may move forward on several of these during the next quarter or two, continue to research that.

Just to mention again, the CMBS, our conduit marketplace, has started up again. The CMBS marketplace is where the banks or the asset managers buy up a lot of mortgages and put them in a pool. Once they have enough in the pool they sell interest in the pool to investors. They are only including today highly-rated tenants and it will work its way down to us at some point in time. Hopefully over the next year.

I am optimistic that this form of mortgages and financing is going to come back to some degree over the next year.

The marketplace continues to be divided, as I mention each time, into these three categories. First the tenants that are AAA or certainly rated in this form of no less than BBB and they are well-located, high-quality real estate, usually very large office buildings or manufacturing facilities. These are being sought after by the large real estate investment trusts or the large insurance companies with pension funds.

The cap rates or yields on these properties continues to rise a little bit but it's still, the rates are still much too low for us to consider this category. And anyway, the purchase price would be way over what we would be willing to pay for any one property.

The other area that we could get into but haven't yet is the small real estate properties like fast food locations or pharmacy chains. Those locations that are being purchased have been purchased mostly by individual investors but at a much slower rate today than they were in the past. The yields have moved up to about 7.5% on those retail locations.

This area is very much in flux today and this market is coming our way. We have seen a few of the properties, albeit in out-of-the-way locations, hit as much as 9% cap rates. We are not interested in those but I think as time goes on we may get a shot at some of that as well.

Our investment space is this middle market where we seek the non-rated tenants. These are small- and medium-size businesses in commercial offices or industrial properties. We seek those out because we have the expertise to underwrite these small-business tenants in conjunction with the real estate, because as you know we are in the business of lending and investing in small businesses in the other part of our business. So we have this dual underwriting that we can go in and handle.

We also like the medical and retail area. Retail, as I just mentioned, but we really don't have much in that part of the world. All of this area that I am talking about now is sort of our domain and the cap rates in this group are on the low side of 9% today. Some of them are a little under 9% but in that range and as high as 13%. So we just need to put some mortgages on the books and start buying some of this and hopefully we can really move this little company along.

As we buy the real estate and lease to some medium and large companies we have done a few of those kind of deals to people like Sara Lee and Waste Management and Unisys. So we have some rated clients in our portfolio but they are certainly not AAA as some of the larger tenants are.

Now we are focusing our efforts on finding good properties and long-term financing that match up our long-term leases. We lock in that long-term financing in place with good long-term leases and that should give us a spread that we can pay out to our shareholders over the future. But it's currently challenging because we just don't know where the economy is going.

We don't know if it's completely stabilized so we are being very careful. And anyway, as I mentioned, the mortgage market place hasn't come back to the degree that we would like it to come back to. So we are going slow; we are watching what is happening. And as the mortgage market comes back I am hopeful that we can put a lot more of these investments on the books.

We have signed an agreement with a bank to provide some mortgages to us and should be able to report in the next meeting whether it goes through or not. I am optimistic that we are going to have that one go through. If it goes through that would be a good indication that things are freeing up for us and it will for others as well.

We have begun discussions with our lenders for a line of credit. They came down to our offices here. We had a good meeting.

They have another bank that may want to join with the group that is there so I am getting pretty optimistic that we are going to get this new line of credit in place during the summer. It comes due in December; it would be nice to go ahead and put it in place now and know that we have it in place for the next couple of years.

There is a new opportunity, there is another part of the marketplace that is opening up and I really wonder how it's going to develop. There is about $1 trillion of old CMBS pooled mortgages and they are coming due over the next three years.

There just doesn't seem to be any way there is lending capacity to refinance those mortgages so we think a lot of those are gone to come to the marketplace at pretty steep discounts. And we may be able to buy the mortgages or maybe even the properties that are secured by the mortgages at substantial discounts from where they are traded at in prior times.

So we will watch that marketplace. I think next year will be a big year and then the next year after that is even bigger, so we have got some opportunities coming our way there. All of you are probably watching the auctions that are going on now. If you turn, I think it's the Wednesday or Thursday Wall Street Journal is filled with these auctions.

Substantial amount of those loans and the real estate that is being auctioned off there is mostly housing related, either apartment buildings or those that are secured by development land for houses. None of that is in our marketplace.

We don't play in that area. We are not interested in that so hopefully over time if they get to some office buildings or other things that we might be interested in then we can bid on those. But right now what is coming out of those auction houses is not much related to what we want to do.

Looking at the economy much of the industrial base that rents industrial and commercial properties remains okay. Prices for most of the real estate have declined my best guess is that the real estate we own has declined somewhere between 5% and 10%. The appraisals that Danielle mentioned were off about 6% so there has been some depreciation, I am sure, in our properties if we had to sell them today.

Although most of our properties have mortgages with them that are assumable and so, who knows, we might be able to get all of our money out if we had to sell them. We don't intend to sell any of them. As you know, we buy and hold. We have only sold three properties since we started this company, those were in Canada and another one is in Norfolk that we sold. So our goal here is to buy and hold and use those to pay dividends.

Most of our tenants are doing okay. We have a few that haven't done as well as we had hoped, but none of them are in the deep position of not paying us. And I think they will keep paying because mainly those buildings that they are in are very critical to their operations so we expect things to be good for 2010 and not a huge amount of changes.

As we finish up our discussions with our line of credit if we can get that into a two-year commitment, maybe even more, we should be able to take some nice deals and put them on the books as well.

At this point I just want to say I am optimistic that our company is going to be fine for the immediate term and probably the long term as well, but we all have to worry about what is going on out there. We don't want to make any missteps by acquiring something that might cause us a lot of problems.

All the spending that has been announced in tax by the government is just going to lead to further tax increases and that will change the fabric of this country. I think inflation is on the way and that is why it's such a good time to be in the real estate marketplace because real estate tends to go up in price when inflation goes on.

And that is why I love this REIT so much. It has reasonable business tenants with good outlooks. If inflation is coming in, then the value of this real estate should increase along with inflation.

Just to reiterate our plans, we are trying to grow in a number of ways. First, we are talking to some local banks to provide mortgages on our unmortgaged properties. Once we get that mortgage money we would turn around and invest that in new properties that would create more income for this company. We have about $80 million in properties that do not have mortgages and we are working hard to find mortgages for all those properties.

If we can, of course, that will be -- and we will press release that if it happens just so you know because that will be a big indication that we are on the run again for new transactions that we can put on the books.

As Danielle mentioned, we are looking at ways to raise capital from our senior common stock. We had the first sale. We are hopeful that this summer that we will sell out about $50 million worth of that. It has a 7% yield on it.

This is like preferred stock and if we can t sell that and then put it to work at the rates that we have been talking about then that will have a nice impact on the common stock as well. We have seen a nice increase in the stock over the past few months but still not considering selling common stock because the price is still much higher in terms of yield than almost anybody in the triple net business.

If you looked at all of the, I think it's about seven of us that are pure triple net in this space that we are talking about here, that is the triple net space, I think we are about close to 9% yield, about 8.8% today. The average is somewhere in the 5% to 6% range. If we went to 5% or 6% yield as we should be, because we are certainly as good as any of them in the marketplace, the stock would really go through the ceiling.

Another reason not to sell common stock of course is that if we add more buildings and properties we are going to be able to increase the dividend. If we sell more shares of the common stock we have got to meet that extra dividend, the extra increase in the dividends. So we are looking for other ways to raise money but it's hard to tell you how or when at this point in time that we are going to be able to do that.

Just to summarize again, in April the Board declared monthly distributions of $0.125 per common share per month. That is for April, May, and June so we are run rate at $1.50 per year. That is a nice run rate for such a good REIT.

Because the real estate can be depreciated, we are able to shelter that income. The distributions in 2009 were sheltered, it was about 94% return of capital which is tax-free and that should be similar in 2010. The stock is a great one to hold in your regular accounts because it's so tax friendly.

After all, if you bought the stock at today's price of $16.96 you would have a pretax yield of 8.8%. But even if you are in the 40%, 45% -- 40% tax bracket after tax you are getting a yield about 8.3%. How many times can you get a yield of 8.3% after the government has taxed everything else that you own?

This 94% return of capital is due to the depreciation of the real estate assets and the other items on the balance sheet. It causes earnings to remain exceedingly low after the depreciation is applied. And that is why we talk about FFO because it adds back the real estate depreciation.

As you all know, depreciation of a building is a bit of a fiction since at the end of the depreciation period the building is still standing. It's a great thing if you own the stock personally because you don't pay any taxes on that part that is sheltered by the depreciation shield. However, the return of capital does reduce the cost basis on the stock which may result in a larger capital gains tax when the stock is sold.

With a stock price averaging about $16.96 today the dividend yield on our stock is about 8.8%. And with 94% of the sheltered it's a mighty good opportunity to load up. We will declare the next monthly distribution in early July for the months of July, August, and September.

With that I will stop and, Jackie, if you will come on board and we will try to answer some of the questions from our shareholders and the analysts that are out there.

(Operator Instructions)

And, Jackie, are we sure they can get in because we had a problem once that they couldn't call, for some reason they couldn't get in?

(Operator Instructions) [Leroy Carter], private investor.

David, I just wanted to show you that somebody can get in if they are there. Just on that line of credit, will that be larger than what you carry now?

Well, it's not necessary. We may go to larger but just to use some the math for you, for example, if we got a mortgage on some of that $80 million we would be paying down the line of credit from where it is today, about $35 million or so. And so then what you would want to do is borrow again into it.

As long as we can find mortgages our goal would be to do long-term mortgages against the long-term leases that we have. Probably won't increase it beyond where we are at today simply because I think we are going to be able to get some mortgages.

I always hate to get a line of credit for two years, say, and then start putting properties on the line of credit that have a 10- or 15-year lease. Recipe for disaster is to lend long and borrow short so we always try to match up our terms of our leases with our terms of our debt by putting mortgages in place. So I am not sure we want to increase it.

I think we could. I think we could probably push it back. As you knew we were at over $100 million at one time on our line of credit. When mortgages were plentiful we needed that in order to fill up the line of credit and then turn around and put mortgages in place because we were going at such a fast pace.

The banks certainly were eager to move forward on putting our line of credit in place so we will just have to see how it comes out. Stay tuned, something will happen hopefully in the next 60 days.

One other question, David. On the $80 million that you do not have mortgages on, what are you looking for in length and interest costs on those?

What comes along right now is usually a five-year term mortgage with some extensions on it. Sometimes it's another five-year extension and so you sort of get a five and five. The banks have a chance to raise the interest rates usually after five years. You are just playing a shorter-term game now than you were sometime ago when the CMBS marketplace is there.

We are hopeful that we can get interest rates like we have got on our mortgages today in the 6% range. That may be a bit optimistic. I don't think it would exceed 7% so we would still be well in the money.

As you know, we never bought properties at low cap rates. I know a lot of people were buying stuff at 6.5% and 7% cap rates. I think -- what is our cap rate now, average cap rate?

I think it's 8.7%.

Well, we never bought anything below 8.3% or 8.4% and most of the time I think our average is running into 9% now.

I am sorry; you are right, it's 9.6%.

9.6% is the average today. So you can see that we are well high in terms of the yield on our real estate compared to a lot of people that were buying at low cap rates, 6.5%, 7%, and financing it with two- and three-year paper that was 2% and 3% at the time. So as a result they were making great money.

But then of course the train wreck came along of not being able to roll those short-term mortgages over into longer term mortgages or even short-term mortgages because a lot of REITs hit the wall because of that and had to raise money at various low rates.

We just have avoided all of that. We have been very conservative. I know folks get really upset because we are so slow and so picky, but when times like the one we just went through come along we tend to stand up better than the average REIT. And so that is our mode of operation, Lee.

What is the average -- what I am trying to say, on the $80 million you got left what is the average price of the properties?

That is the $80 million.

Yes, the $80 million but is there five mortgages involved there or 10?

You probably have about three or four mortgages --

Three or four, okay.

-- that you would cover that with. And so you would bundle them in two and three properties at a time hopefully and mortgage them out. We do have a couple banks that are interested in a single property so we are just working that marketplace.

And it's coming back. It's amazing how quickly it has turned; what a difference a year makes. A year ago was just a disaster.

True. All right. Thanks, David.

You are welcome. Do we have any other questions, Jackie?

[David Devinsky], Robert W. Baird.

Got a couple questions. You mentioned cap rates for the properties that you guys were looking at were in the 9% to 13% range but how big is that pipeline? And how many properties are out there that you guys would be looking at if you guys could line up the financing for it?

David, we don't tell people that we are interested unless we have the money so we have not been in the marketplace knocking on doors. We have had three properties that we came close to and working on and the pipeline probably has half a dozen that are -- and they know that we are not going to go forward unless we get a mortgage in place.

So you try not to talk to a seller and say to them I will buy your property and don't tell them that it's subject to us being able to get financing in place. So it's kind of hard to negotiate until we know this mortgage that we are working on is going to close or more of the senior common is sold so that we have the money to do the transaction.

I would say that if we had the money, my goodness, we could put $100 million on by the end of the calendar year if we had the capital available.

Okay, great. And then just going back to the senior common stock can you just talk a little bit more about, I think you might have mentioned $50 million is kind of your target. How long was that? When would you expect to get that amount of capital?

I wish I knew. We are new to the non-traded REIT marketplace. You probably know, because you are a professional in the business, there is a whole market place called non-traded REITs that is they register the shares and then they sell them but it's never traded. It's held by people for long periods of time, usually five years at a minimum.

That marketplace runs anywhere from $8 billion to $12 billion in new raises of capital every year. This is our tiptoe into that marketplace to see if we can sell some shares of our stock in that marketplace.

I am unsure and really unwilling to tell you other than we hope it will happen all this summer and get done this summer so that we can put the money to work and have it working sometime by fall and start talking about raising the dividend.

Okay. Just lastly on the 2010 lease maturities for the tenants that are not expecting to renew, can you just give a little bit more color on how far the dialogues are and where you would see releasing of that space? Is there potential for positive releasing spreads or do you see a negative role down there?

In the one property, which is the smaller of the two, I would say that that lease negotiation has been hot and heavy for at least a month now. They want us to redo a lot of things in the building and they are willing to pay -- if we put the money in the building, they are willing to pay the rate that is necessary to carry that at the rate we like.

So I think that one is well along. I don't think it will happen in time so that we won't skip several months, maybe even six months, because of the construction that they want in it. So that one is ongoing; we will see what happens.

And then the second one is one in which we are studying repositioning the building altogether from where it is today at a fairly low rate to reposition it to something that would be quite attractive and would probably make it a candidate for it getting sold after we do the construction to it. It would be in an area that we are not that good at. We have a partner and we would probably just finance ourselves out of that partnership make a few bucks and move on.

That one will take at least a year from the June timeframe when that comes up so you will see a drag from that one not being paying rent for probably a year as we reposition property by tearing down part, maybe all of it and reconstructing a different building for a different focus there all together.

Okay. And then what are the capital expectations for the repositioning of those two properties?

The cap rate for the last one I mentioned is very high and that is because it's going into an area, a medical area. I am just not -- it's real early to talk about that. We are having a study done now. The study is due out in two or three weeks and the partner that we have is very excited about the property.

And so my guess is that that will get going sometime late summer and be finished sometime next spring. At that point in time it will lease up and then we will probably want to sell that and get out of that business but the cap rate would be much higher than anything we have on it now.

The other smaller one the cap rate is not going to be that different but we are going to put more money in the building. So at that point in time that cap rate should be just fine for what we are talking about.

And how much money would you have to put in to the properties?

Probably have to put a couple million bucks into that property, the last one I mentioned. Not sure; we don't have a budget on the first one but it would be substantial. Both of them are substantial amounts, maybe $2 million to $3 million each.

Okay, great. Thank you so much.

John Roberts, Hilliard Lyons.

Hey, David. Most of my questions have been answered but let me just throw something out there. What share value do you have to see before you are going to consider an equity offering?

You guys are always after me to do equity offerings. Let's see, why don't I not say that. That would not be good for me to put that out in the marketplace.

Us analysts can't do that. I am just doing it strictly for modeling purposes, David.

I know. I would like to be in the same yield range that all the other triple net lease guys. If you took an average of the nine or 10 of us that are in the marketplace I would sure like to think that our stock is worth as much as theirs are and be in that range.

Because I think that if we do the senior common or if we get some mortgages coming in, as I think we are going to do, we are going to be adding another $50 million to $100 million worth of properties with great spreads. And that would jack up the payments to the common shareholders. I don't want to sell shares at this price and then have to pay up as we increase the dividend.

So my goal is to increase the dividend and I don't want to dilute existing shareholders. I don't want to have to pay a higher price in the year for the money that I might raise. So I am hopeful that these two paths that we are going down, that is the senior common as well as the mortgages, will yield us enough money to make the dividend grow pretty handsomely.

How do you anticipate doing $50 million of that senior common? Is there an offering or are you going to do that just an after-market sort of deal?

It's an offering and it's handled by an underwriter that is in the non-traded REIT space.

Okay. All right, thanks, David.

(Operator Instructions) Mr. Gladstone, there are no further questions at this time. I would like to hand the floor back over to you for any closing comments.

All right. Well, we thank you all for calling in. We appreciate all the support that you have all given us. This should be a good year, so that ends this conference call.

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