Gladstone Commercial Corp (GOOD) 2015 Q2 法說會逐字稿

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

And I'll now turn the conference over to your host, David Gladstone. Please begin.

All right, thank you Tarone, that was a nice introduction and we appreciate all of you calling in. We really do enjoy these times on the phone, and wish we had more times to talk. And if you're in this Washington DC area, we're located in the suburb called McLean, Virginia, and have an open invitation to stop by, and see us and say hello. It's about 60 people here, and put a bigger team now, and we're always inviting people to come by and see us. Some of the people here have dog or they bring them to work. So we have a few dogs here to greet you as you come in.

And now, I'll turn it over to Michael LiCalsi, he is our General Counsel and Secretary, also serves as the President of Gladstone Administration, which serves as a administrator to all of the Gladstone funds and the related companies as well. He'll make a brief introduction, and announcement regarding the legal and regulatory matters concerning the call. Michael?

Good morning, everyone.

The report that you are about to hear may include 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. And these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And there are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the factors listed under the caption Risk Factors in our Forms 10-K and 10-Q filed with the SEC. And those filings can be found on our website, www.gladstonecommercial.com and on the SEC's website at www.sec.gov. 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.

And in our report today, we also plan to talk about funds from operations or FFO. 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 from the property plus depreciation and amortization of real estate assets. The National Association of REITs or NAREIT has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. And please see our Form 10-Q filed yesterday with the SEC and our financial statements for a detailed description of FFO. And today, we also plan to discuss core FFO, which is generally FFO adjusted for property acquisition costs and other non-recurring expenses. We believe this is a better indication of the operating results of our portfolio and allows better comparability of period-over-period performance.

And to stay up-to-date on our fund as well as all the other Gladstone publicly traded funds, you can sign up on our website to get email updates on the latest news, you can also follow us on Twitter, our user name is GladstoneComps and on Facebook, the keyword, The Gladstone Companies. Finally, you can visit our general website to see more information at www.gladstone.com. In the presentation today is an overview and we ask you to read our press release issued yesterday and also review our Form 10-Q for the quarter ended June 30, 2015. Both of these documents are on our website, www.gladstonecommercial.com and now we will begin the presentation by hearing from our President, Bob Cutlip.

Thanks, Michael. Good morning, everyone.

During the second quarter, we acquired two properties and issued new debt on both of these properties, raised $12.1 million of common equity under the ATM program, modified one lease such at the anchored-tenant will expand into the entire building next year at the lease expiration of another tenant and refinanced $30.4 million of debt that was maturing in 2015 with a combination of new debt and equity. Subsequent to the end of the quarter, we also amended our fee structure to be more in line with our peers, leased our partially vacant property located in Raleigh, North Carolina and acquired another property in Atlanta, Georgia for $13 million. As you can see, our acquisitions, capital, and asset management teams, all contributed to our success this quarter.

We had another excellent quarter as we continue to increase our asset base by acquiring new properties. This is our 15th consecutive quarter of closing at least one new acquisition. We crossed the milestone and we now own 101 properties. We're really pleased with our activity and consistency and we continue to have a strong pipeline of acquisitions.

Now for some details. During the quarter ended June 30, we acquired two additional properties. The first property is a 78,000-square foot office building located in Columbus, Ohio. The purchase price was $7.7 million, the average cap rate is 8.3% over the life of the 15-year lease. We funded this acquisition with cash on hand and the issuance of $4.5 million of mortgage debt. The building serves as the headquarters of a privately-owned home-based healthcare provider. The second acquisition is an 86,000-square foot office property located in Draper, Utah, which is a suburb of Salt Lake City. The total purchase price was $22.2 million with an average cap rate of 8% over the life of the six-and-half year lease. This is our first acquisition in Salt Lake City and we hope to acquire more assets in this market going forward. We funded this acquisition with cash on hand and issuance of $13 million of mortgage debt. The tenant is EMC Corporation, which is a leading technology company that develops, delivers and supports IT storage hardware and cloud computing software to customers literally throughout the world. Our property is one of eight worldwide centers of excellence for EMC.

After the end of the quarter, we acquired another facility. This property is a 78,000-square foot office building located in Atlanta, Georgia. Purchase price, $13 million; the average cap rate is 9.9%. We funded this acquisition with cash on hand and the issuance of $7.5 million of mortgage debt. The tenant leased 55,000 square feet of the property for seven years and the remaining 23,000 square feet for 15 years. The tenant in this property is Delta Community Credit Union, which is the 23rd largest credit unions in the US and the largest in the state of Georgia with 26 branches. This property houses the flagship retail branch and also serves as an office location. Delta Air Lines' headquarters is located directly across the street from our property.

Our acquisitions team has been placing significant focus on acquiring properties in secondary growth markets. The hallmark of our continuing high occupancy remains and will continue to remain thorough tenant credit underwriting and the mission critical nature of the property. However, closing transactions in growth markets leads to properties in land constrained locations over time and subsequent increases in property values, which we believe will benefit our shareholders. Over the past two years, we have invested in Phoenix, Salt Lake City, Denver three times, Dallas four times, Austin, Indianapolis, Columbus, Ohio and Minneapolis. It's our intent to continue to promote this strategy going forward.

Shifting to our portfolio, as of today, we have three vacant properties and two partially vacant properties, representing less than 3% of our total annual rent. Our current occupancy is 97.9% and all tenants in our occupied buildings are paying as agreed. The three for-lease properties in submarkets of Minneapolis, Houston and Chicago are receiving considerable interest. We, at this time, have prospects for all of the buildings, but do recognize that the two properties located in two smaller markets would be more of a challenge due to the slower current leasing velocity in those markets.

Our asset management team has been quite busy year-to-date renewing existing leases and leasing our available space. We renewed approximately 155,000 square feet of office and industrial space at three of our properties in Minneapolis and Raleigh, North Carolina. The tenant downsized in the Minneapolis property to 74,000 square feet from 115,000 square feet and extended for seven-and-a-half years. The tenant in Raleigh renewed their entire lease in a 60,000-square foot office building and they also renewed 21,000 square feet in the adjacent 116,000-square foot manufacturing facility, which they had previously fully occupied. Their lease extensions are for five years. Nearly immediately, thereafter Sumitomo Electric Corporation leased 87,000 square feet in the same manufacturing facility for 12 years, bringing the property to 93% occupancy. Sumitomo's lease commences the same day that the first tenant downsizes in the building on August 1.

Also, we modified the lease with the anchor tenant occupying one of our properties located in Columbus, Ohio. I wanted to remark on this transaction, because, as you may recall, we are acquiring on a very limited basis, properties that have a lead tenant in the majority of the building on a long-term lease, and the balance of the property may be occupied by two to four tenants. The intent is to enable the lead tenant to expand over time in the same facility, thus enabling us to retain the tenant, and the rental income stream. The anchor tenant in the Columbus property is currently occupying 92% of the building, and the modification allows this tenant to expand into the remaining space, currently occupied by another tenant, whose lease expires in December of 2016. The lease term for the expansion space is coterminous with their current lease, and both leases expire on December 2023. We have thus converted a higher cap rate multi-tenant building into a single-tenant net leased property.

We continue to work diligently on the remainder of our leases that come due in 2015. We originally had 12 leases expiring this year, and we have successfully extended the leases for seven of these tenants. We're negotiating a lease extension with an eighth tenant, and we have a ninth property in which we have signed a sale agreement to sell the property to a sub-tenant in the fourth quarter. So we have three properties that are unresolved. Two of the tenants have moved out and we've been notified that another will vacate at the end of the year. To that end, we are aggressively pursuing new tenants for these properties and we are currently negotiating a direct lease with a sub-tenant in the property whose tenant is vacating at year-end. The three leases where we know the tenants are vacating comprise less than 3% of our projected 2015 rental income and one-half of this income does not expire until December 2015. We have already commenced lease renewal negotiations with the three tenants that have 2016 expirations and have a fully executed letter of intent with one of the tenants to extend the lease for five years in the entire building. And the expiring rents for the next four years ending 2019 represent less than 2% of annualized projected rents for each respective year. So after this year, our lease rollover slow down dramatically and our existing portfolio will have stable and growing rental income. And as I noted in the past, locating new tenants and signing leases with our existing tenants is going to require some capital outlays for tenant improvements and leasing commissions.

We also entered into an amended and restated management agreement with our external advisor in order to be more in line with other externally managed fleets. Danielle will more fully explain this amendment in her segment of the presentation.

So in summary, at quarter-end, all of our existing tenants are paying as agreed and our portfolio is 97.9% occupied. We acquired two properties during the quarter and continued to have a very active pipeline. Our asset management team was also very busy renewing tenants and leasing our properties and our capital team was issuing equity and refinancing our maturing mortgage debt. We have consistently increased acquisition volume over the past three years, and we currently have two properties totaling $17 million in due diligence and we have three properties totaling $22 million that are in the letter of intent stage. And finally, under initial review, we have $225 million of properties that we're investigating.

Our objective as I've indicated in the past for our size is to have at least $250 million to $300 million in this pipeline of possible acquisitions with something in each phase from initial review through letters of intent and due diligence. Our team continues to meet this objective and has prospects in each phase, which we hope is going to lead to continuing consistent closings in the months ahead.

Now, let's turn to Danielle Jones, our Chief Financial Officer for a report on the financial results.

Thanks, Bob and good morning, everybody.

We continue to (technical difficulty) equity base or total assets increased $830 million from the two acquisitions we completed this quarter. We continue to focus on decreasing our leverage and have been issuing new equity under ATM program to help achieve this goal. We expect to continue decreasing leverage over the next several years through a combination of lower leverage on newly issued debt and refinancing our maturities with a combination of equity and lower leverage. The amounts outstanding under long-term mortgages in our line of credit was $532 million at the end of the quarter and is represented as a funding both of our new acquisitions this quarter. In addition, we have raised over $31 million in common equity under our ATM program during 2015 and have used these funds to acquire properties, refinance maturing debt, and to fund capital improvements at certain of our properties. Debt financing does continue to be available from multiple sources, interest rates have been increasing in anticipation of the Federal Reserve Bank will increase the federal funds rate later this year. At the end of the second quarter, interest rates were about 20 basis points higher than they were at the beginning of the year and about 40 basis points higher than they are at the end of the first quarter. Interest rates still remain low from a historic perspective and we continue to actively try to match our acquisitions with cost effective mortgages. Depending on several factors, including the tenants' credit rating, property type, location, terms of the lease leverage and the amount and term of the loan, we're generally seeing fixed interest rates ranging from 4% to 4.5%.

As Bob mentioned, we did refinance about $30.4 million of mortgage debt that was maturing this year with $21.5 million of new mortgage debt and the remainder with borrowings under our line of credit and cash on hand. The weighted average interest rate on the maturing debt was 5.3% and the rate on the new mortgage debt is variable at LIBOR-plus 2.25% which is a rate of about 2.5% today. This is a 2.8% decrease from the mortgage debt that was repaid. We also locked in the rate by purchasing a cap on this floating rate debt at 5.25%.

Looking at our upcoming long-term debt maturities, we have mortgage debt in the aggregate of about $8 million payable during the remainder of 2015 and about $100 million payable during 2016. The 2015 principal amounts payable includes a $3.9 million balloon principal payment that's due on one mortgage that matures in December. We expect to refinance the remaining mortgage debt with a combination of new mortgage debt and equity. The 2016 principal amounts payable include $92 million of balloon principal payments due on nine mortgages that matures throughout the year and we also anticipate being able to refinance these with a combination of new mortgage debt and equity.

The weighted average interest rate on the 2016 debt is 5.7% and while we do expect interest rates to increase from today's lows, we still expect to achieve at least a 100 basis point interest rate reduction when we refinance these loans in 2016. We've already begun discussions with lenders on the debt that matures during the first quarter of 2016. We will continue to pay the additional debt amortization payments from operating cash flow and borrowings under our line of credit. We also issued debt during the second quarter of $17.5 million on our new acquisitions at a weighted average interest rate of 3.9% which was the low end of the range making these deals very accretive for our shareholders. We continue to implement our strategy of lowering our overall leverage by reducing our weighted average loan to value on both newly issued debt and refinanced debt.

We have increased our common market capitalization by 11% over the past year, and have issued over 3.4 million new shares of common stock. We have decreased our loan to value from a high of 67% in 2009 to 52% today.

Turning to our line of credit, we currently have $53.7 million outstanding under the line at a weighted average interest rate of approximately 3%. We continue to only use our line to make acquisitions that we believe can be financed with longer-term mortgage debt or that we believe are good additions to our unsecured property pools acquired under our line of credit. We also continue to finance the majority of our properties with long-term fixed-rate mortgages, which allows us to secure the spread between the rent coming in and the mortgage payments going out, locking in the profit for the length of the lease.

As of today, our available liquidity is approximately $14.2 million, comprised of $5 million in cash and an available borrowing capacity of $9.2 million under our line of credit. With our current availability and access to our ATM program, we have enough availability to fund our current operations, deals in our pipeline, and any known upcoming improvements at our property.

Looking at our operating results for the quarter, we again reported a core FFO number. We believe core FFO, which adjusts for our property acquisition expenses and other non-recurring expenses, allows our investors to better compare period-over-period results. The per share numbers I reference are fully diluted weighted average common shares. Core FFO available to common stockholders for the quarter was approximately $8.3 million or $0.39 per share, which is about a 4.9% increase when compared to the first quarter. Quarterly core FFO increased because of the additional revenue we achieved from new acquisitions made during the quarter, coupled with a decrease in general and administrative expenses. This was partially offset by an increase in property operating expenses and our base management fees from additional shares issued.

We also believe that the recently announced change in our fee structure will improve our results as we expected to lower certain fees paid to the management company. Since we lowered the base management fee from 2% per year of common stockholders’ equity to 1.5% of total stockholders' equity per year, we also renewed the catch-up provision of payment from the incentive fee calculation, we lowered the incentive fee to 15% from 20% of our core FFO. We increased the hurdle rate on the incentive fee from 7% to 8% per year of stockholders' equity, which is a larger number than the incentive fee that's calculated from the previous advisory agreement. We put a cap in place on the incentive fee, so that the quarterly incentive fee cannot be greater than 115% of the average quarterly incentive fee paid during the trailing four quarters. And we also removed the capital gains from the calculation of the base incentive fee, but we did provide [capital gain fee of] 15% payable each year on the difference between any realized capital gains minus realized capital losses for the year.

We believe these changes to see bring us near to the current market practice and we're hopeful to facilitate growth of FFO distributions to stockholders in the future. We also believe this amendment will allow us to become more competitive in sourcing and maintaining talented investment and operations professional.

While 2015 and 2016 bring it with the challenges as we work on the lease renewals and debt maturities, we believe we have the right team and plan in place to reposition and continue our growth activities. We're confident that 2015 will be successful, as we continued to increase our asset and equity base and decreased our leverage. We are focused on managing our property operating expenses as well.

And now, I'll turn the program back over to David.

That was a good report Danielle, and a good one too from Bob Cutlip and Michael LiCalsi, both -- all given good reports.

Again, as you heard, the main report for this quarter is that we purchased two properties for about $30 million and placed mortgages on them about $17.5 million locking in the spread between those two refinancing mortgage debt to mature significantly lower rates. Every time we refinance, it seems to help us out on our income, we raised $12.1 million of common equity and as she was just explaining, we amended the fee structure to be more in line with the competitors. I hope this will increase our FFO quicker than we had anticipated and asked. We have continued to add quality real estate to the portfolio [to short] existing investments and we grew our asset base, again this quarter.

As we continue to grow our market capitalization increases and we hope to see higher trading volumes in the stock corresponding uptick in the price of the shares, the distribution rate today is about 9.4%. So it's very, very high compared to most of the other real estate investment trust. As many of you know, the Company didn't cut its monthly cash distributions during the recession. It's quite a success story, what some of the very good companies cut their distributions and most of them never came back to the size they were before the recession. Just wish, some of the analysts would pick up this story and play it out stronger simply because it was quite a fee. And quite frankly, I think we are still in a position to do that again should a similar recession come. Hope it doesn't come but if it does, I think we're ready for it. We all want to increase the distributions, but please give us a little credit for some of the very steady cash payments that we made to our shareholders, our track record of not cutting their distribution, should stack up extremely well against others that have cut theirs, didn't build it back up to their cost levels.

This is what we're doing today, we need to increase the common stock market capitalization in order to increase the trading volume and give investors who want to buy a lot of stock, the ability to do this. As most of you know, institutions are the largest buyers and holders of REIT stock. But the big buyers always want to know if they -- how many shares are outstanding, because they want to know if they buy $20 million worth of stock that there'll be liquidity when they want to sell. We still don't have enough shares outstanding to give them that kind of confidence. However, we have consistently built our asset and equity base, we doubled the size in the last four years. And with this growth, we hope to see more large buyers come into the stock and that should be helpful to increase the price and lower the cost of capital for us, so that we can buy a lot of different stock -- different properties, so that we can have a larger dividend payout. So we are buying properties today that will cover the dividend on the new shares, so we can issue more shares. Again, we're told over and over by investment bankers that we need to be bigger and if we're bigger, we'll have more buyers and the yield on the stock will be more in line with the larger REITs and this is called yield reduction. The average is about 6.4% today. And of course we're at 9.4%, so we've got a lot of room.

We did study a lot of different REITs and what their cost and G&A and all the other ideas about them. We amended our fee structure in order to be more in line with our competitors who are externally managed and internally managed. I think this will decrease our gross G&A and hopefully allow us to grow the FFO and ultimately be in a position to increase our dividends. We continue to have a promising list of potential quality properties, we are interested in acquiring those because that list of properties, we need to continue to grow and it needs to grow as we grow because every year we get bigger, so that means the list of properties that we're seeking to buy has to grow as well. With the increase in the portfolio of properties comes greater diversifications and those diversifications can protect all of our shareholders including yours truly we believe it will also contribute to much better earnings.

We are focusing our efforts to fund good properties and long-term financing to match them up, being able to lock in those long-term financings to finance those properties, it's really good for us in the future. Between 2016 and 2019, we only have about 2% of our forecasted rents expiring and our debt maturities after 2016 will drop significantly. And so we're set up very well over the next several years and we're much more optimistic that things are going to be very positive for us over the next few years.

Again, I'd touch on the economic outlook much of the industrial base. (technical difficulty) commercial properties like our properties remained very steady and most of them are paying their rents. There's still some businesses that are having problems, obviously in the economy is still not in great shape. However, we expect good growth. Good, the rest of 2015 for this real estate investment trust. I am very optimistic on our company that will be fine in the future (technical difficulty) continue to be cautious in the acquisitions that we're doing. We'll buy good properties and underwrite the tenants to assure ourselves that they can make payments during the recession.

We made it through the last recession without cutting the dividend or having a lot of problems with tenants. If there is another recession lurking on the horizon, I think our portfolio will continue to stand the test against that one. And if the Fed decides to raise interest rates, we're really ready for long, we have most of our properties financed for long-term fixed-rate mortgage debt to match up with the fixed rental payments. We don't use a lot of short-term debts to hold the properties. We've watched that scenario in the last recession, put a lot of people in very difficult positions.

In July 2015, the Board voted to pay a monthly distribution of $0.125 per common share for July, August, September for an annual run rate of $1.50 per share. This is a very attractive rate for such a well-managed real estate investment trust like ours. We've now paid 131 consecutive common stock cash distribution since inception. We went through the recent recession without touching those, I just think that's a wonderful story for anybody who's buying the stock. Because real estate can be depreciated and we are depreciating hours, obviously. We're able to shelter the income of the Company. In addition, because some losses recognized in 2014, when that one property we returned to the lender, the common distribution in 2014 was 100% return on capital meaning that there was no taxes due on that if you are holding that as an individual. We don't expect it to be the high in 2015, but the return of capital has historically run somewhere around 80%. So this is a very tax-friendly stock in my opinion and a good one to hold in personal accounts --- income.

The return of capital is mainly due to the depreciation of real estate asset and other items that's caused earnings to remain very low after depreciation. That's why we talk about core FFO because we're adding back the real estate depreciation. Depreciation of a building is really a bit of a fiction sensed at the end of the depreciation period the buildings still standing. So if you own stock in a non-retirement camp as opposed to having an IRA or retirement plan, you don't pay any taxes on that part that sheltered by depreciation as it's considered a return on capital. However, the return on capital does reduce the cost basis on the stocks, which may result in our larger capital gain tax when the stock is sold.

Our stock yesterday was about $16.03, the distribution yield is 9.4%, stock price has taken a hit like many REITs, we've watched the whole REIT industry go down and with [the backdrop of] rising interest rates, it's caused a lot of investors to flee to bond market and any high-yield market, which many real estate investment trust are considered to be in the high yield area. We are hopeful that our stock price will rebound and stabilize over the next few months and as the uncertainty subsides, we need a REIT start trading at much lower yields than our stock and let me just say again the REIT universe is trading at about 4.2%, and at that yield we were trading at that yield would be $35 stock and the triple net REITs are trading at 6.4% yield, so if our stock was trading at that it would be a $23.30 stock. So we've got a lot of room to rise in terms of the yield on the stock today.

I know some analysts would say, oh, yes, but you're externally managed and somewhat more leveraged than other REITs. Once you take a look at this, I'd like to say this, this REIT has a great team and the cost to operate this REIT is not higher than any other REIT out there and with the change in our management contract, I just think we're going to continue to beat out other REITs in terms of our operating strategy.

And also if you've been watching our borrowing has been going down every quarter recently. We're nearly at 50% based on market capitalization of debt to equity, that's about $1 of equity for every outstanding dollar mortgage debt that we have on our buildings. I think that's very conservative. The Board will vote in mid-October during our regular schedule quarterly Board Meeting and the declaration of a monthly distribution from October, November, December. I just think it, this is such a solid company, I hope you'll all go out and buy some more shares.

And now, I'll stop and have Tarone come on and we'll have some questions from our shareholders and analyst who follow this wonderful REIT. Operator, would you please come on.

(Operator Instructions) John Roberts, Lyons Capital.

First, what was the process behind the management fee reduction, just to make a decision?

(multiple speakers) We went through a lot of analysis. We've been doing it for about 7 months, 8 months looking at different ways to change it and we saw three or four, yes, it's three REITs that used something that's very similar to what we have. So we looked at that and said let's start with that. As you know, a lot of the REITs (inaudible) surprised at this, they seem to tinker with their fee every quarter and come up with a minor change here or there. So we thought this would be a good starting point. The idea again was to get ourselves in shape, so that we could increase the dividend over some period of time. So we did a lot of study, looked at a lot of REITs that are internally managed to pull out their G&A, of course, it's harder to get to those numbers and they always have some kind of extra fee that they charge for and bring in income. So we've decided that we're going to try to follow what the market is doing and that was our best guess at where the market is.

Okay. Can you talk a little about equity issuances at this point given where the stock price stands?

Yes, we've been reticent to issue a lot of shares at this point in time, I would love to do equity offering, but quite frankly it's just the price has dropped so much and we're not alone, the whole REIT industry has been dropping. So prices on many stocks are very bargain basement and this one certainly is with such a high yield. So from my standpoint, we're going to be very candid in raising additional equity, however if you and the other analysts would put out a lot of buyers on the stock, we'd probably be able to get the price up a bit, I'm just joking now.

David, I've got to buy out there as you know.

I don't know.

I can't do it single handedly, unfortunately. Talk a little bit about acquisitions, what's the pipeline look like, what are you anticipating. I have to think at this point, given that you're somewhat capital constrained acquisitions are going to be a little more difficult?

Bob, you want to take?

Sure. Yes, hey, John. Well, as I indicated, we have a couple of properties in due diligence. One, we are anticipating it's under $10 million that we'd be closing this quarter. The other one that's in due diligence has been delayed, probably delayed closing into the fourth quarter because of a seller request. So I think, as David indicated, we're going to hold back and as we typically do, we're going to be looking at even more highly accretive deals before we would bring into committee. So the competition among my leaders out there is going to become stiffer but that's just doing it the safe way. We're hopeful that with the announcement on the fee structure and how this may change in the future and some of our re-leasing and renewal activities will generate some additional interest, but we're going to be patient that we're not going to jump off the deep end.

Hey John, one thing to remember here as you know in historical terms, we used to do some very high accretive transactions. So we know that marketplace very well. Because we're running two business development companies, we are in great position to underwrite the tenant. So what may look very risky to some, we pretty much reduce the risk by underwriting small or mid-size business as a tenant. And so, we've been pushed, brought back into that category of doing little higher rate of return in order to cover the dividend on any new shares.

The second point, you're right on target though, it has restrained our ability. We've probably turned down two or three fairly large transactions that were in sort of a mid-range of return, closer to what we've been doing in order to bolster our size. And so we've had to pass those just for the simple reason as we didn't want to put on a deal that was probably not going to cover or just barely cover the dividend that we are having to pay. So we are ever mindful and watch what's going on in the stock market, because that determines what we can go out and buy.

Are you looking at things like, maybe, some higher yield debt type investments rather than strict property investments?

No, we've stayed away from lending simply because most of those high-rate loans really mean you're doing a workout, you're dealing with somebody who's got problems. We did do one transaction in which we were trying to do a construction kind of loan that was going to lead us to the point of owning the property. They didn't really work out as much as we had hoped, and so we didn't end up buying the property, but we've got a great rate of return. I guess, we'd look at a few more of those, but it's not on the agenda to do a lot of that.

Are you looking at issuing any potential non-traditional sort of equity? I know you get the senior common out there, but anything on the preferred side, maybe, because the preferred market is probably little cheaper at this point than the common equity market?

Yes, I love preferred stock, as you probably know. We haven't been able to issue any permanent preferred recently, but obviously, we have issues -- we have preferred outstanding today, and I'd love to do some more of that. So we may look at that, where you think we could get in terms of rates today.

You have to talk to the bankers then David, but I have to think it's heck of a lot cheaper than your cost of capital on the common right now.

We agree. So, we are looking at all alternatives, but as you know, we terminated our senior common, it never really fit into the non-traded REIT area that well, and so we never got a lot of traction, even though, it's very attractive and very much a better opportunity for those who like the non-traded REIT world. Anyway, that's where we are.

All right, thanks, David.

Okay, next question?

(Operator Instructions) We have no further questions, so I'd like to turn the call over to David Gladstone for any closing remarks.

All right. Thank you all for calling in and we'll see you again next quarter at the end of this call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.