Gladstone Commercial Corp (GOOD) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Commercial third quarter ended September 30, 2015, earnings call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today, CEO Mr. David Gladstone. You may begin, sir.

All right, Andrew. Thanks for that good introduction and thanks to all of you for calling in this morning. We do enjoy these times that we have with you on the phone; wish we had more time. We also enjoy the questions and answers at the end, so hopefully we have some good questions today.

If you're ever in this area, the Washington DC area, we're in a suburb called McLean, Virginia, and if you are in this area you have an open invitation to stop in to see us. It is about 60 members of the team and I'm sure some of them would be here to say hello if you stop by and see us.

We're going to start out first with Michael LiCalsi, who is our General Counsel and Secretary. He also serves as President of Gladstone Administration, which serves as the administrator of all the Gladstone funds and related companies as well. He will make a brief announcement regarding some of the legal and regulatory matters concerning this 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 Securities Exchange Act of 1934, including statements with regard to the future performance of the Company. These statements involve certain risks and uncertainties that are based on our current plans which we believe 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 these forward-looking statements, including all of the risk factors included in our Forms 10-K and 10-Q that we file with the SEC that can be found on our website, www.GladstoneCommercial.com, and the SEC's website, www.SEC.gov. The Company undertakes no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law.

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 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 discussing our REITS. 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. Generally, FFO adjusted for property acquisition costs and other non-recurring expenses. We believe this is a better indication of operating results of our portfolio and allows better comparability of period-over-period performance.

To stay up-to-date on our fund, as well as all of 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, username GladstoneComps, and on Facebook, keyword The Gladstone Companies. Finally, you can visit their general website to see more information at www.Gladstone.com.

The presentation today is an overview. We ask that you read our press release issued yesterday and the 10-Q for the quarter ended September 30, 2015. Both can be found on our website, GladstoneCommercial.com.

Now we will begin the presentation today by hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Michael. Good morning, everyone. During the third quarter we acquired one $13 million office property in Atlanta, Georgia; raised $9 million of common equity under the ATM program; amended our fee structure to be more in line with our peers; leased our partially vacant property located in Raleigh, North Carolina; leased the majority of our vacant property located in Baytown, Texas; modified one lease such that the tenant will expand into the remaining vacant space in our Indianapolis property in the fourth quarter; and refinanced $11.3 million of maturing debt.

Subsequent to the end of the quarter, we also acquired one industrial property for $6.5 million in Atlanta; expanded our line of credit to $110 million, adding three banks and reducing the costs on the facility; renewed a lease with one tenant whose lease was to expire in 2015; and completed negotiations with three tenants whose leases are scheduled to expire in 2016. As you can see, our acquisitions, capital, and asset management teams were quite busy and all contributed to our success this quarter.

We had another excellent quarter as we continued to increase our asset base by acquiring new properties. This was our 16th consecutive quarter of closing at least one new acquisition. We crossed a milestone and we now a 102 properties. We're extremely pleased with our activity and consistency, and we continue to have a strong pipeline of acquisitions.

Now for some details. During the quarter ended September 30, we acquired a 78,000 square foot office building located in Atlanta for $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 Delta Community Credit Union, which is the 23rd largest credit union in the United States and the largest in the state of Georgia with 26 branches.

This property houses the flagship's retail branch and also serves as an office location. Delta Airlines headquarters is immediately across the street from our property.

After the end of the quarter, we acquired a 90,000 square foot industrial facility in the Atlanta submarket of Villa Rica, out the I-20W corridor. The purchase price was $6.5 million. The lease term is 18 years and the average cap rate is 9.2%, very accretive for our shareholders. Universal Pasteurization, a market-leading high-pressure pasteurization food processor, is the tenant.

Our acquisitions team has been placing significant focus on acquiring properties in secondary growth markets, as I've remarked in the past few quarters. 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 we believe will lead to subsequent increases in property values that will benefit our shareholders.

For the past two years we have invested in Phoenix, Salt Lake City, Denver three times, Dallas four times, Austin, Atlanta, Indianapolis, and Columbus, Ohio, to promote this strategy. The last three acquisitions have been in Atlanta and Salt Lake City, two markets in which we wish to increase our concentration.

Our asset management team has been quite busy year-to-date as well, renewing existing leases and leasing our available space. Since January of this year, our team has leased or renewed 420,000 square feet, attesting to our ability to maintain a high occupancy factor. At quarter end our portfolio was 97.9% occupied, continuing our high occupancy record.

As I noted in our last call, 2015 has been a year of lease expirations for us. We originally had 12 leases expiring in 2015 and we have successfully extended the leases for eight of these tenants. And we have a ninth property in which we have signed a sale agreement to sell the property to a subtenant in the fourth quarter.

In the 10th property, we are in final direct lease negotiations with the existing subtenant to occupy 80% of the building upon the expiration of the primary tenant's lease term at the end December. So we have two of the 12 properties unresolved at this time, resulting in an 87% success factor for these two properties, which are both fully vacant. To that end, we have engaged a broker to sell the Dayton, Ohio, property and anticipate we will be able to close the sale of this property over the next 12 months.

We recognize that other vacant property located in eastern Massachusetts will be a challenge due to the slower current transaction velocity in that market. However, we are aggressively pursuing new tenants for this 12th property and at this time have three full-building user prospects for the property.

So from a 2015 bottom-line perspective, the two vacant properties comprise less than 1.5% of our projected rent and we are hopeful that one of the properties will be sold within the next several months.

Shifting to new leasing activity, Sumitomo Electric Corporation leased 87,000 square feet in our manufacturing facility in Raleigh, North Carolina. The lease term is 12 years and it brings that property to 93% occupancy. Their lease commenced the same day that the existing tenant downsized in the building on August 1.

Two tenants have also renewed or expanded in our anchored multitenant office building in Indianapolis, which will raise that property's occupancy to 100% by January.

And Cardiac Cath Lab of Baytown leased nearly 7,000 square feet in our 12,000 square foot medical office building in that same town in Texas. The lease term is seven years. They took possession of the space in September and rent commences in January of 2016 after completion of their tenant improvements. We are currently marketing the remainder of this space, 5,000 square feet, to other medical users in this Houston submarket.

Our team has also begun renewal activity on the three remaining leases that are set to expire in 2016. At this time we have agreed upon business terms with each tenant. Two of the tenants will extend their leases. For the third tenant, who occupies three separate buildings, we will sell two of the properties to the tenant and we will extend their lease in the third property. We expect to complete all of these actions in the fourth quarter, well ahead of the expiration date.

With these actions completed we expect our same-store rents to be stable and growing in 2016 and expect our occupancy to remain at a high level. Same-store rents in the out-years beyond 2016 also appear to be favorable and stable as the expiring rents in 2017 and 2018 represent less than 2% of our annualized projected rents for each respective year. As I've noted in the past, locating new tenants and signing leases with existing tenants is going to require capital outlays for tenant improvements and leasing commissions.

During the quarter 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 REITs. Danielle will more fully explain this amendment in her portion of the presentation.

So in summary, at quarter end all of our existing tenants are paying as agreed and our portfolio is 97.9% leased. We acquired one property during the quarter and one property subsequent to quarter end. As I noted, our asset management team was also very busy renewing tenants and leasing our properties with an expected strong finish to 2015 and success on the 2016 expirations.

We continue to have an active pipeline of acquisition prospects. Our objective, as I've noted in the past, is to have at least $250 million to $300 million in the pipeline of possible acquisitions with properties in each phase including initial review, letters of intent, due diligence, and of course, closing. In this manner, if we have items in each one of these phases, we will consistently close quarter after quarter as we have done in the past.

Our team continues to meet this objective. However, we have slowed the acquisition pace citing the current market conditions and our lower stock pricing. With a commitment to staying with our strict underwriting criteria, we're going to be patient, but we still believe it will lead to continuing, consistent closings in the months ahead so long as market conditions permit.

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

Good morning. We continue to grow our asset and equity base. Our total assets increased to $838 million from the one acquisition completed this quarter in conjunction with ongoing tenant improvement projects. We continue to focus on decreasing our leverage and have been issuing equity under our ATM program to help achieve this goal.

However, as Bob discussed, with the recent drop in our stock price and impact to the entire REIT industry, we have slowed the amount of equity we've been issuing under the ATM. We expect continued decreasing leverage over the next several years through a combination of lower leverage on newly-issued debt and refinancing our mortgage maturities with lower leverage.

Looking at our capital structure, the amount outstanding under long-term mortgages in our line of credit was $538 million at the end of the quarter. In addition, we raised $36 million of common equity under the ATM program during the first nine months of 2015 and have used these funds to acquire properties, refinance maturing debt, and to fund capital improvements at certain of our properties.

We also amended our line of credit earlier this month in order to position us for growth over the next few years. We expanded the line from $75 million to $85 million and also added a $25 million five-year term loan facility. We also extended the maturity date of the line of credit for one year through August 2018.

The interest rate on the line of credit was reduced 25 basis points at each leverage tier and the interest rate on the term loan is 5 basis points less than the line of credit. The total maximum commitment was also increased from $100 million to $150 million.

We also expanded the number of banks in the line. In addition to KeyBanc and Comerica Bank, we added Fifth Third Bank, U.S. Bank, and Huntington Bank to the syndicate. We believe this addition of three strong lenders illustrates the confidence in our long-term strategy. We thank KeyBanc, our lead bank, for their efforts.

We currently have $49 million outstanding under both the line and term loan facilities at a weighted average interest rate of approximately 2.75%. We continue to only use our line of credit to make acquisitions that we believe can be financed with longer-term mortgage debt or that we believe are good additions to our unsecured properties acquired under our new line of credit.

Long-term mortgage debt continues to be available from multiple sources. Interest rates have been very volatile under anticipation that the Federal Reserve will increase interest rates later this year.

Between the beginning of the year and the end of the third quarter, the yield on the 10-year Treasury ranged from a low of 1.6% at the end of January to a high of 2.5% in late June, about a 90 basis point swing. At the end of the third quarter, the yield on the 10-year Treasury was 2.1%, about 30 basis points lower than it was at the end of the second quarter.

While the yield on the 10-year Treasury has declined from its highs earlier this year, lenders have increased their margins at which they lend in response to the increased volatility and anticipation of a raise in interest rates. This increase in margin has impacted overall borrowing costs and offset the decline in the 10-year Treasury yield. However, interest rates still remain attractively low and we continue to match our acquisitions with cost-effective mortgages.

Depending on several factors including the tenant's credit rating, property type, location, the terms of the lease, leverage, and the amount and term of the loan, we are generally seeing fixed interest rates ranging from 4.3% to about 4.75%.

As Bob touched on, we were able to refinance $11.3 million of mortgage debt that matured this quarter with $1.7 million of mortgage debt and the remainder with borrowings under our line of credit and cash on hand. We used equity in this refinancing in line with our strategy to lower the loan to value of our portfolio. The weighted average interest rate on maturing debt was 5.2% and the rate on the new mortgage debt is variable at LIBOR plus 2.25%, which is a rate of about 2.5% today, a 2.7% decrease from the mortgage debt that was repaid.

We also locked in this rate by purchasing a cap on this floating-rate debt. We also issued debt during the third quarter of $7.5 million on our new acquisition at a fixed rate of 4.5%, which was the low end of the range, making this deal very accretive for our shareholders.

Looking at our upcoming debt maturities, we have mortgage debt in the aggregate principal amount of $5.7 million payable during the remainder of 2015 and about $100 million payable during 2016. The 2015 principal amount payable included $3.9 million (technical difficulty) principle payment due on one mortgage that matures in December that we expect to refinance with new debt next month. The 2016 principle amount include $92 million of balloon principle payments due on nine mortgages that mature 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, we still expect to achieve at least a 100 basis point interest-rate reduction when will refinance these loans in 2016. We have already begun discussions with lenders on the debt that matures during the first quarter of 2016 and expect to refinance some of this before the end of 2015. We will continue to pay the additional debt amortization payments from operating cash flow and borrowings under our line of credit.

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 continue to increase our common market capitalization and have issued over 2 million shares of common stock during 2015. We have decreased our loan to value from a high of 67% in 2009 to 52% today. As of today, our available liquidity is approximately $18.3 million comprised of $4.5 million in cash and available borrowing capacity of $13.8 million under our line of credit.

With our current availability and assets through our ATM program, we have enough availability to fund our current operations, deals in our pipeline, and any known upcoming improvements at our properties. Looking at our operating results for the quarter, 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.

All per share numbers I referenced are fully-diluted weighted average common shares. Core FFO available to common stockholders for the quarter was approximately $8.3 million, or $0.38 per share, which increased slightly when compared to the second 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 is partially offset by an increase in property operating expenses from properties that weren't vacant during the second quarter.

We also completed our first quarter under our revised fee structure, and as you can see, we did not have a credit to our incentive fee paid to our advisor this quarter. We believe these changes to the fee structure brought us more in line to the current REIT market practice and are hopeful it will facilitate our growth of FFO and distributions to stockholders in the future. We also believe this amended fee structure will allow us to become more competitive in sourcing and retaining talented investment and operations professionals.

While 2016 brings us challenges as we work on debt maturity, we believe we have the right team and plan in place to reposition and continue our growth activity. We are confident that the remainder of this year and 2016 will be successful as we continue to increase our asset and equity base and decrease our leverage. We are focused on managing our property operating expenses as well.

Now I will turn the program back over to David.

Thank you, Danielle. Good report. Good report from Bob and Michael. The Company continues to grow and it's very strong.

Main news again this time is the purchase of another property, $13 million, and then placing a mortgage on the property for $7.5 million. And the real significance of that is locking in the earnings from that property for shareholders come any kind of disaster that might happen in terms of interest rates; that is in place for the future.

We've been refinancing our debt and maturities and it's just a significantly lower rate. Interest rates were higher seven to 10 years ago when we financed these properties. This year has been a great year to refinance and 2016 looks just as great for our refinancing properties and lowering our cost of debt.

We raised $9 million in common equity and re-leased some of our vacant space, so overall it was a very positive quarter for the Company. We will continue to add quality real estate to our portfolio and shore up the existing properties. And as we continue to grow our market capitalization increases, we hope to see higher trading volumes in our stock and a corresponding uptick in our stock price because the distribution rate today is very high compared to other real estate investment trust.

This is just a great stock for people looking for cash dividends that are mostly sheltered from taxes, and this year we might be as much as 70% to 80% sheltered so it would be a great one to put in your personal accounts.

As many of you know, the Company didn't cut its monthly cash distributions during the recession. That was because we had everything financed long term. It was quite a success story. We watched some of the great companies in the business cut their distributions and many of them never recovered from that.

So here's what we're doing today. We do need to increase our common stock market capitalization in order to increase the trading volume and give an investor who wants to buy a lot of stock the ability to do this.

These institutions, especially the smaller institutions, those buyers always want to know the number of shares outstanding, so if they buy $10 million or $20 million worth of stock they know they will be able to get liquidity if they need it. We still don't have enough shares outstanding to give them that confidence, so we've been hard-pressed to get some of the -- well, any of the large institutions, but a number of the small institutions to come in.

We have consistently built the asset and quality base. We've doubled the size in the past four years. This growth, we hope, will be more institutional-friendly. Institutional buyers can come in and get some stock and hopefully help increase the price and lower the cost of capital so the new investments can be more accretive to our shareholders and our dividend payout can go up.

In order to help us grow the income of the Company, we amended our fee structure. I think it's very much in line with people like us, the REITs that are like us. This will decrease our gross expenses and hopefully allow us to grow our funds from operation, which are our earnings, and ultimately be in a position to increase the dividend.

We continue to have promising list of potential quality properties that are interested in -- that we are interested in acquiring simply because that list of properties continues to grow as some of the real estate investment trusts have retrenched. We increased the portfolio of properties; comes greater diversification and we believe better protection against any earnings decrease.

We are focusing in our efforts on finding these good properties and long-term financings (technical difficulty) into secondary markets more than primary, simply because the rates are better and, quite frankly, the long-term outlook is better. Being able to lock in these long-term financings will be good for us. Between 2016 and 2019 we only have 2% of the forecasted rents expiring and our debt maturities after 2016 drop significantly. And we believe the interest rates are likely to be higher after that point in time so we're going to spend the rest of the period in 2016 locking in our interest rates.

We're set up very well over the next several years, and I think people who want consistent dividends and a good chance of an increase in dividends should be buying this stock. We're much more optimistic now that things are going -- that are so [positive] for us and look so positive over the next few years.

Much of the industrial base that we have as tenants, they are doing pretty good. Our properties remain steady. We haven't lost many tenants over the years. In fact, only a couple have really done any damage to us and so that's quite a testament to the team selecting good properties and putting them on the books.

I am very optimistic about our company and I think Bob Cutlip I will continue to be cautious in our acquisitions. We're not going to go on some crazy acquisitions out there just to grow the asset base. We want to make sure the assets are great for us long term.

We made it through the last recession without cutting the dividend or having a lot of problems from the tenants and I think if there's another recession lurking -- although it doesn't look like it, but it sort of feels like it based on all the news that comes out -- our portfolio is going to continue to stand the test against time. If the Fed decides to raise interest rates, we're ready for them. We have most of our properties financed with long-term fixed-rate mortgages so we don't use a lot of short-term debt, and if we do use the short term, we end up turning around trying to put a good long-term mortgage on them.

In October 2015 the Board voted to maintain the monthly distribution of $0.125 per common share for October, November, and December annually then of $1.50 per share. This is a very attractive rate for a well-managed REIT like ours. We paid 134 consecutive common stock cash distributions since the inception of the Company and we went through the recession without cutting those distributions. I think this is a wonderful company today for those who want consistent dividend.

Because real estate can be depreciated, we are able to shelter the income to the Company. In addition, because we had a loss in 2014 related to the property we turned over in a deed in lieu transaction, 2014 was 100%. We don't expect this to be this high in 2015. It could be in around 80%, but will have to wait and see at the end of the year what's going to happen in terms of the shelter that we have for those dividends.

This is a very tax-friendly stock for individuals and I think it's a great one to put in your personal account as opposed to the IRA, Keogh, or retirement plan. This return of capital is mainly due to the depreciation of real estate and other items and causes earnings to remain low after depreciation, and that's why we talk about core FFO because that core FFO means we have added back the real estate depreciation.

Depreciation of a building is really just a fiction. It's something you can do with the IRS in order to shelter your earnings. And if you own the stock in a non-retirement account, you don't have to pay any taxes on that part that sheltered by the depreciation and that is considered a return of capital. However, for most of you, the return of capital does reduce your cost basis in the stock and may result in a larger capital gains when you sell the stock.

So our stock closed yesterday at $16.37. It's back up from the doldrums, but not as high as it needs to be. The distribution is about a 9.2% return. I'll say it again -- 9.2% return, which a good chunk of that, maybe as much as 80%, is sheltered. Our stock price has taken a hit, as many of the REITs have. I just think it's due to the threat of interest rates increasing, and that seems to be going by the wayside right now.

Let me say this again. The REIT universe is trading at about a 4.32% yield today, so if we were trading that obviously would be around $34 a share, that would be wonderful. And net-net-net REITSs, we are thrown in that category because most of our transactions involve triple-net leases. But the net-net REITs are trading at 6.4% yield, so if our stock was trading in that area it would be trading at $23 a share. There's just a lot of room for expansion of the stock based on the REIT stocks that are out there.

The Board will vote again in mid-January during our regularly scheduled quarterly meeting on the declaration of monthly distributions for January, February, and March.

And I'm going to stop at this point in time and ask Andrew to come on board and give us some people that are going to ask some great questions for us.

(Operator Instructions) John Roberts, Hilliard Lyons.

Morning, David. I don't know if this should go to you or Bob, but property operating expenses were pretty high in the quarter. Just wondering if there was anything out of the ordinary or why that jump, and if that is something that will continue going forward.

Danielle has got the answer to that. She is the gal with numbers.

Part of it was from the two vacancies in Q2 that hit in Q3, but most of it is really because we bought properties that have -- are subject to a gross lease. And so you will see an increase in property operating expenses, but you will also see an offsetting increase in tenant recovery. It's just the way we have to account for it.

All right, very good. So should I model that going forward?

Yes, yes, for this it's probably a good run rate for now. If we re-lease some of the vacant building, it should go back down. But, yes.

All right. Also, how many of the tenant leases that you have that expire in 2016 are still -- you still need to re-sign?

Just the three that I mentioned. We had already completed a lease -- really a lease renewal of one of our tenants in our anchored multitenant building in Columbus who is going to take over the balance of the building at the end of 2016. But only the three that I mentioned, those are the only three that we have pending for 2016.

So all the rest are re-signed. You have no others expiring in 2016?

No others expiring. As I indicated, we are hopeful that we will have these three closed before the end of the fourth quarter.

John, it's pretty light all the way through 2019 in terms of having anything (technical difficulty).

This is our biggest year.

I remember that.

This is our biggest year. And as David said, with the opportunity we have on the debt refinancing next year, from 2017 on up our maturities are also much lower. So we're much encouraged about the out-years right now.

Super. And what was the average price of stock sold under the ATM in the quarter?

You know, John, I don't have that handy but I think it's somewhere -- it was somewhere around $16. It's in our 10-Q. I will get back to you in a second, but I think it was somewhere in the $16s, yes.

Great. Thanks, Daniel. Thanks, David. Thanks, Bob.

Jeff Rudner, UBS.

Good morning, David, and congratulations on a very nice quarter. You had commented earlier that you were looking to issue more shares so as to make the stock more accessible to larger investors. If someone wanted to buy a large position in the Company, they might find it difficult with the only 21 million shares outstanding we have.

Do you have a figure in mind as to how many shares you would like to issue over a period of time to bring it up to a sufficient capitalization?

I think once we see the institutions coming into the stock, we will know that we really don't need to do that anymore and we can plan on financing things a little different with perhaps preferred stock or some other mechanism. But, at this point in time, I don't think we are getting the benefit that many of the triple-net REITs are getting -- stocks trading way above the 6.4% that's going on out there -- and I think it's primarily because the institutions aren't buying.

Okay, thank you very much.

John Massocca, Ladenburg Thalmann.

Good morning, everyone. Quick question on the Phoenix property that is underlying the one mortgage note payable you have. What's with the progress on construction with that property? And are you guys still interested in purchasing it -- sorry, utilizing your right to purchase it once construction is complete?

John, we have just received certificate of substantial completion. The punch list is just about complete. The tenant will pay starting November 1. We have a right of first offer, so we do not have a right of first refusal or an absolute right to acquire the property, and the developers who are kind of the lead on this have elected to go out and market the property. They are right now in contract negotiations with a third-party buyer.

The benefit to us on this transaction is that the way we've structured it with the developer is that before the developer can receive any proceeds, we will receive a 22% return on our invested capital over the time that it is invested. And I think on this transaction, that's the way it's going to turn out. If they fall through on this contract we may have an opportunity to acquire it. But the cap rates are very low, which is encouraging for the developer, and we will just see how it ends over the next probably two months.

Okay. But if it did fall through, you would still be interested in buying the property, assuming it would be in your wheelhouse?

Oh, yes. It's a 15-year lease with an excellent credit tenant. It's the way we underwrite the credit and it's on a hospital campus in Phoenix. I mean, its location is great; the use is great; the tenant would be great.

Okay, perfect. And then sticking with acquisitions, is this slower, more incremental acquisition pace that we saw in 3Q something we're going to continue seeing on a going-forward basis, just given maybe you guys cost of financing and the market out there? Or is this just a result of the lumpiness of net lease acquisitions?

It's a combination of all those, John. It's interesting, we went to the Net Lease conference just recently and, in chatting with a number of our peer groups and the larger peer groups, a number of them are staying on the sidelines a bit or looking at much larger acquisitions as compared to what we acquire. Our sweet spot is between $5 million and $30 million.

But also we have, in talking with our peers -- we're getting called back as being number two or number three and the sellers are wanting to see if we are interested, which is telling me there may be some modification in the market. And that's why we have been somewhat hesitant. But the stock price has affected our desire because our cost of equity is higher right now.

So we're going to be patient. We want to stick with our underwriting. We will acquire at the cap rates that we have in the past, if we can find something in a good secondary growth market.

John, Ladenburg just needs to wade into the stock and get up in the $20s and then we can buy a lot of it.

Then focusing on the one property in eastern Massachusetts that is coming off lease, you mentioned you four potential tenants or prospects.

It's three, it's three.

How is demand for any of those? Sorry, it's three?

It's three and they have each toured the property. It's a food-grade facility and each of these prospects are food-grade users. We have just begun discussions with them. There's no letter of intent. We expect RFPs soon from them, but nothing of substance right now.

Then if you just tried to -- if potentially leasing it didn't work out, what is the market like for selling an asset like that?

It's interesting. These three users are interested in acquiring as well as leasing, and it could be that in fact we would be selling -- could be selling the asset to one of these users. We are seeing in that market that users are more interested in owning right now than in leasing because of the capital they themselves must place in the building. This has freezer/cooler space in it now, but as we all know, when someone comes in they have a little bit modifications to their process and their business. And so if they're going to invest that money, they sometimes wish to own it first and then maybe do a sale-leaseback later.

Okay, perfect. That's it for me. Thanks very much, guys.

(Operator Instructions) At this time I'm showing no further questions. With that said, I would like to turn the call back over to Mr. David Gladstone for closing remarks.

All right, thank you all for calling in. We'll talk to you again next quarter and should be even brighter next quarter. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.