Gladstone Commercial Corp (GOOD) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Commercial Corporation's third-quarter earnings ended September 30, 2016 earnings call and webcast.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to David Gladstone. You may begin.

All right. Thank you for that introduction, and thank you all for calling in. We always enjoy this time we have with you on the phone, and wish we had more talks like this. If you're ever in the Washington DC area, come by and see us. We're in a suburb called McLean, Virginia, and you have an open invitation to stop by and said hello. We have about 60 members of the team now.

We'll hear first from Michael LiCalsi. He is our General Counsel and Secretary. Michael is also is the President of Gladstone Administration, which serves as the administrator to all the Gladstone public funds, and related companies as well. He'll make a brief announcement, regarding some of the legal regulatory matters, and then call for a report. Go ahead, Michael.

Good morning, everyone. The report that you're about to hear may include forward-looking statements within the meaning of the Securities Act of 1933 and the Security Exchange Act of 1934, including statements with regard to the Company's future performance -- and 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 result 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. These can be found on our website, GladstoneCommercial.com and on the SEC's website, 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 property, plus depreciation and amortization of real estate assets. The National Association of REITs 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, for our financial statements for a detailed description of FFO. And we also plan to discuss core FFO today, which is generally FFO adjusted for property acquisition costs and other non-recurring expenses, and we believe this is a better indication of our 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'd sign up on our website to receive email updates on the latest news. You can also follow us on Twitter, username GladstoneComps, and on Facebook, the keyword, the Gladstone Companies. And finally, you can visit our general website for more information, www.Gladstone.com.

And the presentation today is an overview, so we ask that you read our press release issued yesterday, and also review our Form 10-Q for the quarter ended September 30, 2016. We also created a financial supplement which provides further detail on our portfolio and results of operations. They can all be found on our website, GladstoneCommercial.com. And now, we will begin the presentation by hearing from Gladstone Commercial's President, Bob Cutlip.

Thanks, Mike, and good morning, everyone. During the third quarter, we acquired a $23.9 million property located in Fort Lauderdale, Florida, raised $30 million in a direct placement of our Series D Preferred stock, and redeemed the remaining maturing Series C term Preferred stock. Raised $12 million in net proceeds from sales of our Series D Preferred, and $10.5 million in net proceeds from sales of our common, both through our ATM program. Executed one new lease with a tenant in our partially vacant Chicago industrial property, raising the occupancy to 100%, and renewed or extended three leases with tenants in our South Hadley, Massachusetts, Richmond, Virginia and Maple Heights, Ohio properties. We sold three properties located in Rock Falls, Illinois and Angola, Indiana, executed a contract to sell our Toledo, Ohio property, and repaid $12.7 million of maturing mortgage debt, and placed $4 million of financing on a previously unsecured property.

Subsequent to the end of the quarter, we executed a lease amendment with our tenant in our Vance, Alabama property to expand that property by 75,000 square feet. The tenant will enter into a new 10 year lease at the expansion's completion in mid 2017. We extended the lease with T-Mobile in our Wichita, Kansas property for five years, executed a Letter of Intent with a tenant to occupy the remaining space in our Burnsville, Minnesota property anchored by Bosch, and continued our program of meeting with registered investment advisors and institutions to promote our brand. Over the past 3 1/2 months, we've held 22 such meetings, and we'll continue to do so in the future.

We had another excellent quarter as we continued to re-lease vacant property, and continue our industry high occupancy. We also added another high-performing asset to our portfolio. We continue to be pleased with our activity, and have a healthy pipeline of acquisition candidates.

As I noted to you during our last quarterly call, our acquisitions team has spent considerable time over the past several months researching the direction of the market. Noted researchers at the beginning of the year had forecasted the market cycle may be peaking. Actual data through the first eight months reflects that investment volume is down by about 15%, and REITs have been net sellers as reported by national brokerage firms.

Discussions with brokers reflect that listings are up, but closings are down. Whether this leads to some cap rate expansion in the future remains to be seen, but our team is going to continue to monitor market conditions, and actively investigate opportunities. And we will acquire properties when the tenant credit, location and asset returns are attractive, and promote our measured growth strategy.

Now for some company-specific details. During the quarter ended September 30, we acquired a 119,000 square foot office building located in Fort Lauderdale. The purchase price was $23.9 million, lease term nine years, and the average cap rate 8.3%, so very accretive for our shareholders. We placed a $14.1 million mortgage note on this property.

The building is 100% occupied by Citrix, and it's an integral part of a larger Citrix campus in the immediate area which they own. Citrix is a Fortune 1000 and S&P 500 Company that enables business mobility through the secure delivery of applications and data to any device, on any network.

We also executed a lease amendment to expand our tenant's facility adjacent to the Mercedes-Benz assembly plant in Vance, Alabama. Upon construction completion, the lease term resets to 10 years, and the average cap rate over the new term for the entire 245,000 square feet is an estimated 10.4%, so also very accretive. Our acquisitions team continues to only acquire properties in strategic secondary growth markets. As I've noted in the past, the hallmark of our continuing high occupancy remains, and it is also -- always going to continue to remain thorough tenant credit underwriting, and the mission-critical nature of the property.

Location though is also important, as it can lead to increased property value over time in land-constrained locations. Over the past three years to promote this location strategy, we have invested in Phoenix; Salt Lake City twice; Denver three times; Dallas four times; Austin, Atlanta twice; South Florida; Indianapolis; Columbus, Ohio twice; and Minneapolis. This strategy also improves our overall operating efficiency.

Our asset management team continued our strong leasing performance. As noted, we increased our occupancy in our Chicago building by executing a new lease for 21,000 square feet, bringing the occupancy to 100%. We also extended or renewed four leases, two of which were set to expire in 2017. At this time, only 0.7% of our rents are expiring in 2017 and 1.3% in 2018. So our team is really staying ahead of lease expirations in general, and actively managing our portfolio.

We only have one fully vacant property remaining today. Our property in northeastern Massachusetts, an 86,000 square feet freezer cooler industrial property. We have one full building prospect, and one prospect for 50% of the building at this time.

We have successfully extended all of our leases that were originally set to expire in 2016, with the exception of a 2,900 square feet office space in our multi-tenant property in Indianapolis, and our portfolio occupancy is currently 97.7%. In total, for 2015 and 2016, we've successfully concluded 16 of 18 lease expirations. And in doing so, transitioned to what I believe is a fully, full service real estate operating company reflecting an excellent ability to execute successfully in every phase of a property's lifecycle.

As part of our capital recycling program, we sold three properties during the quarter, and have five additional properties that we are marketing for sale, and two of these five are under contract at this time. These assets are considered non-core in our efforts to move out of smaller single asset markets, and to redeploy the proceeds in our target locations. As we reflect on our recent portfolio efforts, the better long-term news for our overall growth strategy is that only 4.5% of forecast rental income is expiring through the end of 2019, during a period when we anticipate the industry may experience headwinds at some point. So our cash ramps should be stable and growing, and our occupancy should remain high, even if economic conditions deteriorate.

This is an important fact for our shareholders, as the majority of our peers have a minimum of 20% and as high as 50% of their leases expiring during this same period. The majority of our capital availability is going to be used to pursue growth opportunities, because we do not anticipate needing significant capital for tenant improvements or leasing commissions to retain tenants, to re-lease vacant space or to fund operating deficits. Danielle, our CFO, separately, is going to expand upon our REIT financing activities. But I think it's important to note that our refinancings continue to lower our leverage, lower our annual interest costs, and the amount of debt maturing reduces through 2017 and beyond.

So in summary, our third-quarter continued our leasing and acquisition success. We refinanced maturing mortgages at lower interest rates, and we redeemed maturing term debt through a lower cost Preferred issuance. Our team continues to have a strong pipeline of acquisition candidates, and we'll adhere to our strategy of only acquiring properties with credit-worthy tenants in growth markets that are accretive to our operations.

Now before asking Danielle to speak, as you are aware, we announced Daniel's departure which will become effective today. On behalf of the entire Gladstone team, we want to thank her for her significant contributions, and really her tireless efforts during her 12 year tenure, and we wish her and her family the very best in the future. As you are also aware, we have a new CFO, Mike Sodo to replace Danielle.

Mike brings a significant experience in the REIT financial reporting and treasury functions, and in communicating and engaging rating agencies, analysts, lenders, and investors. As many of you know, he used to be here in McLean, Virginia at Capital Automotive REIT. Now let's turn it over to Danielle for a report on the financial results.

Thanks, Bob. We continue to have a strong balance sheet, as we systematically grow our assets, and focus on decreasing our leverage. We reduced our debt to growth asset level to 51% today, from 57% at the end of 2015, and a high in the mid-60% range in 2009. We did this through refinancing maturing mortgage debt at lower leverage levels, and redeeming our term Preferred stock with equity. We expect to continue to decrease our leverage over the next several years.

Long-term mortgage debt continues to be available, but at slightly higher rates than we experienced during 2015. The yield on the 10 year treasury has been very volatile. Despite the federal reserves efforts to raise interest rates, the yield on the current 10 year is about 50 basis points lower than it was at the beginning of 2015. Since the beginning of 2016, the yield on the 10 year has been as high 2.2% and as low as 1.3%. This volatility has been driven by global uncertainty, questions regarding the strength of the economy, and the Federal Reserve Bank's stated desire to increase interest rates.

In response to this volatility, CMBS lenders have become a less reliable source of mortgage financing, as they continually change the spreads at which they're willing to make loans. In early 2015, CMBS spreads were between 280 and 300 basis points, and by the third quarter of 2016, they had dropped to between 210 and 240 basis points. With the change in the risk retention rules approaching, CMBS spreads for loans closing after November 2016 have widened by approximately 30 basis points. The banks have also widened their spreads by 25 to 50 basis points, and the life insurance companies and the CMBS lenders have reintroduced floors.

Banks in particular, are trying to move into the vacuum left by the CMBS lenders. With CMBS loan originations down by more than 40% year-to-date, the life insurance companies and banks have become increasingly more selective in determining which properties they will finance. However, interest rates still remain attractively low, and we continue to actively 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 about 4.3% to about 5% today. To this end, we repaid $12.7 million of maturing mortgage debt this quarter, with borrowings under our line of credit and cash on hand. The interest rate on the maturing debt was 5.8%, and the rate on the line credit today is about 3%, which is close to a 3% decrease from the mortgage debt that was repaid. We also placed $4 million of debt on a previously unsecured property during the quarter.

Over the past 18 months, we have refinanced close to $120 million of debt, with $57 million of new debt at a weighted average interest rate of 2.91%. We also added some of these properties to our unencumbered pool under our line of credit, in an effort to provide more flexibility in the future. Prior to the refinancing, the mortgages had a weighted average interest rate of 5.82%. The combined refinancings will reduce our annual interest expense by approximately $3.4 million, which is straight to the bottom line.

Looking at our upcoming maturities, we have one remaining balloon principal payment of $8.2 million payable in December of this year. We do anticipate being able to exercise the one-year extension option of this note. Prior to maturity, this note has an additional three one-year extension options through 2020. We also have $61 million of balloon principal payments due in 2017. The weighted average interest rate on this debt is 6.1%, and we expect to achieve about a 3% interest rate reduction. We are focused on our strategy of lowering our leverage by reducing our weighted average loan-to-value on both newly issued debt and refinancing -- and refinanced debt.

Turning to equity, we raised another $30 million of our 7% Series D Preferred, and use the funds to redeem the remaining $13.5 million of our 7.125% Series C Term Preferred that was maturing in January 2017. We also raised both common and Preferred equity under our ATM program during the quarter for an aggregate of $22.5 million under both programs. We used these funds for a new acquisition, refinancings and tenant improvements at certain of our properties. As of today, our available liquidity is approximately $43 million, comprised of about $4.3 million in cash, and an available borrowing capacity of $38.9 million under our line of credit. With our current liquidity and access to our ATM programs, we have enough availability to fund our current operations, deals in our pipelines, and any known upcoming improvements at our properties.

And now I will discuss operating results for the quarter. All per share numbers I reference are fully diluted weighted average common shares. Core FFO available to common stockholders was $9.4 million or $0.39 per share for the quarter, which increased from the second quarter. Our results were impacted by an increase in rental revenues from leasing vacant space and acquiring new properties, coupled with lower net property operating expenses from increased occupancy and lower G&A expenses.

G&A expenses were lower due to a reduction in legal, accounting, and shareholder-related fees. We incurred fees in Q2 related to the legal settlement at one of our properties, which were not incurred this quarter, coupled with lower accounting fees primarily from timing of tax fees. Shareholder-related fees were also lower this quarter, as we incurred fees during the second quarter related to the annual meeting and proxy that were not incurred during the third quarter. We also saw a decrease in interest expense from the lower interest rates achieved on our refinancings. We encourage you to also review our quarterly financial supplement posted on our website under presentations, which provides more detailed financial and portfolio information for the quarter.

While we continue to have challenges as we work on debt maturities and the headwinds from the global macroeconomic conditions, we believe we have the right team in place and plan in place to reposition and continue our growth activities. We are confident that remainder of this year and into 2017 will be successful, as we continue to increase our asset and equity base, and decrease our leverage. We will focus on maintaining our high occupancy. And now, I will turn the program back over to David.

All right. Thank you, Danielle. Another good report, and certainly a good report from Bob Cutlip and Michael LiCalsi too. And I want to say goodbye to CFO, Danielle Jones. So we all wish her well. She did a great deal to help the Company grow to where it is today. And I also want to say welcome to Mike, Mike Sodo. He is the new CFO who was part of the financial team at Capital Automotive REIT here at McLean, when I was on the Board of that great company. He brings a lot of strong skills to the Company, so we will welcome Mike on board, and you will hear from him next round.

The main news to report this quarter is the acquisition of almost $24 million worth of new property and raising Preferred stock. We always worry about deferred stock that comes due, but we were able to raise additional Preferred stock to pay off the old Preferred stock that was coming due in 2017.

As Bob mentioned, we're leasing more vacant space. We renewed all of the 2016 leases except for a small office lease, leaving about 4.5 % of forecast rents expiring, and that's all the way through 2019 to 2020. Refinanced maturing loans at lower interest rates, and position ourselves, I think, for some very strong growth for the next three or four years. Continued to add quality real estate to our portfolio, and shore up the existing properties that we have.

As many of you know, this company didn't cut its monthly cash distributions during the recession, and that was quite a success story. We watched some very good companies cut their distributions, and most of them have never recovered to bring their dividends back to the original level. We are in a great position, not to have that problem if the economy has a skid again. So I think we are in great shape today.

Here's what we are doing today. We need to increase the common stock market capitalization, in order to increase the trading volume to give institutional investors who want to buy a lot of stock the ability to do that. These institutional buyers always want to know the number of shares outstanding. So if they buy a lot of shares, say $10 million or $20 millions worth of our stock, then they know they will be able to get liquid in that, if they have to sell it. And we still don't have enough shares outstanding to give them that confidence, although we have now had a number of very strong, well-known institutions come into our Preferred stock. They haven't ventured into the common stock to any great amount so far.

However, we have consistently built our assets and our equity base, doubling the size in the past five years. And with this growth, we hope to see the buyers come into the stock, and that should be helpful in increasing the price and lowering our cost of capital, so that new investments will be accelerated, and the dividend payout can be increased. We are raising more Preferred stock in that Series D, a 7% yield. We have that, and we are using our ATM program now to raise a few more of those shares.

We have a new webpage in our site, I would encourage you all to go see it. It is quite innovative and has a lot of good information. So head out to www.GladstoneCommercial.com. That explains the Preferred as well as the common stock. We can't redeem this new Preferred stock for five years, so it has a long-term friendly investor outlook on that one.

We continue to have a promising list of potential quality properties to buy, we are interested in acquiring them. Because of that, we expect to continue the growth of the assets of the portfolio even more next year. With the increase in the portfolio of properties, comes greater diversification, and we believe better earnings. However, please know that the price to buy good buildings with good tenants is very high these days, and we still have a lot of people chasing after almost everything we've looked at.

We focused our efforts to find good properties, long-term financing to match that, so we are able to lock in that spread between what we buy it at, and the yield, versus what we are able to finance it at. Between 2016 and 2019 we only have about 4.5% of the forecast rents expiring. And I know, Bob and his team, the managers, will lease that up as well. So we're much more optimistic, now that we have so much behind us, in terms of rents coming due. And we only have another year of refinancing these properties as well.

Much of the industrial base and businesses that rent industrial and office properties like the properties we own remain steady, and most of them are paying their rents. As you know, we have a terrific credit underwriting group here, that underwrites our tenants, and I consider the track record that they have, for paying their rents, I think the future is very bright for the ones that we have in our portfolio today. It's a strong underwriting that has kept us above 96% occupied since 2003, when we started this Company.

While I'm optimistic about the Company, and I know it's going to be fine, Bob and I will continue to be very cautious in the acquisitions that are made, as we've done in the past. So we made it through the last recession without cutting the dividend and having a lot of problems. And I think that just about anything that the government, or anybody else can throw at us at this point in time, I think we'd survive quite well.

Earlier this month, the Board voted to maintain the monthly distributions at $0.125 per common share for October, November and December, for an annual run rate of $1.50 per year. This is very attractive rate in a well-managed REIT like ours. We have now paid 141 consecutive common stock cash distributions, and we went through the recession without even thinking about cutting the dividend, we were that strong. That is more than 10 years and that is a wonderful track record.

Because of the real estate can be depreciated, of course, you all know that you shelter the income, so that it's more of a return of capital. About 79% of the common stock in 2015 was a return of capital, and this is very tax-friendly stock. In my opinion, it's a good one to put in your personal account, if you're seeking income, because you don't pay taxes on that 79% since it is a return of capital. Return of capital is mainly due to the depreciation of the real estate assets and other items, and that has caused earnings to remain low after depreciation. That's why we talk about core FFO, because this is adding back the real estate depreciation.

Depreciation of a building is a bit of a fiction for tax purposes, since at the end of the depreciation period, the building is usually still standing, in pretty good shape. You may have to put a few dollars in it to bring it back up, but if you owned the stock of -- in a nonretirement account, as opposed to having it into an IRA or retirement plan, you don't pay taxes on that 79% unless you sell the stock. And then of course, your tax base is a little bit lower.

Stock price closed yesterday at $17.85. The distribution yield on the stock is about 8.4% today. I just look at this, and can't understand why the yield is so high. The triple net REIT marketplace is trading at about 5.4% yield. So if we could just drop it to 7.4% the stock would be $20 a share, and of course, if we make it to 5.4%, you'd be at about $27 a share. So there's a lot of room for the expansion of the stock, based on the REIT stock yields. I just think that over time, as we become bigger and more people investigate and know us, that yield will go down and be more like the other REITs in our category.

Investors continue to discover us. Bob has been on a tear, going out and talking to people about the REIT, and he has gotten a lot of people interested that probably didn't even know about us before. And that's a good reason for the REITs to trade at such a high-yield. It's just no reason at all, low lease turnover in the next four years, just almost assures you that revenue number is there.

I know analysts always say the same thing, every time I talked to them, and I know Bob gets the same question. And they always say, but you're externally managed, and I just want to hit that one more time. We may be externally managed, but it allows us to access a team of credit underwriters unlike any internally managed REIT. Our high occupancy level is a testament to the access we have to the credit underwriting skills and backgrounds that we have here in this Company.

We are a REIT that looks first at the tenant to make sure they can pay the rent. And I know most REITs look at the real estate first. We do look at the real estate. We do all the classic underwriting of real estate, but we also have this whole culture here, of credit underwriting the tenants.

We don't rely on third-party credit ratings of tenants. So we saw what that happened to people during the last recession. So we're internally managed in terms of looking at the credit rating of our companies.

We have also performed an analysis of the cost of operating REITs. And it's not higher -- and ours is not higher than any other REIT, whether it's internally managed or externally managed. As you know, as we get bigger, we have adjusted the management fee to keep it in line with other internally and externally managed REITs. So from my perspective, I can't see what all the fuss is about.

We have been methodically decreasing our leverage every quarter. We are now nearing 50% leverage We're about $1 of stock outstanding, in dollars for every debt that we have on the buildings. And given the track record of steady income for the last 10 years, I think that amount of leverage is very conservative, consider that we have remained so well leased up. Now the Board will vote again in mid January during our regularly scheduled Board meeting to declare the distributions for January, February, and March.

Now, if the operator will come on, we'll have some questions from shareholders and analysts who follow this wonderful REIT. Will the operator please come on, and tell the listeners how they can ask questions?

Thank you.

(Operator Instructions)

John Massocca, Ladenburg Thalmann.

Sorry, I was on mute. Good morning, everyone.

Good morning.

You just kind of touched on that you have an acquisition pipeline going. Can you give us any more detail on that? What is the size of the pipeline, and do you have anything under LOI?

Sure, John. Right now our overall pipeline is over $325 million. We have, at this point, one property in the Letter of Intent stage. That's out in the West Coast, and we have 2 properties that are really in due diligence. One of those is in Philadelphia, and the other I consider in due diligence, is our expansion of that property we have Vance, Alabama. Until the construction is completed, we keep that in due diligence.

So the balance of those properties are literally across the country. I mean, we, as we try to tell everybody, and it's reality, we only focus on the secondary growth markets. So the totality of our pipeline right now is in cities such as Dallas, San Jose, Denver, a couple of properties there we're chasing, Philadelphia as I said, Seattle, Nashville and South Florida, and then that property in Vance, Alabama that is an expansion.

Okay. And then kind of touching on dispositions, I know you guys increased assets held for sale. What you think is the ultimate size of disposition program, or is this something where you're going to be selling a couple million dollars of assets every quarter, as you look to kind of fine-tune the portfolio?

I think, here, we're approaching it from two separate directions. First of all, I think as David has said, and what really surprised me and attracted me to this Company, I mean, I'm not concerned about the credit. The issue that we're facing, and I'm hearing it when I go out and talk with these investment advisors and the portfolio managers, is that we really -- they're really like to see us reduce the totality of all of the markets we are in.

So our focus really, John, is going to be identifying those single asset markets that are kind of really tertiary. And for example, the five that I talked to you about, they're in Toledo, Montgomery, Alabama, South Hadley, Massachusetts, Syracuse, New York and Hazelton, Missouri. And where we are in the cycle right now, where everyone says it is peaking, we figure that as the opportunity presents itself, we're going to sell those. So I can't tell you how many we think we're going to sell, but we will probably sell as this market continues to peak.

And then as David and I have said, I mean, we've got great cash flow from these tenants and from the assets. So but we do want to reduce the total number of markets that we're in. And we will continue to do that until the market turns.

Okay. That absolutely makes sense. And then, just tell me more detail on the existing portfolio? If I look at page 16 of your supplemental, the number of -- percentage of rents you get from publicly traded companies increased pretty dramatically, at 19%. What drove that? I don't think -- it wasn't entirely the Citrix acquisition, was it?

Say this again now.

If I look at page 16 of your supplemental versus last quarter's the same chart you gave there, it says there's a publicly traded companies accounted for 49% of rents, which was about a -- it was 30% last quarter. So what drove that increase?

I'm going to have to respond back to you. I don't have that specifically with me, John. But I will get that back to you before lunch today. Okay?

No problem. And that's it for me then.

Okay. Just to finish up on John's point, it's opportunities that come up, that we haven't said to ourselves, let's go after public companies. We've just seen buildings come up that are owned by public companies or rented by public companies. There has been no special desire to go after public versus private. Next question?

Andy Mack, Midwest Advisors.

Good morning. This is actually Rick Murray.

Hi, Rick.

I'm just curious if you could help us understand the impairment charge in the quarter?

Danielle, do you want to hit that?

Sure. Well, I can start, and then maybe you can talk about the assets specifically.

Yes.

And again, Bob touched on, in the previous question that we have five assets held for sale. Two of them, the one in South Hadley, Massachusetts, we took about a $1.1 million impairment loss. And the one in Hazelton, Missouri, we took about a $700,000 impairment loss on. The one in Hazelton I will say, that one actually the tenant had a purchase option that we entered into when we put them in the building, I want to say about 2010. And they exercised that purchase option. And so we, that's why that property is held for sale, and how the impairment came about there. But I will let Bob touch on Yankee a little bit more.

Yes, the Yankee Candle is in that property in South Hadley, and they've been in the property for a long time. The reason that we had to impair it, is that we have several times tried to sell this asset. It is in what is, really it's an industrial asset, 150,000 square feet, irregular configuration in a residential area. And so, when we acquired the property, it absolutely made sense with Yankee in there.

They then made this property really their excess storage location, all we are doing now is getting one-year renewals. It's a non-core location for us. And so we figured, listen, we are going to get the highest and best cost we can right now. Let's go ahead and exit the property, and move on down the road. So that's really why we did that one, Rick.

Explain to Rick also, that there may be some that are sold for more than we have in them, so there may be some gains coming down the road.

Oh, and then there have been gains. Last year in 2015, we realized net gains of about $1.5 million, $1.3 million to $1.5 million. And yes, the assets, the number of assets that we have that are being held for sale, a number of those are going to be capital gains. It is just that, we think right now, we can get the most we can from those assets, and then try to redeploy those in those growth markets that we are pursuing.

Okay. Thank you. That's helpful. My other question was, I guess, a little bit more strategic, and I'm trying to reconcile your commentary about the outlook which, frankly, I think is very prudent and thoughtful. But trying to marry that with the focus on maintaining a dividend, which is not well-covered, and perhaps a reduction of the dividend would give you a little bit more flexibility in your deleveraging, and also opportunities to take advantage of things that may present themselves in what could be a choppy environment as you suggested?

Rick, we, what you just said, cut the dividend, is something that we never mention here, because we're not going to do it, unless we're just forced to. So we're going to go forward, we're going to build up the Company, so that we are in a situation where we're in excess, we earn in excess of what we're paying out as a dividend, and hopefully that occurs soon. The idea is, once we get to that point, we can begin to raise the dividend. Our model will be much like [N&N or O], in the sense that we'd be raising the dividend a little bit every quarter, and trying to push forward, and continue to increase the dividend. Because that's who we are after, is dividend lovers.

Yes, and let me add to this because, Rick, I think you and I have chatted about this in the past. I mean, when we look just back over the last three years, starting at the end of 2013 through 2016, because of some of the legacy asset issues, and the renewals and the releasings that had to take place, we have had a loss of, we've had to pay additional operating expenses, and had lost rents that had amounted to almost $6.5 million to $7 million, and over a three-year period with about 19 million to 20 million shares on average, that equates alone to like let's say, $0.08 to $0.09, $0.08 to $0.10 a share. But we maintained $1.50, and David and I were committed to keeping the dividend, because we were able to acquire accretive assets and maintain that number.

As we go forward now, with most of this behind us, we think that now that accretion, and our continued ability to acquire assets with good, let's say, margins over our costs, our WAC, we'll be able to be raising that FFO and the core FFO, which should translate into some dividend increases. It's just a commitment that we've made throughout the history of the Company. And we've experienced something that a lot of the -- let's say, a lot of the REITs that went public much later than us, and after the let's say, the downturn, have not had to experience. And they are going to be experiencing it over the next three or four years, and we are not.

Okay. Thank you.

Other questions, please?

(Operator Instructions)

I'm showing no further questions at this time. I would like to hand the call back over to David Gladstone for any closing remarks.

All right. Thank you all for calling in, and we'll talk to you next quarter.

Ladies and gentlemen, for participating in today's conference. That does conclude today's program. You may all disconnect.