Gladstone Commercial Corp (GOOD) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Commercial Corporation Second Quarter Earnings ended June 30, 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, David Gladstone. Please go ahead.

Well, thank you, Charlotte. Nice introduction, and we thank all of you for calling in. We always enjoy this time that we have with you on the phone and wish we have more time to talk to you. Open invitation. Please come by and visit us if you're ever in the Washington, D.C. area. We are located in a suburb called McLean, Virginia, and you have an open invitation to stop by and say hello to the people that are here. A lot of people are on the road, but we have 60 members on the team now or so. And there's usually always someone here to say hello to you if you stop by.

We'll now hear from Michael LiCalsi, he's our General Counsel and Secretary. Michael is also the President of Gladstone Administration. And he serves as the administrator to all of our public funds and related companies as well. He'll make a brief announcement regarding some of legal or regulatory matters concerning this call and report. Michael, you're up.

Thank you, David. Good morning, everyone. This report 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 company's future performance. 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 risk factors, including in our forms 10-K and 10-Q, which we filed with the SEC. Those can all be found on our website, gladstonecommercial.com; and on the SEC's website, which is 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-GAAP accounting standards that we can use in discussion of REITs. Please see our Form 10-Q filed yesterday with the SEC for a detailed description of FFO.

We also plan to discuss core FFO today, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe this is the 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 and other Gladstone publicly traded funds, you can sign up on our website to receive e-mail updates on the latest news, plus you can also follow us on Twitter, username there is GladstoneComps; and on Facebook, the keyword is the Gladstone Companies.

And finally, you can visit our general website to see more information about ours and our related funds at www.gladstone.com. Today's presentation is an overview, so we ask that you read our press release issued yesterday and also our review our Form 10-Q for the quarter ended June 30, 2017, as well as the financial supplement that we prepared for everyone. And this provides further detail of our portfolio and results of operations. You can find all these documents on our website, gladstonecommercial.com.

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

Thanks, Mike. Good morning, everyone. During the second quarter, we acquired a $15.5 million multistory office property in Philadelphia; completed construction of a 75,000-square foot expansion to our industrial property in Vance, Alabama; extended an 83,000-square foot office lease through 2028 in Allen, Texas; sold one noncore property in Hazelwood, Missouri and one in Concord Township, Ohio; issued $20.2 million of common and preferred equity through our at-the-market programs; and continued our outreach program by visiting with registered investment advisers and then meeting with investment banks, analysts, fund managers and lenders at REIT Week to discuss operating results and strategy.

Subsequent to the end of the quarter, we acquired a $26.4 million industrial property in Philadelphia, Pennsylvania; acquired a $51.4 million 3-building office complex in Orlando, Florida -- the press release for that acquisition was just issued this morning; extended the lease on 223,000-square foot industrial facility through 2031 in Northeast Pennsylvania; commenced activity to expand an existing tenant by 200,000 square feet in Big Flats, New York under a long-term lease; issued $26.1 million of common equity through an overnight offering; and issued an additional $13.6 million of common and preferred stock under our ATM programs.

As you can see from this overview, we had another excellent quarter as we continue to add high-performing assets to our portfolio, renew and extend leases, and issue equity as we anticipate continued growth opportunities. Our portfolio is 97% occupied at June 30, and we continue to be pleased with our activity and have a healthy pipeline of acquisition candidates.

Now for some company-specific details. We completed one acquisition during the quarter and 2 acquisitions in July. We acquired a $15.5 million office property in Philadelphia in June. Jacobs Engineering, a Fortune 500, company is the tenant. Jacobs has been in the building since construction completion in the late '90s, and there is 8.5 years remaining on the lease. We assumed a 3.55% fixed rate mortgage and the average cap rate is 7.2%.

Subsequent to the end of the quarter, we acquired 2 additional properties. One of these is a 300,000-square foot, $26.4 million industrial building in Philadelphia. The tenant is National Archives and Records Administration or NARA. This is our second facility with this government agency under long-term leases. They recently signed a 10-year firm term lease extension through 2027. NARA has been in the building since construction completion in the mid-90s. Average cap rate 6.6%, and we entered into a 10-year fixed-rate mortgage at 3.75%. We can expand this building by 40,000 square feet should NARA require more space, which provides some additional flexibility for us.

We also acquired a 306,000-square foot 3-building office complex in Orlando, Florida. ADP, S&P AA rated, is in 72% of the complex through 2027. The average cap rate is 8.48% and we entered into a 10-year fixed rate mortgage at 3.89%.

As noted during our last call, on May 19, we completed the 75,000-square foot expansion to our Lear industrial facility in Vance, Alabama. The lease term reset to 10 years. The average cap rate over the new term for the entire 245,000 square foot, $20 million investment is 10.5%. Very accretive for our shareholders.

We are also in final lease negotiations to expand a facility for our tenant in New York. The new facility, scheduled for completion during the second quarter of 2018, will be adjacent to 120,000 square foot industrial building that they currently occupy. The estimated total development cost is $12.6 million. Upon completion of 200,000 square foot facility, the leases will reset to 15 years for both buildings. The average cap rate for the expansion facility will be an estimated 8.9%.

Our team continues to have a strong pipeline of acquisition candidates exceeding $250 million in volume today and 14 properties. Of this total, $14 million is in due diligence, $55 million is in letter of intent stage and the balance is under initial review.

As I've noted on our previous call, the hallmark of our continued high occupancy remains, and is going to continue to remain, thorough tenant credit underwriting and the mission-critical nature of the property. Location and configuration are also important. In over the past 3 years to promote this aspect of our strategy, we've invested in growth markets. These include: Phoenix; Salt Lake City twice; Denver 3 times; Dallas 4 times; Austin; Atlanta twice; South and Central Florida; Philadelphia 3 times; Indianapolis; and Columbus, Ohio twice.

This emphasis on select markets also improves our overall operating efficiency. So our strategy is, first and foremost, credit emphasis with an added focus on our growth locations.

Our asset management team has continued managing our strong portfolio performance. Year-to-date, we renewed 3 of the 5 leases scheduled to expire in 2017. Of the 2 remaining leases, 1 tenant has vacated that 100,000-square foot property at the end of May, and we have a 50,000-square foot prospect for 50% of the space. The final expiring lease through the end of 2017 is a 2,000-square foot office lease. The tenant has notified us that they will vacate that space, but our anchor tenant in the office building wishes to lease the resulting vacant space after the lease expiration in September.

As noted, we extended 2 leases subsequent to quarter end, a 223,000-square foot industrial tenant through 2031 in Northeastern Pennsylvania. And also extended a lease on an 82,000-square foot office tenant in Allen, Texas through 2028. This latter extension also eliminated the lease termination option that we inherited when the property was acquired in 2013.

As it relates to our vacant and partially vacant properties, our vacant property in Newburyport, Massachusetts is currently under contract for sale to a local investor with a scheduled closing in August. We have a lease out for signature for the balance of the vacant space in our 12,000-square foot medical office facility in Houston, Texas. And we are in final lease negotiations with our anchor tenant in the 117,000-square foot industrial property in Raleigh for the remaining 7,000 square feet in that building. So portfolio leasing activity continues to be strong by the team.

As part of our portfolio rightsizing efforts to operate in cities we deem to have strong prospects, we sold 2 noncore properties during the quarter. One property was located in Hazelwood, Missouri and the other was in Concord Township in Northeast Ohio.

We recognized a GAAP loss upon the sale of both properties equal to $1.9 million. This is partially offset by a $550,000 lease termination fee received and relates to the sale of the Ohio property. The positive result for the company is that we exited 2 single properties in noncore markets, and reinvested the proceeds in the acquisitions closed in July, which were all in our target markets. The overall capital gain from all dispositions year-to-date during 2017 equals $4 million.

Since January 2015, we have exited 9 single-property markets as part of this capital recycling program. We will continue our capital recycling efforts on a selective basis in the future, but only as market conditions permit, as the majority of our tenants in the smaller markets have already renewed their leases, experienced no issues during the recent recession and are excellent rent payers.

As we reflect on our recent portfolio efforts, the better long-term news for our overall growth strategy is that less than 4% of our forecasted rental income is expiring before 2020. This is an important fact for our shareholders, as the majority of our peers have approximately 20% or more of their leases expiring during this same period. So our cash rate should be stable and growing and our occupancy should remain high, even if the economic conditions deteriorate.

The majority of our capital availability is going to be used to pursue growth opportunities because we do not anticipate any significant capital for tenant improvements and leasing commissions to retain tenants, or to re-lease vacant space, or to fund operating deficits. Michael Sodo, our CFO, is going to expand upon our refinancing equities. But I think it's important to note that our refinancings have lowered our loan-to-value, lowered our annual interest costs and the amount of debt maturing has already reduced significantly through 2017.

This combination of our improving capital structure, our lower annual debt cost on our same-store properties, the rightsizing of our portfolio and the opportunity to emphasize growth positions us well in the current environment.

Now let's turn it over to Mike to report on the financial results.

Good morning. I'll start by reviewing our second quarter operating results. All per share numbers I reference are based on fully diluted weighted average common shares.

FFO and core FFO available to common stockholders were $10.3 million and $9.8 million, or $0.40 and $0.37 per share for the quarter, respectively. While this is a 6% increase in FFO totaling approximately $570,000 over the prior quarter, it is substantially associated with the lease termination fee that we received on the disposition of a noncore asset. With the exception of this, core FFO reflects a $23,000 increase from the prior quarter.

As Bob mentioned, we have made 2 individual building acquisitions, as well as a 3-building portfolio acquisition in the past 6 weeks. In advance of these acquisitions, we did raise a good amount of equity, which I'll discuss further in a minute.

Our second quarter results reflect an increase in total operating revenues to $22.9 million as compared to total operating expenses excluding impairment charges of $14 million for the period. We continue to reduce our interest expense by $200,000 from Q1 due to our gradual deleveraging and efficient loan refinancings.

As Bob mentioned, we did sell 2 noncore properties during the quarter. These sales resulted in a net loss of $1.9 million. We also did record an impairment charge on one asset that is classified as held-for-sale totaling $250,000.

Now let's look further into our debt activity and capital structure. We continue to have a strong balance sheet, as we grow our assets and focus on decreasing our leverage. We've reduced our debt to growth assets to 50% from nearly 60% at the beginning of 2016 through refinancing maturing mortgage debt at lower leverage levels and redeeming our Series C Preferred Stock, which was considered debt due to its mandatory redemption date.

We expect to continue to gradually decrease our leverage over the next 18 to 24 months. As we've continued to discuss this with various analysts, investors and lenders, we believe this will put us in a strong balance sheet position going forward. We continue to primarily use long-term mortgage debt to make acquisitions.

As we grow through disciplined investments, we'll look to expand our unsecured property pool with additional GOOD assets, as well. Over time, this will only increase our funding alternatives. As we manage our balance sheet, we have repaid $115 million of debt over the past 18 months, primarily with new long-term variable rate mortgages and interest rates equal to the 1-month LIBOR plus a spread ranging from 2.35% to 2.75%. We have placed interest rate caps on all of these new mortgages.

We also have added some of these properties to our unencumbered pool under our line of credit, whether an advanced permanent debt placement, disposition or in an effort to provide more flexibility in the future. Prior to the refinancing, these mortgages had a weighted average interest rate of 6%. Our deleveraging and refinancing efforts have been a tremendous success, with second quarter interest expense decreasing by approximately 9.5% versus second quarter 2016. On an annualized basis, this equates to over $2 million in interest savings.

Looking at our upcoming maturities, we have only 2 loan principal payments remaining in 2017 totaling $22 million. These loans have a weighted average interest rate of 5.4%. We anticipate refinancing these maturities into new long-term debt or adding some of these properties to our asset pool under our line of credit. Either outcome should result in reduction in interest expense. 2018 loan maturities are also very manageable, with only another $38 million coming due. We don't have more than $50 million of mortgages maturing in any single year until 2022.

Long-term mortgage debt continues to be available, but at slightly higher rates than we experienced in recent years. Interest rates have been volatile in the last 6 to 8 months. With that said, interest rates still remain attractively low from a historical perspective, and we'll continue to actively try to match our acquisitions with cost-effective debt. Depending on several factors including the tenant's credit, property type, location, terms of the lease, leverage and the amount and term of the loan, we're generally seeing on rates from the high 3% range to the mid-4% range. As Bob noted, the 10-year fixed-rate loans on our 3 recent acquisitions range from 3.55% to 3.89%.

Finally, I'll turn to our equity activity during the second quarter and subsequent to quarter-end, which I referred to previously. We've been very active in both our Common and Series D preferred ATM programs. During the second quarter, and net of issuance cost, we raised $15.6 million of common equity at a weighted average of $21.14 per share and $4.7 million of Series D preferred equity at a weighted average of $25.12 per share.

During July and net of issuance cost, we raised another $12 million of common equity at a weighted average of $21.29 per share and $1.6 million of Series D preferred equity at a weighted average of $25.41 per share. We continue to view the ATM as an extremely efficient way to deploy equity.

In addition and as mentioned earlier by Bob, we successfully completed an overnight offering of 1.15 million shares of common stock on July 25th. The underwriters also fully exercised their over-allotment option to purchase an additional 173,000 shares. Net proceeds to the company totaled $26.1 million. These funds were opportunistically raised predominantly to fund the high-quality office portfolio acquisition in Orlando that we closed yesterday.

While the ATM equity issuances did have a dilutive effect on FFO in short term, we believe they were efficiently executed to primarily provide capital to fund accretive deals that we've just recently closed on, as well as those in our near-term pipeline that will help us grow profitability as we move forward.

As of today, our available liquidity is approximately $44 million, comprised of $3 million in cash and an available borrowing capacity of $41 million under our line of credit. With our current availability and access to our ATM programs, we believe that we have enough liquidity to fund our current operations, deals in our pipeline and any known upcoming improvements on our properties.

We encourage you to also review our quarterly financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter. We feel good about executing our business plan during the rest of the year, as we continue to increase our high-quality asset base and continue to improve our metrics, including leverage. We're focused on maintaining our high occupancy with high strong credit and real estate.

Institutional ownership of our stock increased by 14% in the past 18 months to over 54% as of June 30. Certainly, some of this is a function of being included in the RMZ index last year. But David, Bob and I have been extremely happy to meet with current and potential institutional investors, portfolio managers, investment banks and the like. David, Bob and I look forward to further engaging not only with our existing investor base lenders and coverage analysts, but also establishing new relationships, as the company moves forward to its next chapter.

Now I'll turn the program back to David.

Okay. That was a great report from Mike and Bob and Michael. And that quarter ending June 30 was an excellent one. And boy, coming out the first month of the next quarter, the September 30 quarter, that's really exciting with all of those closings.

And the main news, of course, for the quarter that ended is we raised common stock and preferred stock; continued to increase our equity and offering in the -- that we did; we leased more vacant space; we paid mature loans or refinanced them at lower interest rates. We've really positioned ourselves for some good growth going forward.

Now we've added some quality real estate to our portfolio and shored up the existing properties. And many of you know that our company didn't cut its monthly cash distributions during the recession. I think that was a story that we told over and over again. It was a wonderful story. We watched some of our GOOD companies that were out there -- who we were competing with, had to cut their distributions. And most of them never came back or recovered from cutting their dividend during that period of time. So we are in a great position not to have substantial problems if the economy hits the skids again.

We also are looking at how strong we are today. We don't have many leases coming due for the next 2.5 years. So low risk and low spending on new tenant improvements. We continue to refinance loans that were coming due and we're doing them at much lower interest rates than there are currently on the books for, so that falls right to the bottom line. And we're now building up the asset base with new purchases and we have more of those to come.

I just think the balance sheet today at this company is strong. It's battle ready, if there is another recession or problem in the economy, to withstand whatever they throw at us. So here's what we are doing today. We continue to increase the common stock market capitalization in order to increase the trading volumes, and we'll give the institutional investors who want to buy stock a lot of stock and availability and liquidity.

Institutional buyers always want to know the number of shares outstanding. So if they want to buy $10 million or $20 million of stock, they know they can get into it. And if they want to sell out because of some reason, they can move out. We were -- also this inclusion of our stock in the MSCI US REIT Index, it was certainly a big help to us in many ways. They bought a lot of stock but also they got us a lot of publicity.

We still don't have enough shares outstanding so we'll give some institutional investors the confidence that we have liquidity. So we'll continue to build on that. We've consistently built our assets and equity base, doubling the size over the last 5 years. And with this growth, we hope to see more buyers coming to the stock and should, hopefully, help increase the price and lower our cost of capital so new investments can be achieved more easily.

The offering we did last week had large institutions show up. We had one large institution that we really couldn't meet their demands. We were oversubscribed and so it was a little hard to give them what they wanted. But we're getting noticed out there. And as I've told you every time, we raised more preferred stock in the Series D and it has a 7% yield, and that's really very strong for us to put that on our books.

We have a new webpage on our site at www.gladstonecommercial.com that explains the preferred in more detail. We can't redeem this. I think we've got another 4.5 years or so that we can't redeem it. Don’t intend to redeem it, even after 4.5 years but the idea is it's a nice piece of paper for institutions, as well as individuals.

We've had some large institutions buying the preferred stock in the past. So they have a strong interest in our company, and believe before the common stock, they'll move into that. And D.A. Davidson came along with a buy recommendation on our stock. I think they're spot on with the buy recommendation. We continue to have a promising list of potential quality properties to put on the books.

As you've seen, we've just closed 3 new properties in a very short period of time. It's about $100 million worth of new investments. All are 100% occupied. We expect to continue to grow the asset base and the portfolio over the next year.

With the increase in the portfolio of properties comes greater diversification, and we believe, better earnings. However, please note that the price to buy a good building today with good tenants is still very high and the yield is very low. So we have to be very careful and pick and choose among all of those that are for sale in this market.

We're focusing our efforts on finding really good properties with long-term financing to match our long-term leases. Being able to lock in the long-term financing is really good for us in the future. Between 2017 and the end of 2019, we only have about 3.8% of the forecasted rents expiring. So managing that is much easier. Managing the debt maturities, we don't have that much coming due now. So I'm much more optimistic now that we've got all of these things behind us that we can concentrate and, hopefully, grow the asset base much faster.

Much of the industrial base in the business that we're in is within industrial and office properties and they remain steady today. Everything is going along at a very nice rate. People are paying their rents. As you know, we have a terrific underwriting team here, the underwriters of our tenants, and consider the track record of the tenant paying their rent is the most important thing. The future is really bright today. We're over 96% occupied since 2003. And I think we can maintain that for the foreseeable future.

While I'm optimistic about our company and its fine future, Bob and I will continue to be very cautious in our acquisitions as we've done in past years. We made it through the last recession. We have made this through this wobbling economy that we tend to be in today. And so if there's another recession lurking on the horizon, I think our portfolio will be strong.

On the distributions, in April, the Board voted to maintain the monthly distributions to $0.125 per common share for the month of July, August and September. that's an annual run rate of $1.50 per year. This is a very attractive rate for a well-managed REIT like ours. And yes, I know you want to know when we're going to increase the distribution amount, and all I can say on this point is as FFO increases, we will have to look at some small increases in the dividend as we go forward.

We have now paid 150 consecutive common stock cash distributions. We went through the recession without cutting those distributions, so this is a wonderful track record. Because the real estate can be depreciated, there's another thing that's very interesting here. You can shelter the income of the company. And the return of capital was 71% of the common stock in 2016. This is a very tax-friendly stock for anyone who wants to put it in their personal account because you don't have to pay tax on that on return of capital.

Return on capital for me is mainly due to the depreciation of the real estate asset and other items because it causes our earnings to remain low after depreciation. That's why we always talk about FFO and core FFO because we're adding back to real estate depreciation. I always say this, depreciation of a building is a bit of a fiction. Yes, you do have to put some money back in at the end, but the depreciation period -- after the depreciation period, the building is still standing.

So if you own stock in a non-retirement account as opposed to having it in an IRA or retirement plan, it's a great stock to own because you don't pay tax on that part of the sheltered by the depreciation. However, return of capital does reduce your cost basis in the stock, which may result in a larger capital gains tax when you get ready to sell it.

On Monday, at close, we were at $21.28 on our common stock. The distribution yield now is a little over 7%. Many of the REITs are trading much lower. These triple-net leases, as they call them, REITs are trading between 5% and 6%. A little bit over, some of them. So if their stock was trading, then that yield would be around $27 per share. So the next goal is to push it to $27. There's a lot of room for expansion of the stock, based on the yield and based on the industry and people like us out there.

My guess is that as investors continue to discover and familiarize themselves with the company, we'll see the price of the stock increase to bring the yield in line with the other REITs. So there's simply no reason whatsoever that this REIT should trade at such a high yield, given the track record and the low lease turnover for the next 3.5, 4 years.

I know the analysts will say, but you're externally managed. And I keep saying this every time, we're a very different company. We externally manage. It allows us to access a team of credit underwriters like no internally-managed REIT can. High occupancy level, I believe, is testament to the access to those credit underwriters. We are a REIT that looks first at the tenant, make sure the tenant can pay the rent, whereas most REITs will look first at the real estate. We look to the real estate, but for us, it's the tenant and the ability to pay and the probability of not paying is what we're looking to reduce.

We've also performed an analysis on the cost of operating a REIT, and it's our estimate that it's not higher than any other REIT, whether it's internally managed or externally managed. We go through this once a year with our Board, just to make sure that we're in line, and we always seem to come out in a very strong position. As you know and as we get bigger, we've adjusted the management fee and we continue to drop the fee. And this puts us in line with any of the internally-managed REITs, in my estimation.

We've been decreasing our leverage every quarter. Bob likes low leverage, I like high leverage, but we sort of get together on that. We're now almost borrowing at a level that we want to be at, that's about $1 in stock outstanding for $1 of debt on the buildings that we own. And given the track record of steady income for the last 10 years or more, that amount of leverage is very conservative, given the strength of the portfolio that we have.

And does everybody know that the mortgages we have are exculpatory? My guess is they don't. This means that the lender can only look to the property they financed, not to our company. So another safety feature is that they can only take the building. And by the way, we've only had one building go bust since 2003. And when it did, we gave that back to the mortgage lender. So we experienced a loss, of course, but we didn't experience a loss that dragged the company down over a long period of time.

Well, let me stop now and we'll have the operator come back on, and we'll have some questions from our GOOD shareholders and some of the analysts out there about this wonderful company. Operator, would you come on and give them instructions?

(Operator Instructions) Our first question comes from the line of Ryan Meliker from Canaccord Genuity.

I just had 2 quick questions. First of all, congratulations on getting all the deals done. You guys have been pretty active. But as we think about some of the deals, especially the equity offerings, I guess, what drove you guys do the overnight offering as opposed to continued issue on the ATM? I mean, it looks like net proceeds on the ATM came out to a similar level to where you were on overnight over the last 4 months. But the pricing on the ATM is much, much more attractive to you guys. It looks like, on a net basis, about over 7% higher proceeds per share. So I'm wondering why you guys chose to do that? And if we're going to see more of that or if you guys are going to be more active on the ATM?

Well, Ryan, I'm -- Mike's going to take that one. He's up to date on all the numbers. Go ahead, Mike.

Yes. Ryan, thanks for the question. To your point, we were very active in the ATM. Q1 and Q2, we were issuing about $25 million, and even subsequent to June and in July doing roughly $13 million of ATM issuances, with a common piece of being that in the mid to low $21 range net of fees. But to -- as we think about our pipeline, and as you can see this has been a pretty robust 6-week period, the ATM facility will always fund our traditional asset acquisitions, probably predominantly more in the $10 million to $25 million single property range. When we get to points where we're looking at larger portfolio deals like the ADP portfolio, which is a great property with great credit, we can't be solely reliant upon the ATM program for the amount of equity that is going to be required for that type of deal when we're doing those acquisitions in the 50% to 55% leverage level. So being mindful of doing $100 million of acquisitions in a 45-day period, we've been looking at the overnight market, feel like -- as of the date of close, we did it with a common share price of $21.72. Still a positive for the shareholders to fund that accretive deal. So as we look forward, it's dependent upon timing and size of pipeline. The ATM program will continue to hum along and be active predominantly on the common side, a little bit on the Series D, throughout 2017 and into the future. But when we hit times where we have bumpier acquisitions, we will be potentially looking at those overnight markets like we've looked at in the past.

Ryan, do you have a second question?

Yes, the second thing I wanted to ask you about was along those -- the acquisition time line and what's going on. It sounded like -- you mentioned you had $55 million in assets on letter of intent. How confident are you that those will close? And I'm assuming none of those are the size that would warrant another overnight, is that fair?

That is fair. Those do not warrant an overnight. And I can only talk to you about history. When we look at letter of intent, we're still in a competitive mode with a number of other people, and we're going to best and final offer. So our track record has typically been somewhere between 15% and 25%. So since I've been here 5 years, that's been pretty indicative of how we can score. We sometimes we get a little bit higher, but it's a very competitive market out there now. As you know, cap rates really haven't risen and there's more foreign money chasing deals in secondary growth markets. So I think that's still a pretty good percentage, Ryan.

Okay. That's helpful. And then, one last question and Mike, this is probably more for you. If I recall correctly, your series A and B preferreds, are they both redeemable at this point in time? Would you guys look to take those out, whether it be do it with another preferred closer to where the market seems to be on Series D ATM?

Yes, I think it's a fair question, Ryan. They both are freely redeemable at this point in time. All I can say is it's one of many capital markets topics that we kick around, while we continue to watch where the preferred market is. But there's no indication of a direction one way or the other by the company at this point.

Our next question comes from the line of John Roberts from Hilliard Lyons Capital.

Bob, this is mainly for you. You laid out the pipeline and -- I'm sorry, you spoke awful quick. So I didn't get all the numbers down. You had 14 properties, I think...

Yes, 14 properties. Right, $14 million in due diligence. By due diligence, that is the property that is going to be an expansion of our tenant in New York. So that is a done deal. We are just finalizing the lease negotiation. So that's only property in due diligence at this point. The other properties that are in letter of intent are 2 industrial and 1 office property, pretty much in our sweet spot of size. And as I indicated, Brian (sic) [John], our history has been 15% to 25% kill ratio on those things. And so we'll see how they turn out. But the beginning of the year, as you know, it was very slow. And in fact, reports from ULI and even Green Street and CoStar were that volume was down 20%, Q1 '17 versus Q1 '16. That volume has now increased, and, of course, it has led to more listings. So we're cautiously optimistic about the balance of the year. We're still seeing product come cross the transom and reviewing it from a niche review standpoint. We'd like to have somewhere between $150 million and $200 million in the initial review stage all the time because, as we all know, they fall out.

Right. So the other -- that's 4 properties, you got 14 in total. What's the other 10 look like?

Four of them are industrial and 6 of them are office, and they're all in our target markets. They're in, on the website, the 20 target markets. The team has done a great job of staying with growing portfolios in these secondary growth markets so that we improve our operating efficiencies. We're staying away from tertiary markets completely.

Right. And those 10, probably $150 million in total, say?

It's about $160 million -- almost $170 million.

$170 million. Okay. And then, David, you've got a real wide range of cap rates this quarter. The one property 6.6%, and you've got going as high as 10.5%. You want to give us some clue as to sort of the range you're looking at and would you feel more comfortable at this point, on a cap rate basis?

Bob is going to answer that one, he's online every day.

Very astute. Very astute, John. Here's what transpired across the on those. As we have noted in the past, we are really wishing to move more on the industrial side as many people have. And the property in Philadelphia, which is the 6.6% cap rate, is with an existing tenant, NARA. And we recognize that the margin on that is much -- of course, much smaller. But from an industrial standpoint, we feel confident anywhere from the mid -- really the upper 6s to the low to mid 7s, we will chase those deals. On an office product, we really want to start with the 7% if we possibly can. So when I look at that property from an industrial standpoint, that fits into our wanting to be into a secondary growth market with really a very stable tenant, and existing tenant, and with the ability to expand that property by 40,000 square feet. I feel very confident of continued long-term occupancy, which I think, because there is security related to every NARA facility, they won't want to leave and I think we'll have a little bit better negotiating position on the renewals. Moving up the spectrum. The office property that we bought was in the low 7s cap rate, once again in a strong market with an excellent tenant. I mean, they are Fortune 500, very strong for us in a place that we want to be. The 10.5% is a bit of an outlier, and that was in the expansion of our existing facility in Alabama. When we bought it as a forward purchase of the build-to-suit in 2013, Buzz Cooper and I wanted to be sure that we did a good job recognizing we may need additional space in future, so we bought the land with additional expansion capability. And since Mercedes-Benz doubled their investment, our tenant, Lear, was able to expand and increase their contract. And of course, they couldn't go anywhere, so that improved the leverage that we had on the negotiating of that deal. And then the deal in -- the deal in Maitland Center, which is absolutely -- if you've been down on Florida, Maitland Center is the first submarket north of the CBD. It is completely built out right now. We're buying that property below replacement cost, in my opinion, it's under $170. We have structured parking on that. And our parking ratio, I think, is like over (inaudible) and then with ADP in over 70% of the building, we -- getting a cap rate at that level is really, really strong for us, almost 8.5% on a...

That sounded very high to me.

Well, here is the thing. We were not -- to be honest with you, we weren't selected first on that deal. And the -- we had identified some items that had to be done on the property. And so we were not selected. As it turned out, the company or the buyer who was selected, identified the same issues that we had but afterwards, and did not incorporate it into their underwriting. And so as it turned out, the items that we said had to be done were, in fact, done when it came back to us. And I think there was just a question of -- it's not a net-leased property, it's our anchored multi-tenant program. But we felt so strongly about ADP, they in fact had just expanded into the current space that they're in now; and in one of the buildings they are in, 4 of the 5 floors. And the other floor is occupied by 3 tenants, which are Skanska, Marsh & McLennan and Florida Gas. So if they move out, I think it's a great opportunity for them to expand. So we look at it from the standpoint as we're taking on more risk. So if we're going to take on more risk and you've got multiple tenants, more management-intensive, the cap rate should be higher.

Great. Well, it sounds like good property.

We're excited about it. It's -- the construction is A quality, by an excellent developer/owner. So we feel very, very happy. The team, led by Brandon Flickinger, did an absolutely great job in getting this across the goal line.

Next question comes from Dan Donlan from Ladenburg Thalmann.

I just wanted to go back over the Orlando building you guys announced and then just recently talked about. I'm just kind of curious that -- you said you have like a multi-tenant structured program. Could you maybe expand upon that? I hadn't heard that nomenclature before.

Well, we call it anchored multi-tenant. And what that means, Dan, is we will buy a property that has maybe 3 to 4 tenants in it. If the lead tenant, the anchor tenant, is at least in 60%, 60% to 70% of the building, and has a minimum of 7 years left on the lease, and because of our credit underwriting look, we see them in a growth trajectory. And if, in fact, they need to grow in the future, we know that the balance of the space will accommodate them because they're already in it, and then we can work with the other smaller leases to move people out if necessary. I mean, as you know, in the net lease business, it's binary. Three things can happen at the end of the tenant's lease period, and 2 of them aren't good. They need to expand or they need to contract. And so, with the building now that we see as anchored multi-tenant that we know is flexible and since there are other tenants in that building if, in fact, our prime tenant needs to reduce in space, we know that we can re-lease the balance of the space. If the tenant needs to expand, then we should be able to accommodate their expansion because of the other tenants in the building. So it's a very small product type for us. It will never be over 10% of our total portfolio. But we think it does a couple of things for us. It initiates a relationship with a company that we think has a great growth trajectory ahead of them, and it also gives us flexibility at the end of the lease term should they either need to expand or contract.

Okay. Makes sense. And just kind of curious from a buy perspective, is this something that is -- because it's over 60%, the anchored tenants are over 60%, is this something that's not as interesting to some of the multi-tenant office folks and obviously, not attractive to the single-tenant office folks? Is there kind of a sweet spot for you in that realm?

We think it is. And the reason being is the typical multi-tenant player, and I was one in the past, wants to acquire a property that has some vacancy in it. And therefore, they have -- obviously and correctly more upside because they're taking on more risk. And so we're trying to carve out a niche play here, which has been very successful as we've done it in Columbus, Ohio and in Dallas, Texas, to buy a property that has multiple tenants in it. So you do have to have management capability to take care of the tenants, but it is fully occupied. So the typical value-add multi-tenant player is not going to have interest in this because the returns aren't going to be as great. Net lease returns are not expected to be as great on a levered basis as value-add properties.

Okay. Appreciate it. That make sense. Just kind of wanted to talk about the lease extension in Allen, Texas, as well as the Poconos lease. Could you maybe talk about any concessions there? Did you roll the rents up or down? What percentage that was?

The GAAP rent in Texas went up. I can't tell you the exact specifics, but we can get that to you because they extended the lease. We did not change the rent. They kept the current rent. We gave the tenant in Texas, I think it was 700 -- about $700,000 in tenant improvements to be done over the next 12 to 18 months. The lease in the Poconos, there was no concessions at all, and it just stayed -- the GAAP rent stayed the same. So we just -- we gave them a cash concession on the rent, but we wanted to maintain the GAAP rent for the period of time. Did that sound right, Mike?

That's right. And just to follow-up on the Allen, Texas, Bob. He's spot on with the TIs. But counterbalancing that and getting the 6-year extension, the GAAP rent went up by 10%.

Okay. And then kind of just speaking -- I don't think you guys provide the same-store rent number as some of the peers do. But you did mention in your prepared remarks that you thought same-store rents would be stable. What does that mean? Is that kind of a -1 to a +1? Or was it just kind of flat? What did you mean by stable in the press release?

By stable, I mean, they're flat. They're flat to maybe as high as a 3% increase. When we include -- like the Lear property that we did, on that property, we did the expansion. Well, we also extended the existing lease and that rent went up. So we had a positive there. The lease in Boston, the Yankee Candle lease went up about 1% on a GAAP -- on a cash and GAAP basis, since it's 1 year. And then we had a roll-down on the other lease that we -- which was a call center with T-Mobile. So overall -- and I don't have the specifics, Dan, but I can get those to you and I will get those to you. I think we're going to be somewhere between, on a GAAP basis, 1% to 3% up this year.

And on a cash basis?

It is going to be a little bit of drop, there's no doubt. I mean, these are typically 5-year renewals, as you know. On most of the leases that you get, the renewal options are typically 5 years. So it could be 2% to 3% drop in cash for the first year.

And for those of you who may be interested in the answer to this question, we'll put it in our Q&A section on the website, just so it's available to everybody.

Okay. And then just last a question for you, Mike. On the ATM issuance, just going back to Ryan's question, did you get any reverse inquiries on that? I mean, have you done any type of large blocks with institutions? Or is this just -- mostly just issuing this stock into the marketplace?

The answer is yes. Some of it's just traditional flow of issuance, and then there are reverse inquiries that come in either directly to us or to our bank. And on those, candidly, it depends on our liquidity needs. In some instances, we've said yes and executed. In some, there just hasn't been the need for liquidity based upon historical issuance, as well as the foreseen pipeline.

Our next question comes from Barry Oxford from D.A. Davidson.

To piggyback on the ATM and capital raise, you were talking about finding a larger portfolio and then needing to do an equity offering. Would you say that the probability in 2018 is probably pretty decent, that you're going to do another follow-on of similar size that you just did? Or not necessarily?

It all depends on what we find out there. And I'd say the probability is high only because at some point in time, you're going to have something that's going to come along that you want to do that's a larger transaction that can't be satisfied with the ATM. But trying to give you an idea when that might happen is just impossible. But I think it's a good idea to keep that in mind. It's not going to hurt the stock because we're going to do it so close to the point of where we're closing, as we did this time, that the money is going to go to work immediately.

Great. And then another question on the cap rates. You mentioned the continued strong demand for the buildings that you guys are out trying to acquire. Is it possible to think about the cap rates actually compressing in the back half of 2017 as you acquire, given the strong amount of people that are in the marketplace looking at product?

Barry, I think it's hard for me to say. We have seen in intel that our leaders out in the field are giving me is that they've pretty much stabilized. I mean, there are a few places in the West where cap rates in fact have dropped some, compressed some. But then in the Midwest, we're seeing some movement up in the cap rates. So I would say that in everything that I've read from a research standpoint, stabilized cap rates are what we're seeing just because we don't know exactly what's the next move on interest rates and when it's going to be, and how it would really impacts long-term debt. Because, as you just mentioned, there's so much money flowing in from foreign sources that the competition continues, and we're safe haven.

(Operator Instructions) Our next question comes from the line of Rob Stevenson from Janney.

Bob, how are you thinking about the balance today between continuing to bring down leverage and continuing to also bring out -- bring down your dividend payout ratio, in terms of how you're financing transactions? And what type of transactions you guys are looking at?

Rob, what we do is as follows: As Mike indicated, our -- we have, every year, lowered what our leverage would be on new deals. When I came on board, we were at over 60%. We're now in the low 50s. The plan for Mike and I is to continue to do that. But do it selectively because if we can still maintain, that's what David and I look at, we can maintain the margin of over 200 to 250 bps, weighted average cost of capital versus our return, we're accretive. And that's what the team really focuses on. But I hear you on the dividend payout ratio as -- and the bottom line is we have to grow the FFO per share. And that will lead to a number of things, as you know. I mean, ultimately, we'll be able to raise the dividend, but people will see a growth pattern for us. We've had to deal with, I think, so many challenges as you and I and Mike have discussed when we met with you as it relates to the last 3 to 4 years, relating to lowering our leverage, re-leasing space, and we see ourselves entering a much more favorable position here, particularly now with the stock trading logically above NAV right now based on everybody's calculations. I'm encouraged that we're going to be more competitive. I mean, 12 to 18 months ago, I could not do a deal with an average cap rate of 7% and say that it was accretive. I can do that now. And it is accretive and it makes sense. And we just have to -- we have to pick our spots, stay in our secondary growth markets, add to our portfolios in each of those markets so that people see concentration growing, which relates to better, I think, NAV calculation because they'll see us in fewer markets and with more products in each of those better markets, which will I think, lead to then lower dividend payout ratio because the stock will slowly rise. But we've got to get to the FFO per share growth, which Mike and I are committed to and David. And I see that ahead of us over the next 12, 24 months.

Okay. And then, I guess, one follow-up question there is when you're looking at your funnel of acquisition opportunities today, I mean, how constrained are you from a capital standpoint? I mean, is it a situation where it was do this $50 million deal? Or do a couple of other ones? Are you basically now, the way that you think about it, able to do whatever comes across your desk that meets your returns threshold? How do you guys sort of look at that these days?

Well, the way -- let me start and then Mike will finish up. But when we provide guidance to our leaders out in the field, we're saying, number one, we have always operated under the strategy that we don't want to buy a single asset that is going to create great risk for us. And so that's why, as Mike indicated earlier, our sweet spot is $10 million to $25 million. We have, since I have been on board, only bought 2, what I would consider to be large assets over $50 million. One was with GM and this is with ADP. So I think our focus, until we really get above $1 billion to $1.2 billion in assets, is going to stay in that under $30 million on a typical basis. And I think we can handle that mostly with our ATM. But when we come across an opportunity like we did with ADP, or with GM earlier, and we see that it makes sense based on our underwriting, we will pursue that. But as David indicated, we don't know where that is right now but we're hopeful that we'll have over next 12 to 18 months.

Yes, from my side Rob, I think based upon what we've done recently, where we go forward, I feel comfortable that the traditional acquisitions on an individual basis or even in the 3-property portfolio deals can be funded. We've done almost $40 million in the ATM year-to-date. We did $26 million overnight. We have over $40 million still available on the line after the Orlando acquisition. And our lenders have been appreciative of the deleveraging efforts. So I think to the extent we required incremental capital, it's out there. We're very cognizant from a diversification perspective that we, at a company of plus or minus $1 billion of assets, aren't going to go out and lob on a 10% credit or anything like that. If you're looking at those and the capital requirements related to that, that could be challenging. But that's not our playbook and how we're organically growing the company. So as CFO, I feel comfortable that there will not be hold-ups on the capital market side, as we see the GOOD deals that the deal team brings to our investment committee and to close.

At this time, I'm not showing any further questions. I would like to turn the call back over to David Gladstone.

All right. Thank you all for calling in. We really appreciate all the effort that goes into asking good questions and giving us a chance to explain things much greater. And we'll see you again next quarter. That's the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.