Gladstone Commercial Corp (GOOD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Commercial Corporation's First Quarter ended March 31, 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call maybe recorded.

I would now like to turn the conference over to David Gladstone, Chairman. You may begin.

Thank you, Nicole. Nice introduction, and thanks to all of you for calling in this morning. We enjoy all the time that we have with you on the phone, and wish we had more time to talk with you. But if you're ever in the Washington, D.C., area, we're located in the suburb called McLean, Virginia. You have an open invitation to stop by and say hello. You'll see some of the people here, hopefully. Most of them are on the road, doing the work that they do of buying new real estate. There are over 60 members now.

First, we'll hear from Michael LiCalsi. He's our General Counsel and Secretary. Michael's also 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 legal and regulatory matters concerning in the call and report today.

Michael?

Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable.

Many factors 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 listed on our Forms 10-Q, 10-K, and other documents that we file with the SEC. Those can all be found on our website, which is www.gladstonecommercial.com. Specifically, you would go to the Investor Relations page there or on the SEC's website, and that's www.sec.gov.

Now we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law, of course. For today, we will discuss FFO, which is funds from operations. 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 on property, plus depreciation and amortization of real estate assets.

We'll also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenue and expenses, and we believe this is a better indication of our operating results, and allows better comparability of our period-over-period performance. We also ask that you take the opportunity to visit our website, again, gladstonecommercial.com, sign up for our e-mail notification service. You can also find us on Facebook. Keyword there is the Gladstone Companies. And as I always say, we have our own Twitter handle these days, and that's @GladstoneComps. And today's call's an overview of our results, so we ask that you review our press release and Form 10-Q, both of which were issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website.

Now I'll hand the baton back over to Gladstone Commercial's President, Bob Cutlip.

Thanks, Michael. Good morning, everyone. During the first quarter, we acquired a $14.3 million industrial property adjacent to the Mercedes Benz assembly plant in Vance, Alabama; leased 34,000 square feet of previously vacant space in our Maple Heights, Ohio, industrial property; issued $9.4 million in new mortgage debt at a fixed rate of 4.58%, collateralized by our office acquisition in Columbus, Ohio; repaid 2 mortgage notes totaling $16.2 million; sold 2 non-core assets in Tewksbury, Massachusetts and Arlington, Texas; and conducted multiple visits to existing and potential investors in Boston, Los Angeles, Chicago, Milwaukee, Tampa and Orlando.

These non-deal road shows were hosted by research analysts that recently initiated coverage and by Investor Relations consultants. The past 15 months have witnessed significant activity across our investment, asset management and capital-raising functions. These events are noteworthy, and they include: We invested $153 million in 8 property acquisitions and 1 expansion project at an average cap rate over the term of 8.1%.

These acquisitions were in our growth markets of Philadelphia; Columbus, Ohio; Salt Lake City; Orlando; and a recent favorite of mine, the Mercedes Benz assembly plant in Alabama. And 83% of this acquisition volume is with rated investment-grade tenants or tenants with investment-grade parent companies.

We also exited 6 non-core properties as part of our capital recycling program, completed the lease-up of an industrial property in Raleigh, North Carolina and an office property in Houston; renewed and extended the leases of 5 tenants at a gap rental rate per square foot increase of 7.6%; recast, expanded and extended our revolver in term loan at lower costs; and refinanced $57.3 million of maturing mortgages at lower leverage and lower interest rates.

We expect each of these items to have positive impacts on our FFO per share, cash available for distribution, capital availability and, of course, leverage. I think one can also conclude that every team member across all of our functions were contributors to these successful achievements. Some of our investors and critics challenge us on our payout ratio. While FFO per share is in excess of our dividend amount, these payments have exceeded a 100% of true cash available for distribution for some time. However, we have consistently improved this ratio since 2013 even with the capital required for tenant improvements and leasing commissions for the 23 lease expirations during that period, while also addressing $201 million of maturing mortgages, which required significant equity to lower the overall leverage from 63% to today's 47%.

We were able to improve upon that payout ratio and maintain a $1.50 to $1.54 FFO per share because we acquired accretive assets each and every year, while improving the credit profile of the balance sheet through significant deleveraging. The characteristics of those investments since 2012 are worth noting. The average annual acquisition volume has been approximately $111 million. The unexpired lease terms range from 7 to 10-plus years, with annual lease rate escalations, and the average gap cap rate on these assets is currently 8.7%. These characteristics equate to increasing cash flow year after year. We're also approaching the time period at which the cash rents will be exceeding the straight line gap rents, as these leases are at or approaching the inflection point from a straight-line rent perspective. This should continue to lower the payout ratio to the benefit of shareholders and our working capital position. And looking at the first quarter of 2018 as compared to the first quarter of '17, same-store gap rents increased by 0.4%, whereas cash basis same-store rents increased by approximately 2%.

Our acquisitions and asset management momentum continued during the first quarter. We acquired our second industrial asset adjacent to the Mercedes Benz assembly plant in Vance, Alabama. As I noted to you earlier, Mercedes Benz has increased their investment at the plant and recently announced they will be manufacturing 2 electric SUV models, beginning around 2020. Our $14.3 million acquisition is the direct result of their increased investment plants. The 127,000 square foot fully automated operation provides wheel and tire assemblies for a number of models, mostly SUVs, that are manufactured at this location. The average cap rate over the approximately 9 3/4-year lease term is 7.6%, and our tenant, Truck and Wheel, has personally invested over $20 million in the property. And as an aside, Truck and Wheel has an existing relationship with Mercedes Benz in Europe.

We continue to increase our occupancy by leasing 34,000 square feet in our Maple Heights, Ohio, industrial property. Two of our non-core properties were also sold during the quarter, 1 in Tewksbury, Massachusetts, and 1 in Arlington, Texas. The combined sales prices were $11.1 million, and we realized a net capital gain of $1.8 million. These transactions collectively increased our occupancy at quarter end to 99.1%. We plan to continue this capital recycling program on a select basis when we can immediately redeploy the proceeds into one of our target markets.

The current state of market conditions is also an important subject to discuss. As noted during our last quarterly call, overall investment sales volume for 2017 was trending lower than for 2016. Published reports following the year-end, reflect sales volumes did in fact decrease by between 8% to 10%, as compared to 2016. This softening continued through the first quarter of 2018, and listings and closings are expected to be lower than the first quarter of '17. Completing the ninth year of the current cycle, noted researchers in the industry have forecast that the market cycle maybe peaking from a volume standpoint. And with the exception of industrial properties, prices appear to be peaking as well. In fact, Green Street Advisors, a noted research firm for the public REIT industry, reported that their overall pricing index for all product types for the trailing 12 months is down 1%. Now this is not significant, and research firms are still forecasting that overall investment volume for 2018 could be similar to 2017. It is, however, indicative of a potential seller-buyer disconnect on pricing, with interest rates expected to rise in the coming months. It is appropriate to note that we are seeing office acquisition candidates that were originally promoted as very low cap rate transactions failed to close, and are returning to the market with higher guidance, as much as 25 to 50 basis points. Our team will continue to monitor market conditions and actively investigate opportunities. And we'll acquire properties when the tenant credit, location and asset returns are accretive and promote our measured growth strategy.

Before I address our current pipeline and the opportunities we are pursuing, a few comments are in order about our operating characteristics over the next 18-plus months, which help sets the stage for our execution strategy. We have no lease expirations for the balance of the year, and we are currently 99% occupied. For 2019, we have the 3.4% of forecasted rents expiring. In addition, our loan maturities for both 2018 and 2019 average just $26 million per year, a very manageable level. Therefore, we should have stable and growing cash flow on our same-store properties and our capital should be available for pursuing growth initiatives.

Relating to growth opportunities and our strategy, our team continues to have a strong pipeline of acquisition candidates, exceeding $310 million in volume, 19 properties, 10 of which are industrial. Of this total, nearly $40 million is in the letter of intent stage, and the balance is under initial review. We're making a conscious effort at this time to increase our industrial allocation. With the heated competition for larger properties, our focus is in fully developed industrial parks, with properties that are 75,000 to 300,000 square feet in size, many of which are going to be occupied by middle-market non-rated tenants, whom we believe we can underwrite with our proven tenant credit underwriting capabilities. The larger properties, on the other hand, with higher clear heights and larger trailer parking capabilities are trading well above replacement costs in several markets, and we do not believe that is an appropriate strategy for us.

So in summary, our first quarter and last 15 months' activities continued our acquisition and leasing success, extended our credit facility, refinance maturing loans, and positioned us well to pursue growth opportunities.

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

Good morning. I'll start by reviewing our first 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 $11.8 million and $11.7 million, respectively, or $0.40 per share for the quarter. On a core FFO basis, this is over a 6% increase, totaling approximately $700,000 from the prior quarter, which equates to an additional $0.02 per share. The rents from the accretive acquisitions that were completed toward the end of 2017 contributed significantly to the growth of core FFO per share this quarter and are anticipated to help us continue to increase profitability going forward. As Bob mentioned, we also acquired one industrial property in late March, and disposed of our only fully vacant property. Our first quarter results reflected an increase in total operating revenues to $26.4 million, as compared to total operating expenses of $17.4 million for the period.

Now let's take a look at our debt activity and capital structure. We continue to enhance our strong balance sheet, as we grow our assets and focus on decreasing our leverage. We've reduced our debt-to-gross assets by 10%, to 47%, since the beginning of 2016, generally through refinancing, maturing debt, and financing new acquisitions at lower leverage levels. We expect to continue to gradually decrease our leverage over the next 18 to 24 months. As we've discussed this with analysts, investors and lenders, we believe this will put us at the proper leverage level, going forward, long term. We continue to primarily use long-term mortgage debt to make acquisitions. As we grow through disciplined investments, we'll look to expand our own unsecured property pool with additional high quality assets as well. Over time, this will increase our financing alternatives. As we manage our balance sheet, we've repaid $123.6 million of debt over the past 24 months, primarily with new long-term variable rate mortgages at interest rates equal to the 1 month LIBOR, plus a spread ranging from 2.5% to 2.75%. We placed interest rate caps or swaps on all new variable rate loans. We also added some of these properties to our unencumbered pool under our line of credit, whether in advance to permit debt placement, disposition or in an effort to provide more flexibility in the future.

In order to improve our balance sheet, we have often put additional equity into the refinanced properties. As previously discussed, this has helped significantly reduce leverage, and generally enabled us to obtain interest rates on our mortgages, thereby, reducing the interest expense with those lower rates in excess of $2 million annually. Looking at our debt profile, 2018 loan maturities are very manageable, with only $15.6 million coming due after extending the maturity dates on 2 loans from 2018 to 2020, subsequent to quarter end.

Further, we have less than $40 million of mortgages maturing in any single year until 2022. As we discussed on prior calls, the Q4 2017 extension of our term loan for a new 5-year term and our revolver for a new 4-year term incrementally improved our liquidity and maturity profile. Depending on several factors, including the tenant's credit, property type, location, terms of the lease, leverage, the amount and term of the loan, we are generally seeing all-in REITs on refinances and new acquisition debt ranging from the mid-to-high 4% range. We continue to minimize our exposure to rising interest rates, with 94% of our existing debt being fixed rate or hedged to fix through interest rate swaps and caps. We've remained somewhat active in our -- in issuing from our common stock in Series D ATM programs.

During the first quarter, in net of issuance cost, we raised $640,000 of common stock and $940,000 of Series D preferred stock. While we continue to view the ATM as an extremely efficient way to raise equity, we entered the year with significant liquidity, and continually keep our assessment of the relative value of our common stock, as compared to trading prices, in mind as we determine when to raise capital.

As of today, we have $4 million in cash and $48 million of availability 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, properties we are underwriting and any known upcoming improvements at 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 remainder of 2018, as we continue to increase our high-quality asset base and continue to improve our metrics, inclusive of leverage. We're focused on maintaining our high occupancy with strong credit in real estate, with minimal near-term lease expirations, along with manageable loan maturities, our deployment of capital will be heavily focused on high-quality real estate acquisitions with strong credit tenants.

Institutional ownership of our stock increased by over 15% since the beginning of 2016 to over a 56% as of March 31st. Certainly, some of this is a function of being included in the RMZ Index in December of '16. But Bob and I have been active in meeting with current and potential institutional investors, portfolio managers, investment banks and the like. We look forward to further engaging with not only our existing investor base lenders and coverage analysts, but also established a new relationships, as the company moves forward to its next chapter.

Now I'll give it back to David.

Well, very good report, Mike, and also from Bob and Michael. Good reports from all 3 of you, and a really nice quarter. Everything's clicking along the way it always does, with a smooth running company like ours. And just to summarize, we acquired $14.3 million in industrial property adjacent to the Mercedes Benz assembly plant in Vance, Alabama, becoming a great assembly area down there in Alabama. We leased 34,000 square feet of previously vacant space in our Maple Heights, Ohio. So we're now at 99.1% occupied in our portfolio. We issued $9.4 million of new mortgage debt collateralized by our office building in Columbus, Ohio. It was a fixed rate of 4.58%, repaid 2 maturing mortgages for $16.2 million and sold 2 properties, one in Tewksbury and the other in Arlington, Texas. We had about $11.1 million that came back from those sales.

Bob and Mike have been visiting a lot of investors, and you might see him in a city near you soon. They are traveling and telling everybody the good news about this strong company. As many of you know, the company has been very strong. It didn't cut its monthly cash distributions during the recession, and that was quite a success story, as we watched other good real estate investment companies have to cut their distributions. And most of them have never recovered from that original dividend level to -- coming back to where they are today. We're in a great position not to have substantial problems if the economy hits the skids again. We do have many leases coming due -- don't have many leases coming due during 2019, so we expect low risk in spending and new tenant improvements, and we continue to refinance loans that are coming due. Not many there, but when we do, we refinance them and are getting lower rates.

And now we're building up the asset base with the purchases that are coming in. And I think the balance sheet's really strong today and battery-ready for any kind of recession that comes in. We built our assets and equity base, doubling the size in the past 5 years. And with this growth, we hope to see more buyers coming into the stock, and should hopefully help increase the price of the stock. We are raising preferred stock in the Series D level. We are out in the marketplace doing that. The web page for all of these preferreds are at gladstonecommercial.com, and you can read about the preferreds and see if that fits into your portfolio. We have some large institutions buying preferred stock in the past, so we have interest in our company, and I think some of those institutions will come on down to buy in the regular shares of common stock. D.A. Davidson and Janney have come in with buy recommendations. I see Janney was out before this call with a buy recommendation. We certainly appreciate that, but I do believe they're spot on with the buy rating. Some of the other institutions are looking at us, and I think we'll get some more indications of buy ratings as time goes on. We continue to have a promising list of portfolio -- of new portfolio of companies, and acquiring in '18 and '19. I think the portfolio of properties is coming -- making us greater diversification. We believe that's really better for earnings. This is evident in the first quarter results. However, please know that the price of good buildings with strong tenants is very high and the yield is very low, so we have to be very particular about what we buy. We might crash into our dividend. We certainly don't want to do that.

Much of the industrial base of businesses out there that rent industrial properties, like our properties, remains steady. More of them are paying their rents, and so as a result, we haven't seen a lot of problems in the portfolio. As you know, we have a terrific credit underwriting group that's part of the team. They underwrite our tenants. And considering the track record of tenants paying their rent, I think the future is bright. Strong underwriting has kept the company at more than 96% occupied since 2003, and we're over -- we're just at 99.1% today. I'm optimistic that the company will fine in the future -- will do fine in the future, and Bob and his team will continue to be cautious in the acquisitions, as they've done in the past. We made it through the recession without cutting the dividend and having a lot of problems with tenants. And I think if there's another recession, we'll go through that one pretty easily as well.

In April, the board voted to maintain the monthly distribution of $0.125 per common share in April, May and June. That's an annual rate of $1.50, very attractive for a well-managed REIT like ours, which we believe is perfect for individual accounts. I know the institutions have been piling in, but we like the idea when we get a lot of individuals. I know some of you want to talk about increasing the distribution amount, and I do too. And all I can say at this point is that, as FFO increases, we'll have to look at some small increases in the distributions. We feel like we have solid prospects for growing the FFO now, with so much balance sheet improvement and lease expirations behind us. We've now paid 159 consecutive common stock cash distributions. And as you know, I keep mentioning it, because it's such a win, the recent recession didn't slow us down at all. Because the real estate can be depreciated, and we're able to shelter the income of the company, the return of capital was 60.4% for the common stock in 2017. This is a very tax-friendly stock. And I think any person that wants to put it in their personal account will love the idea that if you don't pay taxes immediately on the 60.4%. It's only when you sell the shares that you have to come back in and look at it again.

The return of capital. I know I get this question a lot. The return of capital is mainly due to the depreciation of the real estate and other items, and it causes earnings to remain low after you deduct the depreciation. That's why we talk about FFO and core FFO, because it adds back the real estate depreciation. As you all know, depreciation of a building is a bit of a fiction to begin with, since the buildings used is still standing, and quite usable after the end of the depreciation period. So if you own stock in a non-retirement account, as opposed to having it in an IRA or retirement plan, you really don't pay any taxes on the part that's sheltered. So it's a great place to park some money, and get the nice dividends without having to pay tax on it.

Stock closed yesterday at $17.54. It's very low. I would give a current yield of 8.5%. Many of the REITs are trading at much lower rates. The recent downdraft in our equity market has created a good time to buy our stock. The triple net REIT universe, generally trading right now at about 6.44%, according to one of the studies I just read. So if your stock is trading at that -- if our stock was trading at that yield, we would be priced at about $23 per share, and this shows you that there is a lot of room for expansion of the stock price to closer-to-the-industry stocks like ours.

And my guess is that as investors continue to discover and familiarize themselves with our company, we'll see the price of the stock increase and bring the yield in line with the other REITs like ours. This is simply no reason for this REIT to trade so low in such a high yield, given the fact that we've -- the track record over the last few years. I know some analysts get really upset. They say, "But you're externally managed," and being externally manage allows us to bring in the credit underwriting team. If we need more people, we've got extra people here that can help manage the REIT, our high-occupancy level and treatment, and it is a testament to the access we have the credit underwriting that we do. We are a REIT that looks first at the tenants to make sure they can pay their rent, whereas most REITs look at their real estate. And we look at the real estate, but it's subject to us doing an underwriting of the tenant.

In addition, while our salaries are paid by external advisers, many of our resources, such as Bob and Mike, are solely dedicated to Gladstone Commercial.

Now we've also performed an analysis on the cost of operating this REIT, and it's within the range. In fact, right on the range of internally managed REITs. And as you know, we adjusted the fee structure in 2015 to keep in line with the other internally managed REIT.

We've been methodically decreasing our leverage. We've been putting up more equity when we refinance our mortgages, but we're near the end of using that much equity and transactions. I'd like us not to go too much lower. Our current level of leverage is quite conservative, given the history of defaults or lack of defaults, and equity will be used to buy properties. That will improve the earnings, so we can get closer to increasing the distribution to stockholders.

Regarding our debt, I want to make sure that everybody knows that the mortgages that we have are what they call exculpatory. This means the lender can only look to the property they finance and not to the overall company. I'm sure we have a few that have some adjustments to them, but most of them are in that line. So I'm going to stop now. And Nicole, if you'll come on and give us -- give the people out there a chance to ask questions about this wonderful company. Please read them how they can do that.

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

Given the continued use of the preferred ATM program, can you talk about how you're thinking about that, because if the goal is to get institutional investors to play in the preferred, have you guys really thought about doing a marketed deal of this size, so that somebody could buy $5 million, $10 million if they wanted to, to be able to put into some of those larger preferred funds that are out there?

Rob, thank you for the buy rating this morning. That was very nice. The ATM program lets us get money coming in at a regular rate, so that we can use it quickly and not have it sitting idle and not doing well. We can pay down the debt, but the debt cost is low. So thinking about the ATM program and its -- you're right on target in terms of using it, but I just don't think we could use a big chunk all at once. We have probably 5 or 6 of the big preferred buyers in that stock now. And I was just with one 2 weeks ago, and he's buying when it comes down to a price. As you know, it's traded quite handsomely. So as a result, we've not been out there really touting it that much. But you're right, we probably should look at it. If we come up on a nice good-sized transaction that we need to raise some equity around, I would say we'd probably go with the preferred program of a secondary.

Mike, I mean, would you still price at a 7% yield if you did a marketed preferred transaction today, given a 3% 10-year treasury?

Sure, Rob. I've obviously watched the preferred perpetual market very closely, inclusive of the last 6 months, I would say. If it was December, we would price sub-7. But my sense of the market today, with the significant rise in the treasury, and I think the institutional bid on the preferred side has been relatively weak. Throughout the first quarter, is that it probably would not be sub-6. So obviously, the Series D preferreds was hovering around, trading about $26 per share vis-a-vis the $25 par throughout 2017. It's been within $0.10 to $0.20 of the $25 number recently, which implies plus or minus that 7 yield.

Okay. And then how are you guys thinking about, I mean, assuming that the common stays at sort of similar levels and it's not as attractive for you to be doing any common equity issuance under the ATM, how are you thinking about sort of the max in your capital stack that you would go with preferred? I mean, you're probably 12 percentage today. I mean, could that go up to 15% or 20%? Or is there -- internally, do you guys have sort of an either soft or hard cap on how much preferred that you guys would use in the cap stack?

Yes. We haven't really sat down and penciled in what our maximum would be, but we're not going to go the route of some of the other preferred issuers out there in which we're upside down, that is we have more preferred than we do common. So the goal is to look at it as another piece of debt, if you want to think about it that way, that's got a dividend that has to be met. So the quality of the issue is going to be critical for us. If we could get something lower, certainly, we would do that. But I'm not sure the marketplace is ready for a 6.5% or even a 6%, given the fact that interest rates have been climbing.

Yes, Rob, I would agree with all that. I mean, I tend to take the conservative approach, and despite these being perpetual instruments, I think a lot of people look at them through the lens of being more debt-like.

Okay. And then Bob, any success in recent discussions with sellers to be able to take OP units from you given an 8.6% dividend yield, and the stability of the stock over the last couple of years?

It's like you're reading my mind. We are right now -- we are looking at 2 of those opportunities right now. One's out West and one is closer to home here in the D.C. area, but it's -- we're not there yet. But yes, we are definitely investigating that very comprehensively. And we're starting to see more people, at this point in the cycle, want to investigate using OP units and buying OP units instead of taking the capital gain. So yes, we are looking at it, and we have 2 opportunities we're pursuing.

Our next question comes from the line of Barry Oxford at D.A. Davidson.

Great. Just to piggyback on Rob's capital structure. You guys did issue a little bit of common during the quarter. Are we going to continue to see the Common be issued even though it's not in a great amount? Are we going to continue to see that being issued, given the level of the stock price? Or going forward, we're probably not going to see that?

Barry, all things remaining equal, the $600,000 that we issued in the first quarter was issued in the first week of January. We did not issue any common beyond that. So to the extent, we find deals where the current stock pricing allows us to underwrite accretive high-quality deals, we potentially consider incrementally issuing the common. But I would say, the common on a historical basis is trading at 11.4 earnings multiple off of last year's $1.54. We just printed a $0.40 FFO number for this quarter. The implied 8.6% dividend yield, as compared to a peer set that is more than 200 basis points below that, is not particularly attractive. So I think the generic expectations should be minor issuances at least in the near-term.

And as long as we're kind of talking about opportunity for money and so do you guys factor in a share buy back? Or do you feel, given where your capital structure is for the company, not really in a position to kind of execute on that?

Yes. Unlike some of our peers, I mean, as we're -- we have a different payout ratio. Bob mentioned it. Obviously, we're covering on an FFO basis. We're not covering it on a cash available for distribution, while getting very close to that. I think we have less levers to pull in some of the peer set based upon the covenant package we have within our corporate debt. So clearly, at some price, it would become more compelling, but there's been no overture or announcement from the company in terms of specifically delving down that path in the near term.

Right. Great. And one last question, just changing gears a little bit. On the acquisition pipeline being mostly industrial, but you guys made some comments that office pricing might look actually pretty decent. Why not take a look at that?

I think my concern on the office side is that it appears that the supply is getting out of control. I mean, the first quarter this year on an overall basis. First quarter looked like about 5 million square feet of absorption and about 11 million square feet of completions and about 80 million in the pipeline. So yes, there's opportunity, and there is opportunity, I think, in the Midwest for some office acquisitions at a little bit higher cap rate, which we will pursue. But we're trying to be very cautious, and we're watching which markets we go into, because we don't want to -- we don't want to kind of buy into a market that's going to be really over vacant. Some of the markets are getting up to 20% already. And that scares us a little bit.

(Operator Instructions) Our next question comes from the line of Craig Kucera of B. Riley.

I want to circle back to your commentary on seeing some deals coming back in office, with maybe 25 to 50 basis points higher. Have you got any color? Is that where either the financing isn't coming together for those potential buyers? Or is the equity falling apart?

No. I think what's happening, Craig, is that there's a disconnect on the expectations of the cap rates. That's what we're hearing from -- I'm hearing from a lot of my peers out there who are out there trying to buy. They're just believing that most of the cap rates are probably 50 basis points too low from a guidance standpoint. And they see that interest rates are going to rise and, therefore, the margins are going to be squeezed. And so they're just sitting back, saying, "We know what's going to happen, and so either come back with higher guidance or we're going to sit on the sideline." So I think it's more that than the other -- than the equity falling out.

Got it. So I guess, and kind of circling back to some of the other question today, with your stock price where it is and sort of your goals of being leverage neutral in buying more potentially investment grade or at least recently buying more investment grade, I guess what are the levers that you can push to kind of move things along? I mean, is it more just to sit and wait until maybe industrial cap rates start to back up, which seems somewhat unlikely? Or do you start pursuing maybe more middle-market industrial or maybe push a little more into office? Although it sounds like you do not want to go in the direction of office.

Well, I mean, we will -- I mean you know that we have a higher allocation of office and we will do office. But quite frankly, we're seeing opportunities in Columbus, Ohio; Indianapolis; Detroit; and even Salt Lake City, where the cap rates on these industrial properties and they -- and Craig, these are not the big, what I call, mega bombers. These are anywhere from 75,000 to maybe 250,000 square feet. They're properties that were built in the 90s. They're tilt wall, but they're 24 feet clear. They're not 32 to 36 feet clear, but they have good bones on them, and they're in, let's say, already developed parks, that from our perspective, with our ability to underwrite these tenants, we're seeing some opportunities there. Now they're -- right now, we're thinking they're going to be trading, and I don't want the competition to know about it, but they're going to be trading at a range that makes sense for our cost of capital.

And Craig, most of these have tenants that are mid-sized and maybe even lower middle-market-sized businesses, which is an area. As you know, we have 2 BDCs that are in that marketplace every day. So we underwrite people there. I don't think -- competition typically doesn't go after that market simply because it's not rated, and they don't have the kind of underwriting skills, I think, we bring to the fore. So you may see us do some of these, I'll say, smaller transactions, and have to do 2 of those to get up to the size that we normally would do one. But it's a fertile area for us since we have the tools to make it work for us.

(Operator Instructions) I'm showing no questions at this time. I'd like to hand the call back to David Gladstone for any closing remarks.

All right. Thank you all for tuning in, and we'll see you next quarter. That's the end of this call.

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