Gladstone Commercial Corporation (GOOD) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Gladstone Commercial Corporation’s First Quarter Ending March 31, 2015 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Gladstone Chairman. Sir please go ahead.

All right, thank you Amanda for that nice introduction and we welcome you all to the call, we appreciate you calling in. I always enjoy the times that we have on our phone with you, I wish we had more time with you, but we only do this once a quarter. So please come visit us if you're ever in the Washington D.C. area we're located in a suburb called McLean Virginia and you have an open invitation to stop-by and say hello. You'll see a great team here about 60 members of the team now it's no longer a small business and we have some people here that even bring their dogs to work so we are very dog-friendly here. So now let's turn it over to Michael LiCalsi who is our General Counsel and Secretary, also serves as President of the Administrator regarding some of the legal and regulatory matters concerning this call today.

Good morning, everyone. The report that you are about to hear may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the factors listed under the caption Risk Factors of our Forms 10-K and 10-Q that we filed with the SEC and they can be found on our Web site at gladstonecommercial.com and on the SEC's Web site at sec.gov. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether they result as a new information, or 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. And the National Association of REITs, or NAREIT, has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. And please see our Form 10-K, filed yesterday with the SEC, and our financial statements for a detailed description of FFO. We also plan to discuss core FFO today, which is generally FFO adjusted for property acquisition costs and other non-recurring expenses. We believe this is a better indication of the operating results of our portfolio and allows better comparability of period-over-period performance. And to stay up-to-date on our fund, as well as all of the other Gladstone publicly traded funds you can sign up on our Web site to get e-mail updates on the latest news and you can also follow us on Twitter, user name GladstoneComps and on Facebook, keyword, The Gladstone Companies. And finally you can visit our general Web site to see more information at www.gladstone.com. And the presentation today is an overview and we ask you to read our Press Release issued yesterday and also review our Form 10-Q, for the quarter ended March 31, 2015. You can find them both on our Web site www.gladstonecommercial.com. Our Shareholders Meeting will be held this Thursday May 07th at McLean Hilton and we invite you all to attend the meeting we ask that you please vote you shares, so that we can ensure a quorum at the meeting. And now we will begin the presentation today by hearing from our President, Bob Cutlip.

Thanks, Michael. Good morning, everyone. During the first quarter, we acquired two properties, by issuing new debt on one and funding the other property with equity, raised $15.1 million of common equity under the ATM program with Cantor Fitzgerald, extended three leases that were set to expire in 2015 and 2016 and selected three national property management firms as strategic partners for asset management execution. Subsequent to the end of the quarter we also issued a $300,000 interim financing loan, signed a financing term sheet to refinance debt totaling $22 million on three of our properties which have loan maturities this year, and in a recently acquired anchored multi-tenant building the larger tenant agreed to expand into the balance of the building and the smaller tenant’s lease expires in 2016. So as you can see our acquisitions, capital and asset management teams all contributed to our first quarter success. We had an excellent quarter to start 2015 as we continue to increase our asset base by acquiring new properties. This was our 14th consecutive quarter of closing at least one new acquisition. We're extremely pleased with our activity and the consistency over the last several years and we continue to have a strong pipeline of acquisitions. We expect to close more properties prior to the end of the second quarter. Now for some details, during the quarter ended March 31st we acquired two additional properties. The first property is 156,000 square foot office building located in Richardson, Texas in North Dallas suburb. The purchase price $24.7 million with an average cap rate of 8.3% over the life of the 10 year lease. We funded this acquisition with cash on-hand and issuance of $14.6 million of mortgage debt. The tenant operates the nation's largest private Medicare exchange and is wholly-owned by a leading global professional services firm. The second acquisition is a 30,850 square foot office property located in Birmingham, Alabama. The purchase price was $3.7 million with an average cap rate of 9.1% over the life of the 8.5 year lease. The property is fully leased to TekLinks a leading and growing provider of IT consulting and technology-related services to businesses located in the Gulf South. We funded this acquisition with cash on-hand. Our acquisitions team has been placing significant focus on acquiring properties in secondary growth markets. Now the hallmark of our continuing high occupancy remains thorough tenant credit underwriting and the mission critical nature of the facility. However, acquiring properties in growth locations leads to ownership and what we believe will be land constrained locations overtime, which will lead to subsequent increases in property values and ultimately will benefit our shareholders. Over the past 18 to 24 months we've invested in Phoenix, Denver three times, Dallas four times, Austin, Indianapolis and Columbus, Ohio to promote this strategy. Shifting to our overall portfolio as of today all the three of our buildings continue to be fully occupied and all of the occupied buildings continue to pay as agreed. One of our vacant properties is located in Houston Texas. This is a 12,000 square foot medical facility in close proximity to our hospital. We have three active prospects for this building, two are for the entire building and one is for two-thirds of the building. We have another vacant property located in Newburyport, Massachusetts where the tenant just vacated last week and relocated to Rhode Island. This is an 86,000 square foot food processing facility and at this time we have one prospect for the entire building. Our other partially vacant property is located in the Southwest suburb of Chicago. The tenant in this property moved out in December and we executed the lease with a new tenant for 38% of the building. At this time we have four active prospects each for the balance of the building or 35,000 square feet. This increased activity seems to validate what market researchers are stating and that is that small and middle market companies are finally seeing improving conditions and are making real estate decisions. Turning to our tenants, we continue to improve the value of our existing portfolio of properties by reviewing and re-negotiating existing leases and performing improvements at our properties. We continue to work diligently on the remainder of our leases that come due in 2016 and we've begun discussions with tenants who have leases expiring in 2016 as well. We originally have 12 leases expiring in 2015 we have successfully extended the lease for seven of these tenants, one is in negotiation with the tenant and one in which we have signed a sale agreement to sell the property to a sub-tenant in the fourth quarter. We have been notified however the three tenants were in fact leased and we're aggressively pursuing new tenants for these properties at this time. The three leases where we know the tenants are vacating comprise less than 3% of our projected 2015 rental income and one half of this income does not expire until December of 2015. So while we originally had 12 leases rolling in 2015 we only have three leases expiring in 2016, six in 2017 and four in 2018. The expiring rents for these years represent less than 2% of the annualized projected rent for each respected year. So after this year our lease rollover will slow down dramatically and our existing portfolios will have stable and growing rental income. As I noted earlier, we have selected three national firms CBRE, Christina Lake Field and JLL to serve as regional partners, as we continue to improve the all important asset management function of our business. Each will perform on the ground property management services at an assigned portfolio. The properties will not incur any expenses that we are not already obligated to incur today. This local expertise will enhance the service to our tenants and will ensure that properties are maintained at a high quality. And in addition we get another benefit is that we're going to be receiving the local market intelligence from our teams which is going to be a significant benefit in our removal, re-leasing and acquisition activities. Locating new tenants and signing leases as I have indicated in the past usually requires some capital outlaid to return improvements and leasing commissions. So in summary at year-end, all of our existing tenants are paying as agreed and our portfolio was over 99% leased. We acquired two properties during the quarter and continue to have a very active pipeline. Our asset management team was also very busy, renewing tenants and leasing our properties. We've consistently increased our acquisition volume over the past three years and we currently have two properties totaling $30 million in due diligence. We have four properties totaling $41 million that are in the letter of intent stage and then we have just over $245 million of properties under initial review. Our objective is to have as I have indicated in the past at least $250 million or $300 million in the pipeline of possible acquisitions, with properties in each phase including the initial review, letter of intent stage and property due diligence. Our team continues to exceed this objective and has prospects at each phase of the acquisition process which we hope is going to lead to continuing and consistent closings in the months ahead. Now let's turn to our Chief Financial Officer, Danielle Jones, who’ll report on the financial results.

Thanks Bob. Good morning everybody. We continue to grow asset and equity base in the first quarter. Our total assets increased to 807 million from the two acquisitions completed during the quarter. We continue to focus on decreasing our leverage and have been issuing new equity under our ATM program to help achieve this goal. We expect to continue decreasing leverage over the next several years to the lower leverage on newly issued debt and refinancing some of our maturities with lower leverage. We announced outstanding under long-term mortgages and our line of credit was 510 million at the end of the quarter and is representative of funding both of our new acquisitions this quarter. In addition to today we have raised over $20 million in common equity under our ATM program during 2015. And we’d use these funds to acquire properties and to reduce the outstanding balance under our line of credit. Reviewing our upcoming long-term debt maturities, we have mortgage debt in the aggregate principal amount of 40 million payable during the remainder of 2015 and 97 million payable during 2016. The 2015 principal amount payable includes 34 million of balloon principal payments due on three mortgages that mature in the second half of this year. As Bob mentioned we have find a term sheet to refinance 22 million of this debt which will close this summer and expect to refinance the remaining mortgages with the combination of new mortgage debt and equity. We expect to achieve at least to 100 basis point interest rate reduction when we refinance these loans in 2015. The current weighted average rate on our 2015 debt maturities is 5.4% and market rates for these loans are below 4% today. The 2016 principal amount payable includes 90 million of balloon principal payments due on nine mortgages that mature throughout the year and we also anticipate being able to refinance these with a combination of new mortgage debt and equity. We've already begun discussions with lenders on the debt that matures during the first quarter of '16. We will continue to pay the additional debt amortization payments from operating cash flow and borrowings under our line of credit. Debt financing continues to be available from multiple sources. At the end of the quarter interest rates are approximately 80 basis points lower than they were a year ago. The upward pressure on interest rates associated with the ending of the Federal Reserve quantitative easing program has been offset by the Federal Reserve we are raising interest rates too quickly slower than anticipated domestic economic growth, weakness in the European and Chinese economies and international tension. Lenders are competing with one another to meet their production goals which is resulting in tightening interest rate spreads and more flexible terms. Interest rates remain historically low and we continue to actively trying to match our acquisitions with cost effective mortgages. Depending on several factors, including the tenant credit rating, property type, location, the term of the lease, leverage, and the term of the loan, we are generally seeing fixed interest rates ranging from below 4% to about 4.5% depending on the term of the loan, tenant credit and loan value. To this end, we did issue new debt during the first quarter of 14.6 million on one of our new acquisitions at an interest rate of 3.9%, which is the low-end of the range on a deal with a cap rate of 8.3% which was very accretive for our shareholders. As we mentioned, we are continuing our strategy of lowering our overall leverage by reducing our weighted average loan to value on newly issued debt and also issuing additional common equity. We’ve increased our market capitalization by 37% over the past year and have issued over 4.4 million new shares of common stock. We’ve decreased our loan to value from a high of 67% in 2009 to 53% today. Turning to our line of credit, we currently have 35 million outstanding at a weighted average interest rate of approximately 3%. We continue to only use our line of credit to make acquisitions that we believe can be financed with longer-term mortgage debt or that we believe are good additions to our unsecured property pool acquired under our new line of credit. We continue to finance the majority of our properties with long-term fixed rate mortgages which allows us to secure the spread between the rent coming in and the mortgage payments going out, locking in the profit for the length of the lease. As of today our available liquidity is approximately $26 million comprised of 7 million in cash and an available borrowing capacity of 18 million under our line of credit. Currently we have enough availability to fund our current operations, deals in our pipeline and any known upcoming improvements at our properties. Looking at our operating results for the quarter, as you saw in our Press Release filed yesterday, we reported a core FFO number. We believe core FFO which adjusts for our property acquisition expenses and other non-recurring expenses allowed our investors to better compare period-over-period results. All per share numbers I referenced are fully diluted weighted average common shares. Core FFO available to common stockholders for the quarter was approximately $8 million or $0.38 per share which is about a 4% increase when compared to the fourth quarter, quarterly core FFO increased because of the additional revenue we achieved from new acquisitions made during the quarter coupled with the decrease in general and administrative expenses. This was partially offset by an increase in our base management fee from additional shares issued. We also earned an incentive fee this quarter what we didn’t in Q4 because of the loss and disposal of our Minnesota asset. While 2015 brings with it challenges as we work on both lease renewals and debt maturities, we believe we have the right team and plan in place to reposition and continue our growth activity. We are confident that 2015 will be successful as we continue to increase our asset and equity base and decrease our leverage. We are focused on managing our property operating expenses as well. And now I will turn this program back over to David.

Alright, Danielle, that was a good report and good report from Bob and Michael LiCalsi too. We encourage you all to read that Press Release and the quarterly report filed yesterday with the SEC called Form 10-Q, there is a lot of good material and a lot of good work that goes into producing that document, and you can find it on our Web site at gladstonecommercial.com, it's also on the SEC Web site. Main items again, are purchasing two new properties, $28 million for the mortgage on one of these properties at 14.6 million to lock-in the spread between the interest that we're paying and the rents that are coming in. We extended three leases that were originally scheduled to expire in 2015 and 2016 and also raised $15 million in common equity. As you have noticed we continue to add quality real estate to our portfolio and shore up the existing investments and we grew our asset base as we try to do it every quarter. As we continue to grow our market capitalization we hope with current trading volumes and greater liquidity in our stock and corresponding pick up in the stock price because the distribution rate is much higher than those compared to other REITs like us. As many of you know the Company didn’t cut its monthly cash distribution during the recession that was quite a success story, well like some of the other great companies and have to cut their distributions and most of them never have come back to their original level, so us staying at our same level through this period of time has been a great accomplishment. I do wish more of the analysts would pick up on the story of how strong we've been in the past and how strong we look as we go forward. I know you all want to increase the distribution and I certainly do too as a large shareholder but please just give us some credit for the very steady cash payor that we are and convert it in your portfolio and hopefully not worry about it. Our track record of not cutting the distribution should stack up extremely well against that have cut their dividend and have not build it back prior to levels of six years ago. Here is what we're doing today to increase the price of the stock. We are seeking to increase the common stock market capitalization and that’s the number one goal. That will increase liquidity and trading volume and this will give investors who want to buy a lot of stock at one time the ability to do that. The big buyers of stock always want to know that if the number of shares outstanding that if they buy $10 million or $20 million worth of stock that there will be liquidity if they want to sell and get out. We still do not have enough shares outstanding to give them that much confidence. However we are consistently building the assets and equity base almost doubling the size over the past four years. With this growth we hope the additional large stock buyers will come into the stock and that should hopefully help increase the price and lower our cost of capital so that new investments will be very accretive to our dividend payout. We have a program in place now and we're executing that over the next few years and I hope to see a corresponding increase in the price of the stock. We are also expecting to reach that marvelous milestone of having assets over $1 billion in the near future. And when we do that as we promised you we would, we'll take a look at the price of our management fee and we're working on that now, and doing some studies and coming forward that we will present to the Board of Directors hopefully by the end of the year. As we look at future, we have a promising list of potential quality properties that we're interested in acquiring because that list of properties we hope to be able to grow the asset portfolio even more during 2015. With the increase in the portfolio of properties comes greater diversification and we believe that's a sort of earnings. We are focusing our efforts on finding good properties and long-term financing to match those long-term leases, being able to lock-in that long-term financing for the future, that really helps us. So between 2016 and 2019 we only have a very small amount of forecasted rents expiring and our debt maturities after 2016 drops significantly, so we we're set up very well over the next several years to continue what we're doing today and I am increasingly optimistic that things are going to be extremely positive for this Company during the next few years. Much of the industrial base businesses that rent industrial and commercial properties like our properties, have remained steady and most of them are paying their rents. Now, we expect good growth in 2015 for this REIT. And while I am optimistic that the Company will be fine in the future and as Bob Cutlip has explained and I concur we will continue to be cautious in our acquisitions as we've done in the past years. We made it through the recession without cutting dividend and if you think there is going to be problems in the future I think having ourselves set up the way we are that we should go through the next recession that may be lurking on the horizon as we talk. And if the Fed decides to raise interest rates and we're ready for them, and most of our properties are financed with long-term fixed rate mortgages so they match up on our long-term leases and we should not have a problem. And we do not use the lot of short-term debt as some of our brethren in the business do and so we stayed away from that addiction to get very low cost interest rate loans and a very short-term period in order to make our numbers look better. In April 2015 the Board voted to maintain the monthly cash distribution to stockholders of $0.125 that for April, May and June, and at the annual rate of a $1.50. This is a very attractive rate to REIT like ours. We have now paid 128 consecutive common stock cash distribution since our inception and we went through the recent recession of course without touching those dividends and I just think that should be emphasized over and over again. Because the real estate can be depreciated, we are able to shelter the income of the Company from taxes and as the return on capital has historical been somewhere around 80%. This is a tax-friendly stock. In my opinion for those personal accounts that are speaking income. This return of capital is mainly due to depreciation of the real estate and other items that we have on the books and it has caused earnings to remain low after depreciation. And that's why we talk about core FFO, because this adds back the real estate depreciation. Depreciation as you all know, and a depreciation of a building is a bit of a fiction in the tax code and at the end of the depreciation period that building is still standing and still usable, so if you own stock in a non-retirement account as opposed having it in an IRA or a retirement account, you don't pay any taxes on that part is sheltered by the depreciation as that is considered a return of capital and that’s about 80% of the payment that we're guessing it's going to be this year. However the return on capital does reduce your cost basis of stock, may result in a larger capital gain when you sell the stock. Stock have been traded around $17.84 as it closed yesterday the distribution on the stock is about 8.4%. Many of the REITs that you see out there are trading at much lower yields and let me say again. The REIT universe is trading at little over 4% yield. And if we were trading at that yield the stock price would be $36 as the net-net-net REITs are trading at about 5.96 per year. And so if our stock was trading at that yield on an annual basis the price would be about $25 a share. So there's a lot of room for expansion in the stock-based on yields compared to other REIT stocks and overtime as we get bigger and have more liquidity it's anticipated that we will begin to trade like many of those stocks at a much lower yield. I know some analysts will say yes but you're internally managing you are somewhat more leveraged than other REITS but just once I wished somebody would say something about this great team because they have done a great job over the years and if you've been watching our leverage has been going down every quarter. We're now nearing 50% leverage based on our market capitalization and that is about $1 of stock outstanding for a $1 of mortgage and you have to remember that mortgage debt is what they call exculpatory and that means if we can't pay the mortgage the only thing the mortgage holder can do is go after the piece of property they don’t come up to the REIT and our main company. So this is a very well structured REIT right now and not a lot of risk in our profile. The Board will vote again in mid-July during the regular scheduled quarterly Board meeting is declared the monthly distribution for July, August and September and another reminder, our Annual Shareholders Meeting will be held Thursday May 07th at the McLean Hilton. We wish you all would show up and we only get three or four people coming to the meeting and we like to have about 100 of them show up it would make it a much more enjoyable on a shareholder meeting. But now I'll stop and see if there is some questions from our loyal shareholders out there and the analysts that follow this wonderful REIT. Would the operator please come on and help our listeners ask those questions.

Yes sir, thank you. [Operator Instruction] And our first question comes from the line of Rob Stevenson from Janney. Your line is open.

Bob can you talk about what the weighted average remaining lead term is in the portfolio today?

I think about -- we will look it up but I think it's close to 7.5 years.

Okay. And then…

[Multiple Speakers] But I think it's around 7.5.

And then how are you guys feeling about preferred stock today as a source of capital. You guys have been very active with the ATM but how you are feeling about preferred where do you think you can price and how much could you issue if you wanted to do a deal today?

Well my feeling about that and I don’t know Bob will chime in if you wants to is that I love preferred stock and I’d love to have permanent rather than term. I don’t think many people are buying as much permanent as they used to but my goal would be to issue a little more preferred stock. We don’t have anything on the agenda right now but that’s where we think we will one day issue some more preferred.

Your next question comes from the line of Dan Donlan from Ladenburg. Your line is open.

David I wanted to go back to your comment on when you compared your dividend yield to the triple net peers. You have to sensitize that for leverage and you have to sensitize it for covering your dividend with recurring cash flow, operating cash flow. So I guess I think that’s why your yield is a little bit higher is that you don’t have it what you got higher leverage and you're not covering it with recurring cash flow?

Well, if you say so, cash is cash, we have been consistent and have paid dividends forever in a day never cut the dividend, no likelihood we're going to cut it in the future and if you go back to some of those that you would rate higher because they do those things that you're mentioning and they all had a lot of problems during the last recession and they haven’t learned and they are still using a lot of short-term capital in order to finance their deals. So I don’t know you like them, not much better than us that's just everybody's choice.

Right, well, I guess what I am saying is that I am not sure it's a fair analysis to make given kind of those things in place but not necessarily when you compare yourself to the average REIT but I think some of your triple net peers that you know didn’t cut their dividends have raised them since the downturn, and are now much higher than they were kind of in call it a ’07, ’08. But just wanted to kind of talk a little bit about, you know you talked about the asset management fees bringing that down I mean what's holding you back from doing it now, you know because if, if I look at your G&A and I don’t, and I exclude the add back that you give to the advisor, your G&A when you put all the advisory expenses, diligence cost, the acquisition cost, all these different items which you know you're in the business of acquiring properties you know every quarter, you know that’s like 19% of your NOI and if you look at that again exclude the add back you know that you give to the, that your, for the advisor, that's 1.8% of gross assets, that’s the highest of any triple net REIT that I cover and I cover 12 of them. So I am just kind of curious as to how you're going to be able to reduce those expenses on a going forward basis?

Well as you get bigger you can absorb more of those in terms of the relationship to the earnings. And so that's where we think we are at $1 billion in assets. So who knows we'll see, we're going to go through the analysis now, we have just started that and we should be finished by the end of the year, I am not sure when the Board will take a look at it but we're going to come at you with something and hopefully we are in your range so Dan that you will approve it.

Right, well, what about the incentive fee, why not just permanently, why not just change that structure because that’s, you pay more in incentive fees than you do in base management fees, you know if I look at the hurdle rate, the initial hurdle is 7% and the second hurdle is I think 8.75, if you're buying properties in the low 8s, you know or you're almost in the money on any of those properties, why not increase that hurdle rate to you know somewhere around 10% to 12%. And then I think your earnings would start to go up because you wouldn’t have so much incentive fee?

Well that's what we're looking at. We're going through that analysis now in terms of how low should the incentive fee be and how to reward the people as well as our shareholders.

And then just looking at your G&A, well actually just to take one step back, is internalizing the Company on the table?

It's not right now because we still got a lot of things to do for all of the company, I think we want to rely on the individuals that have expertise in this area that we can't possibly bring into the company at this point in time.

Okay, is may be the fact that you're talking with or working with JLL and CBRE and some of those regional brokers, is that a step in that direction?

It's a step in the sense that we've gone away from having a lot of those people that are doing work for us but most of our tenants have told us that they don’t like the fact that they are supposed to manage their properties, they want somebody else to manage, they don’t mind paying, they just don’t want to have to do it themselves. So that's why we have rounded up these three and we had a bake off between all of them in different regions and we've come up with these three as our beginning number and I don’t think we will expand it from there but we might end up dropping one of them if they don’t perform as well, as the others. So this is an experiment to try to remove the tenant from taking care of their properties, to give some professionals the opportunity to take care of the properties and let them bill the tenant directly. I think that will take something off of our table because we've been doing a lot of that internally here and really haven’t been rewarded for that at all except through the fact that we have our incentive fee. So as we move that out of our shop and into the others that will help us remove some of the expenses out of the company.

Okay. But do you think I mean, do you think if you internalize the company though that assuming your expenses stayed the same which I think would be hard to argue given kind of where other internally managed REITs have their G&A loads relative to gross assets, but assuming it stayed the same, wouldn’t you get a pretty nice pop in the stock in terms of changing your corporate governance, I mean a lot has been discussed in the REIT plan recently about corporate governance and those REITs that are externally advised have really taken a hit over the last couple of years. So you know given that your net is REIT, you're constantly issuing equity to buy properties, you really need to have a better cost of capital to make things more creative. And if your stock, if you internalize the company, you would probably get a really nice business stock price which would allow you to issue stock at a more attractive rate and allow you to have things that are more creative, I mean why haven’t you looked at this in more detail, I mean what is holding you back from doing this?

Well what holds us back is that it's going to cost the company a lot more money to engage the legal and accounting people that are working at the advisors levels that are shared with other companies. So I don’t want to put that expense on top of what we already have. So we are going to work the other side of the ledger which is trying to make sure that we're charging a reasonable amount and we'll compare it for you. And I think there is a belief out in the marketplace that internally managed is so much cheaper than externally managed, that it's just a no [indiscernible]. Let us do our analysis and we're glad to show it to all of our shareholders of how we're approaching the problem.

Okay, well I think if you looked at several other REITs in your space that are similar in size, you would see that their G&A loads are significantly less than yours and they are internally managed. So I think the shareholders would be rewarded if you were to internalize versus stay the same. So anyways, just last from me on the CapEx, was there anything in the CapEx number Bob, it looks it was 1.7 million or so, is there some type of expansion dollars that are being spent there?

Dan?

Yes, we've got about one of our tenants we just removed and we've put about 1.3 million or 1.4 million of that into the renewal and extension. And so it's, and of course their rent is higher than it was before and that takes effect I think it's June 1 is when that takes effect. So yes that's what it was for Dan.

Okay. And then as far as the acquisition front, you know Bob since you've started it, you've really started to ramp it up you know, is this more or less you know you work on your relationships from prior firms, what else is kind of driving you know your acquisition momentum?

Well believe or not I think it's really more of the team members that we have out in the field than me, I mean I held some we have three great leaders out there who are very well connected to see everything and as you know our cost of capital is higher than most of our peer group and yet we are able to successfully invest in the markets that you know you and I've been spoken about, we need to be in the secondary growth market and Buzz and Matt and Andrew White I mean all three of them are doing I think a phenomenal job with their team uncovering opportunities that makes sense for us. So it's probably a minuscule amount of Bob and the majority of the guys who are out in the field.

Yes, and I look at your implied cap rate and it looks you know with today's stock price somewhere around 8.1% and when you look at some of your office and industrial peers in the single tenant world, you know they are closer to 7.3, 7.4. So I guess bridging that gap would be which is surprising to me to some degree because you have more industrial than those companies doing, that's a lower cap rate type of asset. So I guess given kind of that, you know you do have this disadvantage from a cost of capital standpoint, are you focusing more on you know one asset class versus the other or is it simply you know you are sticking with office and industrial and you know staying in more secondary markets and that's how you are able to you know give you know properties that are somewhat above or at least in line with your you know implied cap rate?

Well, it's interesting, we, if you look at what we had purchased, let's say in 2014, we had 10 assets that we purchased and six of those were office and four of those were industrial and of course then if you add the expansion on our industrial we had five of them, and our overall ratio in the company right now is just over 40% industrial and just over 50% office and the balance being the retail and the medical. I don’t see that changing, I think everybody knows and I just saw and listened to a webcast by CBRE, the industrial market is extremely, extremely competitive and most of the secondary and gateway markets are in the 6s they are certainly not going into the 7s. And if we have to have something in the 7s to start or to make sense and we're just sticking to our netting, staying within our envelope. And as I said you know, we, our pipeline right now, the two properties that are in due diligence, one is Columbus and one is in Salt Lake City, Salt Lake City is a city that we would love to be in long-term, we think that’s a great market and we've already invested in Columbus and we want to do more there. So it's difficult, yes it is and challenging but we're finding deals that do make sense and as David said you know we've got to be patient, we've got to be persistent, we got to stick to staying in the size acquisition that we are looking at right now and in the annual volume 120 to 150 is perfect for our size at this point. So we're just going to continue to do that.

[Operator Instructions] And sir at this time I'm showing no further questions.

All right. Well, thank you all for calling in. We appreciate all those nice questions and hope to see you this Thursday at the Annual Shareholders Meeting. That’s the end of the conference call.