Gladstone Commercial Corporation (GOOD) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Gladstone Commercial Corporation's First Quarter Ended March 31, 2018 Earnings Call. 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 may be 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 are ever in the Washington DC area we are 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 is our General Counsel and Secretary. Michael is also President of Gladstone Administration which serves as the administrator to all the Gladstone public funds and related companies as well. He will make a brief announcement regarding some legal and regulatory matters concerning 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 in 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 if you go to the Investor Relations page or on the SEC's website, and that's www.sec.gov. 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. 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 will 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 email 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. Today's call is 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 time 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 two mortgage notes totaling $16.2 million; sold two 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 roadshows 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 eight property acquisitions and one 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 six 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 five tenants at a gap rental rate per square foot increase of 7.6%; recast expanded and extended our revolver and 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 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 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 are 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 2017, 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've noted to you earlier, Mercedes-Benz has increased their investment at the plant and recently announced they will be manufacturing two electric SUV models beginning around 2020. Our $14.3 million acquisition is the direct result of their increased investment plans. 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 nine and three-quarter 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, the 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, one in Tewksbury Massachusetts and one 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 cap recycling program on a select rate 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 continue through the first quarter of 2018 and listings and closings are expected to be lower than the first quarter of 2017. 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 will 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 helps set 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 averaged 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, who we believe we could 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, refinanced 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 $0.02 additional 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 reflect 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 have 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 unsecured property pool to additional high-quality assets as well. Over time this will increase our financing alternatives. As we manage our balance sheet we have 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 one-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 an advanced permanent 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 dollars 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 two long 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 five-year term and our revolver for a new four-year term incrementally improved our liquidity and maturity profile. Depending on several factors including the tenant's credit, property type, location, terms of lease, leverage, the amount in terminal loan, we are generally seeing all in rates 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 fixed through interest rate swaps and caps. We've remained somewhat active in issuing from our common stock and Series D ATM programs. During the first quarter and net of issuance costs 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 56% as of March 31. Certainly, some of this is a function of being included in the RMZ Index in December 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 establishing new relationships as the company moves forward to its next chapter. Now, I'll give it back to David.

Well, a very good report, Mike and also from Bob and Michael, good reports from all three of you. And really nice quarter, everything is clicking along the way it always does with a smooth running company like ours and just to summarize, 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 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 with a fixed rate of 4.58% repaid to maturing mortgages for $16.2 million and sold two 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 them 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 are in a great position not to have substantial problems as the economy hits the skids again. We do have many leases coming due. We don't have many leases coming due during 2019, so we expect low risk in spending in new tenant improvements and we continue to refinance loans that are coming due, not many there, but when we do we refinance them and now are getting lower rates. And now we're building up the asset base with the purchase that are coming in and I think the balance sheet is 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 five 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 webpage 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 had 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 and the regular shares of common stock D.A. Davidson and Janney have come in with my 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. And 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 new portfolio of companies and acquiring in 2018 and 2019 I think the portfolio of properties that 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 or we might crash into our dividends. We certainly don't want to do that. Much of the industrial base of businesses out there that rent industrial properties like our properties remained 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 as part of the team and 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 - were just at 99.1% today. I'm optimistic that the company will find the future, will do fine in the future and Bob and his team will continue to be cautious in their 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 will go through that one pretty easily as well. In April, the Board voted to maintain the monthly distribution of 12.5 cents 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 will have to look at some small increases in the distributions and we feel like, we have solid prospects for growing the FFO now with so much balance sheet improvement and lease expirations behind us. And we've now paid a 159 consecutive common stock cash distributions and as you know I keep mentioning it because it's such a win and the recent recession didn't slow us down at all. Because the real as they can be depreciated and were 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 accounts will love the idea that you don't pay taxes immediately on the 60.4%, only when you sell the shares that you have to come back in and look at it again. 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 building is usually 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 in an IRA or retirement plan, you really don't pay any taxes on a part that's sheltered, so it's a great place to park some money and get nice dividends without having to pay tax on it. Stock closed yesterday at $17.54, it is very low and will 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's a lot of room for expansion of the stock price closer to the industry stocks like ours. And my guess is that investors continue to discover and familiarize themselves with our company will 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 managed 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, high occupancy level and treatment. And it is a testament to the access we have to 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 the real estate. 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 advisors, many of our resources such as Bob and Mike are solely dedicated to Gladstone Commercial. 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 REITs. 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 in 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 distributions of stockholders. Regarding our debt, I want to make sure that everybody knows that the mortgages that we have or 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 want to stop now and Nicole, if you'll come on and give the people out there a chance to ask questions about this wonderful company? Please read them how they can do that.

Thank you. [Operator Instructions] Our first question comes from line of Rob Stevenson of Janney. Your line is now open.

Good morning guys. 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 your institutional investors to play in the preferred, have you guys really thought about doing in a market a deal a size so that somebody could buy $5 million, $10 million if they wanted 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 is very nice. The ATM programs 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 just where we can pay down a debt where the debt cost is low. So thinking about the ATM program and it's - 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. You know we have probably five or six of the big preferred buyers in that stock now and I was just with one, two 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 upon 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 professional market very closely inclusive of the last six months, I would say if it was December we would price of sub 7, but my sense of the market today with the significant rise in the Treasury and I think the institutional bit on the preferred side has been relatively weak throughout the first quarter is that it probably would not be subsets. So obviously the Series D preferreds was hovering around trading about 26 bucks per share vis-à-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 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 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 professional 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 8, 6 dividend yield and stability in the stock over the last couple of years?

It's like you're reading my mind. We are right now – we are looking at it at two of those opportunities right now. One is 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 we 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 two opportunities we're pursuing.

Okay. Thanks guys, I appreciate it.

Thank you. All right. Next question?

Our next question comes from the line of Barry Oxford of D.A. Davidson. Your line is now open.

Great, just 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're 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 a 11.4 earnings multiple off of last year's $1.56 we just part of the 40 cent 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, it's 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 share buyback or do you feel given where your capital structure is for the company and 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 are not covering it on a cash available for distribution while getting very close to that. I think we have left levers to pull then some of the peer set based upon the covenant package we have within our corporate debt. So clearly at some price it will become more compelling, but there's been no overture 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 of 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 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.

Right, now that makes sense. Thanks guys, I appreciate it.

Thanks Barry.

Okay, next question?

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible] of B. Riley. Your line is now open.

Hey, good morning guys. 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 gotten 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 happened Greg 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 it's going to happen and so either come back with higher guidance or we're going to sit on the sidelines. So I think it's more that than the other than the than the equity falling out.

Got it. So I guess and kind of circling back some of the other question today, with your stock price where it is and sort of your goals of being leverage neutral and buying or potentially investment grade or at least recently buying more investment grade, I guess what are the levers that you can push to just kind of move things along? I mean, is it more just a sit and wait until maybe industrial cap rates start to backup 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 don't want to go in that 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 Greg these are not the big, what I call mega bombers, these are anywhere from 75,000 to maybe 250,000 square feet. They are properties that were built in the 90s. They are tilt wall, but they're twenty four 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 Greg, 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 to two 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 two 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.

All right, thank you very much.

All right, next question?

Thank you. [Operator Instructions] I'm showing no question at this time. I’ll 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.