Gladstone Commercial Corporation (GOOD) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Gladstone Commercial Corporation’s Second Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. David Gladstone. Sir, you may begin.

Alright. Thank you and welcome everybody. We enjoy these times we have together with you on the phone and wish we had more time to talk with you, but if you are ever in this area in the Washington DC area we are located in the suburb called McLean, Virginia, just outside Washington DC, so you have an open invitation to stop by and say hello and see the people that are working on all your things and we have got about 65 people here. We will hear from Michael LiCalsi first. He is our General Counsel and Secretary. Michael is also the President of Gladstone Administration which serves as the administrator to all the Gladstone public funds especially this one and he will make a brief announcement regarding some legal and regulatory matters. 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 and 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 in our Forms 10-Q and 10-K and other documents that we file with the SEC. Those can be found on our website, www.gladstonecommercial.com specifically the Investor Relations page or on the SEC’s website, which is 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 of course as required by law. 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 non-recurring revenues 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 ask that you take the opportunity to visit our website, once again gladstonecommercial.com. Please sign up for e-mail notification service. You can also find us on Facebook, the keyword there is The Gladstone Companies and we are also on Twitter, the handle there is @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 will turn the presentation back over to Gladstone Commercial’s President, Bob Cutlip. Bob?

Thanks Mike. Good morning, everyone. During the second quarter and through July, we entered into contract negotiations to acquire a 156,000 square foot industrial property in the Columbus, Ohio market, agreed to lease modifications to construct additional parking for our tenant in Springfield, Missouri, entered negotiations with our industrial tenant in Vance, Alabama. We expand their 127,000 square foot facility by 15,000 square feet and held 15 meetings every week with analysts and investors and lenders and completed a non-deal roadshow in Tampa and Orlando, Florida. The past 12 months have witnessed significant activity across our investment, asset management and capital raising functions resulting in improved operations. These events are noteworthy and include the following: we invested $130 million in 7 property acquisitions during this timeframe at an average cap rate over the term of 8%. These acquisitions were in our growth markets of Philadelphia, Columbus, Ohio, Salt Lake City, Orlando, and as you know, a recent favorite of mine, the Mercedes-Benz assembly plant location in Vance, Alabama. And 80% of this acquisition volume is with rated investment grade tenants or tenants with investment grade parent companies. We exited three non-core properties as part of our capital recycling program, completed the lease up of industrial property in Raleigh, North Carolina and an office property in Houston, renewed, extended or expanded the leases of four tenants at a GAAP rental rate per square foot increase of 7.6%, recast, expanded and extended our revolver and term loan at lower costs and refinanced over $30 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 leverage. And one can also conclude that every team member across all of our functions were contributors to these achievements. As noted on our first quarter call, we have been focused on improving our financial metrics since 2013. During that period significant lease expirations and over $200 million of mortgage maturities, this activity has required considerable personnel resources as well as significant amounts of equity capital to fund tenant improvements, leasing commissions, operating expenses on vacant space and of course to lower our leverage. The good news is that our occupancy remained high throughout this period. We lowered our leverage from 63% to 47% and we improved our cash payout ratio year-over-year. We were able to improve upon that payout ratio and maintain $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 and debt really validate the strength of our growth trajectory and balance sheet security and are worthy of a few notes. Since the beginning of 2012, the average annual investment volume has been approximately $110 million with lease terms ranging from 7 years to 10 years plus with annual lease rate escalations, the average GAAP cap rate on these assets is 8.7% and during this period we actually doubled the size of our portfolio. These characteristics equate to increasing cash flow year-after-year. We are also approaching the time period at which these leases cash rents will be exceeding the straight line GAAP rents as the 7 year to 10 year leases are at or are approaching the inflection point from the straight line rent perspective. This should continue to improve the payout ratio to the benefit of our shareholders and our working capital position. Looking at the second quarter of 2018 as compared to the second quarter of ‘17, same-store GAAP rents increased by 0.3%, where as cash basis same-store rents increased by approximately 2%. Our investment in asset management activities continued to generate positive momentum for our operations. We are currently in final contract negotiation to acquire a 156,000 square foot industrial property in the Columbus, Ohio market for $8.3 million. The going in and GAAP cap rates are estimated at 7.6% and 9.2% respectively, the lease term 15 years. We are also in negotiations to expand our 127,000 square foot industrial property in Vance, Alabama by approximately 15,000 square feet. As you may recall, we purchased this property in March. Our tenant is now planning to add a production line to their current operations and we are fortunate to have acquired the property with expansion land which creates benefits for our tenant for our shareholders. We are also finalizing plans and just received jurisdictional approval to add approximately 160 additional car parking spaces for our tenant in Springfield, Missouri thus solidifying their commitment to our property and increasing rental income. Market conditions are worthy of some comment. The first four months of the year witnessed reduce listing opportunities compared to 2017 as reported and communicated to our team by our national broker relationships. National research firms reported investment sales volume was lower for net leased properties during the first quarter of 2018 versus the first quarter of 2017 and nominally higher for all property types. And there is an apparent buyer-seller disconnect in several markets. Green Street Advisors, the noted real estate advisory and research firm suggested that nominal cap rates in most property sectors with the exception of industrial of course appear to be moving up slowly and our experience with that reflects that interest rates have risen approximately 50 basis points to 75 basis points over the past 12 months. Now with that information behind significant capital is still available on the sidelines with considerable interest in U.S. real estate and the expectations are for 2018 investment sales volume to be similar to that in 2070 which is still really quite healthy for the industry. Our team will continue to monitor market conditions and actively investigate accretive opportunities that promote our measured growth strategy. Before I address our current pipeline and the opportunities we are pursuing, a few comments about our operating characteristics over the next 18 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 3.5% 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 in our same-store properties and our capital will be available for pursuing growth of our portfolio. As it relates to the growth opportunities on our strategy, we have noted an increase in activity and sales listings as of late. Our current pipeline of acquisition candidates exceeds $300 million in volume, 19 properties, 11 of which are industrial. Of this total $26 million is either in the Letter of Intent or due diligence stage and the balance is under initial review. The property locations of these candidates include Central Florida, Louisville, Philadelphia, Columbus, Ohio, Kansas City, Houston, Denver, Salt Lake City and Phoenix, all of which are target markets. We are today making a conscious effort to increase our industrial allocation. With the heated competition for larger properties, our focus is in fully developed industrial parks, with properties that are 50,000 to 300,000 square feet in size, 24 to 28 foot clear heights in the warehouse, ample trailer parking and occupied by middle-market non-rated tenants, a tenant profile that we believe we can underwrite with our proven credit underwriting capabilities. The larger properties with higher clear heights and larger trailer parking capabilities are trading well above replacement costs in several markets, but we do not believe that is an appropriate strategy for us. So in summary, our second quarter and last 12 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 report on the financial results.

Good morning. I will start by reviewing our operating results for the second quarter and first 6 months of the year. All per share numbers I reference are based on fully diluted weighted average common shares. FFO and core FFO available to common stockholders were $0.40 per share for the second quarter. On a core FFO basis, this equates to $0.02 additional per share as compared to the second quarter of 2017, which is over a 5% increase. For the 6 months ended June 30, FFO and core FFO available to common stockholders were $0.80 per share and $0.81 per share respectively. On a core FFO basis, this equates to $0.06 additional per share as compared to the first 6 months of 2017, which is over a 7% increase. This performance demonstrates the accretive, yet prudent growth that the company has recently completed as well as the performance of the in-place portfolio. Coupled with no near-term meaningful lease expirations, this is anticipated to help us continue to increase profitability going forward. Our second quarter results reflected an increase in total operating revenues to $26.6 million as compared to total operating expenses of $17.5 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 under 47% since the beginning of 2016 generally for 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 have 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 will look to expand our 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 have repaid $97.4 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 have placed interest rate caps on all new variable rate mortgages. We also added some of these properties to our unencumbered pool under our line of credit whether in advance of permanent debt placement disposition or in an effort to provide more flexibility in the future by increasing the size of our total unencumbered asset pool. In addition, in order to improve our balance sheet, we have often put additional equity into the refinance properties. As previously discussed, this has helped to significantly reduce leverage and generally enabled us to obtain improved interest rates on our mortgages thereby reducing the related interest expense by in excess of $1.2 million annually. Looking at our debt profile, 2018 loan maturities are very manageable with only $11.6 million coming due after extending the maturing dates on two loans from 2018 to 2020 during the quarter and one from 2018 and 2019 subsequent to quarter end. Further, we have less than $40 million of mortgages maturing in any single year until 2022 to continue to proactively manage and improve our liquidity and maturity profile over time depending on several factors, including the tenant’s credit, property type, location, terms of lease, leverage and 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 fix through interest rate swaps and caps. We have remained somewhat active in issuing both our common stock and our Series D preferred stock using our ATM programs. During the second quarter and net of issuance costs, we raised $2.9 million of common stock and $1.2 million 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 $3 million in cash and $52 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 in 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, including leverage. We are focused on maintaining our high occupancy with strong credit and 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 has increased by over 15% since the beginning of 2016 to over 56% as of June 30. Bob and I have been very active in meeting with the 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 will turn it back over to David.

Thank you, Mike. Good report and also a good one from Bob Cutlip and Mike LiCalsi, both of them gave good reports and everything is clicking along here at company. We have spent a lot of time working on our tenant base. As was mentioned, we do have some deals in the stream that are coming in. Hopefully, the one in Columbus, Ohio will get closed and we are doing a lot of lease modifications, one in Springfield, Missouri that Bob mentioned and also in Vance, Alabama. Folks, there are some pundits out there that are saying that many of the banks are going to have financial problems with all their real estate loans, because they have been making such easy loans to people out there on the real estate world. In the last recession, we made every payment to our banks and this REIT didn’t stop our cut, its monthly cash distribution to stockholders during that recession and we have not lowered our dividend since inception in 2003 as quite a success story. So if there is another recession, I think you can count on us and expect us to go through any trouble times in a good way. We are in a good position today. We don’t have any leases coming due through 2018 and less than 4% in 2019. So, we expect low risk and low spending on new tenant improvements. We continue to refinance loans that are coming due and doing a good job of getting good rates or similar rates to what we have. We have been raising more preferred stock in the Series D, which is a 7% yield. We are able to put that to work at a way that comes in and helps us pay our common shareholders. We had some large institutions buying the preferred stock in the past. We have interest in our company and it’s not very long I believe before they will be buying more of the common stock, many of the larger REITs are pretty much owned by the institutional marketplace, continue to have promising list of potential quality properties that we are interested in acquiring, we will hit some in ‘18 and ‘19 and increase the portfolio of properties that comes to greater diversification and diversification is good for us all. Much of the industrial base and business today that rents in industrial and office properties like the ones that we have remained very steady and most of them are paying their rents and as you know we have a terrific credit underwriting group that underwrites our tenants and considering the track record of our tenants paying their rents, I think the future is bright. It is the strong underwriting team that we have here that kept the company out at more than 96% occupied for them since 2003 and today we are at 99%. And I am very optimistic that our company will be fine in the future. Bob and his team will continue to be cautious in their acquisitions. And as you all know in July the Board voted to maintain the monthly distribution of $0.125 for July, August and September and that’s an annual rate of $1.50 a year. This is a very attractive rate for a well managed REIT like ours. I think you have got excellent investments and the individuals that are running that are just superb. And yes I know you all want to know when we are going to increase the distribution and I hope you all noticed that we were about $0.40 a share in earnings and we paid out $0.375 cents, so we are getting closer and closer to making a decision. And I think as the FFO increases, we will have to look at making some small increases in the dividend, I feel like we have a solid prospect for growing FFO now and much of the balance sheets improved and expirations are behind us. We have now paid 162 consecutive common stock cash distributions and we went through the recession without cutting any of those because real estate can be depreciated we are able to shelter the income of the company and the return of capital was about 60% last year. I am not sure where we will come out this year, but this is a very tax friendly stock in my opinion for those who want to put it in their personal account and especially if you are seeking income that’s tax free. This return of capital is mainly due to the depreciation of real estate and other items and has caused earnings to remain low after you put in the depreciation and that’s why we talk about FFO and core FFO because this is adding back the real estate depreciation. Depreciation of a building has always been a bit of a fiction in the since that depreciation period doesn’t do much to the building and is still standing at the end of the depreciation period. So if you own the stock and the non-retirement account as opposed to having it in an IRA or retirement plan you don’t pay the tax on that part that’s sheltered by the depreciation. However, you are supposed to increase your capital base and had reduced your capital base so that you have to pay a higher tax when the day comes that you want to sell a stock. As we all know, no one out there is going to sell the stock in this great company. Currently we have a price of about $19.46, the distribution yield on the stock now is 7.7%. Many of the REITs that are trading are at much lower yields and trading in the 5% to 6% yield range. So if our stock was trading there, the stock would be about $27 per share that was noted by Henry Coffey at Wedbush. He just picked up a pencil and wrote a nice report on us. Henry knows us from our business development company area. Henry follows those and he knows how we underwrite those loans and investments we make. And I am assuming he is looking at our portfolio of tenants and saying we must be doing a good job there. And my guess is that as investors continue to discover this company built by more shares and the price of the stock will increase and the yield will go down to where the other REITs like us are turnover and forecast for the next 4 years I think is going to be a wonderful track record, so I know a lot of people are betting on that. And I want to touch on one thing that I hit on every time because I have got some new data. You always are hammering at us about external management. There is a study out that looks at G&A of REITs in the U.S. and of the 189 REITs we are almost the lowest in terms of G&A compared to total revenues. We are number 11 on the list, so we are the 11th lowest cost of operating when you look at G&A of all the 189 REITs out there. Also G&A compared to average assets we are number six meaning we are the six lowest cost to operate for G&A of all the 189 REITs out there. So I think that should put to bed this discussion about being externally managed. Yes, in the past there was some bad voice there, but we have demonstrated we are not part of that crowd and we have been decreasing our leverage. We are currently, I don’t know down around what are we at now 47%, we have been putting out more equity when we refinance our mortgages. If that was the end of that now, I want to use the equity, lower the debt amount of course, but our current leverage is quite conservative compared to the risk if you look at our portfolio. So regarding our debt, I want to make sure everyone knows that the mortgages we have are exculpatory that most of the lenders do not have a shot at our balance sheet. I just have to look to their property. So, not only is our company strong in terms of debt ratio to equity, we have a safety feature for our stockholders. Well, now let’s have the operator come on and ask some questions and we will try to answer those questions for everyone out there.

[Operator Instructions] Thank you. And our first question will come from Barry Oxford with D.A. Davidson. Your line is open.

Great. Hey, guys. Thanks so much. Real quick, when you look at the acquisitions out there and given the fact that you don’t have many leases expiring in ‘18 or in 2019, would you guys look at doing more kind of value-added opportunities where building might be, let’s say, 50% leased and then you come in and you kind of add value and maybe you have a 6 or 6.5 going in, but equivalents to 9, 9.5 once you lease it up something like that?

Very good question. We are a net lease operator. We don’t want to change that model. What we have done that is a bit of a variation as we have done anchored multitenant properties both in the industrial and office side and what we would typically do we would buy the property and it could be as you know is as low as 90% occupied, but we are buying it on the cash in place, but for us to go below 90% really doesn’t make sense, because we don’t want to send the signal that we are not a measured growth, slow growing year-over-year model for our investors.

Right, got it. Thanks guys.

Next question please.

Our next question comes from Rob Stevenson with Janney. Your line is open.

Good morning, guys. Couple for me. David, in your comments about dividend, given the trend that the earnings are moving to now, how is the board thinking about that, barring anything unforeseen is a modest dividend increase on the table for ‘19 is that the sort of thought process at this point?

Yes.

Okay. One for you, Bob in terms of the pipeline on the acquisition side, what’s the sort of mix today roughly between industrial and office assets?

I would say, as I indicated on the call, we are probably seeing – we are seeing more industrial, but I must admit these are not the large boxes when I look through our pipeline really over the last several days, we are ranging anywhere from about 40,000 square feet to about 200,000 square feet. Their rear-loaders that are probably 300 feet deep, 24 and 28 feet clear, good trailer course, but they are not the 500 to 1 million square footers, because so many of those are really trading it well above replacement cost. Last week, I was in Salt Lake City with our West region leader, Andrew White and one of his broker relationships and friends got us – put us together like 8 properties that we went in toward and most of those are exactly what I am talking about. Their rear load facilities, they are under 300,000 square feet, they are add up, let’s say a margin and a cap rate where we can compete at this time. Quite frankly, we are not going to be competing in the 5s, we are going to be competing as you know in the mid to high 6s and low 7s, that’s where we can do damage and we can be accretive.

Great show now of industrial to office in our portfolio?

32% industrial.

Yes, high level of two-thirds, one third. Yes, I mean, candidly, it’s about 5% of the retail and medical office.

Good number. I would like to see more industrial too.

So we have seen more – we are seeing more Rob and that’s through the efforts of recognizing that we are going to be staying in our target markets, but they are going to be smaller properties just to be perfectly honest?

Okay. I mean giving your sort of focus on investment grade, is that really keeping you out of the flex space like the PSB type of assets?

I mean we why don’t like flex space I will say that right now, because the re-leasing cost on flex space is really, really very high. I live that in a prior life, so we are going to stay with industrial properties that are probably 10% to 15% office no more. But we are going to go with middle market non-rated tenants. The tenant that we have underwritten in Columbus just did this perfectly. They have been in business for many, many years. This is their corporate headquarters. They had 29 production lines in the building, 15 year lease, I mean we are going to see I think more and more of these as their corporate tax change come to effect and people continued to grow their businesses. And that’s where we played better and because of the history of never being below 96% occupied and the ability to underwrite the credit, we can go into those markets and that tenant profile and be successful long-term.

Okay. And then last one for me, can you talk a little bit about the market for the preferred ATM, how much of that stuff could you or would you issue, how – is it you guys that sort of limiting the quarterly issuance of that or the market and then what Mike do you think about in terms of the max that you would want to see preferred be in terms of the cap structure?

Sure. I appreciate that, Rob. So, the Series B trades in the neighborhood of 25.47 today, it’s implied 6.9% dividend yield. I would say we are the gating item in terms of issuing that in a meaningful way, the $2.2 million we have done year-to-date certainly could have been a more meaningful number. In 2017 we issued approximately $14 million of the Series B as I look at it from an aggregate capital structure perspective preferreds make up about 12% of our total assets today, that is an overweight I would say as compared to the peer set which would typically be more in the 5% to 10% range. So we continue to look at the Series B as an indicator as to where we can do a new issue of preferreds. As we have said in the past, our appetite is solely in a material way to do a preferred for preferred trade and if there ever was an attractive dividend yield on that as you know our Series A and Series B which make up $56 million our professional vehicles but are redeemable at our election given 30 days notice. So we will of looking to watch that, obviously there is headwinds there within the preferred market during 2018 as well with having a tenure at 2.96. So I think from an expectation perspective we will issue some Series B on a margin our hope aspiration is to continue to improve shareholder value and the common thereby driving down back piece of it abstracts cost of capital.

Okay. Thanks guys.

Next question.

Our next question comes from Henry Coffey with Wedbush. Your line is open.

Good morning everyone and congrats on a real solid quarter and a great start for us. When – I was wondering if you could kind of run through the – but I guess I would call the portfolio row forward, I know you gave some numbers I just didn’t get them all down in terms of property acquisitions, property sales and how that affected balances?

Henry, are you talking about let’s say the last 12 months and then going forward let’s say the next...

No just – well both for the last 12 months and going forward, but also just for the specifics of the first six months of the year?

Okay. Well, over the past 12 months we acquired like $130 million worth of properties at about 8% cap rate. Those were office and industrial. Of those 80% of the tenants were investment grade or their parents are investment grade. The – we have only acquired $14.3 million, $14.4 million this year now with an industrial property in Alabama. That we have already have another property there next to the Mercedes-Benz assembly plant. And quite frankly the listing volume for the first quarter is very slow, it has picked up quite a bit now. And so now I feel much more confident and comfortable that we are going to be closing some transactions over the next 90 days to 120 days and that includes both industrial and office properties, if I had to tell you and I will tell you that the markets that I think we could be very successful in, it’s going to be Columbus, Ohio, it’s going to be Philadelphia, it’s going to be Central Florida, it’s going to be potentially Denver where I think we can operate and maybe even Phoenix industrial on a smaller square footage basis, under 100,000 square feet. So I see that as probably the strongest markets for us going forward. We will not be very successful in my opinion in Chicago, Dallas, Fort Worth, Atlanta, the cap rates there are in the five. And I think that is just too low for us to what it does, it doesn’t make sense, it’s not accretive for us at our cost of capital. And we think we can be successful in these secondary markets that we think are growth markets. And we think long-term they are even going to be better for us from the standpoint of protecting our shareholders and growing on a measured basis.

So in terms of new investments for every say $100 of new property put on the books, can you give us some sense of what the ideal way to fund that would be, how much is from sales of existing properties, how much would be some form of mortgage or term debt and that how much actual new equity would you have to put into the transaction?

Okay. Let me start and then I will turn it over to Mike as Mike can answer that as well. We over the past 3 years to 4 years we are using capital recycling we were selling assets that really were what we consider to be non-core long-term, but that really has fallen off. I think if I look forward over the next 24 months it will be probably well under $20 million per year that we would be selling and redeploying. And the reasons for that Henry is we have already been through renewals with most of these tenants. They are excellent, they have got excellent balance sheets, their credit is great, their payments are very good, they don’t want to leave their mission critical facilities. And so I am just as happy to keep those tenants in our portfolio. And I will turn it over to Mike to talk about how we are in fact underwriting most of our acquisitions now.

And Henry to that end from a leverage perspective, I would say using plus or minus long-term mortgage being a 50% component of capital required by properties and the other piece of it by and large will be sourced through common equity. That is generically how we underwrite. As we speak to leverage targets we are at 46.8% book leverage. And again we use that as in our indicator because on the enterprise value basis you are subject to fluctuations in stock volatility. Our long-term target on that is two to four points below where we sit today. So by originating deals at plus or minus 50% leverage as well as having scheduled amortization on the – in excess of $400 million of mortgage debt in place, we think we can accomplish our target in that 18 month to 24 month time period.

And then on the dividend issue I know a dividend increase is always a great thing, but what is the thought process in terms of making sure your FFO gets way ahead of what the dividend is and perhaps that results in a more attractive or less attractive I guess lower yield and a higher share price, I mean there are two different levers there obviously?

It’s just giving you the benefit of, if we don’t disclose AFFO, but we are very cognizant of cash available for distribution if you softer that off of our statement of cash flow looking at operating activity cash flow as compared to dividends paid, in 2017, the first six months of 2017 that quantified to 113% payout ratio, in the first quarter of 2018 that quantified to approximately 107% payout ratio. In the second quarter of 2018 I believe it’s 103% of the payout ratio. So as we are looking at this, we expect to be on a run rate basis by the end of ‘18 on a cash available for distribution perspective all things are remaining confident without adverse macro events, fully covering the dividend, so I appreciating there has been substantial work done by the team in the last 5 years to really meaningfully improve that ratio. We want to get to a point where we can actually be in the 90s. On a payout ratio basis, we have 2% to 4% of incremental growth in earnings on an annual basis and we can show ratable dividend increases whereby the difference the dividend increase and the increase in earnings is there to support lease roll CapEx and TI requirements.

And if I could add one more comment to that, Henry, as I indicated on the call from 2013 to 2017 we actually doubled the size of the portfolio and I think the cap rate was at 8.7% and with those being 7 to 10-year leases, what I am very encouraged about is that now we are hitting the inflection point on each of those leases that the other cash rent is going to be greater than the GAAP rent and that goes directly to the bottom line and continues to add to what Mike was talking about, which is improved cash position and that’s what we are looking for.

Excellent. Thank you.

[Operator Instructions] Our next question comes from Brandon Travis with Ladenburg Thalmann. Your line is open.

Brandon, are you there?

Hi, can you hear me?

We can hear you now. Go ahead.

Thank you. Was there ATM issuance weighted towards the back half of the quarter?

Yes, exactly. The vast majority of the common issuance happened in June.

And then can you provide an update on [indiscernible]?

Yes, that’s still held-for-sale. We have one prospect for that property at this point that is it. They are – our course, Yankee is in there and they have been doing 1 year renewals year after year, but we think it’s in our best interest to just go ahead and sell that property and redeploy the capital.

Thanks.

Alright. Do we have another question?

I am not showing any further questions at this time. I would now like to turn the call back to Mr. David Gladstone for closing remarks.

Alright. Thank you all for your questions. There were good ones this time. I hope next time we get some more good ones and that’s the end of this conference call.

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