Gladstone Commercial Corporation (GOOD) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Commercial Corporation’s Second Quarter Ending June 30, 2020 Earnings Call and Webcast. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

Well, thank you, Sarah. That’s a nice introduction and thank you all for calling in. It’s an interesting time to talk about real estate, but we still enjoy these times we have with you on the phone and wish we have more time to talk with you and certainly enjoy the questions and at the end. Now we’ll hear from Michael LiCalsi, our General Counsel and Secretary. He will give us legal and regulatory matters concerning the call and the report that we’ve given in yesterday. Michael?

Thanks David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and 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 risk factors listed in our Forms 10-Q, 10-K, and other documents that we file with the SEC. You can find these on our website which is gladstonecommercial.com or on the SEC's website at www.sec.gov. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by law. And today, we will discuss FFO, which is Funds From Operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses on property, plus depreciation and amortization of real estate assets. We'll also discuss FFO as adjusted for comparability and core FFO, which are generally FFO adjusted for certain other non-recurring revenue and expenses. We believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. Please take the opportunity to visit our website once again, gladstonecommercial.com. Sign up for our e-mail notification service. You can also find us on Facebook. The keyword there is The Gladstone Companies. We even have our own Twitter handle 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 issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website. With that, I'll turn the presentation over to Gladstone Commercial's President, Bob Cutlip. Bob?

Thanks you, Michael. Good morning, everyone. During the second quarter, we executed a lease amendment to extend a 59,000 square foot office tenant in Raleigh, North Carolina through 2025, we extended a 22,000 square foot industrial tenant in Raleigh through 2021, we extended a 5,000 square foot office tenant in Minneapolis through 2023, executed a lease to expand a tenant by 17,000 square feet in Columbus, Ohio with a lease expiration date of December 2025, extended a 26,000 square foot office in Green Tree Pennsylvania through 2031, and collected 98% of scheduled rental income for the months of April, May and June. Subsequent to quarter end, we executed a lease amendment to extend a 42,000 square foot office tenant in Richmond through 2026, sold our 347,000 square foot industrial property in Maple Heights, Ohio for $11.4 million resulting in a net capital gain of $1.2 million and collected 99% of scheduled rental income in July. As noted on our first quarter call, our investment strategy is emphasizing an increase in our portfolio of industrial allocation, which we believe will improve our property operating efficiencies, reduce capital expenditure levels, and potentially result in improved valuation over time. From January 2019, through June of 2020, our investment volume was $201 million, all of which were industrial properties providing further evidence of this commitment. Our industrial allocation has increased from 33% in January 2019 to 43% today with an objective of achieving a 60% allocation within the next 18 to 24 months. During the second quarter, our investment opportunities were limited due to the effects of COVID-19. We didn’t acquire any properties during the quarter. However sales listings have in fact increased in numbers recently and at this time, we have a 153,000 square foot industrial property in the I-70 Corridor of Indianapolis that’s in the due diligence process. The total cost is approximately $10.6 million with a 10 year remaining lease term and a GAAP cap rate of 8%. The expected closing date is September 1st. Our asset management team continued to deliver on improving our same-store operations. During the second quarter, the team executed four lease extensions, three office properties and one industrial property totaling approximately 113,000 square feet. These extensions required no tenant improvements. The team also expanded our anchored tenant by 17,000 square feet in a Columbus Ohio office property and they now occupy the entire building reconfirming the objective of our anchored multi-tenant program. And subsequent to the end of the quarter, our 42,000 square foot office tenant in Richmond Virginia extended their lease through 2026 with no tenant improvement requirements. In combination, all of these transactions increased the straight-line rent associated with these properties by approximately 14% over the extended lease terms. In reflecting on the first six months of the year, the team completed eight leasing transactions, seven of which were office properties totaling 362,000 square feet with a weighted average lease term of 6.6 years. The weighted average straight-line rent increased by 5% and the overall tenant improvement allowance was approximately $6 per square foot, which in our opinion is a very favorable number with the larger percentage office versus industrial transactions that were completed. The onset of the COVID-19 virus has required increased emphasis on portfolio management. The company has successfully implemented a work from home arrangement for our employees. However, our active tenant engagement program continues and is delivering positive results. With an emphasis on tenant credit, we have always engaged our tenants quarterly to discuss their recent financial performance and this strategy has established strong ties with each of them. During this pandemic, we have appropriately increased our connections with our tenants. Some interesting and favorable characteristics of our tenant profile were included in our business update press releases, 84% of tenant revenue is from tenants who on average contribute 1% or less of company revenue. In the hospitality, oil and gas and airline industries only comprise 2.5% of annual revenue. The challenges arising as a result of the virus prompted us to immediately connect with all of our tenants at the onset which we have completed and we’ll continue to do. There has been and we expect there will be requests from tenants for rent deferral and we will address them as we are notified by the respective tenant. Our strategy is to offer rent deferral, not rent abatement, to limit the deferral to a one to three month period if at all possible, to have tenants continue to pay a portion of their rent during the deferral period and to require repayment of the deferred rent over a six to twelve month period. There is no doubt that each agreement will have unique business terms. However, the key objectives are to maintain our increased core FFO per share and to return cash flow to the proper previous level as soon as possible. The company granted rent deferrals to three tenants in April representing approximately 2% of total monthly rental income throughout the second quarter. These tenants continued to pay partial rent. The deferrals ranged from 1.5 months to 3 months and the payback period ranges from 6 months to 9 months currently scheduled to end in March 2021. We expect to continue to have conversations with other tenants requesting short-term concessions and we will report the results of those conversations as they take place. And a number of our tenants are taking advantage of the federal programs available to them and we are hopeful of positive outcomes on their applications. Anticipating that many on the call are interested in lease expirations through 2020 and beyond, I wanted to summarize the teams’ thoughts and our current activities. We have one lease expiring between now and year-end that has not been negotiated, that lease is with GM and as I indicated in our first quarter call, they will vacate our Austin, Texas property at the end of August. Our active marketing of the property with assistance from the local Chamber of Commerce has resulted in eleven current prospects for the building ranging from 65,000 square feet to 320,000 square feet, which of course is the entire building. It continues to be interesting to note and report that our GAAP rent at the property of $14.50 per square foot triple net compares favorably in the sub-market with current space offerings in the low to mid-$20 per square foot on a triple net basis. Unfortunately, COVID-19 has nearly eliminated property tours in Austin unless they are virtual. We have in fact, created a virtual tour for our property and are using it through our connection with the chamber and with our brokers’ prospects. With considerable interest from the West Coast and Chicago, as well as that large Austin prospect, and Tesla’s recent decision to build a gigafactory there, we expect a positive outcome, but must remain patient and persistent with the ongoing virus impacts. Long-term, we are positive about our same-store performance as lease expirations for 2021 and 2022 average approximately 5% based on projected rental income. Therefore, overall cash flow should be stable with limited risk enabling the team to focus on growth. Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus. Economic forecasters are estimating that both second and third quarter GDP maybe negative, and of course their estimates do vary. This slowdown in economic activity will certainly impact our industry and has had a dampening effect on investment sales volume as April and May and I believe June volumes were down compared to 2019. And port authorities reported drops in container volume ranging from 10% to 30%, compared to the same periods last year. However, the continued interest in industrial properties, particularly those related to e-commerce has resulted in no increase in cap rates for this product type in several markets. There is however, some expansion of cap rates for smaller properties that are more manufacturing in nature and particularly for sale leaseback transactions in select markets and the sizes here are anywhere from 50,000 to 200,000 square feet. And this is a product type that matches our interest in our underwriting strength, particularly for middle market non-rated companies seeking capital to reinvest in their business. We will continue to monitor the evolving conditions and adjust our strategy accordingly. And as it relates to growth opportunities, investment sales listing have moderated driven primarily by the effect of the virus. Our current pipeline of acquisition candidates is approximately $255 million in volume representing 16 properties, all of which are industrial. Of the 16 properties, one property is in due diligence, two are in the letter of intent stage and the balance are under initial review. Because of the stay-at-home directives in many states, several of the properties in the pipeline are what I would call, a home position. Our team is staying actively engaged however in these markets as we believe acquisition opportunities will arise that we can and we will pursue. So in summary, our second quarter activities reflected strong leasing and rental collection success, continued active engagement to identify industrial acquisition opportunities and collectively positions us well to pursue growth opportunities. Now let’s turn over to my partner Mike for a report on the financial results, including our capital markets activities.

Thanks, Bob and good morning, everyone. I’ll start by reviewing our operating results for the second quarter of 2020, 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 and $0.41 per share for the quarter respectively. Specifically, core FFO was $0.40.5 per share rounding up to $0.41. FFO and core FFO available to common stockholders were both $0.80 per share for the first six months of the year. This performance demonstrates the accretive, yet prudent growth that the company has completed in recent years, as well as the performance of the in-place portfolio. In addition to these accretive deals, our same-store cash rent continues to grow at 2% on an annualized basis. Our second quarter results reflected stable, total operating revenues of $33.5 million as compared to total operating expenses of $24.1 million for the period excluding one property impairment charge. As Bob laid out, our team is actively engaged with every tenant of ours as we intend to maximize shareholder value through and beyond the COVID-19 pandemic. We are pleased with the team’s and portfolio’s performance through July and believe we’ve performed exceptionally, but these are unchartered times which we will continue to navigate together. We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage. We’ve reduced our debt-to-gross assets by nearly 15% to 46.5% over the past five years through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are 1% to 2% away from our target leverage level long-term, which means that nearly all raised equity will go toward accretive acquisitions. We continue to primarily use long-term mortgage debt to make acquisitions as we grow through disciplined investments while also look to expand our unsecured property pool with additional high-quality assets. Over time, we expect that this will increase our financing alternatives. Looking at our debt profile, as of today, our 2020 and 2021 loan maturities are very manageable with only $3 million and $21 million coming due respectively. We have continued to proactively manage and improve our liquidity and maturity profile over time. We continue to minimize our exposure to rising interest rates with over 90% of our existing debt being fixed rate or hedged to fix through interest rate swaps and caps. While entering the second quarter with sufficient liquidity we’ve been modestly active in issuing our common stock and preferred Series E stock utilizing our ATM programs. During the second quarter, net of issuance costs we opportunistically raised $500,000 through common stock sales and $1.9 million through preferred stock sales. We continue to manage liquidity and the balance sheet to ensure that we have sufficient liquidity for upcoming capital requirements. As of today, we have $3 million in cash and $36 million of availability under our line of credit. With the current availability, the strong performance of the portfolio and access to our ATM programs, we believe that we have significant incremental flexibility to fund our current operations near long-term properties that we are underwriting in 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 continuing to execute our business plan as we continue to manage our existing portfolio, increase our high-quality asset base and continue to improve our metrics. We’re focused on maintaining our high occupancy with strong credit and real estate. Institutional ownership of our stock has increased over time to 60% as of June 30, nearly a 20% increase over the past four years. Bob and I continue to be very active in meeting with current and potential investors, portfolio managers, coverage analysts, investment banks and alike. We look forward to establishing new relationships as the company moves forward to its next chapter. Regarding the common stock dividend, we did increase it in the first quarter and while the increase was small, we have also announced that we are leaving the dividend as is again in the third quarter. We have not cut nor suspended the dividend since our IPO in 2003. Our stock closed on Monday at $18.54. The distribution yield on our stock is about 8.1%. Many REITs are trading at much lower dividend yields and higher multiples. Now, I’ll turn it back to David.

Okay. Thank you, Mike. It was a good one and Bob Cutlip did a good job, so did Michael. I think the team has performed very well and we are hurt a little bit by the virus and the government’s reaction. The real problem today is, we have no idea how either part of the U.S. government or the local governments will react to the virus. So there is just a big unknown out there. We’ve heard a lot today about the numbers of new transactions and leases and all that’s impressive. We’ve collected rents that were due during the first and second quarters that we are in good shape there. We’ve executed lease extensions strong there. We got rid of one building we owned in Maple Heights, Ohio. We may sell a few more during the next quarter, but our goal is to keep ourselves above all of the problems that are going on here. The team is strong. We have good professional team and pursuing quality properties and a list of acquisitions. But most of these we are looking at the strong credit tenants. They are great tenants and excellent investments that you can get somebody with some financial strength and not in a part of the economy that’s going to collapse. The middle market businesses like the many tenants were in is a place that almost all of us hear it was truly has been at it for his whole career of financing and working with middle market tenants. We are not up in the status fear of the big tenants. We’ve got a few of those, but most of them are middle market companies that we underwrite as if we were making a loan to them from a bank. These are times that have never been seen before. We are in the middle of a pretty strong recession at this point in time. But we are doing a fantastic job, I think. And I am going to stop here and let people that are smarter than I am ask some questions and we will do the best we can to answer them. Operator, if you will come on please and let’s get some questions from those smart people out there.

[Operator Instructions] Our first question comes from the line of Gaurav Mehta with National Securities. Your line is now open.

Okay, thanks. Good morning.

Good morning.

Good morning, Gaurav.

Good morning. First question I have is on the dispositions. I was hoping if you could provide some color on the property that you sold and I think also you made some comment on your expectation, maybe you sell a few more in the next quarter. So, maybe provide some color on your view on dispositions and how should we think about it?

Certainly. This property we acquired a number of years ago and it was occupied by Pennzoil. They elected to move out of that property and so we converted to a multi-tenant building. It’s not in a high, let’s say transaction velocity location and the configuration is a bit irregular, Gaurav. And so, we felt the best thing for us to do since we did not want to expand our portfolio in this part of Ohio was to exit that property and use those proceeds to really reinvest in industrial, but in the markets that we have been targeting recently. And fortunately, we came out of this with a capital gain and if I am looking at it going forward, we are looking at a few properties that are, what I call, single storey, non-core office properties that over time we have wanted to believe to move out of anyhow and we are getting the opportunity to do so. I do not see any other industrial properties short-term that would be on the disposition list, but we will selectively continue to look at these non-core single property markets, particularly single storey office that we can exit and redeploy the proceeds. Mike and I really believe when we’ve said it a number of times they are trying to exit properties, but try to stay under, let’s say $15 million to $20 million a year in our exiting of our product and then redeploy that capital as opportunistically as we can as our teams identify new industrial properties primarily.

Any other question?

Yes. As a follow-up, there was a property impairment charge in the second quarter. Can you provide some color on that charge?

Sure, Gaurav, legacy assets, office assets that is currently vacant, it would be one of the prospects to potentially fill up the remainder of that target of $15 million to $20 million of dispositions. And it’s something that we will have – we are having discussions on both leasing and sales scenarios, but that would be something that again we would view as one of our handful of non-core assets that we are contemplating a disposition, it was bought seven years ago.

Okay. Thank you.

Thank you.

Thank you. Other questions?

That’s all. Thank you.

Thanks, Gaurav.

Thank you. Our next question comes from the line of Rob Stevenson with Janney. Your line is now open.

Good morning guys. Bob, what’s the level of TIs that the GM property needs in order to retenant?

Let me look at it and approach it two ways. As I’ve indicated, our current GAAP rent is like at $14.50. We really can be and will be probably a low cost provider out there. So, if in fact the rents are in the $18 to let’s say $20 to $22 range, I anticipate that our TI will be somewhere between, close to around $25. However, as you get further and further into the longer-term leases with a lot more TI, it could go with high as between $30 and $35. But then the rents are going to be in the mid to upper $20 per square foot. That’s what we are looking at right now. That’s the guidance we’ve received from our brokers and kind of from the chamber and development authority as to what people are seeking. When you look at other locations like the CBD and the domain, they are in the mid to high 30s and even low 40s from a rental rate standpoint, so. So, I feel very good about where we believe we’ll be going over the next number of months. Once this – once the virus kind of enables us to open up that city a little bit more and get some more property tours.

And what’s the sort of timeframe, I mean, you are going to have GM moving out at the end of August. How long of a process is it to deploy that sort of $25 or even $30 or $35 the TIs you’ve got. A few months, or is that six months? I mean, how extensive is that work that you are going to need to do in parts of the building. Is it a situation we are not fully ready to occupy until sometime mid first quarter of 2021 or you are going to be able to be – able to start occupancy by year-end of this year if you get a tenant in there?

I think it depends on the specific tenant. GM did a great job of creating really designing and constructing creative office space in that building having walked it, I mean that building has raised floor, has ten foot ceilings, it has, it’s really column free. When you look at it and having, actually having walked it after it was completed right after 2000s with Dell. Michael Dell’s team allowed us to walk through that building as we were developing similar properties in the research triangle. You have two 40,000 square foot floor plates. You enter the building and immediately you have access to elevators, but each of the wings that are $40,000 square feet have their own private elevator. They have their own service elevator. So, the flexibility is that, Michael Dell and his team put into that building is really great for social distancing. And as I indicated, column free – column free floor plates are really very positive. Now, I would say that with the backlog that we have as I’ve indicated, and we have three to four that are very, very interested, once we can get actual tours of the building, we are probably looking at a six to eight months period for the entire building. We have pro forma that we are going to do either multi-tenant or single tenant. Right now, the tenants range that I indicated there from 65,000 to 320,000 square feet, but are really strong prospects from a 150 to the full size of the building. So, I still think it’s going to be probably six to eight months from the time that we really can actively get into that building which hopefully is going to be within the next 30 to 60 days. That’s the whole. But I can’t drive what’s going to go on with this virus.

But to your point, Bob, in a multi-tenant scenario, if that’s the way we were to go, it would take six to eight months to have the building fully occupied.

Correct.

But there would be staggered occupancy subject to TI and square footage requirements in fourth quarter and first quarter.

Good point. Good point.

Okay. So, at this point, it sounds like that the $25 to $35 range for TIs doesn’t include a substantial amount for taking a single tenant property and converting it to multi-tenant? But it’s already more or less set up that way there maybe some cost, but it’s not huge in terms of what it’s going to cost you to multi-tenant access?

I don’t think so, Rob, because the size of the tenants that we are seeing really would either occupy one side of the other of a full floor plate or multiple storeys. So, the way the building is designed, you can really secure each of the floors and that’s what’s very positive from my perspective and makes me a bit optimistic because we can show tenants that maybe both in the tech business or in the healthcare business or the financial institutions that we can secure your area very simply and very efficiently.

Okay. Mike, given your comments about the common stock valuation and also, trying to stick with the $15 million to $20 million target for dispositions, how are you thinking about the relative attractiveness of common versus preferred? And is there really an opportunity here to increase dispositions to fund acquisitions as a bigger percentage of that $265 million pipeline actually pencils for you guys?

Sure. So, I guess, I would cover the backdrop. We have almost $40 million of liquidity today. And the refresh for everyone in terms of where our equity desires have been over the last 24 months since July 1st of 2018, we’ve done something in the neighborhood of $150 million of common issuances via overnight, but predominantly through ATM, as well. On the preferred side, net of redemptions, we’ve only done $20 million. But Rob, to your point, and obviously demonstrated during the second quarter with us only doing $500,000 on the common side and doing $1.9 million on the prep side, and the common by the way was done at $19.71 and the prep was done at an average share price of $22.52 as compared to its par value of $25. But in this exceptional time period with the pandemic, I mean, we are sensitive to the div yield and issuing the preferred at a weighted at a $22.52 implies doing that at a $7.35 dividend yield as compared to our current common dividend yield of $8.1, and it would be as if we issued common at $20.40. So, the long ones here is, we continue to heavily overweight toward common. But we need to get more stability, because we don’t love the share price where it is. So, we will contemplate tapping minorly into the prep, but from an aggregate prep load as compared to enterprise value, we are probably in the 11% to 12% range, And Rob, as you know, and we’ve consistently messaged and demonstrated there isn’t a massive appetite to overweight on prep even if perpetual in nature. So, I think with our existing liquidity, not being able to predict share prices. But having access to those ATM programs, as well as some modest dispositions, speaking freely, I am going to get caught shot. And we will be able to support the pipeline of industrial acquisitions that Bob laid out.

Okay. And with that as the backdrop, I know that you’ve historically done a moderate amount of dispositions in order to cover the dividend and I have the variability. But there has been a lot of talk at a one of the political parties on potential changes to the 10/31 program is a way to raise revenue. Are you thinking about putting in any potential strategies like selling even more non-core assets into the year-end depending on how the election is leading and sort of turns out to get ahead of that? Is that entering the Board’s thought, David, at this point in time? How are you guys thinking about any of that as it pertains to the business model?

I think the big problem, Rob, is trying to figure out which way the winds are blowing in the political area with this one side seems to want to close down the entire company at once and the other side wants to open it, wide open. So, trying to figure out who has got the upper hand is always going to be difficult. I look at this as a different way. You can hide months today, hide is the wrong term, but you can put your money in something like treasury builds, but now you are actually paying to keep in treasury builds. You are not making any money or you can buy a stock like ours and I just think for people who are trying to avoid the big problems out there in the COVID marketplace today. This is a good place to go and stay and something that pays you a different – a decent yield and at the same time has a way of getting your money back. As everybody knows, we are very focused on making the dividend payment and that’s our – almost our sole reason for living every day. And so, I don’t think that the Board or I or any of the team members want to convert this into something else. I think we are right on where we are today and we are just going to keep going, but going slower and more deliberate, and yes, we will sell some buildings. But it’s not to meet the dividend, it’s because it’s out there in a space that we don’t want. One of the big problems of selling something is we’ve got a lot of good buildings that were not favorable toward in terms of long-term. But you hate to sell them because they are paying as agreed and so, it’s really hard to say to somebody, I want to get out of this one because they are paying and then you got to go find something, a place to put the money. So, there is a balance that we are looking for here and my goal is for this company, just to continue to hold on tight. My own belief is that there will be something that will turn the corner on this COVID-19. I am personally a believer in hydroxychloroquine has one of the ways to stop this thing. But I know that’s against most everybody that’s out there on the government medical profession. But I’ve just seen it in action. I have two doctors, one loves it and gives the long story and the other one doesn’t like it. And so, I don’t know whether this is a political matter or whether this is just something that is ingrained in people’s mind is that, hydroxychloroquine doesn’t work. And then the other side says, but we’ve got thousands and thousands of people on hydroxychloroquine for other than this and there is no setback. So, somewhere along here, the – I don’t know, clouds will open and the sunshine will come through and I know the American medical profession is really strong on finding solutions to these kind of problems though. I don’t know if that’s answering into your questions, but that’s where we are today. And the goal is not to change what we are doing but to do more of the things that we are doing at just a slower more methodical pace.

Okay. Thanks guys. Appreciate it.

Thanks.

Okay. Thank you.

Thanks, Rob.

Next question.

Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is now open.

Good morning.

Good morning, John. How are you?

Good. So, sort of bringing back to GM again in Austin, but can you remind us or maybe provide some color on what the carrying cost for the Austin property would be in terms of tax spend, security, utilities, et cetera. Just any kind of color there. I mean, I know it’s 4% of straight-line rent, but maybe what the additional impact is going to be during the period where GM is not there and tenant hasn’t moved in?

I can address what I think the OpEx is going to be. I don’t have the interest information – interest for the debt with me right now, John. But the OpEx is going to be somewhere between $6 and $8 a square foot. It will definitely be less than it is currently just because with that occupancy, you are not spending as much money on a lot of the common area cost that you typically would internal to the building. We can get that interest information to you and we’ll email it to you after the call.

No, no, I was looking for the OpEx. That was perfect. And then, with regard to some of the re-leasing in the quarter, you provided some very helpful detail on kind of the straight-line rent increases, but could you provide some color maybe broadly or specifically on movements in cash rent?

Well, at the 14% race, you are probably looking at a 2% to 3%, because most of those renewals are five to six years. So you are probably looking at a cash increase of anywhere from 2% or to maybe 3% or 4%. No more than that.

Okay. And then, broadly speaking, outside of GM, how is the office leasing market looking? Has COVID been an impediment to leasing? Or maybe you are seeing more interest in suburban office given kind of the space you can offer, the parking you can offer, all of that.

I’ll tell you, I have just been so impressed and encouraged with what our team has done on these office properties. We’ve right now – the one property in Minneapolis that we leased 50% of it in the first quarter. We now are down to the final strokes for another 10,000 square feet there and that is a suburban office property and we competed, believe or not with a CBD property. And I think one of the reasons is that there is not that large migration, but I think there is more of an interest of getting outside of the CBD, particularly for our types of tenants. And our types of tenants, you know are in buildings that are under five to six storeys. So, we are not the urban type tenant attracter of that type of company. So, I believe when I look at where we are going, going forward, we probably next year have, oh, it’s going to be at I’ve got four office properties that we are going to have lease expirations and one – and we started off with between almost with nine. We’ve renewed some of those already, but I think there will be a challenge. I, mean, I am just being honest there is going to be a challenge on the renewal of office tenants. But I think because of the mission-critical nature of those properties and the tenants that I see before me here on the sheet, I think we are going to be in very good shape to at least probably maintain the straight-line rent. That means that probably, we may have a little bit of a draw down, but not significant.

Okay. And have you seen, I know it’s kind of early days, have you seen any of these tenants who maybe traditionally would be looking at kind of urban infill or CBD office be interested in some of your properties or is it still maybe too early in the outlook in a pandemic world?

It’s a really good question, John. I think it’s just a little bit early because, people just can’t get out into our properties. We are getting a lot of hits on telephone calls but we are not getting any really tours on those that we currently have that are vacant. And we have vacancies in Ohio and in Illinois and of course in Minneapolis. Yes, are we getting calls, for sure, but we are not getting tours because most of these cities are shutdown.

Okay. And then, one last kind of quick one. Can you maybe provide some color on the decision to change the base management fee calculation to be based on assets versus total equity? Is that’s what kind of drove that decision what was kind of your guys reasoning there?

Sure. Well, it’s something we’ve kicked around for many, many years, John and we talk to it with people like yourself, as well as Bob and I are out doing on the road shows or road shows. I think we all – as we just think about it, there has been some noise in terms of the concept of being able to issue equity just to increase the base management fee. I mean, we are truly in the business of running our and managing our portfolio. We did a very detail analysis, I would say, but for COVID, we probably would have made this change a quarter earlier. But at that point it was all hands on deck to ensure that we collected the rents that we did, which was we believe pretty exceptional for a company of our size. But if you go back five years, on average, the base management fee under this new calculation was somewhere in the 43 basis points to 43.3 basis points average. So the concept here was to keep things either neutral or shareholder friendly on the margin on the go-forward and to make it all just really based upon what the heck is our portfolio look like at a particular point in time. And obviously being externally advised and well, I only work for this company, Bob only works for this company, our sister Land Agricultural REIT had gone to this type of concepts a couple of quarters ago and my understanding is that was favorably received.

Okay. That’s it for me.

Thank you very much.

Next question.

Thank you. Our next question comes from the line of Craig Kucera with B. Riley FBR. Your line is now open.

Appreciate the color on vacancy being in Ohio and Illinois, Minneapolis, but sort of specifically, can you talk about sort of the sequential increase in vacancy from first quarter to second quarter, were those smaller tenants? Or were there any larger tenants? What types of tenants, et cetera?

We had a single storey, 92,000 square foot office property in Minneapolis go vacant at the end of the first quarter. That was our biggest hit, Craig. And that’s one of the single storeys that Mike just related that we've impaired that property. It's interesting, in this same park, Blackstone has just acquired three other properties in that same park that that are single storey office. And so, we are going to exit that property, but it's somewhat encouraging to me that that Blackstone has come into that park and now we are starting to get some interest on people who may want to acquire the property.

So, I think looking at your supplement, I think that that was included at first quarter. So there was no incremental increase in vacancy from March 30 to the end of June?

No.

There was a – I am failing to recall which parcel that got us down below the 96. The sale of the Maple Heights asset in July, real time today, we are north of 97% occupancy. So there might have been a couple of square footage, Craig, but that would have been it.

Okay. That's helpful. And as far as your revenue, were there any contra items expensed against rental revenue this quarter, maybe tenant receivable write-offs or anything else like that?

No write-offs. I would say, that under the new GAAP guidance and obviously for folks like yourselves that have covered us for a number of years, you will see on the P&L the lease revenue numbers are – as well as the operating expenses have dramatically gone up. I would advocate for every analyst to look at those on a net basis being your lease revenue less property and operating expenses for comparability. Again, some of that is a GAAP exercise and modification in guidance. Also, we’ve had some integration projects internally that have now enabled us to track even triple net expenses some even at tenant-managed properties. So we are grossing up our income statement there as a function of that, and now that recovery revenues and the amounts that the tenants are obligated to pay as lessee, they have some lumpiness in nature. So from peer-to-peer they may fluctuate. And that make COGS a little bit less of a trend. I would say from an absolute cash rent perspective, cash rent in the first quarter was $28.5 million and in the second quarter it was $28.8 million. So, trending the right way, benefiting from the first quarter acquisitions that we executed.

Okay. Thanks for the color.

Thanks, Craig.

Other questions.

We have no further questions in the queue at this time.

All right. Well, we thank you very much all of you for the good questions that you gave us and we enjoyed talking with you again. Michael and certainly Bob are always to try to answer any questions at the end of this call. Thank you all for calling in.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.