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Gladstone Commercial Corporation (NASDAQ:GOOD)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 08:30 AM ET

Executives

David J. Gladstone - Chairman and CEO

Michael LiCalsi - Internal Counsel and Secretary

Robert G. Cutlip - President

Danielle Jones - CFO

Analysts

John Roberts - Hilliard Lyons

John Massocca - Ladenburg Thalmann

Jeffrey Rudner - UBS

Operator

Good day, ladies and gentlemen and welcome to the Gladstone Commercial Corporation First Quarter Ended March 31, 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, David Gladstone. Please go ahead sir.

David J. Gladstone

All right, thank you Charlotte for that nice introduction and thank all of you for calling in this morning. We enjoy the time we have with you and we love these phone calls and wish we had more time to do this. And if you are ever in the Washington D. C. area we're located in a suburb called McLean, Virginia and you have an open invitation to stop in and say hello. You'll see a lot of great people here. I think there's almost 60 of us now and we do have couple of dogs that actually come in and will greet you as you come to the door.

Like to introduce now, Michael LiCalsi. He is our Internal Counsel and our Secretary; he also serves as the President of our Administrator to present the statement regarding forward-looking statements. Michael, go ahead.

Michael LiCalsi

Good morning, everyone. This report may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and of the Securities Exchange Act of 1934 including statements with regards to the future performance of the company. These forward-looking statements involve certain risks and uncertainties that are based on our current plan which we believe is reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all those factors listed under the caption Risk Factors of our company's 10-K and 10-Q filings that are filed with the Securities and Exchange Commission. Those 10-K and 10-Qs can be found on our website at www.gladstonecommercial.com and on the SEC's website as well. The company undertakes no obligation to publicly update or revise any of the forward looking statements, whether as a result of new information, future events or otherwise except as required by law.

In our talk today we plan to talk about funds from operations or FFO and since FFO is a non-GAAP accounting term, I need to define FFO as net income excluding the gains or losses from the sale of real estate and any impairment losses from property plus depreciation and amortization of real estate assets. The National Association of REITs or NAREIT has endorsed FFO as one of the non-accounting standards that we can use in discussion of REITs. Please see our 10-Q filed yesterday with the SEC and our financial statements for a detailed description of FFO.

Our shareholder’s meeting will be on May 1st at the Hilton McLean and we invite you all to attend the meeting. We ask you to please vote your shares so that we can ensure a quorum at the meeting. To stay up to date on the latest news involving Gladstone Commercial and our other publicly traded funds please follow us on Twitter, username gladstonecoms and on Facebook keyword; Gladstone Companies. You can also go to out general website to see more information at Gladstone Commercial on all of our funds at www.gladstone.com.

And now we'll begin the presentation today by hearing from our President, Bob Cutlip.

Robert G. Cutlip

Thank you, Michael. Good morning everyone. During the first quarter we acquired two properties and assumed debt that covered both our --, extended our line of credit for the year and amended certain term under the line to reduce our cost. We received an unsolicited offer to sell one of our properties at a nice profit. We issued additional common equity through our ATM program and recorded an impairment loss on one of our properties.

We had a good quarter as we continued to increase our asset base by acquiring new properties. This was our 10th consecutive quarter of closing new acquisitions. Market conditions permitting consistency in closing acquisitions quarter after quarter really is a key team objective. All the new acquisitions we closed were tempered by the impairment loss we recorded during the quarter. We are still happy with our overall results and have a strong pipeline of acquisitions entering the second quarter.

We impaired a 350,000 square feet, two storey Roseville office facility partially occupied by [UNISYS] because we changed our estimated hold period during the quarter. The impairment charge of $14 million is disclosed in our 10-Q which we filed yesterday. As you are aware we have been trying to re-lease the property for over a year after our tenant [UNISYS] downsized to about one-third of the building in January of 2013.

Our leasing team, led by our Managing Director for the Midwest region, and our leasing agent, CBRE have engaged 23 prospects over the past 15 months, including numerous proposals but to no avail. We continue to try to re-lease this space and we currently have submitted an unsolicited proposal for a 40,000 square feet user and are waiting their response.

The characteristics of the building present a challenge because of several reasons. First, 180,000 square feet of floor plate on each of two floors whereas typically the floor plate sizes for a multi-storey office building will range anywhere from 20,000 to maybe 45,000 square feet even for like small plate users. In addition the property is located in an industrial park surrounded by large distribution facilities. It has low ceiling height and has limited glass on the exterior and therefore creates difficulties for light to get to the inside of the building.

However even regardless of these conditions we continue to aggressively market the property and our team is working diligently to re-lease the space. The list of properties in our acquisition pipeline remains robust and we were able to close on one acquisition subsequent to the end of the quarter and we hope to announce even more acquisitions in the near future.

Now for some details; during the quarter ended March 31st we acquired two additional properties. The properties totaled 42,000 square feet in our day care facilities located in Allen in Collinsville, Texas, northern suburb of Dallas. The properties are occupied by [Cram] which is a nationally recognized day care and education provider that operates 24 locations in eight states. The purchase price for these properties was $10 million which equates to an average cap rate of 10.3% over the life of the lease. We funded this acquisition with cash on hand and the assumption of $6.3 million of mortgage debt on these properties. (Cram) has 12 years remaining on the leases, it has several renewal options.

After the end of the quarter we acquired another property. This property is 62,000 square feet office building located in Rancho, Cordova, California. The purchase price was $8.2 million with an average cap rate of 8.5% over the life of the lease. We funded this acquisition with cash on hand and the issuance of $4.9 million of new mortgage debt. Barco is the tenant in this property and has leased the property for 10 years. Barco is a global technology firm that designs, develops and manufactures visualization solutions including video projectors, LED displays, digital lighting and lighting controls.

We also received an unsolicited offer during the quarter from a third-party to acquire a 530,000 square foot industrial building in Sterling Heights, Michigan. The tenant in this property had a right of first refusal in any sales scenario. The tenant in fact has exercised this right and we anticipate this sale closing during the second quarter. This is a great way for us to dispose of the non-core assets at a realized gain and redeploy the proceeds into real-estate transactions that are really more in-line with our current strategy.

Shifting to our overall portfolio, as of today all the three of our buildings continue to be fully occupied and all the occupied buildings tenants continue to pay as agreed. Two of these properties are 100% vacant and the third is a partially vacant property we recorded an impairment loss on as I mentioned earlier. The leases on these two vacant buildings comprise less than 1% of our total square footage as on March 31. One of the vacant properties is located in Richmond, Virginia and we have two active prospects for this property, each requiring the entire building. We've seen an increase recently in activity at this property as a result of the completed retail development. That retail development has stimulated demand for both office and retail space.

The other vacant property is located in Houston, Texas, submarket and is a 12,000 square foot medical facility in close proximity to a hospital. We have two prospects at this building as well, one for the entire facility and one for 50% of the building.

Our building located in Roseville, Minnesota remains partially vacant and although we recorded an impairment loss and we've begun negotiations with the lender, we continue to aggressively pursue new tenants for this building. To this end we have three prospects for this property ranging from 30,000 square feet to 80,000 square feet. One of the prospects is an educational user and two are state agencies.

Turning to our tenants, we continue to improve the value of our existing portfolio of properties by reviewing and renegotiating existing leases and performing improvements at our properties. We continue to work diligently on the remainder of our leases that come due in 2014 and 2015, and to this end we have renewed five of the six leases that were originally set to expire in 2014. The remaining 2014 lease expires in December and this building is located in an industrial submarket of Chicago. The existing tenant in this property has already vacated. They really needed to double in size, we could not accommodate them. However they have prepaid their rent through the end of the term in December 2014. We're actively marketing this property at this time and have two prospects, one of which we're in final negotiations for about 40% of this space.

In 2015 we have 11 leases expiring and we're already in negotiations with seven of these tenants at this time. Locating new tenants and signing leases with existing tenants for these buildings usually require some capital outlays for tenant improvements and for leasing commissions.

Switching to mortgages, debt financing is available from multiple sources. We've seen interest rates decline somewhat over the past several months although there has been considerable volatility. While fluctuating the yields on U.S. Treasury securities have declined with the federal reserve guidance that the tapering of its program for quantitative easing will be more gradual than anticipated. Also as more lenders have really re-entered the market interest rates spreads have tightened. Consequently interest rates remain historically low and we continue to actively try to match fund our acquisitions with cost-effective mortgages.

Depending upon several factors, including the tenant credit rating, the location of the building, the terms of the lease, the leverage and the term of the loan we're seeing fixed interest rates in the marketplace today ranging from the mid-4% to low-5% levels. To this end we assumed $6.3 million of mortgage debt in the first quarter which was collateralized by our two new properties at interest rates of about 5.6%. While the interest rate is a bit higher than market on this mortgage the return on this deal is also a good deal higher than average, so it made sense for us to execute the transaction. This loan matures in two years and we will look to refinance at that time at even better rates.

For the property acquired subsequent to the end of the quarter we closed a $4.9 million mortgage. The terms included a 30 year amortization schedule, 10 year term and a 4.9% interest rate. Excellent mortgage returns for our first California property.

In summary, at quarter end all of our existing tenants are paying as agreed and our portfolio was 96.8% leased. We acquired two properties during the quarter and an additional property last week. We've consistently increased our acquisition volume over the past three years and we currently have approximately $60 million of potential acquisitions in due diligence, two office properties two industrial properties. All of these properties may not close but this reflects our continued efforts to increase the number of properties we are investigating.

Our current list of possible acquisitions also includes fixed properties totaling $68 million that are in the letter of intent stage and a $195 million under initial review. As you may recall, our objective is to have at least $250 million to $300 million in what we call our pipeline of possible acquisitions with properties in each stage ranging from our initial review through a letter of intent stage due diligence phase and of course closing. At this point we're exceeding our targets and our team is extremely active. We hope to close on additional properties in the upcoming months, please stay tuned.

Now let's turn to our Chief Financial Officer and Treasurer, Danielle Jones for a report on the financial results. Danielle

Danielle Jones

Thanks Bob, good morning everybody. We continued our goal of consistently growing our asset and equity base in the first quarter. While our total assets actually decreased during the quarter because of the impairment loss we recognized this was offset by the acquisitions of two new properties. With the subsequent acquisition of properties in our substantial pipeline we expect our total assets to increase significantly during the second quarter. The amounts outstanding under long-term mortgages and our line of credit increased slightly to about $450 million as a result of the funding of our new acquisitions.

Now to upcoming long-term debt maturities, we have the mortgage debt in the aggregate amount of $22.8 million payable during the remainder of 2014 and $42.6 million payable during 2015. 2014 and 2015 principal amounts payable including principal payments due in June of 2014 and three mortgages that mature in the second half of 2015. We are currently in discussions with the lender on the mortgage for our Roseville, Minnesota property that matures in June of 2014 to determine the best course of actions for this property.

For the first time we've recognize an impairment loss on one of our properties since inception. The operating expenses, loss revenue and debt service on this property exceeded the rent received by close to $2.4 million during 2013 and the property characteristics present significant challenges even with aggressive leasing efforts. Our objective is to reach a solution that is in the best interest of our shareholders.

As for the mortgages that mature during 2015, we do anticipate being able to refinance these mortgages with new mortgage debt. We do not intend to increase the leverage on any of these refinancing in order to continue our strategy of reducing our overall leverage. We intend to pay the additional debt amortization payment from operating cash flow and borrowings under our line. The interest rate on the debt we assumed during the first quarter was 5.6%, which was higher than current market rate but we paid a premium on the debt because we were able to achieve higher than average returns on this deal. The weighted average interest rate on all of our existing mortgages remained flat from 2014 at 5.4%.

We also are continuing our strategy of lowering our overall leverage by reducing our weighted average loan to value on newly issued or assumed debt and also issuing additional common equity. We issued about 420,000 shares of common stock under ATM program this quarter at an average price of $17.48 per share and net proceeds after deducting operating expenses for about $7.2 million. We used these additional funds to fund our recent acquisitions. The ATM continues to be a great way for us to raise additional equity in a cost effective manner.

Turning to our line of credit, we amended the line during the quarter and extended the maturity date by one year and also amended certain terms underlying. We were able to reduce the pricing by 25 basis points at each pricing level. The changes to the line provided immediate increased availability under the line of about $1.3 million. This amendment positions us well for growth over the next few years by both increasing our availability and reducing our borrowing cost.

We currently have $21.2 million outstanding under the line at a weighted average interest rate of approximately 3.2%. We continue to use our line of credit to make acquisitions that we believe can be financed with longer term mortgage debt or that we believe are good addition to our unsecured property pool acquired under our line. As you may recall our customary business model calls for us to initially borrow from the lines to buy properties. We then obtain longer term fixed rate mortgages as soon as we can. By doing this we are able to secure the difference or spread between the rent coming in and the mortgage payments going out. Thus locking in the profit for five to 10 years or in some cases longer.

From a liquidity perspective, the proceeds on the mortgages and pay down our line of credit thus making the line available for the purchase of the next property. With the current aggressive credit and equity market our business model adjusted so that we are matching it closely as possible long term leases with longer term mortgages. If we did not believe we’ll able to close attractive debt on new acquisitions then we will only buy properties that already have long term mortgages on them or are well suited to be funded on our lines. Currently we have enough availability to fund our current operations, deals in our pipeline of possible acquisitions and any known upcoming improvements in certain of our properties.

Our debt-to-equity ratio at the end of the quarter excluding our term preferred stock and the impairment loss during the quarter was approximately 2.4:1. We are heavily focused on decreasing our debt-to-equity ratio over the next couple of years as we continue to issue more common stock to both overnight offerings and our ATM program and reducing our loan-to-value on new and refinanced mortgages.

As of today, our available liquidity is approximately $26.5 million, comprised of $4.7 million in cash and an available borrowing capacity of $21.8 million under our line. The borrowing capacity under our line is limited to a percentage of the asset value of our unencumbered properties, thus both the amount outstanding under the line and our outstanding letters of credit. In addition we have the ability to raise additional preferred or common equity through the sale of securities that are registered under our shelf registration statement in one or more future public offerings.

And now I'll discuss the operating results for the quarter. Please note that per share numbers referenced are fully diluted weighted average common shares. FFO available to common stockholders for the quarter was approximately $6 million or $0.38 per share, which is about a 6.6% increase when compared to the fourth quarter. FFO per share increased because of the additional revenue we achieved from new acquisitions made over the last two quarters. This was partially offset by vacancies in our portfolio coupled with additional shares issued during the quarter.

Our rental income increased primarily from holding the properties acquired during the fourth quarter for the entire period as the properties acquired during the first quarter only held for a short period. This was offset by an increase in our administrative fees due to a larger percent of the fee being allocated to our fund because we have higher total assets in comparison to the funds managed by our administrator. This was also coupled with the loss revenue and additional properties opening expenses from our vacancies close to $800,000.

We also managed higher G&A expenses in the timing of fees related to our proxy and annual report. We anticipate these expenses to decrease in future quarters which will help our bottom-line. We will manage this increase in expense while maintaining our dividend during the quarter. We were not able to pay a large portion of our incentive fee this quarter because of the dilution from equity issued during the quarter and an increase in our property operating expenses from our vacant portfolio. We expect that over the next few quarters as we invest equity cash into stock offerings and our operating expenses decrease we will start to grow our FFO again.

We believe with our repositioning and growth activities that 2014 will be a great year as we continue to increase our asset base and work diligently to reduce vacant buildings, mange our property operating expenses and make selective property dispositions.

I'll now turn the program back over to David

David J. Gladstone

All right. Thank you very much, Danielle. And that was a good report and good report from Bob Cutlip and Michael LiCalsi too. We encourage all of you, all of the listeners and those out there who might listen to this a little later to read the press releases and the quarterly report that was filed yesterday with the SEC and this is the 10-Q that comes out every quarter. There is just an awful lot of good material in those documents and they spend a lot of time putting it together and I think it would be good for you if you have a chance to read through that and digest a lot of that material. And you can also find all of this on our website at www.gladstonecommercial.com and also on the SEC website.

I think the main news reported this quarter is that we were able to acquire two additional properties and assumed long-term financing on these properties. This makes it worthwhile as you probably know we already have a couple of those in the portfolio and we extended our line of credit and reduced the overall pricing under the line and we also raised some additional common equity to fund these new deals. We did have to record our first loss, the impairment loss and I sense that helps the incentive of our company by getting rid of that, it's going to be better in the future. We will have our further resolution of this property during the next quarter. But I think you're going to see the impact is positive to the company, getting rid of that one property that we've had so much problems with over the last year.

So while we did have a loss we also continue to add quality real-estate to the portfolio. We have shored lot of the exiting investments and we've grown the asset base yet again this quarter. So we continue to grow our market capitalization should increase. We hope to see our trading volumes and our stock now that we've had additional issues of our stock and hope to see a corresponding uptick in the price. And continue to have a nice list of potential quality properties that we are interested in acquiring. I think Bob and his team have been really good at getting out and finding those. Because of this list of properties we hope to be able to grow the asset portfolio even more during the rest of 2014 and with the increase in the portfolio properties comes greater diversification and that’s means better earnings usually.

We are focused our efforts on finding good properties and long term financing that matches those long terms and being able to lock in that long term. That’s what carried us through the last recession, is locking in those long term financings along with the long term leases. We are much more optimistic now that things are going to be positive for us during the next year simply because the economy looks a little bit better. Much of the industrial base that rents industrial and commercial properties like all of our properties remains steady and most of them are paying their rents so we had good response there. There are still some businesses that are having problems and the economy is still not in good shape. However we expect good growth during 2014 for this real estate investment trust.

Now while I am optimistic that our company will be fine in the future we are obviously going to continue to be very cautious in our acquisitions as we’ve done in past years. You know we made it through that last recession without cutting the dividend and having a lot of problems from our tenants and if another recession is lurking on the horizon I think our portfolio continue to stand up and hopefully we will continue to pay our dividend. Don’t see anything on the horizon to stop that.

We were successful in raising common equity this quarter under our ATM program. I wish that program could be better. It keeps us from having to have overnight offering and we put this new equity that we got from the ATM to work quickly and that helps us with our recent acquisitions. We will still use the ATM program as we can during the 2014 and continue to fund our new investments. During April of 2014 the Board voted to maintain the monthly distribution of $12.50 per common share for April, May and June or the annual run rate now is a $1.50 per share per year. This is very attractive rate as on a well manage REIT like hours we've now paid a 117 consecutive common stock cash dividend since the inception of the company and we went through that horrible recession without cutting any of those dividends.

Because the real estate can be depreciated we are able to shelter the income from taxes. This distribution in 2013 was 82% return on capital and that’s really tax free to individual shareholders. This is a very tax friendly stock and in my opinion is a good one for personal accounts that are seeking income. This return on capital is due to the depreciation of a real estate assets and other items and causes earnings to remain very low after depreciation but that’s why we are able to talk about FFO because that’s adding back the depreciation so you can see the real cash flow.

Deprecation of a building and as I say every time is a bit of a fiction since at the end of the depreciated period the building is still standing even though you assume for tax purposes that it's all gone. So if you own the stock in a non-retirement account as opposed to having it in IRA or retirement plan then you don’t pay any taxes on that part of it, sheltered by the depreciation as it's considered a return on capital when we send you the cash. However the return of capital does reduce your cost basis in the stock which may result in a larger capital gain when the time comes to sell the stock hopefully you never sell stock but that’s something that happens from time to time.

With the stock price now at a $17.65 the distribution yield on the stocks about 8.5%. This is very high many REITs are trading at much lower yields. I get a service every week actually comes on Internet and the REIT universe now is trading at 4.3% yield, goodness if we were trading at that price would be over $34 share. And just to make it more comparable analysis the triple net REITs like the ones that we have, all of our situations are triple net, those REIT’s are trading at 6.2%, and if we were at 6.2% would be a $24 a share. I think there is a lot of room out there for expansion of or reduction as you might say of the yield as we go from 8.5% if we come down to 6.2% that would be a big jump in the price of the stock.

The Board will vote again in mid-July during our regular scheduled quarterly Board Meeting on the declaration of the monthly distributions for July, August and September. Please note that our July Board meeting is a little bit later than normal and nothing alarming there we're just giving a little more time to prepare all the stuff for the Board Meeting.

Now I am going to stop and if the operator will come back on we will have some questions from those of you on the line.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will be coming from the line of John Roberts from Hilliard Lyons. Your line is open.

John Roberts - Hilliard Lyons

Good morning, David.

David J. Gladstone

Good morning, John.

John Roberts - Hilliard Lyons

First hey, Bob. On the acquisition pipeline you said and I am sorry if you said this already but I was writing quick and missed it, $195 million under review $68 million under letter of intent?

Robert G. Cutlip

Correct.

John Roberts - Hilliard Lyons

And what was the other?

Robert G. Cutlip

It's $60 million in due diligence.

John Roberts - Hilliard Lyons

$60 million in due diligence, got it. And David can you discuss a little bit more the property not the one that you just wrote-down but there is another one with potential for a write-down that you had discussed in the 10-Q?

David J. Gladstone

Bob, you want to answer that you know more about it than I do.

Robert G. Cutlip

Yes, this is a 150,000 square foot industrial facility in South Headley, Massachusetts and the tenant has renewed it twice for one year after the original lease term was up, and so we will be once again, in fact next week we will be meeting them to talk about a renewal again. The property is located really in a predominantly residential area. There is senior housing there and some multi-family but it works very well for the tenant year in and year out for their overflow requirement, so we will see how it goes.

John Roberts - Hilliard Lyons

Great. And…

Robert G. Cutlip

Small, it's a small, as you might have imagined it's an industrial building so the rents are very low on this property anyhow.

John Roberts - Hilliard Lyons

Okay, great. David can we anticipate what about a $1 million reduction in NOI from the property that you wrote-down at this point?

David J. Gladstone

You mean the write-down at South Venue?

John Roberts - Hilliard Lyons

No, no the amount of reduction in NOI that you are reflecting in the write-down?

Danielle Jones

It's shouldn't impact NOI, John the impairment loss and you just write-down the value of the gross real-estate to an impairment charge which actually doesn't impact your FFO but it's not going to impact our NOI right now.

John Roberts - Hilliard Lyons

Right, but I mean it's reflecting a potential reduction or an assumed reduction in the income on that property I would assume?

Danielle Jones

Well right now our operating expenses are in excess of the income on that property, so I don't think it would actually reduce our NOI.

David J. Gladstone

John the way I look at it it's really been [official] to get rid of it because the expenses that we're carrying at that in the meaning we're paying will actually go away. So we're actually expecting an uptick as opposed to a downtick.

John Roberts - Hilliard Lyons

Okay, great. And I guess we can pretty much anticipate that what you will get for that property has been reflected in the write-down?

David J. Gladstone

Yes, I don't think it's probably it may not even be worth the first mortgage, I am not sure that we're going to get anything out of it. But my guess is that this quarter that will end up either giving it back or doing some kind of -- or something in order to just get rid of it. It's been a huge drain in terms of expenses but more than that we've had a lot of people working it and now they can turn their attention to putting new deals on the books. I hate to lose anything but we're losing the equity that we have invested in that and unfortunately it's gone.

John Roberts - Hilliard Lyons

All right, great. Thanks, David.

David J. Gladstone

Okay, next question.

Operator

Thank you. Our next question will be coming from the line of Daniel Donlan from Ladenburg Thalmann. Your line is open.

John Massocca - Ladenburg Thalmann

Good morning everyone, this is actually John Massocca on for Daniel.

David J. Gladstone

Okay. Hi, John.

John Massocca - Ladenburg Thalmann

Could give more color maybe on the CapEx spend in terms of TI and capital improvements you guys thinking you can have over the next two years. Is it actually more weighted towards 2014 or…?

David J. Gladstone

I don't know if we projected those. Bob or Danielle have we projected out at least this year CapEx and fees and expenses perhaps for the -- I don't know that we have 2015 but Bob you're probably on top of that.

Robert G. Cutlip

Yeah. We right now through the end of 2014 are now expecting approximately from TI and CapEx stand point on a TI side about $2.9 million and about $1.4 million of commission that’s through the end of ’14. And the CapEx is probably going to be somewhere under a $1 million for all of our property, so that’s what it looks like for ’14. Yes we are anticipating more in 2015 as a result of the renewal, and it's hard for me to tell you exactly what they will be since we are in negotiations with those tenants at this time.

Now I would say that we will probably be looking at a like amount or maybe if a little bit more than that next year for the same John.

John Massocca - Ladenburg Thalmann

That makes sense and thanks for color. And then in terms of 10.3 cap rate on the Texas asset. Is that something you think you can see more of in the market I mean I know some of that was probably driven by the debt you put on that was already on those properties. But if you have unique assets can you see those higher cap rates?

David J. Gladstone

You know it's as we say it's time the number of deals that you have coming in and that you close it's so lumpy that you run across good opportunities like that and hopefully run across those every quarter. But Bob you are on the firing line with your team in terms of the number of deals out there that you are saying you can pull out more color on that for John.

Robert G. Cutlip

You know I think John if I had to compare this to the majority of the market I would say that this was more unique then it is standard. I think everybody knows even those interests have flattened a little bit, they are up significantly over 12, 15 months ago. And yet because there so much capital out, there cap rates have really not risen very much at all. In fact I don’t think they’ve really risen at all we are getting a little bit of a benefit in the secondary markets that we are looking at and that’s I am very encouraged about what the team has been able to do and the size of our pipeline and the returns on that pipeline. But we have not seen really any really upward movement in cap rate and just coming from another conference on triple net leases, no one really see in my opinion rates rising in the near term.

John Massocca - Ladenburg Thalmann

That makes sense. And then lastly quick timing question maybe for Danielle. The assets retirement obligations had traditional been positive than it was negative, is that just the end of the obligation or…?

Danielle Jones

No, it was actually an adjustment we had made from prior year for it was just a one-time adjustment that was made this quarter. Yes it's going to go back to what the normal run rate in each quarter for 2015.

John Massocca - Ladenburg Thalmann

Right, that makes sense, thank you very much everyone.

David J. Gladstone

All right next question please.

Operator

Thank you. Our next question will be coming from the line of Jeff Rudner from UBS. Your line is open.

Jeffrey Rudner - UBS

Good morning David and a very nice quarter. I have a couple of questions about a comment you made during your statements after the presentation regarding the fact that because of the aftermarket offering on the one hand you thought there might be more value in the stock and you also thought based on the yield that the price of stock might rise over a period of time. You had mentioned previous quarters that you still plan on having the aftermarket offerings periodically, is that still accurate?

David J. Gladstone

Yeah, the goal is that it's a very low cost way of raising money. Unfortunately you don’t raise a lot of money, so as a result you end up making -- probably avoiding one overnight offering during the year using the ATM.

Jeffrey Rudner - UBS

Okay, but on the other hand if you are assuming that because of the fundamentals the raw fundamentals of the company than the price of the stock might rise out of this mid 17 price area. My experience in the past and I think what investors the potential investors might be concerned of going forward as the stock started to poke up above the $20 levels it has in the past that we might have an aftermarket offering coming so anytime the stock got significantly higher from the current price, as long as we are having the potential of the aftermarket offerings out there people might become concerned about buying the stock much above $19, $20 area. Is that something that you consider of concern also?

David J. Gladstone

Well we always consider concern for anything that knocks the price down so these aftermarket offerings usually and I speak from many of our companies have used it usually don’t damage the stock because they are not putting that many shares and there's a huge limit placed on whichever brokerage house we are using to do the aftermarket. So there is no way of knowing empirically what’s happening, you're really just thinking about it how it will work each time and hoping that you are not damaging the stock price.

So our goal always is not to damage the stock price. It didn’t help us in the long run and so as a result we are all pushing that the ATM program works correctly. We’ve seen a lot of larger companies use the ATM program very successfully. I think it's little more difficult for us at this size in order to get a good ATM program going. But if it will help us grow the company and I am all in favor of it.

Jeffrey Rudner - UBS

Okay, thanks very much.

David J. Gladstone

Next question please.

Operator

Thank you. (Operator Instructions). And I am not showing any further questions at this time.

David J. Gladstone

All right, well sounds like we are at the end of this program and we thank everybody for calling in and talk to you again next quarter. That's the end of the program.

Operator

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

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