Gladstone Commercial's (GOOD) CEO David Gladstone on Q2 2014 Results - Earnings Call Transcript

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Gladstone Commercial (NASDAQ:GOOD) Q2 2014 Earnings Call July 30, 2014 8:30 AM ET


David J. Gladstone - Founder, Chairman, Chief Executive Officer, Chairman of Offering Committee and Member of Investment Committee

Michael B. LiCalsi - Secretary and Internal Counsel

Robert G. Cutlip - President

Danielle Jones - Chief Financial Officer and Principal Accounting Officer


John M. Roberts - Hilliard Lyons, Research Division

John J. Massocca - Ladenburg Thalmann & Co. Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Gladstone Commercial Corporation Second Quarter Ended June 30, 2014, Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be 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 you, all, for calling in. As you know, we all enjoy these times that we have with you on the phone, and wish we had a lot more time to talk to you at various points in the year. But we only do this 4 times a year. So please, if you're in this DC area, come by and say hello. We are in McLean, Virginia. It's a suburb of Washington, D.C. As always, you have an open invitation to stop by and see us and say hello. And you'll see a great team here. There is a number of people here. I think there is about 60 total in the company now, and so we're no longer small.

Michael LiCalsi, he is our General Counsel and our Secretary. He also serves as President of the Administrator and does a great job of keeping us on the straight and narrow. Michael?

Michael B. LiCalsi

Good morning, everyone. This report that is about to be given may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all those factors listed under the caption Risk Factors of our company's Form 10-Q and 10-K filings that we filed with the SEC. Those 10-Q and 10-K filings can be found on our website at, and on the SEC's website,

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 speak 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 nonaccounting standards that we can use in our discussion of REITs. Please see our Form 10-Q, filed yesterday with the SEC, and our financial statements for a detailed description of FFO.

We also plan to discuss Core FFO today, which is our FFO adjusted for property acquisition costs. We believe this is a better indication of our operating results of our portfolio and allows comparability of period-over-period performance. To stay up-to-date, you can sign up on our website to get updates by e-mail on the latest news involving Gladstone Commercial and the other Gladstone publicly traded funds.

You can follow us on: Twitter, user name GladstoneComps; and on Facebook, keyword, The Gladstone Companies. And can you go to our general website to see more information about our companies at

The presentation today is an overview, and we ask you to read our press release issued yesterday and also review our Form 10-Q, which is our quarterly report for the quarter ended June 30, 2014. You can find both of these on our website,, and on the SEC's website.

Now we will begin our presentation from our president, Bob Cutlip.

Robert G. Cutlip

Thanks, Michael. Good morning, everyone. During the second quarter, we acquired 4 properties, assuming debt on one, issuing new debt on 2, and funded the fourth property with equity. We sold one of our properties at a nice profit, issued additional common equity through an overnight offering, and extended the leases of 2 properties that are set to expire in 2015.

Subsequent to the end of the quarter, we also acquired an additional property using equity proceeds, extended another one of our leases that was set to expire in 2015, and funded the loan for a build-to-suit project that is pre-leased upon construction completion to a tenant with its 15-year lease.

We had a great quarter, as we continue to increase our asset base by acquiring new properties. This was our 11th consecutive quarter of closing new acquisitions. We are extremely pleased with our activity and consistency over the last several months, and we continue to have a strong pipeline of acquisitions.

Now for some details. During the quarter ended June 30, we acquired 4 additional properties. The first property is a 62,000 square foot office building located in a Sacramento, California, submarket. The purchase price was $8.2 million, with an average cap rate of 8.5% over the life of the lease. We've funded this acquisition with cash on hand and the issuance of $4.9 million of new mortgage debt at a 4.9% interest rate. Barco is the tenant in this property and has a leased the property for 10 years.

Barco is a global technology company that designs, develops and manufactures visualization solutions, including video projectors, LED displays, digital lighting and lighting controls. This was our first acquisition in California, and it's in line with our strategic expansion into the Western United States.

The second property was a 22,000 square foot daycare facility located in Coppell, Texas, a northern suburb of Dallas. This was the third daycare facility we acquired in this transaction. The other 2 were acquired during the first quarter, as you may recall. All 3 properties are occupied by Crème de la Crème, which is a nationally recognized daycare and education provider that operates at 24 locations in 8 states. The purchase price for the property acquired this quarter was $5.8 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 $3.8 million of mortgage debt. Crème has 12 years remaining on the leases and also has several renewal options.

The third property is a 115,000 square foot anchored multi-tenant office building, located in Columbus, Ohio, for $11.8 million. There are 2 tenants in this property, the largest of which is Quantum Health, a care coordination and navigation firm that works for employers with self-funded health insurance plans. Quantum occupies 92% of the space and has 9.5 years remaining on the lease. The tenants, in total, have an average cap rate of 10.8% over the life of the leases. We funded this acquisition with cash on hand.

The fourth property is a 955,000 square foot bulk distribution warehouse located near Scranton, Pennsylvania, along the I-81 distribution corridor. The purchase price was $39 million; the average cap rate, 8.7% over the life of the lease. We funded this acquisition with cash on hand and the issuance of $22.6 million of new mortgage debt at a 4.2% interest rate. The tenant in this property has leased the building for 10 years, and they've been in the building since 2001.

After the end of the quarter, we acquired another facility. This property is a 125,000 square foot industrial building located in a suburb of Denver, Colorado, for $8.3 million. The average cap rate over the 15-year lease term is 9.3%. We funded this acquisition with cash on hand. The tenant in this sale-leaseback transaction is Barton Supply, which specializes in fabricating steel reinforcement and structural and miscellaneous steel construction accessories for both commercial and residential markets. This facility is going to be both their headquarters and their major manufacturing location. We funded this acquisition with cash on hand.

Separately, we issued a $5.6 million loan for a build-to-suit project in Phoenix, Arizona, that will be occupied by Kindred Healthcare under a 15-year triple net lease. We receive 9% interest on a current basis during construction, with no construction liability. And we have an option to purchase the facility upon construction completion. Now if the developer prefers to sell the facility, upon completion, to a third party, then we'll receive a success fee equal to a 22% return on our invested capital during the hold period, prior to any proceeds distributed to the developer.

We also sold our property in Sterling Heights, Michigan, during the quarter for a gain on sale of $1.2 million. This was a great way for us to dispose of a non-core 550,000 square foot asset at a realized gain and redeploy the proceeds into real estate transactions that are really more in line with our current strategy.

Now shifting to our overall portfolio. As of today, all but 3 of our buildings continue to be fully occupied, and all of the occupied buildings' tenants continue to pay as agreed. Two of these properties are 100% vacant, and the third is the partially vacant property we recorded an impairment loss on during the first quarter. The leases on the 2 vacant buildings comprise less than 1% of our total square footage as of June 30.

One of the vacant properties is located in Richmond, Virginia. And we have one active prospect for this property, which requires the entire building. We're currently negotiating a lease agreement with this tenant and expect them to occupy the premises during the fall of this year.

The other vacant property is located in a Houston, Texas, submarket and is a 12,000 square foot medical facility in close proximity to a regional hospital. At this time, we have 3 active prospects at the building. Two of them are for the entire facility, and one for is about 50% of the building.

Our building located in Roseville, Minnesota, remains partially vacant, and we are in negotiations with the lender at this property to return it through a deed in lieu transaction. And we are anticipating that this is going to happen during the third quarter. This is the first property we have returned to a lender. However, on a positive note, this decision is going to favorably impact FFO on a going-forward basis, and therefore, we believe it really benefits our shareholders.

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 in 2015. And to this end, we've renewed 5 of the 6 leases that were originally set to expire in 2014. The remaining 2014 lease does expire in December. And this building is located in a industrial submarket of Chicago, 55,000 square foot reload [ph] facility. The existing tenant in this properly has already vacated, as they needed to double in space and we just couldn't accommodate them in the building. However, they did pre-pay their rent through the end of the term in December of 2014. We are actively marketing this property now and have 2 prospects, one of which we are in final lease negotiations for about 40% of the space. The other prospect also requires 40% of the building.

In 2015, we have 11 leases expiring, and we have successfully extended the leases for 3 of these tenants at this time. And we're now in negotiations with 2 of the remaining tenants and have been notified that one tenant will leave. The tenant that's leaving is relocating to Rhode Island. We're aggressively pursuing new tenants for this property as we've hired a broker, recognizing that we do have several months before the lease does expire for this tenant who is vacating. While we have 11 leases rolling in 2015, we only have 3 leases expiring in 2016, 2 in 2017 and 1 in 2018. So after next year, our lease rollovers slow down dramatically, and our existing portfolio will have stable and growing rental income.

Locating new tenants and signing leases with the existing tenants, as we've said in the past, usually requires some capital outlays for tenant improvements and leasing commissions.

So in summary, at quarter end, all of our existing tenants are paying as agreed, and our portfolio was 97% leased. We acquired 4 properties during the quarter and an additional property in July. With this latest property, our acquisition volume totals $83 million.

We have consistently increased our acquisition volume over the past 3 years, and we currently have approximately $37 million of potential acquisitions in due diligence, inclusive on the expansion of an existing tenant's facility that's scheduled for completion in August. All of these properties may not close. But this reflects our continued efforts to increase the number of properties we are investigating and closing them, as we move them through the acquisition process.

Our current list of possible acquisitions also includes 2 properties, totaling $31 million, that are in letter of intent stage and $280 million under initial review. Our objective is to have, as you may recall, $250 million to $350 million in our pipeline of possible acquisitions, with properties at each phase, including the initial review, indication of interest, letters of intent and due diligence. Our team continues to exceed this objective and has prospects in each phase of the acquisition process, which we really hope is going to lead to continuing, consistent closings in the months ahead.

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

Danielle Jones

Thanks, Bob, and good morning, everybody. We continued our goal of consistently growing our asset and equity base in the second quarter. Total assets increased to $735 million this quarter, which was an 8.3% increase from last quarter. Our total equity also increased over 12% from last quarter, as a result of our latest equity raise. We are in a growth mode and expect to continue this throughout 2014.

The amounts outstanding under our long-term mortgages and our line of credit also increased to $480 million, as a result of the funding of our new acquisitions.

Reviewing our upcoming long-term debt maturities, we do have mortgage debt in the aggregate principal amount of $20.8 million payable during the remainder of 2014 and $42.7 million payable during 2015. The 2014 principal amounts payable includes both amortizing principal payments and a balloon principal payment that was due in June of this year of $17.5 million on a property that we impaired this year.

We are currently in conversations with the lender to return the property via deed in lieu, which we anticipate to happen this quarter. We intend to pay the remaining 2014 debt amortization payments from operating cash flow and borrowings under our line of credit. The 2015 principal amounts payable include balloon principal payments due on 3 mortgages that mature in the second half of 2015, and we do anticipate being able to refinance these mortgages with the new [ph] mortgage debt. We intend to decrease the leverage on these refinancings in order to continue our strategy of reducing our overall leverage.

Debt financing does continue to be available from multiple sources. We have seen interest rates decline since the beginning of the year, as the yields on U.S. Treasury Securities have stabilized with the Federal Reserve's guidance that it will continue to work to keep interest rates low, despite the ending of the program of quantitative easing in October of last year.

As more lenders reenter the market, interest rate spreads have tightened. Consequently, interest rates remain historically low, and we continue to actively try to match our acquisitions with cost-effective mortgages. Depending on several factors, including the tenant credit rating, location of building, the terms of the lease, leverage, and the term of the loan, we are seeing fixed interest rates in the market today, ranging from low to mid-4% to low 5% levels.

To this end, we issued new debt this quarter of $27.5 million on 2 of our new acquisitions at a weighted average interest rate of 4.4%, and we assumed $3.8 million of mortgage debt, which was collateralized by one of our new properties at an interest rate of 6.3%. So while the interest rate is a bit higher than market on the assumed mortgage, the return on this deal is also higher than average, so it made sense for us to execute this transaction. This loan does mature in 2 years, and we will look to refinance at the time at a better rate.

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 did issue about 1.6 million shares of common stock in an overnight offering at a price of $17 per share, and net proceeds, after deducting offerings expenses, were $26 million. As you are aware, we immediately put a significant amount of this equity to work with our recent acquisitions. We are encouraged that our stock price rebounded nicely since our overnight raise, and is recently trading closer to $17.75.

Turning to our line of credit. We currently have $35.7 million outstanding under the line at a weighted average interest rate of approximately 3.2%. We continue to only use our line of credit to make acquisitions that we believe can be financed with longer-term mortgage debt or that we believe are good additions to our unsecured property pool required under our new line of credit.

We will selectively obtain longer-term fixed-rate mortgages on property financed under our line of credit. 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 5 to 10 years or, in some cases, longer.

From a liquidity perspective, the proceeds from the mortgages then pay down our line of credit, thus making the line available for the purchase of our next property.

With the current aggressive credit and equity markets, we are matching as closely as possible long-term leases with longer-term mortgages. If we do not believe we will be able to force attractive debt on new acquisitions, then we will only buy properties that already have long-term mortgages or are well suited to be funded on our line.

Currently, we do have enough availability to fund our operations, the deals in our pipeline of possible acquisitions and any known upcoming improvements at certain of our properties.

As I stated, we are focused on decreasing our debt-to-equity ratio over the next couple of years, as we continue to issue more common stock through both overnight offerings under our ATM program and reducing our loan-to-value on new and refinanced mortgages.

As of today, our available liquidity is approximately $16.9 million, comprised of $2.3 million in cash and an available borrowing capacity of $14.6 million under our [ph] line.

The borrowing capacity on our line is limited to a percentage of the asset value of our unencumbered properties, 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.

And now, I'll discuss the operating results. You may have noticed in our press release filed yesterday that we reported a Core FFO number this quarter. We believe Core FFO, which adjusts for our property acquisition expenses, allows our investors to better compare period-over-period results, since the property acquisition expenses can be very lumpy quarter-to-quarter.

The per-share numbers referenced are fully diluted weighted average common shares. Core FFO available to common stockholders for the quarter was approximately $6.6 million or $0.39 per share, which was about a 2% increase when compared to the first quarter. Core FFO per share increased because of the additional revenue we achieved from new acquisitions made this quarter, coupled with lower property operating expenses, certain of our vacant properties. This was partially offset by a slight increase in G&A expenses and an increase in our base management fee and the cost of the additional shares issued during the quarter.

We were able to pay out a larger portion of our incentive fee this quarter because of the increased volume of acquisitions. Even though we had dilution from the equity issued, we're managing our property operating expenses from our vacant portfolio. We expect that over the next few quarters, as we continue to invest the equity from the stock offering and our operating expenses decrease, that we will grow our FFO.

So we believe, with our repositioning and growth activity, that 2014 will be a great year as we continue to increase our asset and equity base, decrease our leverage and work diligently to release our vacant buildings and manage our property operating expenses.

And now, I'll turn the program over to David.

David J. Gladstone

Okay, thanks. That was good, Danielle. And we had good one -- good reports from Bob Cutlip and Michael LiCalsi, too. We encourage all our listeners to read our press releases and our quarterly report that was filed yesterday with the SEC, called Form 10-Q. There is a lot of good material in those documents. You can find them all on our website at, and also on the SEC website. I think the main news to report this quarter is that we are able to acquire 4 additional properties, raised equity, issue a long-term financing on the properties. So we continue to add quality real estate to the portfolio, shore up our existing investments and grew the asset base. As we continue to grow, our market capitalization will increase and we hope to see a higher trading volume in our stock and also see a corresponding uptick in the stock price, because the yield today is very high.

I have some things to discuss here. As many of you know, the company did not cut its dividend, lower its dividend, stop its dividend during the recession, and I think that was quite a success story.

But we watched some of the very good companies cut their dividends, and here is a couple of examples of REITs. And I'm not going to name their names even though I have them here.

Company A had a dividend in 2008 of $1.36, dividend is now $0.60, and that's a 56% decrease.

Company B: dividend in 2008 was $1.17; dividend is now $0.66, and that's 44% decrease.

Company C: dividend, 2008, was $1.25; dividend now is $0.14, it's an 89% decrease.

And Company D: dividend, 2008, $2.88 per share; dividend now 41%, so an 86% decrease. And then Company E: dividend, 2008, was $1.43, and it's now $1.10 per share or 23% decrease.

All of these REITs are good companies. And now some of them have increased their dividend back after hitting the low point, but none of these have returned to the original dividend level. And I'm really saddened that none, and I mean really none of the analysts have picked up on the story of how strong we have been over the period. I know you all want us to increase the dividend, and I certainly want to do that as well. But I wish we could get some credit for being very steady dividend payer that has taken care of our shareholders during some very rough times. Our track record of not cutting the dividend should stack up extremely well against the others that are out there that have cut their dividends. But quite frankly, some of them are trading at yields much, much lower than ours and have performed very well, even though they had a pretty poor track record.

And before I get off my soapbox, there is another thing that has bothered me, and this is the discussion that comes up in some of the analyst reports on the credit of the incentive fee that we do to ensure the dividend. Some of the analysts give us a really hard time, because we don't pay out to our management the entire incentive fee. And our people do get their salary and their bonus from the advisory fee that we have. So they're making good money. There's -- the incentive fee is to give senior management team the extra incentive to grow the income. And when they do not grow the income enough, they forfeit part of the incentive fee. This aligns the management exactly with the shareholders, much better than any stock option plan could ever do. So we are about making sure the dividend is paid and the incentive compensation plan does just that. So when you see a credit to the incentive fee, you, the shareholders, you should say to yourself that's a good thing, because management just gave the stockholders part of the incentive pool in order to make sure that dividend is never cut. It's an excellent way to motivate management to perform. And we all watch that as close as possible. But I think it's a very positive thing rather than a negative as sometimes it's portrayed.

We continue to have a nice list of potential quality properties that we are interested in acquiring. And because of that list of properties, we hope to be able to grow the asset portfolio more during the rest of 2014. With the increase in the portfolio of properties, comes greater diversification. We believe diversification is key to our future. It makes sure the earnings are going to be there.

On another note, we've been able to fund some very attractive long-term mortgages to finance our newly acquired properties, and the mortgage market from the banks today is much better. We do look for properties with mortgages already in place that we can assume. But most of the time, we are out there. We close on -- we are unable to close on the debt simultaneously. So we put it on our line of credit, and a few months later, we find the debt to put on the property so that we can put those 2 things together, that is, the time that it's going to take to get the mortgage in place, as well as the time it takes to get the long-term mortgage and lease in place at the same time. We've been able to lock in long-term financing, and that's really good for the future of the company.

We're much more optimistic now that things are going to be positive for us for the next year, even though the economic outlook of the industrial base that rents commercial end [ph] properties, like ours, remains steady. Most of them are paying. There are problems out there. If you look at the foreclosure notices that are out there, you'll see some difficult things going on. And there are still some of our businesses that are having problems. And the economy is still not in great shape. However, we do expect a good growth during 2014 in this REIT. While I'm optimistic that the company will be fine for the future, we're going to continue to be cautious in our acquisitions, as we've done in years past.

As mentioned before, we made it through the last recession without cutting the dividends and without having a lot of problems with our tenants as well. And if there is another recession lurking on the horizon, I think our portfolio will continue to stand the test against it. There are no guarantees in this life, but we are in very good shape today. And if the Fed decides to raise the interest rates, we are ready for them. Because most of our properties are financed with long-term fixed-rate mortgages, so that we won't be impacted significantly from that. We don't use a lot of short-term debt to hold our properties. And while that takes away some of the spread that we could get if we did that, it also ensures that we get that long-term spread over years and years in the future.

We were successful in raising some common equity this quarter, and we put this new equity to work pretty quick. And the funds -- that -- those recent acquisitions that you've seen the press releases on. We may raise some more. But we don't really want to dilute shareholders and then makes it possible to put the equity to work quickly. If we do raise it, it's going to be in small amounts.

We seek to utilize our ATM program. This is where we sell a few shares in the marketplace on a very regular basis, and that'll help us fund our pipeline of acquisitions during 2014.

July 2014, the board voted to maintain the distribution of $0.125 per common share for July, August and September on an annual run rate now of a $1.50 per year. It's a very attractive rate, given the stock price. We've now paid a 119 consecutive common stock dividends, cash dividends, since inception, even though we went through the past recession. Because the real estate can be depreciated, we are able to shelter the rental income of the company, so the distributions in 2013 for our year ending December 2013 was 82% return of capital. And that portion is tax-free during this -- when you receive it. This is a tax-friendly stock and, in my opinion, a great one for personal accounts that are seeking income.

This return of capital is due to the depreciation of the real estate assets and other items, and it causes earnings to remain low after depreciation. That's why we talk about FFO, because that adds back the real estate depreciation.

Depreciation of a building, as you all know, is a bit of a fiction for tax purposes, since at the end of the depreciation period, the building is still standing. If you own the stock in a non-retirement account as opposed to an IRA, or retirement plan, you don't pay any taxes on that part that's sheltered by the depreciation, as it's considered the return of capital. However, the return of capital does reduce your cost basis on the stock, which may result in a larger capital gain when you sell the stock.

With the stock priced at $17.53 at the close yesterday, the distribution on the stock is about 8.6%. Many REITs are trading at much lower yields. I just read that the entire REIT universe is trading at about a 4% yield. If we were trading at a 4% yield, that would mean a $37 stock. And the triple-net REITs, which we are compared to often, is about 5.6% yield. And if we were trading at that yield, we'd be at $26.80 per share. I believe -- I mean, truly, we believe that we should be in that range as well. Our REIT is the highest-yielding triple-net REIT stock and almost the highest yield of all the REITs out there. So if you're looking for yield and a good solid conservative company, I think this is a great one to buy.

The board will vote again in early October during the regular scheduled quarterly board meeting to declare the monthly distribution for October, November, December. So we don't expect any recent thought about increase in the dividend, but there will come a point, at some point in time, in which we'll be able to do that.

Well now, let's stop and get some questions from our shareholders and analysts who are out there about this REIT, with the operator.

Charlotte, would you come on, please, and help our listener so they can ask the questions?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of John Roberts from Hilliard Lyons.

John M. Roberts - Hilliard Lyons, Research Division

I guess, you haven't read my report. I talk about you not cutting the dividend in every report.

David J. Gladstone

Well, thank you for doing that. Have you mentioned how many others that are selling at higher price than us that are selling at a much better multiple of earn -- of yields?

John M. Roberts - Hilliard Lyons, Research Division

That I haven't done. I'm only covering you, David. I'm not covering all the other ones. Bob, can you run the pipeline numbers again? I'm sorry. I was writing them down as quick as I could, but I missed some of them.

Robert G. Cutlip

Sure. What we have right now in due diligence that we have, $32 million in due diligence and we have $31 million in the letter of intent stage. And one of those is industrial and 4 of them are office.

John M. Roberts - Hilliard Lyons, Research Division

Very good. David, can you discuss a little the acquisition-related expenses? They've bumped up pretty significantly this time, and I was just wondering -- sort of a typical run rate on them.

David J. Gladstone

Danielle is the lady with numbers, so she'll give you that.

Danielle Jones

They were a little bit higher this quarter. It was from the $39 million acquisition we acquired in Pennsylvania, and Pennsylvania just has very high transfer taxes, and so it just -- that was probably a one-time anomaly. A lot of times it's state-specific. We usually see it about 1% of purchase price, depending -- that was a higher purchase price. But it really just had to do with Pennsylvania state taxes this time.

John M. Roberts - Hilliard Lyons, Research Division

Okay. So normally, you see about 1% of purchase price?

Danielle Jones

Usually, about average.


We have a question from the line of Daniel Donlan from Ladenburg Thalmann.

John J. Massocca - Ladenburg Thalmann & Co. Inc., Research Division

This is actually John Massocca on for Daniel. Could you just walk us maybe through the potential for the BTS project in Phoenix? Do you think you have -- kind of an estimate of what you think the final cost will be, given that you have a first look at that building?

Robert G. Cutlip

Yes, we've seen all the numbers. We are actually participating in negotiation of the lease. The property is going to kind of guaranteed maximum price, total development cost, just over $18 million. So it already has the construction lender in place. We are in place. We closed that this week -- excuse me, last week, last week. Closed it last week. And so we're very excited about it. We've been working on this project for -- or jeez, I think, over 8 months, with a developer out in Phoenix. And we are so pleased that Kindred Healthcare is the tenant, and the general contractor is Whyte's [ph] Construction, which does a lot of medical development in [ph] general contracting. So we're very pleased with the opportunity here.

John J. Massocca - Ladenburg Thalmann & Co. Inc., Research Division

Is this an opportunity that you guys think you could see more of in the future? It's obviously a very attractive yield. Is this something you guys expect [ph] to do more in terms of business loan -- in terms of construction loans that could possibly lead to acquisitions?

Robert G. Cutlip

Yes, I'm glad you brought that up. I mean, each of 3 leaders in our regions, Matt Tucker, Buzz and Andrew, they are seeking partners with developers, who are more merchant developers, who in the markets that we want to have sizable presence can pursue these deals. We are talking with another developer right now about a similar opportunity in the Southeast.

John J. Massocca - Ladenburg Thalmann & Co. Inc., Research Division

All right, great. And then in terms of the quarter in general, just more broad strokes. $64.9 million was a great acquisition quarter. Is that more of some kind of one-time stuff, or is that something you think you're going see more of in terms of a larger number of acquisitions?

Robert G. Cutlip

At our size, we still try to be in the $5 million to $30 million range. I think the teams have done just a tremendous job over the last 6 months. We think our current annual run rate should be about $120 million to $150 million, so that we don't get out over, what I would call, "the tips of our skis." But we're not going to walk away from a very good accretive deal. And the teams have been able to acquire properties in, what I believe, are very strong secondary markets. When you think about the closings we've done this year, Sacramento, Phoenix, Denver, Dallas, Columbus, and now in due diligence and letter of intent, the Northeast Corridor, I really like the I-81 corridor. I think that's a great distribution location for the Northeast. And credit is king for us, and that's what's really stood the test of time. But we also want to make sure that we're acquiring assets that we know are releasable. We know that a tenant may at some point want to leave. And the team has done a really good job of focusing on those secondary markets that they really believe are good growth markets.


[Operator Instructions]

David J. Gladstone

Well, Charlotte, it sounds like we don't have any more questions. So this is the end of the report. And we thank you, all, for listening, and we'll see you next quarter.


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

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