Darrell Crate: Yes, if it’s accretive yes, it’s accretive – if it’s accretive sure. I mean – and when I talk about stock buybacks, it’s like if we deliver all this growth out there, and find ourselves in a place where the stock is still what is it $11.48 – then like we got to just look at the world and say, what’s going on here, because I know the quality of what we’re bringing forward and the IRRs that we have, and compare it to everything else that’s out there. It’s pretty – I don’t know we feel we can make a case that is very compelling. And so – but we’re always interested in points of view around it. And all we can do is try and be incredibly transparent about what we’re executing on. And we are putting quarter-to-quarter together.
We’re very pleased with what we’re doing. We don’t want to sound over enthusiastic, which is why we talk about 2% to 3% instead of a path of 4%. As we’ve shared with folks, but we’re in a transition period, we see great opportunity. We have a definable edge, we can buy very special real estate, and we think we can create a cash flow profile that should be materially valued.
Michael Lewis: I was not thinking about buybacks, but maybe something in the future, we could talk about that?
Darrell Crate: There you go. I appreciate it. Yes. No, look, and I appreciate the conversation. I think these transcripts are really a terrific opportunity for folks to get to know us who don’t have time to get on the conference call, because we are a smaller cap REIT and maybe they’ll pick up the paper here in six months and read this transcript. And learn a little bit about what we’ve been doing and working very hard to achieve. And we wouldn’t do it, if we didn’t think we could do it well.
Michael Lewis: Thank you very much. I appreciate it
Darrell Crate: Yes, thank you. Thanks for paying attention and following the company.
Operator: Our next question is from Bill Crow of Raymond James. Pleased to see with your question.
Bill Crow: Hi, good morning. Just a couple of clarifications. The 7% cost of capital, is that based on today’s incremental cost of debt and today’s stock price, it just feels like that number is too low, but I just wanted to get a clarification?
Meghan Baivier: Yes, think my comment was closer to mid-sevens and low seven. And yes, that is a perspective on where we can issue. Again, looking at multiple opportunities in the debt market from secured to the unsecured, right, multiple tenors continuing to work to match our assets and our liabilities, but also, yes, an equity price in and around, right, $12 today.
Bill Crow: Okay. So Darrell, the asset you referenced that you were – they want a 5.5 cap rate and now you’re 150 basis points wide of that, and they’re still talking that’s still not within the range of spread and investing, right? It’s got to be eight spots, right?
Darrell Crate: Yes. But I mean, hi, they’ve made it more than halfway, Bill, and it’s a pretty snazzy building. So – if you can give us a little stock price and they can get a little softer, we’re going to have a really the nine figures to deliver that that you’re going to love.
Bill Crow: Yes, a snazzy building is great, but if you don’t have rollover and you’re only getting 0.5% a year on rollover that doesn’t really buy you anything, right? It doesn’t create value?
Darrell Crate: That’s right.
Bill Crow: It can’t be challenge, right. 18% average roll doesn’t cover inflation when you look at it per year. And that’s – that’s kind of, I think, the sticking point here?
Darrell Crate: Yes. No, no, no. Okay. One thing I just want to say is that, yes, I’m with you. You and I see it, I on the math in the numbers. And no doubt, it’s also why, again, changing our TAM so that we can have some profile that makes the cash flow a little bit better, because the reality of the inflation that we’ve had over the last couple of years will be recognized in our cash flow six, seven, eight, nine years from now, which is just too long, and it’s beyond the horizon of anybody on this call. But the reality is that our buildings are more valuable today, because of that than they were a year or two ago. We just don’t have the cash flow to prove it yet. And that’s why we need some things with escalators in it, and some of the projects that we’re working on to develop can be in the eights.
And I see ways that we can again, path to growing 4% is what we’re striving to do. We’re talking about 2% to 3% regularly, and we’re going to get there. And that’s – and we can – any suggestions you have on showing people how we can get to, again, like a $13, $14 stock price. And you’re doing a good job that will – that starts a whole different magnitude of growth for us that, you’d see at acquisitions that are far, far higher than we’ve ever achieved in our history.
Bill Crow: No, I understand that. I appreciate that. Two real quick ones. Dallas acquisition, where in Dallas, is that?
Darrell Crate: That’s the airport. I don’t have the zip code.
Meghan Baivier: I don’t have the address. They’re bringing me at it.
Darrell Crate: Okay. We’ll send it to you, Bill. If you want to go visit, we’ve got a bunch of facilities in Dallas that we’re really happy to have a business tour.
Bill Crow: I was just out there for the eclipse. Finally for me, the two non-government tenants that are in that building, what sort of business is how many of those tenants exist within the portfolio?
Meghan Baivier: I mean the vast majority of our tenancy, obviously, is still a – what we do – government’s all-face.
Darrell Crate: Four or five tenants that are private. It’s very few.
Meghan Baivier: In the building, the….
Darrell Crate: All nice people.
Meghan Baivier: 35% is to the two private tenants, and those are leased through early and late 2032.
Bill Crow: 2032. Perfect. Thank you all very much. Appreciate it.
Darrell Crate: Thank you, Bill. Really appreciate the effort. And appreciate the direct questions, because it’s – I think it’s the only way it kind of shows the scaffolding of what we’re trying to build. So really appreciate it. So it’s helpful to have these conversations for investors.
Bill Crow: Yes. Thank you.
Operator: Thank you. [Operator Instructions] Our next question is from Merrill Ross of Compass Point Research & Trading. Please proceed with your question.
Merrill Ross: Hi. Here we go. Okay.
Darrell Crate: Hi, Merrill.
Merrill Ross: How are you? I’m wondering how the desire to cover the dividend might be prioritizing your acquisitions versus development pipeline, which might be to the detriment of long-term value creation. So you see what I’m saying, acquiring buildings that have been a higher CapEx budget, because they’re older, right? They’re not the new builds that you would build. It has implications for the total return and value creation longer than ’24 months out. So how is the Board looking at the acquisition pipeline, and steering you towards covering the dividend?
Darrell Crate: Yes. It’s a really, really good question. And it’s exactly the conversation that we had at this Board meeting and it’s a conversation we’re having nonstop here, because by deciding to pay a dividend that’s above the payout ratio. You do find yourself in taking on a little bit more leverage, although tiny, that can probably take $0.01, or so of recurring growth away from the future. That said, I think we don’t – we do see the dividend issue as a short-term issue to the degree to which we didn’t think believe it’s a short-term issue in the context of our business, we would reassess it. But as we look at the opportunity to — our development pipeline is very strong, even where the stock price is today, that leads to some very accretive acquisitions.
And we believe that sustaining the dividend for this – today that the short-term benefit, of sustaining the dividend just for consistency, is a marginal detractor from future earnings. But given the opportunities that are in front of us, we think those well outweigh it. So, we are feeling optimistic about being in growth mode, not only from new state and local buildings with escalators to working closely with some government adjacent partners. That can be substantial to the additional development that we’re doing, we are very bullish on government real estate as we’re going forward. As compared to, if you look 18, 20 months ago, we were in a time where I think it was like batten down the hatches, Real estate is uncertain. Interest rates were ratcheting up – and that was a time of – you got to circle the wagons and you see every – not just us.
But every real estate business fund was in flux. We find ourselves, again, feeling very optimistic about where we’re going, what we’re pursuing, we’re finding opportunity, and that makes us, again, feel okay, feel that the dividend is a short-term problem. If we didn’t have that kind of optimism for, where the business is going and what our definable edge in the government space can create. We wouldn’t we wouldn’t be so close with our dividend. We do need to get our dividend in line with our cash flow. And as long as their friends of the Fed don’t take the yield curve up another couple of hundred basis points. We feel like things are very in reach for that to be – that we’re on a very good path. But you’re exactly right. And I think the buildings we’re buying also, I just want to make the same.
We’re very cognizant of what the CapEx burden is, when we do the analysis and I know we’ve had some conversations with you just about portfolio segmentation, and the CapEx that’s required and what’s required by the government. That’s all in our underwriting as we think about saying something, is accretive or not accretive when we announce it.
Merrill Ross: Yes. I think that some guidance regarding the contractual CapEx might help clarify kind of the board’s tolerance to overpay the dividend just, because then we would know more about why they’re making that decision?
Darrell Crate: Yes. No that makes sense. That makes sense to me.
Merrill Ross: Yes, just incremental influence…
Darrell Crate: Yes. And at the end of the day, we are – I mean, just being very direct, I mean we think about CAD just as much as we think about FFO accretion, when we’re looking at deals. And there are some deals that are strong in FFO, but have some capital requirements upon acquisition for us to get to a place where over the life of the lease, we’re operating in the building in a way that is – that optimizes the return that we can achieve. And for some of those buildings, it just means we’ve got to find a bigger pipeline. We’ve got to find buildings that don’t have that problem today. And that’s why, when I say if we can get our stock price to $13, $14, there’s plenty of opportunities that we’re covering that were either eliminating, because of CAD or eliminating, because of some challenge that is brought on by a lower stock price as a REIT is harder.
