STAG Industrial Inc (STAG) 2011 Q2 法說會逐字稿

Greetings, and welcome to the second-quarter results for STAG Industrial. It is now my pleasure to introduce your host, Brad Shepherd, Vice President of Investor Relations at STAG Industrial. Thank you. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the second-quarter 2011 results. In addition to the press release distributed yesterday, we also have filed the second quarter Form 10-Q with the SEC and posted an unaudited quarterly supplemental information presentation on the Company's website at www.stagindustrial.com under the Investor Relations section.

On today's call, the Company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to STAG Industrial's revenues and operating income, financial guidance, as well as non-GAAP financial measures, such as trends from operations, core FFO, and EBITDA.

We encourage all our listeners to review the more detailed discussion related to this forward-looking statements contained in the Company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the Company's website. As a reminder, forward-looking statements represent management's estimates as of today, Tuesday, August 16, 2011. STAG Industrial will strive to keep its stockholders as current as possible on company matters, but assumes no obligation to update any forward-looking statements in the future.

On today's call, we'll hear from Ben Butcher, the Chief Executive Officer of STAG Industrial; and Greg Sullivan, the Chief Financial Officer for STAG Industrial. Now, I will turn the call over to Ben.

Thank you, Brad. Good morning, everybody, and welcome to our first quarterly earnings call for STAG Industrial as a public company. That this is our first call is reflective of the truly big news of the second quarter, our becoming a public company on April 20, 2011. We are pleased to have you join us and look forward to telling you about our first two and a half months as a public company and some significant positive subsequent events.

Presenting today, in addition to myself, will be Greg Sullivan, our CFO, who will review our second-quarter financial and operating results. Also in the room with us today are Steve Mecke, our Chief Operating Officer; Dave King, our Director of Real Estate Operations; and Bill Crooker, our Chief Accounting Officer. They will be available to answer questions specific to their areas of focus.

For those of you who are not familiar with STAG Industrial, it is a self-administered and self-managed real estate company focused on the acquisition, ownership, and management of single-tenant industrial properties throughout the United States. The Company now with a staff of 27 has a full-service platform that incorporates acquisitions, asset management, credits, accounting, and legal functions.

As I mentioned before, on April 20, the Company closed on its initial public offering, which consolidated its predecessor and three other funds owned by affiliates of the Company. At the time of the IPO, the Company owned 91 industrial properties totaling 13.9 million square feet. Today, two and a half months later, the Company owns 96 industrial properties totaling 15.1 million square feet.

Stag's primary investment strategy is to acquire individual Class B, single-tenant industrial properties predominantly in secondary markets throughout the United States in the $5 million to $25 million range. We focus on these markets because we believe secondary markets tend to have less occupancy and rental rate volatility, and less buyer competition compared with primary markets. Further, we believe that due to observed market inefficiencies, our focus on these properties will allow us to generate returns for our stockholders, but are attractive in light of the associated risks when compared to other real estate portfolios.

STAG, its management, its employees are fully engaged in the execution of our business plan and are encouraged by our progress and achievements to date. In particular, we've made marked success in both the leasing of our current portfolio and in making acquisitions to grow the portfolio.

Let me first mention highlights from the Company's leasing activities during the second quarter. The Company has renewed 100% of the leases scheduled to expire the second quarter of 2011. This continues our 100% tenant retention experience for 2011 expirations through the end of the quarter. In addition, the Company has signed leases scheduled to expire in 2011 totaling 152,232 square feet. We have signed an additional -- a lease for an additional 18,000 square feet on an existing vacant space.

As a result of our second quarter activity, which includes acquisitions, overall occupancy increased by 30 basis points to 91%. Our leasing activity has continued to be strong since the end of the second quarter, highlighted by -- the Company has renewed four leases scheduled to expire in the third and fourth quarters totaling 130,499 square feet; and we have leased an additional 20,800 square feet of vacant space to an existing tenant, as well as 72,594 square feet of vacant space to two new tenants to our portfolio.

We've achieved these solid results in the quarter without having to offer significant rent concessions or by incurring large capital expenditures. Indeed, both of these metrics are aligned with or better than our expectations. I believe our leasing results indicate that leasing trends generally across the country and specifically in our end markets are improving and will contribute to the Company's growth and stability.

Turning now to acquisitions. During the second quarter, we completed the acquisition of three properties, including an acquisition by an affiliate of the Company prior to the formation transactions, totaling approximately 484,200 square feet for a combined all-in purchase price of approximately $22.8 million.

Since June 30, we've completed the acquisition of three additional properties totaling approximately 926,240 square feet for a combined all-in purchase price of approximately $36.8 million. The Company is also under contract to acquire four properties comprising approximately 1.2 million square feet for a combined purchase price of approximately $32.9 million. There are some significant conditions to (inaudible) that have not been satisfied, so there can be no assurance that these transactions will be consummated.

Including these yet-to-be consummated transactions, we believe that we will shortly acquire approximately $92 million in assets since the start of the second quarter, especially noteworthy when compared to the size of our existing portfolio. These acquisitions will have been accomplished at an average cap rate in excess of 9%, in line with our expectations.

In addition, our pipeline of deals being considered for acquisition that meet our investment criteria is approximately $470 million. It is being reviewed and considered by our acquisition teams currently. These acquisitions and our pipeline indicate, I believe, that the Company's plans for growth are both realistic and achievable. I will now turn it over to Greg to review our second-quarter financial results.

Thanks, Ben, and good morning, everyone. As Ben mentioned, we had a very solid first quarter as a public company. To recap our IPO, the offering included 13,750,000 shares of common stock at $13 per share. The underwriters also closed on their overallotment option to purchase an additional 2,062,500 shares at the IPO price, resulting in total growth proceeds to the Company of approximately $206 million. All of these shares were sold by the Company and there were no selling stockholders.

Approximately $165 million of the proceeds have been used for debt repayment and related costs, with the balance to be used for general corporate purposes, including acquisitions of additional properties. As part of the IPO process, the Company completed its extension of the maturity date to October 31, 2013 of approximately $141 million of secured debt and the Company closed on $100 million secured revolving credit facility with an accordion feature to expand to $200 million under certain conditions. As of June 30, 2011, the LP unitholders in the Company represented approximately 33%.

Because we went public on April 20, our financial results for the Company represent only a partial quarter. Unlike many of the recent IPOs, our roll-up entities were not under common control, so our predecessor pre-IPO entity was only a portion of our now consolidated entity and not representative of our current activities. As a result, the comparative financial results like those required to be presented in our 10-Q are not particularly indicative of our full portfolio's performance.

We view cash NOI and core FFO as the key financial metrics for our business. The Company generated $9.6 million of cash NOI and $5 million of core FFO. Our measure of core FFO excludes $3.7 million of non-recurring formation costs resulting from our IPO process and $300,000 of acquisition costs, which are a customary adjustment to core FFO.

We've also excluded the mark to market on interest rate swaps in our core FFO metric. Prior to the IPO, our various private funds had not elected hedge accounting, and as a now public company, our quarterly mark to market on our interest rate swaps runs through our income statement. This treatment is in contrast to most REITs, so we felt it more representative to eliminate this non-cash adjustment, which was a gain this quarter, as part of core FFO.

We have also excluded the above and below market lease amortization that resulted from the purchased accounting required by our IPO process. As the majority of our properties were subject to purchased accounting and not included in our predecessor, we have an unusually large proportion of non-cash amortization related to above and below market leases in our rental income. Because of this, we felt it more representative to eliminate this non-cash adjustment as part of our core FFO.

Our balance sheet continues to be strong and flexible. We have no debt coming due in the next 24 months, our debt to adjusted EBITDA was 6.2 times at quarter end, and our cash interest coverage was 2.8 times, which excludes non-cash deferred financing fees.

Our adjusted EBIT has the same adjustments as our core FFO to create a more representative metric. We will aggressively seek to take advantage of today's low interest rate environment through the extension of duration of our debt where appropriate. In particular, the $140 million loan with Anglo Irish Bank will be a focus. This loan is being sold as part of the sale of the entire Anglo US loan book, which is around $9 billion.

As of June 30, 2011, there were no outstanding amounts due under the Company's $100 million revolving credit facility and there was availability of $47 million based on the current collateral pool. As of June 30, the Company's cash balance was around $13 million. We currently have capacity on our balance sheet to buy over $100 million of additional properties without having to rely on the equity markets.

Our same-store occupancy was stable at 90.5%, up 10 basis points from the previous quarter. Our positive leasing spread in the second quarter was 4.7% on a cash basis and 6.1% on a GAAP basis. The rent mark on a year-to-date basis was up 3.3% on a cash basis and 4.1% on a GAAP basis. Our large tenant size, over 160,000 square feet, tends to increase tenant retention and together with the single-tenant nature of our business limits CapEx cost.

We experienced modest CapEx costs for leases signed in the second quarter, $1.46 per square foot. As a result of our sizable positive investment spread on acquisitions, our high occupancy and our modest CapEx costs, we were able to pay a high dividend and our dividend coverage, which is currently 93.5% of our core FFO, should continue to improve with our acquisition activities.

So to summarize, the key drivers to our business are maintaining occupancy through high tenant retention, rolling rents at attractive spreads, and continuing to execute on the acquisition front at attractive positive investment spreads. On all those fronts, we performed quite well. We've also created a detailed supplemental information package to help everyone better understand our quarterly results, which is now available on our website, StagIndustrial.com. And with that, I will now turn it back over to Ben.

Thank you, Greg. We're optimistic about the future for our Company and for our assets. The Company believes that the ongoing measured improvement in the economy will continue to positively impact our own portfolio in terms of occupancy levels and rental rates. The lack of [spectral] development generally across the country and specifically in our markets will enhance our performance on these important metrics.

In addition, our acquisition activity is expected to provide significant enhancement to our overall financial performance. The continuation of low interest rates combined with the availability of attractively priced properties for acquisition will allow the Company to continue to deploy capital on an attractive spread-investing basis.

We'll now open up the floor to questions.

(Operator Instructions). Sheila McGrath, KBW.

Yes, good morning. Ben, I was wondering if you could talk about the pipeline and your expectations for volumes for the balance of the year and cap rates that you're expecting.

(technical difficulty) continues to have the parameters that we've expected -- kind of 9 plus cap rates, and the deal parameters that we've found throughout the exercise of this investment thesis prior to being a public company and as a public company. So we're seeing good opportunities and good velocity of acquisitions going forward.

Okay. I'm sorry, Ben. Part of the beginning of your answer was kind of muted. So what's the volume level that you (multiple speakers) --?

Our expectations are in line with what we've discussed previously, probably 125 for the year, maybe a little bit more.

Okay. And then what level do you feel comfortable with in terms of before you feel you have to go to the equity market again?

Well, as Greg described, we have about $100 million of capacity, given the current capital structure of the Company and availability under various and sundry facilities that we have in place. When we've finished acquiring those assets, we'll be looking at various capital-raising sources and we intend to maintain our leverage metrics. So that will run out as anticipated.

Sheila, it is Greg. The other thing to keep in mind is that to the extent we do transactions that include LP units, that will obviously improve our purchasing power as well.

Okay. And last question. Actually, Greg, could you give us a little bit more detail on the 141? And should we expect when you report earnings going forward that you're going to add back just that unusual IPO adjustment? How should we think about how you're reporting FFO going forward?

Sure. Yes. Let me start the answer, and then Bill Crooker, our Chief Accounting Officer, can fill in as well. Just to give people a little background on this point, unlike many of the other IPOs that have happened recently where there was common control and all the entities were rolled up, we did not have common control. So we ended up having to go through purchase accounting for basically 60% of our asset base.

And as a result of that, we had to recalculate the above/below market rent on that large portion of the portfolio. And if you look at our financial statements, you'll see that that was about $870,000 for the 72 partial day quarter. And if you take that ratio, the 91 divided by 72, which you need to do to all the numbers to make them on a quarterly basis, that's $1.01 million. So it's a very large number.

We thought it was really not representative of our results because of the fact that we had this unusual situation where so much of that purchase accounting adjustment had to run through our P&L. So we tried to once again be transparent to give you the number, but try to come up with the most representative view of what we call core FFO that we can for our various investors.

Bill, I don't know whether you want to add to that.

Hi, Sheila. It's Bill Crooker, and yes, about 50% of our portfolio is mark to market and the purchase accounting and 40% came over on carryover basis. And there's an unusual large portion of portfolio, the 60%, that represented above-market leases, whereas on our total portfolio, we're about 1% to 2% above market. So that's the reason why we felt that we should back up the adjustment for our core FFO.

Okay, thank you.

Yes. I'd like to just add, Sheila, and for the other people on the phone, we tried to add a little more supplemental information this morning. So if you look on our supplemental package on page 8, we gave some more details about capital expenditures and non-cash items. So, you know, when people get a chance, if they want to take a look at that. If you have any questions after the call, obviously, we'd be glad to answer them.

Jamie Feldman, Bank of America Merrill Lynch.

Great. Thank you and good morning. Can you talk a little bit about what the expiration schedule looks like for the rest of 2011 based on the leasing you've done since the end of the quarter and then also lease expiration risk in both '11 and '12, tenants you're concerned about?

Sure. Hi, Jamie, this is Dave King.

Hi, Dave.

For the remainder of '11, we have two leases rolling, one of about 79,000 feet, which is actually vacated; the other, 55,000 feet, which we already have a tenant lined up to take that space. It'll be a replacement tenant, not a renewal.

For 2012, we've addressed many of those renewals already and are sort of working through documentation. So we're hopeful that the outcomes will be positive in all cases, as they have been to date in '11, but we still are a good 18 months away from some of those events.

Jamie, this is Ben. I think that our expectations are that we -- our portfolio will revert back to a more normalized tenant retention. There was low generated retention experience across the industrial landscape during the so-called global financial crisis. And then as you've seen in 2011 and the latter part of 2010, we saw very high tenant retentions; indeed, our experience through the second quarter was 100% tenant retention. I think we will drop back to what we believe over the long run is a more normalized number of 80%, 85% tenant retention.

Jamie, it's Greg. The only other thing I'd add is that as you've seen in the past with our business, we typically don't get active engagement with the tenants typically more than three to six months out. So some of the expirations in 2012, we don't have a lot of visibility to those now, and it's just the way that the leasing process works with them.

Okay. And then can you also talk a little bit more about what you've seen recently? Obviously the stock market is a little bit more cautious here than I think a lot of the commentary we've been hearing on the conference calls. Just what are your most recent conversations with clients? And how are people thinking about their businesses for the next year?

I think in contrast to the general market, we've seen an uptick in decisiveness from tenants and prospects -- willing to sign longer term leases, willing to engage in negotiations perhaps earlier than normal. So I think there may be a perception of value and that the lease rates and occupancies will be picking up. So there's some tendency to lock in now.

And there also has been, again, during the global financial crisis, there was a long period of indecision and undecisiveness. And sort of we're seeing some of the, if you will, snap back from that, where people are back to looking at business on a longer term basis. And as Dave said, looking at longer lease terms and being more decisive in how they think about their business will operate.

Okay. And then have you seen any change in pricing given since the S&P downgrade and given what the ten-year has done? Our understanding in talking to brokers is that there's been a little bit of a movement back into core and super quality assets, there is a little bit more fear in the market. Or how are you seeing that play out for your acquisition pipeline?

Well, I think we've seen -- since the IPO, which is obviously a fairly short period of time, we've probably seen cap rates move in slightly during that time frame. I think that the most recent things that you're describing now would probably tend to reverse that trend but -- a little bit. But we're not seeing -- our competition for buying assets is typically not organized capital. It's one-off buyers, local buyers, etc., who rely on the bank markets for debt. And I don't think there has been -- obviously this most recent turmoil, it's not long-lived at this point. I don't think there's been a whole -- we haven't seen a whole lot of change to date in the markets.

Okay. All right. Thank you.

Thank you, Jamie.

Thanks.

(Operator Instructions). Dave Rodgers, RBC Capital Markets.

Hey, good morning, guys. As a follow-up to maybe Jamie's question from the reverse side, the market turmoil, the data points that we've seen out of the economy over the last six or eight weeks, has that changed the seller profile? Have banks become more aggressive perhaps in forcing sales? Are there becoming increasing avenues for that? Or how has that changed, if you can you give us some color?

Yes. I don't think we have seen specifically bank engendered decisions to sell. I think much like the -- again, during the global financial crisis, much like the fact that tenants were indecisive, sellers were indecisive, or were perhaps not believing that they could sell their assets. So I think we've seen -- in the last 6 to 9 months, we've seen assets coming to market in greater amounts and greater velocity of the type that we seek to buy.

I also think that we're seeing less generally marketed, because the sellers who are coming to -- the pent-up demand to dispose, if you will, or pent-up supply of assets to buy, more and more they're coming to market on a -- what we term a limited marketing basis, where they're showing the assets to three to four known buyers. They're not going out to 100 or 200 possible buyers. They're taking it to a list of people they know can and are likely to perform. And so we're seeing a tremendous amount of the assets that are coming potentially to us or even coming on that limited marketing basis or, in some instances, on -- even prior to that one-off basis, on a non-marketed basis, because of our reputation for transactional certainty and being interested in buying specifically these types of assets.

And then maybe for Greg or for Dave, you've done very well on your leasing spreads here early on and that's been great to see. You did talk about 60% of your leases, I think, being above market that are existing in the portfolio. You've had good success renewing activity. Do we expect to see here in the second half of '11 or '12 where you might actually see greater pressure on those rents? Or is this a longer-term phenomenon and we're going to continue to see growth out of the spread, per your comments earlier, Greg?

Yes, it's a good question. It's interesting. Part of it is sort of the mix. If you look at our predecessor entity, which as we said before is about 40% of the enterprise, most of the rents in that portfolio are well below market. So if you look at our total portfolio, we're only above market by roughly 2% to 3%. So I think part of the challenge is that when you look at that above/below adjustment for core FFO, it is not representative of the entire portfolio.

And the other thing to keep in mind is that because of the very high tenant retention, these tenants tend not to move unless they have some really valid and significant business purpose for moving. The renewal rates are much stickier than a vacant space rate. A vacant space rate is -- there's no standard from which their expectations are based. On a renewal, most of the tenants expect their lease rates to be the same or perhaps slightly higher than they were in the prior lease. So that impacts, I think, some of our realizations.

Dave, do you have any thoughts on that?

The inertia involved with a tenant renewing is pretty significant in terms of move costs, so they're generally willing to trade rate for those costs.

I think we view -- although from quarter to quarter, there may be vagaries in rent marks and rents up and down, -- we obviously had -- the second quarter was a -- and year to date have been strong -- there'll be quarters where we, like other companies, will have roll downs. So we see the long-term trends -- in part to the things we've been talking about in this discussion, we see the long-term trend as slightly upwards.

Yes. The other thing to keep in mind, Dave, is that there's a lot of components to what drives that rental uplift figure. So I think it's important to keep in mind that we're not, for example, offering large CapEx packages. You see potentially some other people in this space offering a larger CapEx package; so you either increase occupancy or manage down that rent roll-down. But I think if you look at the combination of our relatively modest CapEx and that rental uplift, it's a pretty positive metric.

Last question for me is how many transactions or maybe by percent of what you're looking at in the backlog for future acquisitions today would potentially be OP unit transaction?

We have a number of discussions ongoing now with folks who have expressed interest in taking OP units. We have -- until we've consummated one, I'm a little reluctant to suggest what that will be. We certainly have ongoing discussions, but I think it's really going to be experienced as we move through the process.

Okay, great. Thanks for the color, guys.

Sure.

(Operator Instructions). Sheila McGrath, KBW.

Quick question on G&A, Greg. It was a little over $2 million for the stub quarter. I'm just wondering if you could give us any guidance. Were there any one-time items in there?

There actually were. I appreciate you asking that. If you take the number that's in our financial statements, which is $2.6 million, once you adjust for the day count, which should be $10.4 million on an annualized basis, I would say that that is on the high side. And the reason for that is there's a couple hundred thousand dollars of certain non-recurring expenses. For example, we had about $130,000, which was the initial fee for the New York Stock Exchange. There were some formation-related one-time costs. And so if you back that out, you get back down to a figure that's about $9.4 million. That's in line with the kind of numbers that we talked about in the process of the road show.

Thank you.

Thank you. Ladies and gentlemen, we have no time for further questions. At this time, I'd like to turn the floor back to Mr. Ben Butcher for closing remarks.

Thank you all very much for joining us on this earnings call. We appreciate your interest. And for our investors out there, we appreciate your support and investment in the Company. We -- as I mentioned in the initial remarks, we're very satisfied and excited about our performance to date. We think the future is very bright for continued execution of our strategy and we look forward to continuing to perform for all of you. Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.