STAG Industrial Inc (STAG) 2014 Q3 法說會逐字稿

Greetings, and welcome to the STAG Industrial third quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Brad Shepherd, Vice President, Investor Relations for STAG Industrial. Thank you. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2014 results. In addition to the press release distributed yesterday, we have 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 of our listeners to review the more detailed discussion related to these 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, Friday, October 31, 2014. STAG Industrial will strive to keep its stockholders as current as possible on the Company matters, but assumes no obligation to update any forward-looking statements in the future. On today's call, we will hear from Ben Butcher, our Chief Executive Officer; and Geoff Jervis, our Chief Financial Officer. I will now turn the call over to Ben.

Thank you, Brad. Good morning, everybody, and welcome to the third quarter earnings call for STAG Industrial. We are pleased to have you join us, and look forward to telling you about our third quarter results, and some significant subsequent events.

Presenting today in addition to myself, will be Geoff Jervis, our Chief Financial Officer, who will review our third quarter financial results and balance sheet metrics. Also with me 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.

We are happy to report that the third quarter of 2014 was an outstanding period of achievement for the Company. Our record acquisitions volumes, high tenant retention, and strong leasing results are all testimony to the quality of the STAG team, and the strength of our investment thesis. During the third quarter, the Company acquired 18 buildings for the combined all-in purchase price of approximately $174 million. The 3.5 million square feet acquired in the quarter increased the Company's portfolio square footage to 44.5 million square feet, a 26% increase in square footage from the end of the third quarter last year.

The 18 buildings acquired in the quarter are located in nine different states, have a weighted average lease term remaining of 4.5 years, and represent diverse industries including air freight and logistics, industrial equipment, food and beverage and building materials. With these third quarter acquisitions, the Company has purchased a total of 31 buildings for a combined of all-in purchase price of $293 million through September 30 of this year. Subsequent to the end of the quarter, the Company closed on a 98,000 square foot property for approximately $6 million. In addition, the Company has entered into contracts to acquire 12 additional industrial buildings for a combined purchase price of approximately $148 million.

Our pipeline of deals that meets our investment criteria continues to be robust, with approximately $1.4 billion of potential acquisitions including small portfolio deals being reviewed and considered by our acquisition teams. Inclusive of contract, executed but not yet closed, the Company has closed or committed to close a total of over $425 million of acquisitions. This significantly exceeds the Company's full year 2014 target of $325 million to $350 million of acquisitions, an amount that represented approximately 25% growth in the Company's December 31, 2013 real estate cost basis.

The Company produced strong leasing activity in the third quarter as well. It is well worth noting that our leasing activity for the first three quarters of 2014 exceeded any of the Company's previous full year totals. In the quarter, the Company signed six lease renewals, totaling approximately 470,000 square feet. Two of the renewed leases were set to expire in 2014, while four are set to expire in 2015. In the quarter, we also executed new and expansion leases of approximately 74,000 square feet.

Occupancy increased during the quarter from 94.5% to 94.8%. Our tenant retention in the quarter was 98.5%. This number, like the 35% tenant retention in the second quarter, can be considered a small simple anomaly. We expect tenant retention for the fourth quarter to come in at approximately 70%, resulting in 70% retention rate for the year. For the expired leases that did renew in the quarter, we continue to see the cyclically larger increases in rental rates. Cash rollover rent rates changes was a positive 3.5% for the five retained leases, and 7.5% on a GAAP basis

The general outlook for industrial real estate leasing continues to be very positive. The most important factor in this continues to be the general economic improvement in the US. The other positive factors that have been evident for the past years, such as growth in e-commerce, shortening and fattening of supply chains, and the onshoring of manufacturing will continue to drive demand for industrial space over the coming years. This is reflected in national net absorption, which was in excess of 60 million square feet for the quarter, actually an increase from the already strong prior quarters.

Supply remains largely a non-issue, especially across the broad range of markets in which we are most active. This will lead to further reductions of availability, and improving conditions for landlords to achieve rate growth, and backfill vacancy at more profit when it occurs. We continue to expect to see cyclical rent growth above long-term norms for the next three to four years. This was evidenced again in this quarter's rollover rent increases.

Yesterday, we announced that the Board of Directors had approved a 2.38% increase in the Company's annual common stock dividend, from the current annual rate of $1.32 per share to $1.35 per share commencing with the January 2015 dividend. The increase equates to a dividend of $0.1125 per common share per month, and represents annual distribution rate of 6.5%, based on quarter ending share price of $20.71. This is a third dividend increase since the beginning of 2014, evidence of our stated policy to review our dividend and payout ratio on a regular basis. In an effort to continue its policy of sharing our growth in per share financial metrics with the Company's shareholders, the Board anticipates evaluating its dividend policy periodically.

There was one significant announcement in the quarter, concerning our management team. Kathryn Arnone, our General Counsel, has decided to step down from that position as of the end of 2014. Kathryn's long service and value to the Company has been both notable and exemplary. We'll miss her.

We simultaneously announced that Jeffrey Sullivan will join the Company this fall, and will assume the General Counsel role on January 1, 2015 (sic - see press release "2015"). Jeff is likely familiar to many of you following his long career as external counsel in the REIT industry, most recently at Hunton & Williams. We are fortunate to have Jeff join STAG, and have the opportunity to effect a seamless transition at the General Counsel position.

I will now turn it over to Geoff Jervis to review our third quarter financial results, and provide some further detail on our balance sheet and liquidity.

Thank you, Ben, and good morning, everyone. As Ben mentioned, the third quarter continued our trend of progress on the operational, acquisition, and capital raising fronts. From an operational standpoint, starting with property level cash flow, our portfolio-wide cash net operating income or cash NOI was $35.4 million for the quarter, representing growth of 5% from the second quarter, and 21% when compared to the third quarter of last year.

Compared to Q2, cash NOI was impacted by portfolio acquisitions, as the $82 million of acquisitions from Q2 were owned for the full period, and the $174 million of Q3 acquisitions contributed for a partial period. The impact of these acquisitions equated to a $1.5 million increase to cash NOI. It is important to note that due to the fact that our $174 million of acquisitions during the third quarter were heavily weighted to the end of the quarter, and more precisely to the end of September. The full impact of these acquisitions to cash NOI in Q3 was muted. Had all of the period's acquisitions occurred on the first day of the quarter, the impact to cash NOI would have been approximately an additional $3 million.

On a corporate level, adjusted funds from operation or AFFO was $20.4 million for the quarter, a decrease of 1% from the second quarter, and an increase of 16% when compared to the third quarter of 2013, adjustments from cash NOI to AFFO, our corporate level cash G&A, interest expense, recurring capital expenditures and renewal TIs and LCs. Looking at the sequential quarter decrease in AFFO, it is important to note that the aforementioned acquisition timing had a similar impact to AFFO, as it did to cash NOI. Had the period acquisitions been on the first day of the quarter, AFFO would have grown by approximately $2.5 million, converting the reported 1% decline in sequential quarter AFFO to an 11% increase.

On the dividend front, we paid monthly dividends of $0.11 per share during the quarter, and yesterday we raised the monthly dividend by 2.3% to $0.1125 per share commencing with the January 2015 dividend. From a coverage standpoint, our third quarter dividends represented a 94% AFFO pay out ratio, a level above our target of 90%. We feel comfortable with this level, due to the fact that on a run rate basis, factoring in a full quarter of cash NOI and AFFO contribution from our third quarter acquisitions, our AFFO payout ratio would have been below our stated target of 90%.

Looking at expenses, G&A was $5.7 million in the quarter, in line with last quarter when one-time items are adjusted for. We estimate that G&A will be similar in the fourth quarter, and will be approximately $28 million for 2015. These levels will allow us to materially grow the platform, to originate, underwrite and close increasing volumes of acquisitions, as well as to grow our leasing and asset management capabilities, as the function continues to grow in importance at STAG. At the same time, these G&A levels continued our trend of reducing G&A as a percentage of cash NOI, with the long-term goal of having G&A be approximately 10% of cash NOI.

Looking at the balance sheet, immediately available liquidity was $204 million at quarter end, comprised of $5 million of cash, and $199 million of immediate availability on our unsecured credit facility and unsecured term loans. In addition, we had $45 million of additional capacity on our unsecured facilities for future acquisitions. Furthermore, subsequent to quarter end, we raised a $128 million of net proceeds from an overnight marketed equity offering, and we funded our previously announced $50 million 10-year private placement, adding significant additional liquidity to our balance sheet. As we stand today, we have liquidity in the form of cash and available credit sufficient to fund our estimation of acquisitions for all of next year.

As Ben mentioned, our acquisition and leasing activity were strong for the period. We acquired $174 million of industrial properties during the quarter, bringing year-to-date acquisitions to $292 million. Overall, we expect to close in excess of $425 million of transactions in 2014. As we look forward, we feel confident that given our $1.4 billion pipeline we will be able to acquire at a pace to meet our 25% acquisition target in 2015, equating to $450 million to $475 million of calendar year acquisitions. It is important to note that, in the past our acquisitions are typically heavily weighted to the second half of the calendar year, and the first quarter is generally a very slow quarter for us.

From the leasing standpoint, we signed 10 leases for 629,000 square feet during the third quarter, bringing year-to-date leasing activity to 3.2 million square feet. Our leasing efforts were aided by quarterly retention rates of 98.5%, bringing year-to-date retention levels to 69%. We anticipate that our retention rates will be in the 70% range for the remainder of 2014, and the calendar year 2015.

We sustained our low leverage balance sheet in the quarter with net debt to total real estate cost basis running at 40%, and net debt to annualized adjusted EBITDA of 5.5 times at quarter end. Factoring in our post quarter end equity raise and the full cash NOI impact of Q3 acquisitions, our leverage levels are even more conservative, with debt to real estate cost basis at 32%, and net debt to annualized adjusted EBITDA of 4.1 times. We continue to strive for a defensive balance sheet, and believe that we have achieved our goal to date, as evidenced by Fitch's, October 2, affirmation of our investment grade rating, and positive outlook assessment.

Looking at our liabilities at quarter end, we had approximately $678 million of debt outstanding with a weighted average remaining term of 4.5 years, and a weighted average interest rate of 3.62%. During the second quarter, we executed a $100 million private placement of senior unsecured notes consisting of $50 million10 year notes, and $50 million of 12 year notes. Borrowings under both tranches of notes bear interest at a fixed interest rate of 4.98%. The 12-year notes were issued on July 1, and the 10 year notes were issued on October 1.

As we look to manage our liabilities, we will strive to design a low cost, efficient capital structure that matches asset duration, develops multiple credit relationships, minimizes any single calendar year maturity concentration, and manages interest rate risk. Currently, the debt capital markets have a myriad of attractive opportunities for a growth company like STAG, and we will likely take advantage of some of those opportunities in the near-term.

On the equity front, the ATM program was again effective in the third quarter, as we issued 2 million shares of common stock at an average price of $22.32 per share, receiving net proceeds of approximately $44 million. While these levels of ATM issuance are in line with our projections, due to the record volume of acquisitions in Q3, and the volume anticipated in Q4, and Q1 2015, we required equity in excess of what the ATM could reasonably provide. And on October 15, we executed an overnight marketed follow-on offering raising $128 million of net proceeds. Going forward, we expect to continue to primarily rely on the ATM for our equity needs, and if we require extraordinary equity, we will look to discrete equity offerings like the one we executed on the 15th.

In summary, a very good quarter. Success on the left-hand side of the balance sheet with record acquisitions and strong retention and leasing activity, as well as success on the right-hand side of the balance sheet with opportunistic debt and equity capital raises.

And with that, I will turn it back over to Ben.

Thank you, Geoff. As I mentioned at the outset of this call, it was a very successful quarter for the Company, with excellent leasing results and record acquisition achievement. As we progress through this, the fourth quarter, we are highly confident that 2014 will be a record year for both our leasing and acquisition activities. This is continued testimony to the high quality and dedication of the STAG team.

We believe that our investment thesis, and proprietary modeling allows us to consistently identify assets, across both secondary and primary markets, that can be acquired on advantageous relative values. General market conditions remain favorable with relatively low and stable interest rates, continuous strengthening in the leasing market, and a relatively stable cap rate environment. Thus, we continue to be optimistic about the future for our Company, for our owned assets, and for our investment thesis.

We believe that the low leverage business plan to aggregate and operate a large portfolio of granular and diversified industrial assets will produce strong and predictable returns for our shareholders. Our record third quarter operational results provide continued validation of our relative value investment thesis, and broad market investment focus. Going forward, we will maintain our investment discipline, and focus on shareholder returns.

We thank you for your continued support.

Thank you.

(Operator Instructions)

Blaine Heck, Wells Fargo

Hello. Good morning. Just wanted to talk about the CapEx on leases signed during the quarter. I was surprised to see the concessions increase so much on renewals. Was there anything anomalous in the quarter that made TIs come up so much?

Blaine, thanks so much for the question. I am going to turn it over to Dave. It's actually a pretty simple explanation.

Yes, the rise in the quarter is due primarily, almost entirely to one building in Minnesota which is about 175,000 feet. We are extending the lease on that to a 15-year lease, and adding on about 25,000 square feet of new space, which is the cost you see reflected there.

So it is actually new construction, although it got carried in a tenant improvement category because of the way the lease was structured. It's actually new square footage.

Okay. Makes sense. Looking at your expirations in the fourth quarter and in 2015, the expiring rents seem low relative to the average in your portfolio. Do you think that is an indication that we should be able to see some pretty good growth on rental spreads going forward?

I think, when we have talked about it, generally speaking, underlying market conditions are pretty strong, and projected to remained strong. So I think we expect to see above long-term average rental achievements. That is probably a small mix -- reality if you will, the low numbers -- so but that -- because it's a mix issue, you are not going to see a huge jump up, you are going to see normalized jump-ups I think. Dave, do you have any other?

No, that's accurate. We should see positive numbers, but we are just not quite sure how large they will be.

Okay. Fair enough.

But it's mixed, Blaine.

Okay. You have some build-to-suit properties in acquisition pipe. Can you just talk about the process behind finding those opportunities, and whether there's sort of any premium pricing for those assets versus your typical pipe?

Yes, I mean, as I think as we have explained over the past couple quarters where we discussed our interest in the build-to-suit, take-out business. Again, we are operating here on a takeouts. So CFO, and a stop of the tenants. -- The building is done and the tenant is in place, has accepted the building. We are not simply going out and say we want to buy build-to-suits. We are using the same risk assessment model that we use in identifying existing buildings, to identify assets where we think we can buy good relative value. Obviously this is a little different situation, longer leases than our normal exercise.

Cleaner cash flow, obviously little or no CapEx is expected in the near-term. But we are buying the same combination of factors that might lead us an asset we believe to be mispriced in the general market in the existing property market. The same sort of thing here, whether it's a slightly misunderstand credit, a secondary market where maybe some of the other build-to-suit takeout guys don't want to operate. And those kind of -- those same kind of factors lead to, we think, some mispricing which allows us to buy assets, again at good relative value. So we have three deals under contract, and we like all the deals on a relative value basis.

Yes. Okay. Great. And then, Geoff, adjusting for the recent equity raise, you said you are about 4.1 times net debt to adjusted EBITDA. I think that goes up to about 5.1 and when including preferreds, and you are at mid-30%s debt to total assets, which probably goes up to mid-40%s, including preferreds. You obviously have a great acquisition pipeline with $250 million under contract or LOI. So my question is what are your target ranges, or where are you comfortable with those debt metrics?

I think that we are targeting debt to a cost basis of around 40% in the long-term. And then with respect to debt to EBITDA, somewhere in the 5.5 range, between 5 and 5.5.

Okay.

You might note also that we also have for the year, we have raised approximately $300 million of equity, which obviously at that 60/40 ratio would support $500 million of acquisitions. So we have slightly over equitized in advance of first quarter -- excuse me -- our fourth quarter acquisition activity.

Sure. Thanks. That's helpful Thanks.

Thank you. Sheila McGRath. Evercore Partners.

Ben, third quarter was an very active acquisition quarter. Should we assume some of fourth quarter kind of got pulled early, or is fourth quarter shaping up to be equally as active as third quarter?

I hesitate to brag, but I think fourth quarter will likely be more active. Between what we have under contract and under LOI, and our pipeline, we are shaping up for -- as always for us, the fourth quarter is likely to be our most active quarter of the year. I don't think that there was necessarily, may have pulled from the fourth quarter into the third quarter. There may have been a couple things that shifted from the second quarter into the third quarter. But, no -- it's -- the pattern of acquisitions for us, which is building through the year with a big fourth quarter, is likely to occur again -- very likely to occur again this year.

And I forgot to say, good morning, Sheila. Nice to talk to you.

Good morning. (Laughter). Also on next year, you have about 10%, or I think it said 10.7% of leases rolling. I am just wondering if you have any visibility at this point of known move-outs?

I think -- I am going to turn this over to Dave, but I think globally, we are looking at a continuation of sort of 70% of tenant retention and good leasing markets. But I am going to let Dave respond, I am going to turn it over to Dave King.

Sheila, the leases we have clarity on and just sort of the known vacates, that amounts to about 1 million square feet. We have got about 30% of those covered through LOIs. So we expect to resolve those situations pretty quickly, and the remainder are in a marketing phase. We have gotten strong reactions to the two largest of those, which is amount to about 550,000 feet. So we are confident and optimistic.

Okay, great. And last question, I think Geoff, you mentioned $28 million of G&A next year. I wonder if that includes or anticipates additional hiring? And if so, are you hiring for the acquisitions, asset management, where is new hiring?

I mean, I will turn this over to Ben to give you the details, but yes it absolutely does. It accounts for a not insignificant increase in the staffing levels here.

So we are looking at a head count increase next year, over the course of the year, probably a little bit pre-weighted. So early in the year, of as much as 25% increase in head count, and circa, from circa 50 to mid-60s head count. That is primarily the -- we have talked about this before. We think about our Business as having fixed cost components and variable cost component. The variable cost components are those that have to increase with portfolio.

So we are seeing increases on the variable cost components as we grow our portfolio. But we are also building out, continue to build out as we have indicated previously, on what we call the fixed cost components. Primarily the acquisition and analysis teams that allow us to identify and acquire these ever-increasing amounts of assets. So we are increasing the size of the machine on that side of the table, if you will.

Do you have to add additional office space then?

No. We, our move less than a little less than a year ago was contemplated the growth we are undertaking now. So we are in good shape with office space here in Boston.

Okay. Thank you.

Thank you. Andrew Schaffer, Sandler O'Neill.

Given you that you are on pace to deliver consecutive quarters of record-breaking acquisition volumes, I was wondering if you could talk about the controls in place, in order to making sure the transition of these assets into your portfolio go smoothly from a back office, as well as operations standpoint?

Well, I think we have -- I'll turn it over to Dave, and he can talk a little bit deeper about the process. But one of the things we talked about frequently on these calls is STAG's love of, or adherence to people, systems and processes. In order to do the kind of volume that we do in individual transactions, you can't have sort of ad hoc reactions to new assets coming in. We are highly systemized and process-oriented, so I don't know if you want to add to that, Dave?

Not really. We -- most of the organization is involved and aware of acquisitions prior to their closing. So we are well-prepared when we do take assets on, and we do transition those assets amongst groups. And we, as Ben said, we are highly systemized, so we don't see it as an issue.

It really is a -- if you will, a machine. The assets are identified, acquired. And then through that process, they are they're moving through the asset management lease administration process. So they are -- it's a very smooth and orderly process.

So essentially, you are saying you are more pre-emptive in the hiring, versus hiring retroactively?

Yes, we are hiring in advance of need. We are building our asset management function in response not only to the existing portfolio, but the projected increases in portfolio size. I mean, we have made a commitment to grow as long as we can grow accretively and maintain our pricing discipline, 25% a year. Obviously, that is a -- that means head count is going to increase in those variable cost component.

We will reiterate the fact that variable pieces of machine, in order to scale the portfolio are relatively de minimus amount of increase in G&A. So if we decided to hold steady our acquisition size, our acquisition team, and supporting analytic teams, our G&A increases on an annual basis would be significantly lower than the phase we are now, which is building our --the capacity of the machine to acquire assets, et cetera. Which is what we have been increasing our G&A on that side, as well.

Okay. And then finally, of the assets under contract, can you be a little bit more granular, and tell us if any of those are West Coast or California-based?

We have assets under contract and under LOI in California. So we are expecting that if all other things are equal, we will be able to -- we will announce at some point in the fourth quarter that we have acquired a California asset. Obviously, there are things in the contract that have to be satisfied, so until that happens, that won't happen. But we have hired an outward facing acquisition person who is covering the Southwest and California, experienced in those markets. So the application of both feet on the ground, a face in the market is turning up opportunities in those markets.

Okay, great. That's it for me. Thanks.

Thank you. Dave Rodgers, Baird.

Good morning. I don't -- obviously you talk about-leasing as much, I think we talk a lot about renewals. But as you think about new leasing, backfilling some of the vacancies, the challenges in same-store NOI over the last six quarters have been a lot of retention-related. We have known that. As you move forward, how do you feel either, Dave or Ben, about what is happening on the new leasing front to backfill this space? And then what can happen with NOI going forward?

I will turn it over to Dave and we are stopping at the very top on a macro basis. Occupancy is up 92% plus nationally. We feel very strongly that our portfolio is more attractive than the broad or national portfolio. So we are feeling very good about the leasing market. And, Dave?

Yes, the -- I would say the prospect for warehouse and manufacturing facilities remain strong and continues to improve. The struggles we have had in the asset class that we are no longer buying, flex call center assets, are the ones where marketing vacancy is more difficult. So our occupancy in that sector of the portfolio is 79%. So that is where we are having more difficulty. I would say, our main line of business, the warehouse and manufacturing buildings are quite strong.

And then we are systematically over time, with that -- the flex call center portion of our portfolio will be eliminated through opportunistic pruning of the portfolio in that area. The other thing I would tell you is that, there is frequently a glib response that primary markets are better than secondary markets. I think there has been a lot of recognition over the last couple of years, that maybe that is not always true.

And actually, if you look at the data on the long-term basis, it is actually not true. But what's going on today, in supply side of the supply/demand equation is the primary markets are getting spec development and the secondary markets are. So actually, you might -- that might suggest the secondary market will outperform over the coming years, because they have a little better supply/demand balance than the primary markets. So we are very optimistic about our assets, which again are primarily in secondary markets.

As you -- Ben, as you think about reducing exposure to call centers or flex space, and you are growing at a much faster clip now, than we have seen, how do you maintain or maybe not how do you maintain, but do you see any risk to the risk parameters you have put in place around exposure to city, state, industry, et cetera? And any of those get violated in a short period of time, and then get brought back in to check over time, or are those pretty firm guidelines, and how do you see that in the near-term?

I think of the guidelines that we have promulgated, the one that is the most challenged over time is trying to maintain low expirations per year, the 10% expirations per year that we have had recently. I think the norm going forward is going to be more like 15% a year. And that has been stated as our maximum, but it's going to be in the coming years, that will be -- that may be challenged.

Our ability to continue to diversify geographically and by industry et cetera, our experience has been, we set these standards, and it hasn't been that difficult to maintain our discipline on diversity, diversification. It's a -- and we have success, success breeds success. So when we -- for instance, in North Carolina, we buy a bunch of assets. The other brokers in the market, say, hey gee, STAG is buying a lot of stuff. They will start bringing us more stuff, and it builds on itself. But we have be able to, again by building our teams and being a more active presence in across broad markets, able to maintain that geographic and industrial diversification.

And as you may have noted on the tenant credit diversification, we continue to drive that down. We are now sub 15% on our top 10 tenants, which I think is a pretty admirable distribution of credit risk versus almost anybody -- any of our peers, certainly in the industrial market. Or -- I won't even get into the net lease market. But there is a lot more concentration out there among other people.

Yes, agreed. Last question, maybe for Geoff. On the expenses at the property level in the quarter, it seem like the NOI margin, I guess, if you will, in the quarter was much higher, driving a higher performance out of NOI. Was there anything unusual from an expense standpoint, taxes or otherwise in the NOI line in this quarter, which we think about going forward, or is that a pretty good rate?

No, I think that's -- this quarter was a pretty ordinary quarter, and you can extrapolate safely from here.

All right. Thanks.

Thank you. Mitch Germain, JPM Securities.

Good afternoon. I was just curious, Ben, I guess, Geoff and you referenced some investment in some deal personnel. Is the increase in the deal pipeline this quarter, is that seasonality or is that just the efforts of adding some additional personnel to the team?

I think it's a combination of a few factors, probably the most important of which is 2.5, 3 years ago, we had two -- basically had two outward facing people. Now we have six outward-facing people.

So the people that are out on the street, or on the phones with the brokers, et cetera, has tripled over the last few years. So we would expect the pipeline to be bigger because of that. I also think that just the -- our exposure in the market, we have now bought, Steve, how many assets we bought since our inception, 300 or something?

Yes.

We have deployed a lot of capital and across really broad markets. And so brokers out there that are touching these kinds of assets, not only investment sales brokers, but leasing brokers know that the way to earn a commission is to -- you lease a 200,000-foot warehouse in the secondary market, you might want to ask STAG whether they want to buy it.

So I think we are just better known in the market, our access to capital has been demonstrated. Our transactional certainty has been validated over, again these 300 plus transactions. And that transactional certainty, we have talked about it a lot, but it's an important component in being selected by sellers and their brokers as to who they want to transact with. Failed real estate transactions are very painful for small sellers. And we have done, I think a very good job of demonstrating that we will do what we say we are going to do.

Great. Last question for me. You have got this goal of growing the asset base about 25% a year, in terms of how you approach the amount of acquisition volumes. How many more years do you have where -- until you feel like, maybe you are capped out in terms of how much you can grow?

Well, we look at it on a five-year basis, and recognize that the 5th year would be a big acquisition year. Steve who runs our acquisition efforts, shudders a little bit, when we run those numbers out. (Laughter). But I think it is important to look at it on the basis of the potential pool of assets to buy.

I mean, we are talking about a potential asset pool of hundreds of billions of dollars. And even if we ran out those numbers to where Steve had to buy $1 billion dollars of assets in a year, the total assets in our portfolio are still relatively small amount of what we view as our potential target pool. We would certainly still be less than 10% of that pool. I think we can continue to maintain our relative value focus and buy assets opportunistically along the way, and grow in that level for certainly at least five years, and which is sort of where we have been done our modeling thus far.

Great. That's it for me. Thanks.

Right now, it's over $1.4 billion. The pipeline three years ago was probably $1 billion less than that.

Yes, it's impressive. Thank you.

Thank you. Our next question comes from the line of Tom Lesnick with Capital One Securities.

Good morning, and thanks for taking my questions. Sorry if I missed this earlier, but of the three build-to-suits on a dollar amount, how much of $147.7 million is that?

All right. It's $31 million.

$31 million. Okay. And then again, sorry if I missed this, but in terms of timing of the stuff that's under contract or LOI, should we expect acquisitions in 4Q to be heavily weighted backend weighted within the quarter similar to 3Q?

Yes, it is -- traditionally in the fourth quarter, things sort of ramp up towards the end of the year, as sellers decide they want to try to get something in right at the end of the quarter, before the end of the year. So I would expect it there would be a similar activity in the last month of the year. We will start ramping up in November, but you will see it in December.

In many aspects of the world and in nature, if you have space, it tends to get filled. As Steve said, most of those transactions are supposed to be closed in the fourth quarter, and people tend to take up the available time. So, yes, a lot of late in the year stuff. The build-to-suits are, as you probably surmised, or not -- they have to be built. So they are not closings this year, they are closings mostly in the second quarter next year.

Great. Thanks.

(Operator Instructions)

Neil Malkin, RBC Capital Market.

Hello, gentlemen. Good morning. You run a pretty sophisticated operating platform, similar to the Markowitz portfolio, diversification theory. I am just wondering, how do you balance the low operating leverage with the low financial leverage? I wonder, how do you look at -- are you too low levered? And just given the fact that your operating platform has low leverage, and rent growth appears to be tracking better than expected? Do you worry that maybe you are diluting current owners, and not rewarding the current owners with better than expected growth?

We are -- thank you, Neil, for we actually think we are very sophisticated, and we have a sophisticated model. And I am not saying that facetiously. We have spent a lot of time, we -- this model was created on the back of an envelope in 2002, 2003, and it has been continuously refined, and it continues to be refined over time.

We are definitely disciples of cash flow. So our model is -- we are doing our very best to divine the cash flow that can be derived from owning an asset, and buying the ones that we can buy and get relative value in the marketplace.

So the -- the choices on the leverage, are choices that we think will optimize our cost of capital going forward. Obviously, there is a balance between equity costs of capital and debt costs of capital. But it is our belief, and upon advice from others external to us, but basically, we decided to make a firm analysis that we think that the course we are on is optimal in terms of the long-term cost of capital to our platform, and ultimately, the long-term return to our shareholders.

And Neil, I would just add to that, that I think part of what is a bit frustrating to some who look at the Company, is that we really are a growth, and not only a growth but high growth company. And I think a traditional REIT investor is not necessarily used to seeing a trajectory of growth like this. And so, when we have forward spend on G&A and we believe we are doing some next-level thinking here with respect to the next 12 to 24 months of acquisitions and leasing needs, and so, we feel like we are investing in the future. And so the comment about rewarding existing shareholders, we believe that we are doing the best we can to reward existing shareholders, and to make sure we continue to reward those shareholders over the near, medium and long-term.

Okay. Thanks a lot.

Thank you. Mr. Butcher, there are no further questions at this time. I would like to turn the floor back to you for any closing and final remarks.

Well, thank you very much, and thank you, everybody, for joining us today on the call. And while we had the opportunity to review what was a very successful quarter for the Company, the Company has great momentum. The team has continued to improve and be refined, as well as the model refined. We are very optimistic about the fourth quarter and beyond, and we appreciate your confidence in us. And those of you who own shares in us, your support of us, and we thank you for your participation.

Thank you. This concludes today 's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.