STAG Industrial Inc (STAG) 2014 Q4 法說會逐字稿

Greetings. Welcome to the STAG Industrial fourth-quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brad Shepherd. Thank you Mr. Shepherd. You may now begin.

Thank you. Welcome to STAG Industrial's conference call covering the year-end and fourth-quarter 2014 results. In addition to the press release distributed this morning, 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, Monday, February 23, 2015. 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 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 fourth-quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our fourth-quarter results, our full-year results, and some significant subsequent events. Presenting today in addition to me will be Geoff Jervis, our Chief Financial Officer, who will present the bulk of the financial and operational data. My remarks will focus on the larger issues and opportunities. 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. I also invite you to visit our new and improved website at www.STAGIndustrial.com.

Both the fourth quarter and full-year 2014 were very successful periods for STAG. There were solid achievements in all facets of our business, both external and internal. Our accretive acquisition targets were again exceeded, $136 million in the quarter and $429 million of acquisitions for the year, 31% growth.

Internal growth metrics, tenant retention and a positive leasing spreads were also strong for both periods, approximately 70% tenant retention and positive rent spreads in the mid to upper single digits. Our capital market efforts on both the debt and equity fronts continue to drive our overall cost of capital lower and to increase our balance sheet flexibility.

I believe that the fundamental reasons for our Company's success to date can be traced to some pretty simple realities. First, the STAG team of bright, curious, and energetic individuals is second to none in their execution of our investment strategy and operational mandates. Second, we have a supportive and knowledgeable board that understands the significant opportunities available to our company and it empowers us to take full advantage of those opportunities. Third, our differentiated investment strategy allows us to operate broadly across the industrial landscape to acquire assets that we believe offer above market long-term returns, the elusive alpha of investing.

Before I turn it over to Geoff, I would like to note the departure of Kathryn Arnone from STAG. On behalf of myself and the board, I would like to thank Kathyrn, who resigned in December, for her many years of devoted service to the Company. Her wisdom, wit and wealth of knowledge were essential elements of our growth and success, both as a private and a public company.

Geoff will now review our fourth-quarter financial results, our full-year results and provide some detail on our balance sheet and liquidity.

Thank you, Ben, and good morning everyone. As Ben mentioned, both the fourth quarter and the full-year 2014 were very strong periods for STAG, not only in terms of operating and financial performance, but also in terms of platform development.

From an operational standpoint, starting with property level cash flow, our portfolio-wide net operating income, or NOI, was $41 million for the fourth quarter, representing growth of 17% from the third quarter. For the full-year, NOI grew by 24% to $142 million.

It is important to note that given the growth orientation of our business model, metrics such as NOI can be misleading as they do not fully account for the income associated with the period's acquisitions. Had we owned the fourth-quarter acquisitions for the full period, our run rate NOI would have been $160 million.

On a corporate level, core funds from operations, or core FFO, were $24 million for the fourth quarter, representing growth of 14% for the third quarter. For the same period, core FFO per share was flat as we raised significant equity in the fourth quarter for acquisitions that slipped past year end and a majority of the acquisitions closed in the fourth quarter were closed in the second half of the quarter. For the full-year, core FFO grew by 24% to $84 million and also grew on a per-share basis by 6%.

On the dividend front, at our regular board meeting this past Friday, the Board of Directors authorized a monthly dividend for the second quarter holding our dividend at $0.1125 per share. In 2014, we raised the dividend twice, or 10%, to reflect our growth in distributable cash flow.

From a coverage standpoint, our fourth-quarter dividends represented a 94% AFFO payout 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 NOI contribution from our fourth-quarter acquisitions and the impact of being over-equitized during the period, our AFFO payout ratio would have been in line with our stated target of 90%.

Looking at G&A, in 2014, we redoubled our commitment to sizing up our platform for the next few years of anticipated growth. While there are some variable cost elements necessary to keep pace with the portfolio's baseline growth, predominantly asset management and accounting, these costs are relatively small as our business model benefits from being particularly scalable.

The fixed costs as we refer to them are the cost of the acquisition components of the machine, and these are the primary drivers of G&A growth. In 2014, we added 14 employees with the majority being acquisition oriented. As we look forward, we see the staff growing to 70 employees and 2015 with the incremental hires having the same acquisition orientation.

From a dollar standpoint, we anticipate the G&A in 2015 will be in the $30 million range. As we grow, we anticipate that while G&A will need to continue to grow, G&A as a percentage of NOI will normalize in the range of 10%. We understand that static G&A levels are higher than our peers. However, we are a growth company and as prudent managers, we are required to invest in a platform to service future growth. Investors in STAG have benefited from our external growth as we have found outsized returns through our single-tenant single-asset investment strategy. That said, the strategy is labor-intensive as evidenced by our average acquisition size of only $10 million in 2014. In addition, while our platform and model require higher fixed cost, this dynamic has acted as a constructive barrier to entry for many institutional investors.

Looking at the balance sheet, immediately available liquidity was $455 million at year-end, comprised of $24 million of cash and $430 million of immediate availability on our unsecured facilities. In addition, we had $7 million of additional capacity on these facilities for future acquisitions. Furthermore, subsequent to quarter end, we raised $120 million of net proceeds from the issuance of private placement notes, adding significant additional capacity to our balance sheet. As of today, we have liquidity in the form of cash and available credit sufficient to fund our projected level of acquisitions for all of 2015. Furthermore, we do not have any debt maturities in 2015 and we have less than $30 million maturing debt in all of 2015, 2016, and 2017 combined.

As Ben mentioned, our acquisition and leasing activities were very strong for 2014. We acquired $136 million of industrial properties during the fourth quarter, bringing full-year acquisitions to $429 million. Our beginning of the year target was approximately $350 million, and our actual performance exceeded target by almost 25%.

As we look forward, given our $1.2 billion pipeline, we feel confident that we will be able to meet our 25% growth target for 2015, equating to $450 million of calendar year acquisitions. As of today, we have acquired $34 million of properties and have $133 million under contract or letter of intent.

From a return standpoint, our acquisitions if the fourth quarter had a weighted average cap rate of 8% and we anticipate that acquisitions in 2015 will have similar cap rates.

Our promise to investors is that we will buy good, relative value or assets at prices less than they are worth. We have found that the resulting portfolio we have constructed surprises many investors with respect to its location, physical and credit attributes. We encourage investors to review our supplement, specifically the sections relating to market, building characteristics, and tenant profile.

From a leasing standpoint, 2014 was very strong as we ended the year with portfolio occupancy of 94.9%. Specifically, we signed leases for 6 million square feet, including 4.3 million square feet of renewal leases and 650,000 square feet of new leases.

From a rent standpoint, both cash and GAAP rents grew significantly in 2014 with and cash and GAAP rents increasing by 5% and 9% respectively. Furthermore, our leasing efforts were aided by a fourth-quarter retention rate of 72%, bringing full-year retention levels to 70%. We anticipate that retention rates will be in the 70% range for 2015.

We've spent a lot of time recently discussing same-store NOI at STAG, as STAG's experience over the last several quarters has been flat to negative same-store NOI growth. For a mature, stable portfolio, such results would leave one to conclude that the combination of occupancy and/or rental rates was subpar, especially in light of the positive industrial dynamics in the US economy and the positive leasing environment for warehouse distribution centers. STAG, however, is not a mature, stable company. Quite the opposite. STAG is a young, fast-growing company. Our growth has been consistent with our adding on average 41% to our portfolio every year. Furthermore, the properties that we have acquired have been near 100% occupied. Unfortunately, the market itself is not 100% occupied. In fact, our markets are occupied in the range of 90% to 95%. So, as our portfolio matures, occupancy will decline to a market base level. Historically, STAG has achieved occupancy levels roughly 200 basis points above market but still well below 100%.

So when we look at NOI on a same-store basis, the portfolio continues to add 100% occupied properties while the older vintages of properties are trending down in occupancy to market levels. The result should be significantly declining same-store NOI. However, because our rent growth on renewal and new leases has been strong,, as I mentioned before, we have achieved benign same-store NOI growth in the space of several hundred basis points of occupancy headwind. Therefore, until we stop acquiring at the pace and the profile that we've experienced since IPO, our same-store numbers will not be representative of our leasing performance or comparable to our fellow industrial operating companies who are not growing in the same manner. We have attempted to address the inapplicability of this conventional performance metric by disclosing same-store statistics by vintage, a metric that isolates each year's acquisitions. It is our hope that investors will review our supplemental disclosure and it is our expectation that they will conclude that STAG's performance has been at least as strong as its competitors with respect to occupancy and rental rate experience.

Back to the balance sheet, we remain committed to a lower leverage balance sheet, capitalizing our acquisitions with 40% debt and 60% equity. The result of this design has been very strong credit metrics with net debt to annualized adjusted EBITDA at 4.9 times at year-end. We continue to strive for a defensive balance sheet and believe that we have achieved our goal to date as evidenced by Fitch's January 6 affirmation of our investment grade rating and positive outlook assessment. Going forward, we hope to improve our rating and may increase the number of agencies that rate the Company.

Looking at our liabilities at year-end, we had approximately $686 million of debt outstanding with a weighted average remaining term of 6.9 years and a weighted average interest rate of 4.04%. During the year, we refinanced to modify an issue over $1 billion or 100% of our unsecured debt, the impacts being, one, a continued low overall costs of debt; two, no floating-rate exposure with the exception of our revolver; three, introduction of a new class of liability in the form of private placements; four, a material increase in the number of providers of debt capital to the Company; and five, materially longer-term capital structure.

As we look forward, we will strive to raise liabilities that are appropriate given the profile of our assets and, as of today, we remain committed to our conclusion that the best capital structure includes predominantly unsecured debt.

On the equity front, in order to capitalize our acquisitions, we raised a total of $317 million of equity in 2014 from a combination of our ATM programs and follow-on offering in October. On a weighted average basis, our equity capital was raised to $21.98 per share for 2014. In 2014, we raised more equity than we ultimately needed as two large acquisitions slipped from 2014 to 2015. As a result, we have not issued any equity under our ATM thus far in 2015. We do, however, anticipate opening up the program at some point in the first quarter. Going forward, we expect to continue to primarily rely on the ATM for our equity needs and as may be required, look to use discrete equity offerings like the one we executed in October.

In summary, it was a very good quarter and year for STAG. 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.

As we look forward, we as managers are excited that we are building a best in class platform not only for the opportunities presented to us today but also for the opportunities that we foresee in the future. And with that, I will turn it back to Ben.

Thank you Geoff. With the support of our board, we've committed to building on an improving the STAG machine. This is evidenced by the increased headcount in our outward-facing positions, both acquisitions and asset management, increased investment in internal support functions, people, systems, and processes, and our focus on being able to capture the opportunities that we are certain will present themselves in the coming years.

One of the big focuses for 2015 at STAG will be improving our use of data to better identify opportunities and more confidently predict outcomes from our investment and leasing decisions. On a relative basis, we believe that we are already one of the most sophisticated users of data in the REIT world, utilizing a myriad of both internal and external data sources. Our 2015 data initiative is intended to extend that advantage through improved accessibility to data across the organization, increased flexibility and utilization of existing data sources, and the melding of multiple data sources, both internal and external.

Although I'm a big fan of architecture as an artform, the fundamental beauty of real estate from an investment standpoint is its ability to produce predictable cash flows. We believe that virtually all the parameters that will affect the cash flows to be derived from owning an asset are subject to analysis and projection, that the all too common use of decision rules has no place in real estate investment decisions. We have developed and continue to refine a proprietary risk assessment model that allows us to evaluate and project the cash flows expected from an asset on a real estate risk and credit neutral basis. This allows us to identify, triage, evaluate and acquire assets that we believe will deliver above-average long-term returns, delivering not just growth but accretive growth to our shareholders.

Our fourth-quarter and full-year 2014 operational results provide continued validation of our relative value investment thesis and broad market investment focus. Going forward, we'll maintain our investment discipline and focus on shareholder returns.

By almost any measurement standard, our four years as a public company have been a great success. The tendency might be for us to rest on our laurels or perhaps to try and conform more generally to mainstream REIT practices. Instead, the next iterations of STAG will be continuation and amplification of what has brought us success over the last four years since our IPO. We thank you for your continued support.

(Operator Instructions). Mitch Germain, JMP Securities.

Just a clarification, Geoff, per your comments on -- and I guess Ben as well -- per your comments on increasing staff, last quarter you talked about an increase in personnel, a G&A target of $28 million. Now it's up to $30 million. What changed over the course of the last couple of months?

I think for the most part it's just a continuation of our planning to meet the opportunities and challenges of the next two, three, five years ahead and also recognition that we are best served by homegrown talent. So we have formalized both intern, junior financial, senior financial analyst programs and are populating those lower-level areas. And some of the headcount comes from that, the desire to build a team on a more in-house basis. I think the top line number, rather the dollars associated with it is just a reflection of the building of staff and the building of machines, the building machine out of the systems processes that are inherent in that.

Okay. And then there was a modest decline in the deal pipeline, $1.4 billion to $1.2 billion. Is that just in your view seasonality?

Yes, that's seasonality. You know, the fact that we are -- we've had a couple of deals rollover into the first quarter, so our expectation is we are going to have a very large quarter in terms of closings. But I also think the pipeline is pretty robust for this time of year in terms of things that are coming on in the pipeline so we've had some -- on a weekly deal, I mean we've had a significant number of new deals every week. So, we are pretty encouraged actually by the vibrancy of the market at this time.

Great. And then last one for me, Geoff. I think you talked about maybe broadening out some of your credit rating agency discussions. Can you provide some insight there?

Sure. I think we've mentioned in the past we are obviously very pleased with our relationship with Fitch but ultimately this company is going to be a public unsecured debt issuer and we will need a second rating at some point and so this is just getting ahead of that.

Great. Thanks guys. Good quarter.

Sheila McGrath, Evercore.

Yes, good morning. You did do equity and ATM in fourth quarter and then an OP unit deal in first quarter. So do you think as you stand right now that you are over over-equitized and will probably have more debt financing from the pipeline from now until year-end?

Yes, obviously part of the transaction is in the fourth quarter, both the ATM and the follow,-on our anticipation in the level of closings have included those deals that have slipped into the first quarter. So we were certainly over-equitized sort of at the end of the year. We did about -- on our acquisitions last year were about 75% equity, 25% debt at the margin. And so that clearly is in evidence -- our long-term goal is 60%/40%. So I think we've just somewhat by happenstance -- but by these deals slipping into the first quarter, we ended up being a little over-equitized for the year. Then we have over our core -- since the IPO, there has been a general trend towards lower leverage. I think that we are -- our goal is to stabilize in that 4.5 to 5.5 debt to EBITDA range. We certainly drifted below that on sort of a run rate post-follow-on offering basis. But we are in the releveraging stage. I think we've said in the past we tend to instead of over levering and then delevering through follow-on offerings, we tend to equitize and then relever. So we tend to at least in part consciously so that we will always end up on the right side of the delevering line should there be dislocation in the markets.

Okay, great. And then on acquisitions, there were a couple of acquisitions in fourth quarter that only have about two years left remaining on the lease. Do you have a high degree of certainty on the renewal or could you just explain that?

Boy, were we surprise when we found that out. No, just kidding. Our risk assessment model is designed to analyze all the variables that will affect the cash flows going forward. And remaining in lease term is an input into the model. It is not necessarily the most important input in the model. We conceivably could have a -- that end could be zero.

We assess the markets, the real estate market, the tenant use of the building, their probable retention. All those things go into projection of cash flows going forward. I don't think it's necessary that the particular building has a -- you know, is mission-critical. If you understand that the criticality of that building and the probability on a recent basis whether they are going to stay or not, then you can access that building's likelihood of leasing and at what kind of rate. Steve, do you have something --?

Yes. Just to give you -- the two buildings you are referring to are both sort of, to go back to Ben's comment, they are pretty critical to the tenants' businesses. One of them is their primary distribution facility for the United States. They are really well located. They are both on major highways. The buildings themselves are good, clear heights, strong docking, you know, BSFR, etc. So they meet all the qualifications and it's not just Geoff. When we see buildings in good markets with these kind of characteristics, we are just as happy to go after a short-term deal as a long-term deal so long as the risk-adjusted returns are adequate.

Okay, thank you.

Blaine Heck, Wells Fargo.

So, as the economy has been getting better, it seems like some of your tenants should be becoming more profitable. And you guys have been very upfront in saying that the biggest challenge for retention for you guys usually stems from tenants expanding and growing out of your buildings. So, I just wanted to get some color as to whether you guys think that could be a bigger issue for you guys this year when you look at some of the upcoming expirations in 2015?

YEs, I don't think necessarily growth, sort of granular organic growth at the Company is generally the reason why they leave. They leave more because of building consolidations. They are operating out of three facilities and decide they want to operate out of one, or M&A activity and so they are two organizations combining and they have multiple buildings they want to consolidate or consolidate from one entity's building to the other. It's not so much granular growth, especially true sort of in class B assets where the intensity of use, sort of a more of a square foot user than a cubic foot user.

Dave, do you have anything to add to that?

Yes, most of our sites can accommodate expansion square footage, so we've done a few of those deals in the last year. We do have one instance coming in this quarter where the tenant wanted to expand. We couldn't accommodate it on-site and they ended up building a building. So it goes both ways. We do have the capacity to add to our buildings and we are doing it.

And one more thing, in my remarks, I did say that we did expect in 2015 70% retention. So, that is our expectation for the next 12 months.

Okay, that's helpful. So, you guys have done a great job growing the portfolio over the past few years and getting attractive pricing on acquisitions. Do you think it might be getting closer to the point that it may make sense to sell some groups of properties, just given where we've seen pricing for some portfolio deals out there lately?

You know, it's clearly the in-core pricing, the cobalt pricing, or at least what the market believes those trades were priced at are very attractive. You know I think that the -- we still believe that the individual assets that we are buying are worth more in the portfolio than they are outside the portfolio. We're also still trying to grow. We believe there are advantages to diversification provided by additional growth. There is also some investability issues at the margin with, you know, in terms of liquidity and equity market cap. So, we believe it's still growing makes sense. We don't believe that by and large our assets are worth more outside the portfolio, which is the ultimate litmus test as to whether you sell or not. We do believe that the margin individual assets will be sold to users. We have not made any determinations about -- we have one asset class that's not part of our long-term plan, the single storage flex assets. We're still selling those opportunistically and to users as those opportunities arise. There's some time in the future we may make a more determined attempt to sell those assets, but right now it's more opportunistic. Basically if the dividing line is worth more to somebody else than it is to us, we are a seller.

Okay, that's helpful. Thanks.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thanks. Good morning. Can you talk about -- you had some pretty good leasing spreads in the quarter and in the year. As you look ahead to your lease expiration schedule, do you think we're going to see a similar or better, worse level of leasing spreads?

You know, I think this is on a global response, is broadly across the markets that we operate in, if you look at the projection market rent growth projections that we look at CBRE who provides us most often but if you look at some of the other sources is a pretty general belief that we are going to have cyclical above normal and maybe way above normal rent growth in those markets. So, I think that rent growth is already in place versus our in-place rent. I'm sorry. So, the market rent versus our in-place rents, we believe that by itself would drive increased or rather maintain high leasing spreads. I think the projected growth over the next few years is, frankly, likely to widen those spreads.

Okay. And then thinking about your expirations for 2015, I know you guys don't give guidance, but any large chunks we should be thinking about that might be vacating?

We did give a little guidance in that we expect 2015 to be around that 70% number. You know, the clarity as to what tenants are going to do will develop over the year and we have some clarity now which gives us a belief that -- I mean gives us an understanding that 70% number is achievable. You know, 70%, I mean we are expecting 30% vacancy. That's a couple of million square feet. Right? So, there will be vacancies at $40 million -- 15% of almost $50 million now. We are expecting 30% vacancy on that. So, but the markets that these buildings are going vacant into we are very comfortable about the leasability of our assets and also very comfortable about the strength of our leasing team.

Okay, that's helpful. And then can you talk about the cap rates on I guess two questions. One, the cap rates and pricing on your development -- or your acquisition pipeline. And then related to just your pipeline, as you had new people, how should we think about whether you'll be able to penetrate additional markets better and find even more assets?

I think the story that rings true with me, we put somebody into California and starting in the middle of last year, we close one asset in California and we have another one under agreement now. I don't think we would've had assets in California if we didn't have somebody on the ground there who had prior experience and broker relationships in that market. They just wouldn't have been the level of discovery to identify and acquire that asset -- hopefully none of those assets.

So I think as we continue to add people at the margin, we will be much better at divining for instance, you know, closer relationships with leasing brokers in those markets. So, when a new five or 10 year lease is signed on a building, that leasing broker thinks to call us rather than just the sales broker in that market. So, I believe that we will continue to expand and more importantly increase the depth of our inquiry and acquisitions in markets across the country.

Okay. And then on cap rates, where were they in the quarter and what are you expecting for your pipeline?

So, for the quarter, we were just under 8%. The pipeline has remained a little bit higher than that. But our expectation is -- and this is reflective -- the cap rates that we are seeing today or rather that we are acquiring assets on are reflective of this above normal rent growth broadly across most markets. So we have not changed our investment return requirements. As I've discussed probably far too many times with far too many people, we are really not a cap rate buyer. We're looking at long-term cash flow measurements. And we haven't changed those requirements or those goals in terms of long-term cash flow whether it's a 10-year IRR, levered or unlevered, average cash flow over 10, 15, 20 years. None of those metrics have changed. We just able to apply those at lower cap rates because of expected rent growth, again, broadly across most markets.

Okay, that's helpful. Thank you.

Dave Rodgers, Robert W. Baird.

Ben, with regard to some of the build-to-suits that are in the acquisition pipeline and to the extent that you do more, assuming these have longer-term leases and greater rent bumps, what kind of impact are they going to have on the acquisition cap rates? Even though you just said you don't really focus on those I guess we do, so I'll ask the question.

So, we acquire assets generally and most of our assets are third-party owned as opposed to selling backs or build-to-suit. We are looking at places where we think pricing and efficiency exists. And I think that's ultimately too in our build-to-suit endeavors. And so we're not giving up much in terms of cash flow over a long period of time. And the reality is we are really not giving out much in cap rate. The build-to-suits that we've done have been within probably 25 basis points or so of where our regular acquisition activity is. So, upper 7s% is probably where we are seeing most of that activity.

And then I wanted to ask a little bit with regard to some of the temporary leasing that you've done and just with respect to how that compares to your expirations. You've got a little over 3 million square feet expiring this year. Last year, you did a little over 1 million square feet in temporary leasing. So I guess I'm curious on two fronts. One is how does that really impact your retention this year? And I know it's 70%, but I'm curious if that helps the retention, if that is expected to hurt the retention, especially considering the fact that you probably have 30-year leases this year that are temporarily expiring, just kind of even midyear conventions. So, one on retention. And then two, kind of what does that do to leasing economics in 2015? It sounds like you still expect good spreads but are these helping or hurting on the temporary leasing side?

In terms of the retention, we don't count those month-to-month or short-term leases in that statistic. The nature of a lot of those deals is they will be logistics deals that have a three-month trial period and then a three-year follow-on. So, we try to get tenants in the building and then hope for the best that they continue to win the business.

In regard to spreads, we anticipate spreads to be about where they were this year. You know, we are on an eight-quarter streak of raising cash rents. And based on our 70% renewal rate for longer-term leases, I would think we'll be up for the year.

Okay. And then anywhere I guess in the country from an acquisition perspective that you've kind of pulled back or you are waiting to see a market like Dallas for instance where maybe there is too much supply? Anything out there that's cautioned you a little bit in terms of just being more cautious in deploying capital?

Well, I hope if we do what we say we're going to do is that what will happen in a market like Dallas is that we would moderate our -- and CBRE would moderate their rental growth assumptions based on expectations of supply equally and/or surpassing demand.

I think that we are -- to the extent we have a contrarian event, we are probably going to have -- spend a little more time in Houston because so many other people have put black marks against Houston. And it's likely that we may see some pricing breathing room in Houston and able to acquire some assets in what we think is a great long-term market but has a short-term sort of black mark against it.

Okay, great. Thank you.

(Operator Instructions). Daniel Donlan, Ladenburg Thalmann.

Just looking at some of your markets and the occupancies, some of the weakest occupancies are in markets like Iowa, Kansas, Missouri, Mississippi, Oregon. You know, is there a -- have you guys thought a little bit about moving further and further away from tertiary markets and focusing more on primary or secondary? Or just kind of curious kind of given where your vacancies are, your thought process going forward on acquisitions.

We certainly have trended over time probably towards more primary and secondary markets. 85% of our assets are either in primary or secondary markets. I will note, however, that our occupancy in tertiary markets has been very strong. And it's partially because and I think we've talked before about the demand that our tenants have for space is primary demand. It just happens to be in either primary, secondary, or tertiary markets.

And one of the features of tertiary market demand is it's very sticky because there isn't a lot of other stuff. It's the building that suits them. It's not -- other alternatives are not readily apparent. It's also probably easier to expand buildings in tertiary markets, etc., etc. So we've had a pretty good experience with tenant retention in tertiary markets.

I don't think -- I think we will continue to see a reasoned approach to underwriting. Tertiary market rent growth obviously has not been and will not be as strong. So the tertiary market deals are much more existing economics than they are expectations of rental growth. But I think we'll continue -- I certainly hope we will continue to be rational in our assessments of the market dynamics that underlie the investment in any one of these assets.

Okay. And then as far as your exposure to investment grade rated tenants, it came down year-over-year. Was it just the nature of what you guys acquired with this conscious decision or just kind of curious as to how --?

We are not a -- we don't start here though. We need to buy more investment grade deals. We'll buy investment grade deals if they are priced right for us to acquire them. You know, again, I mentioned the word contrarian. It's not necessarily we are contrarians as much as the opportunities are a result of what other people do. So if everybody is rushing to buy assets in the Inland Empire subject to 15-year leases, we're truly, that's how we're going to be. The opposite side of that coin is that, as I mentioned earlier, is a number of people put black marks against Houston. So, you take some of the bidders out of the market and you are likely to find better transactions there. If you went back five years ago, four years ago, you might have been well served to be looking at Eastern Michigan where nobody wanted to go. And they'll probably -- there certainly were some very good deals struck during that time simply because nobody wanted to go there.

We are somewhere between 15% and 20% primary markets, but in order for us to participate in primary markets where the weighted cash flow has pushed cap rates very low there, we have to do -- we have to look for opportunities where shorter lease term, weaker credit, something that is going on that allows us to acquire that asset at a deep enough discount for us to get our returns.

Okay, understood. And then you sold two assets in the quarter. What were the cap rates on those? And kind of what was the decision process behind letting those things go?

They were both -- they were vacant assets and user sales. So we got economics that we think were essentially equivalent to leasing the building through selling the building. So, if somebody showed up to lease the building, or at least a tenant showed up that wanted to buy the building, on a net basis, I think we sold them for about what we bought them for, roughly what we bought them for. So, we view those as to some extent we are not a loss on underwriting but we underwrite -- say we underwrite those deals at 75% tenant retention. Well, the 1 out of 4 points that came up -- but we are comfortable in how we underwrote them and that was substantiated by the fact that somebody came in and paid what we thought we'd pay for it as a user to use that building.

Okay. And then maybe sticking with that to some degree, what is the longest running vacancy that you guys have in the portfolio from a single tenant industrial perspective? And how do you look at that going forward? Does there become a point in time where you just start to put the asset up for sale? Or just kind of curious (multiple speakers)

Yes, the fundamental analysis continues to be is it worth more to us given our belief in how long it will take to lease, what it will cost to lease, what rent is achievable than it is to somebody else. So, the chances that with our cost of capital that a value-added investor is going to find an asset to be worth more than we think it is with our low cost of capital is not very high. So we tend to sell to users who have obviously -- like the user is a combination of an investor and a space user showing up to acquire a building. It's unlikely we would sell buildings simply to investors who wanted to go out and try and make money. Obviously, those are 25 IRR type people generally. So that's not a likely scenario for us.

I have mentioned, will continue to mention there is a possibility in the future that we may decide to exit that one remaining asset class of the single-story flex building, and that could be where it's simply a strategic dynamic that we decided to exit that business.

Okay. And then just lastly, looking at Page 24, the same-store NOI by vintage, which was very helpful that you guys put this in there, if we are looking at kind of the NOI, in most cases the NOI changes better than the occupancy change, so you are clearly getting rent growth. But when we think about your vintages, when should we start to think about NOI eventually turning positive? You know, the pre-IPO stuff from 2011 it's the only -- well, actually the one from 2012 is slightly positive, but it's the only one that's materially positive on the NOI side. So, is it a kind of a four- to five-year period for (multiple speakers)

Yes. And obviously, the dynamics change, we are in a heavier rent increase market today. And so maybe that means it's going to happen a little faster. But we generally look at, in our modeling, look at somewhere in the range of four to five years.

Okay, all right. Thank you.

Michael Salinsky, RBC Capital Markets.

I think just to go back to Jamie's question, you talked a little bit about pricing on the pipeline at this point. But can you talk about composition just in terms of are you moving a little bit more secondary as opposed to tertiary? And where are you seeing the better opportunities currently?

Certainly, certainly everyone's talked about the nonavailability of assets in primary markets from the competition, etc., so certainly you would think that during this time frame that we might be looking more at secondary markets. Not to sound too much like a broken record, but obviously we are reacting to the opportunities.

I think our advantage in the market is that we built this machine that allows us to look on a real estate credit neutral basis to evaluate assets, whether they are in primary, secondary, or tertiary markets, based on their ability to produce risk-adjusted cash flows over time. I don't have a sense for -- I don't know Steve, do you have any sense right now? It's probably more secondary markets. But --?

It's definitely pushing closer to secondary and primary rather than secondary and tertiary. The portfolio, the composition itself has been pretty static between single deals, small portfolio and build-to-suits. So it's interesting month-to-month, year-to-year how similar the portfolio and the pipeline continues to be even though the size of it has increased.

Yes, I think one thing that's interesting to note is last year's remaining lease term at acquisition was shorter than it has been in the past. I say that and that's a reflection of sort of how people look at things. But our pipeline, or our current pipeline is exceptionally long in terms of remaining lease terms. But again, it's just what's available in the market. Some of that is because sale-leaseback activity seems to have picked up and so we are seeing more sale-leaseback opportunities than we have the past.

That's helpful. Then Geoff, you gave some very good color on the same-store NOI and how that compares versus your peers. But one thing I think would be interesting, how does that same-store NOI compare versus your underwriting on those assets? Is the better rent growth that you're seeing more than offsetting the occupancy loss? How far ahead are you on underwriting versus --?

I think that our tenant retention has been, at least in the last year, has been pretty close to our underwriting. What has been a little bit of a surprise is the rent growth because we had -- in the original acquisition models going back two or three years ago, we were probably underwriting 1.5% rent growth sort of across the board. And certainly rent growth, as is evidenced in our recent spreads, has been stronger than that. So we don't have any data we're going to share at this point, but I do think that we are, probably on occupancy, we are at or around where we thought we'd be based on retention. But certainly, rental growth has been stronger.

Fair enough. Thank you.

Tom Lesnick, Capital One Securities.

Thanks for taking my questions. Most of them have already been answered, but just a couple of housekeeping ones. I guess first on acquisitions, obviously historically properties under contract have been a really good one-month leading indicator for actual closings. And excluding the three build-to-suits, you guys had four properties under contract in January. I was just wondering, now that we are kind of at the end of February, where you guys stand on that in actually getting those closed or if there's anything just kind of process related holding those up?

I guess first on acquisitions, obviously historically properties under contract have been a really good one month leading indicator for actual closings. And excluding the three build to suits, you guys have four properties under contract in January. I was just wondering now that we're kind of at the end of February where you guys stand on that in actually getting those closed or if there's anything just kind of process related holding those up?

I don't think there's anything in particular that's affecting the assets we have under a year's contract. They are proceeding along. There's nothing unusual with regard to prior experience. Things are just tracking along.

Yes, our typical just to give you a sense, our typical timeframe is 30-day due diligence and somewhere between 10 and 15, up to 20 days to close after that. So, the stuff we had under contract in January is probably proceeding along just as normal.

Okay, appreciate that. And then obviously you guys had a nice leasing quarter in 4Q. I was just kind of thinking about how the timing of the new leases actually commence through 2015. How should we be thinking about that timing?

The timing of the leases that were signed in 2014?

(multiple speakers)

Well, really, specifically 4Q. Was it 270,000 square feet or so? How should we be thinking about that actually coming online?

Oh, so occupancy of the new leases signed in the fourth quarter, so I'm going to ask Dave. I'm looking at Dave. He can't see me looking at him but --.

The occupancy of the 14 leases?

Of the 270,000 feet, the new leases.

Most of those have commenced already. We typically will sign a lease and have to do some work and occasionally it will be 60 days on that, usually closer to 30 before the rent will commence.

Okay, that's helpful. And then I guess in terms of progress, I know there's obviously seasonality to the winter months, but as you think about velocity here in 1Q, you guys have had a couple of leases quarter-to-date. What are your expirations for 1Q and where do you guys stand kind of in terms of getting renewals done on this?

The fourth quarter of last year, we certainly had some leases accelerate ahead of schedule, things that otherwise might have been taking care of in the first quarter of this year. So we expect the first quarter to be relatively slow, both in terms of new and renewal leases and in terms of expirations.

We do know of one fairly sizable tenant who I mentioned earlier who's moved to a new building. But other than that, we've got a fairly low volume rolling and we expect retention to be a little bit below the 70% we anticipate for the year. That's backfilled in the second half of the year.

Okay, appreciate that color. Nice year guys.

Thank you. There are no additional questions at this time. I will turn the floor back to management for closing comments.

Thank you. Thank you, everybody, for joining us today. Some very good questions. We obviously appreciate the thought that went into them.

As I mentioned in my remarks earlier, we are very excited and intrigued with the opportunities that are alive for us. We've got some very good things going on internally in terms of improving what I think is already a pretty strong and remarkable risk assessment model, increasing our predictive capacity, increasing our deal sourcing potential, all that sort of stuff. So, we are excited about the future. We are looking forward to a great 2015. And thank you for your attention.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.