STAG Industrial Inc (STAG) 2015 Q1 法說會逐字稿

Greetings and welcome to the STAG Industrial Incorporated First Quarter 2015 Earnings Conference Call. At the time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Brad Shepherd, VP of Investor Relations. Thank you, sir, you may begin.

Thank you. Welcome to STAG Industrial's conference call covering the first quarter 2015 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 the 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, Tuesday, May 5, 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.

Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our first quarter 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.

We are off to a great start in 2015. Acquisitions for the quarter were nearly double our previous quarter high. When combined with subsequent closings and deals under contract, we have closed or committed to close $250 plus million of transactions, significantly more than 50% of our projected total for all of 2015. Leasing activity is also strong, as we have over 2.4 million square feet of leases in active negotiations after a typically light beginning of the year. We have committed to continue building STAG to take advantage of the greater acquisition opportunities that are available in the broad US industrial market.

Our people, systems and processes allow us to evaluate very large number of potential transactions in order to identify those that we can acquire on a sufficiently attractive return basis. Last year, we made written offers on a little over 300 potential transactions in order to be the successful bidder on 43. We fully expect that the engine we have built, as it continues to mature, will allow us to maintain our stated asset growth target of 25% for years to come.

Our differentiated investment strategy and our acquisition evaluation processes are what sets STAG apart from our industrial operating company brethren as an accretive growth company. In our strategy and underlying processes, our focus is on cash flow, both near term and long-term. Fundamentally cash flow is just that, cash flow regardless of where it comes from. What differentiates future streams of cash flows are factors like sustainability, predictability and future growth. With perfect information of what the future may hold, the relative value of various cash flows could be perfectly assessed. Without perfect information, relative values determined by the individual investor and/or the market's perception of what the future may hold. In a generally risk-averse world, these perceptions are generally skewed towards the safety of accepted wisdom, the land of decision rules and CYA decision-making. Almost by definition, this type of investing will in the aggregate underperform investing based on unbiased analysis.

We continue to observe that this use of decision rules and arbitrarily conservative underwriting creates an investing landscape where persisting opportunity can be found, particularly in the fragmented ownership space of industrial assets. We are reminded that sound investing practice is not merely the avoidance of risk, it is the judicious balancing of risk and return.

Our investment thesis is founded on belief and the power of analytics over decision rules. The world is not black and white but shades of gray. Our expertise is evaluating these shades of gray allows us to create a probability weighted series of cash flows for any single tenant industrial asset acquisition opportunity that we find. This allows us to analyze and fairly compare acquisition opportunities in disparate locations with a variety of lease lengths, building attributes, and tenant credits.

In the execution of our investment thesis, we are focused on making sure they were well paid for the risks inherent in individual acquisitions. Simply to put, the expected value of the cash flows to be derived from owning an asset exceeds its acquisition cost by a comfortable margin. Our individual investment decisions are thus fairly straightforward, buy if the transaction meets our threshold return requirements; pass if it does not. However, we are also remained vigilant in maintaining adequate diversification in our aggregated portfolio (inaudible) any of the metrics that would introduce undue correlated risk. This serves to enhance our portfolio of cash flows predictability.

It is our expectation and belief that the continued execution of our investment thesis will produce not only better relative and absolute returns but also highly predictable returns for the benefit of our shareholders.

Geoff will now review our first quarter financial results and provide some detail on our balance sheet and liquidity.

Thank you, Ben, and good morning, everyone. As Ben mentioned, the first quarter was another strong period for STAG. From an operational standpoint starting with property level cash flow, our portfolio-wide net operating income or cash NOI was $41.3 million, representing growth of 30% from the year ago period. On a corporate level, adjusted EBITDA, broadly speaking cash NOI less G&A was $34.5 million, representing growth of 26%. Adjusted EBITDA did not grow at the same pace as cash NOI due to increases in G&A as our G&A expense was $7.5 million dollars in Q1 compared to $5.5 million in the comparable period last year.

As we stated in the past, our G&A growth is an investment in the future acquisition capabilities of our platform and were not required to manage, our current portfolio is necessary to allow us to continue to grow at 25% over the next few years. Specifically, with an acquisition strategy based primarily on single assets, our platform costs are higher. A cost that we firmly believe is warranted given the highly accretive nature of our acquisitions. Putting some numbers around it, last year, we estimated that our acquisition team looked at several thousand transactions. We executed some level of diligence on 3,000 transactions, bid on 300 transactions and closed on 43 buildings with an average size of $10 million. In order to execute and achieve continued growth on such a granular level, we must prudently invest in our platform.

Moving down the ledger, core funds from operations or core FFO, generally speaking, adjusted EBITDA less our cost of debt capital was $23.7 million, representing growth of 25% compared to 2014. On a per share basis, core FFO was $0.35 per share, down $0.01 from last year. This decline was due to the aforementioned G&A increases as well as the fact that we remained on average over-advertised for the quarter. These factors were offset almost entirely by the accretive nature of our acquisitions.

In response to the strong run rate growth rate in income, at our Board meeting yesterday, the Board of Directors authorized a monthly dividend for the 3Q of $0.1150 per share, an increase of 2.2%. For the trailing 12 month period, we have raised the dividend to total of 4.5%. From a coverage standpoint, our 1Q dividends represented 91% AFFO payout ratio, a level in line with our target of 90%.

Looking at the balance sheet, we were very pleased to announce that yesterday, Fitch Ratings upgraded the Company from BBB- to BBB flat. In its press release, Fitch cited our strong leverage metrics, strong liquidity and increasing capital markets access as the primary rationale for the upgrade. A copy of Fitch's press release is on our website.

At the end of the first quarter, our immediately available liquidity was $389 million. 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 of maturing debt in all of 2015, 2016, and 2017 combined.

As Ben mentioned, our acquisition activities have been very strong this year. In 1Q, we acquired $97 million of industrial properties and have closed an additional $21 million subsequent to quarter end. Inclusive of properties under contract and LOI, we have a total of $257 million of acquisitions closed or in process, representing 57% of our entire 2015 target. As we look forward, given our $1.4 billion pipeline, up from $1.2 billion at year-end, we feel confident that we will be able to meet our 25% growth target for 2015 equating to $450 million of calendar year acquisitions.

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

From a leasing standpoint, activity was seasonably slow as we executed 300,000 square feet of new and renewal leases in the quarter with cash rents down 2.4% and GAAP rents essentially flat. In addition to the new and renewal leases, we signed an additional 245,000 square feet of temporary leases. Given that this quarter's activity was a very small sample and based upon our 2.4 million square foot pipeline of leasing LOIs, we anticipate that rents will grow for the remainder of 2015 as they did in 2014.

From a retention standpoint, we retained 64.1% of maturing tenants and continue to expect 70% retention for the full year, in line with our 2014 experience. We spent a lot of time recently discussing same-store cash NOI at STAG as STAG's experience over the last several quarters has been flat to negative same-store cash NOI growth. This quarter, however, our same-store cash NOI was up 1.5%. As we look forward, we expect strong rent flow to materially offset occupancy stabilization. We expect same-store cash NOI to be roughly flat as we have indicated in the past.

Back to the balance sheet. We remain committed to a low leveraged balance sheet, capitalizing on 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 of 5.3 times at quarter end. We continue to strive for a defensive balance sheet and believe that we have achieved our goal today as evidenced by Fitch's upgrade.

Looking at our liabilities at year-end, we have approximately $747 million of debt outstanding with a weighted average remaining term of 7.4 years and a weighted average interest rate of 4.5%. During the quarter, we closed an additional $120 million of long-term fixed rate debt, representing the culmination of our comprehensive refinancing that we embarked on in Q3 of 2014.

On the equity front, in order to capitalize our acquisitions, we've raised a total of $32 million of equity in Q1 from a combination of our ATM programs and the private issuance of OP Units as consideration for one of our acquisitions.

On a weighted average basis, our equity capital was raised at $26.05 per share for the 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 last October.

Before I pass it back to Ben, I want to spend a moment on two separate topics, OP Units and inflation. First OP Units, as you may know, we own our assets in a typical operating structure where the public company owns its assets by a subsidiary partnership. This partnership allows us to exchange partnership ownership units or OP Units for properties on a tax deferred basis for the seller, very similar to a 1031 like kind exchange. The benefit of our ability to offer this tax structure are powerful and we look to increase the use of this technology as another institutional advantage in our non-institutional marketplace.

It is also worth noting that unlike underwritten offerings such as our ATM and traditional follow-on offerings, OP Unit transactions are executed without any third-party fees or discounts, saving the Company between 1.5% and 8% compared to underwritten offerings; yet another benefit of the OP Unit technology.

On the inflation topic, we believe that we have not only a strong posture in the event of inflation but also arguably a superior posture relative to most companies. There are four main drivers of our conclusion. First, our average lease duration is 4.2 years and pursuant to our lease expiration disclosure, on average 15% to 20% of our leases will roll over the next few years. This allows us to capture inflationary increases in rent on a relatively efficient basis. Second, our growth. Since IPO, we have grown our portfolio by over 40% a year. If we continue on this pace or the more measured pace of our targeted 25% growth, we will be acquiring material amounts of assets in the prevailing interest rate and cap rate environments. So if cap rates rise in an inflationary environment, we will effectively be bootstrapping our book of assets up in terms of cap rates. Larger companies or non-growth oriented companies will not be able to benefit from this bootstrapping to the same degree.

Third, we acquire a large majority of our assets at below replacement cost. As such, these assets have built in protection from speculative development that typically comes from rent growth. And finally, our balance sheet. We have long-term liabilities, 7.7 years on average, excluding our revolver and no floating rate exposure other than our revolver. Any of our floating rate term loans have been fully swapped to fixed rates. So as inflation causes increases in the market cost of debt, our entire book of permanent liabilities will be below market from a cost standpoint. The benefit of this below market debt will allow increases in rental revenue to fall more directly to the bottom line. As I stated earlier, we believe that these four drivers position STAG very well in the event of inflation.

In summary, it was a good quarter for STAG, success in the left hand side of the balance sheet with acquisitions and strong retention, as well as success in the right hand side of the balance sheet with opportunistic debt and equity capital raises and the upgrade from the Fitch. As we look forward, we as managers are excited that we're 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'll turn it back to Ben.

Thank you, Geoff. As previously mentioned, and with the support of our Board, we have committed to building on an improving STAG, continuously making improvements in our people, systems and processes. In prior period comments, I've focused primarily on the acquisition side of our business. However, we are equally proud of the continued development and strength of the other side of the house, our operations group that leases and maintains our 250 plus asset portfolio.

During 2014, our operations group was restructured allowing more traditional asset management lines and strengthened through new hires. From a systems standpoint, our 2015 (inaudible) better access to centralized data, improved tools for managing processes and identifying opportunities for revenue and maintenance and enhancement. The tenants in our buildings are our customers. These are our most important relationships. Improved customer service will lead to better tenant retention and other revenue enhancement opportunities such as expansions and build-to-suit opportunities.

Two weeks ago yesterday, we celebrated our fourth anniversary as a public company. During these four years, we have made great strides in accretively growing our Company and solidifying our place among leads in general and more specifically, among the industrial operating companies. Going forward, we'll maintain our investment discipline and focus on shareholder returns. We thank you for your continued support.

I will now turn it back to the operator and open the floor for your questions.

Thank you. At this time, we will conduct a question-and-answer session. (Operator Instructions). Brendan Maiorana, Wells Fargo.

So if we look at kind of the dynamics of your cost of capital over the past -- let's call it this year, share price is down and cap rates are down a little bit. And so, while it looks like your cost of equity relative to FFO or AFFO run rate is maybe around 7% and your cost of debt is obviously much lower than that, weighted average cost of capital is still well below where acquisition cap rates are. But do you think maybe about selling some assets to, one, demonstrate sort of the value of your existing portfolio and realize some of the strong asset prices that are out there and recycle that into acquisitions as opposed to what the strategy has been thus far, which is to issue some equity to help fund the acquisition growth strategy?

That has not been -- I think we said this before, as I think that we look at our assets within our portfolio and the value to us within that portfolio. We'll sell an asset if we believe that it's worth more outside the portfolio than inside the portfolio and we don't believe that it's generally the case. Despite the strong activity in the private markets, we continue to believe that to be the case. Certainly our cost of equity with the decline in the share price since January has gone up. We're still very, very accretive to the margin and acquiring assets. And we believe there also continues to be a benefit that has accrued to us from size and things like our scalability and eventual reduction of our G&A load as a percentage of NOI, certainly investability, the larger company -- larger float allows the some of the larger investors who may not participate at the date to participate. So although it's something we look at, it's not something that we have based on our evaluation is deemed as good course of action for us at this time.

Probably for Geoff, so lease terms were down or they were low, I think they were 3.3 years and I think it's the first time you guys have offered the term. I think you've mentioned in your script, 4.2 years is your average lease term. Anything -- and then it also look like your temporary leases were higher, at least the amount was higher this quarter. So anything in terms of the short duration of the leases and the higher proportion of temporary leases this quarter or should we see that normalize as we get later this year?

I would say that the -- as is generally or [primarily] the case in our quarter-to-quarter activity, it's a small sample. So we bought three deals in the first quarter, so that the average is skewed by the fact that it's just a small sample. I still think that you'll see as buy, generally speaking, an average of the remaining lease term across our acquisition activity over a longer period of time will be in excess of our average for the existing portfolio. So the existing portfolio of 4.2 years, I think over a longer period of time, you might expect this to have something in the five to six year range remaining lease term at acquisition.

Temporary leasing number is a -- again small sample anomaly. First quarter is always very light in terms of leasing for us. Dave -- I'm talking because Dave King who is here who can talk and will talk is suffering from the head cold and some people say he sounds like Barry White, so maybe I should let him talk. But I know David and his team are very successful in terms of the activity on deals. Deals (inaudible) square feet of leases today. So there's a lot of activity going on it has and will continue to result in leasing activity. It must show up here always.

Not particularly.

So last one, I don't know this could be for Ben or Dave, too. About a dollar a square foot TIs and leasing commissions in the quarter and last quarter is about $0.50. What do you think is normalized for that number as we think about just long-term?

Since inception, we've averaged about $1.20 per foot and that is inclusive some office deals that are loaded into that number. Dollar foot is we generally consider a new rental rate or a new deal capital contribution. We do a lot of our renewal deals without tenant improvements and often without brokers. So I think dollars is a fair number as run rate.

Tom Lesnick, Capital One Securities.

I really appreciate the additional disclosure and the supplement this quarter, but I just wanted to ask quickly on leases on the lease expiration table as always you provided quarterly detail out for the rest of 2015. I'm just curious given kind of the ramp ups you're going to see here in 2Q and through the rest of the year, given the seasonality in the first quarter, where do you guys stand today really on renewing the bulk of the space for the rest of the year?

I think you'll see quarter-to-quarter variability in retention rates. Next quarter is, as you will see -- as you've seen from the slides is a very low amount of turnover and so we've given that low amount of turnover no move-outs and we have a significant one will likely produce a low retention rate. We still believe for the year that blending the four quarters together, we're going to see retention somewhere around 70%. Obviously, if next quarter is low and this quarter was a little bit low 70%, we're expecting very good retention over the remainder of the year. The 2.4 million square feet that was alluded to earlier in lease activity, a significant portion of that is renewal activity, which makes up deals that are rolling later in the year.

And then again, going back to the additional disclosure, on the same-store NOI by vintage page, which I know you guys started providing last quarter, I thought you broke out a bucket of flex/office buildings acquired in 2012. I was just wondering if you could provide some context behind that?

Yes, they were provided in 2012 as part of our portfolio purchase of -- they were actually assets that were bought by a predecessor company back in 2006 and 2007. So they kind of don't feel like acquisitions as much to ask as we -- the experience of buying was back during the period where we were buying but actually they came as part of a portfolio and so it's not assets we're buying today.

Our view on flex assets is we'll opportunistically liquidate that portfolio over time. That means that when we sign a new lease, get some type of new commitment from a tenant, those assets will be sold or the counterpoint to that is if there is an asset that I guess we're deploying but we don't think it's leasable, and there is not an immediate user sale, we may choose to liquidate those assets. But for the most part, we're going to liquidated them at least to investors.

I would just add with respect to the format of the reporting. We added that line of flex/office so that the data on page 22 for quarterly cash NOI in the -- by vintage chart puts to the traditional same-store analysis on the page before. So you can see how the two relate to each other.

James Feldman, Bank of America.

So I guess if you could just start out talking about as you guys have been expanding the platform, hiring more people, I think you had said in the past, you were looking to get into more regions or at least dig deeper into some of the regions. Can you talk about where you stand and maybe the West Coast and some of the other parts of the country that you haven't had as many people.

Yes, so -- over the past three years, we've gone up from two to four to now seven outward facing acquisition people. The last two acquisition people brought on Board, one was brought on Board midyear last year and she is focused on California and Arizona and in the most recent acquisition person bought on Board is focused on Texas. These are markets where we have probably been a little under-represented, it's been in part because they're obviously very -- tend to be low return competitive markets, but is also because we haven't spend as much time if you will digging through the sand on the beach to find the gems that lie for us to buy.

So we've already seen success in California. We're looking to continue to see success in acquisitions in California and in Arizona because of having somebody focused specifically on that market. We expect the same thing to happen in Texas and we expect to -- although we already own assets in Texas, we expect to increase our asset acquisition activity in that market. So correspondingly as we added those people that means that some of the other people who are covering Texas and California and Arizona before are now more focused on the markets that they have been left with or focused -- pointed to focus on while these people -- the new people are focused on these other markets.

So we're diving deeper, we're doing more offers -- unsolicited offers, where we know for instance, a new lease has been signed, we'll go in and make an offer on an asset that may not have been brought to market and we are having a fair amount of success in doing that.

And then should we expect to see more of a G&A ramp going forward or do you feel like you (multiple speakers)?

We had obviously quite a lot of G&A ramp over the last two years as we've made some conscious decisions to build the machine to be able to continue to buy the granular assets that are so accretive to us. I think that most of the pieces are in place today, so the benefits of the scalability that we've talked about in our operations will now start to have a greater impact, the portfolio continues to grow and as we normalize our G&A, our expectation is to normalize down around 10% of NOI in around -- over the next five years. We certainly have because of our increases in G&A over last two years, that decline from the mid teens down to 10% has been slowed down, again that will get back on course going forward.

And I would just add, Jamie, that for the year, -- we've given the guidance that we'll have $30 million, the quarter was $7.5 million and to put a little more precise estimate on it, $7.5 million for each quarter of this year is a pretty good estimate.

And then just in terms of the assets you're buying and what you're seeing out there, I know you guys starting (inaudible) last year started to talk a little bit more about how your portfolio quality stacks up to other REITs, other peers. What are you guys seeing in terms of quality of the assets you're buying and then just interested in maybe some of the larger portfolios that are out there?

So I think that we're -- in some degrees we're reacting to what's -- where we can find the best returns. But we are finding, as we have gone down to buying little shorter lease terms over the last few years as -- sort of reflection of again opportunities, but also the opportunity to buy probably a little bit better quality assets with shorter lease terms to take advantage of the expected fairly significant rises in run rates over the next few years as demand continues to exceed supply. So I think that the asset quality has probably continued to improve the -- overall portfolio qualities continue to improve.

Then any interesting portfolios, are you seeing the (multiple speakers)?

We have an interest, unfortunately they won't sell us to at that prices that we can make the returns we want to make. I think that these private market valuations and this was referred to earlier are very strong and we're seeing and we reviewed one portfolio recently that had 42 assets in it that has been aggregated by some and we decided on a quality basis, we are interested in 10 of the assets and on a price basis, we would buy zero of the 42 assets if we evaluated based on what these people had aggregated the assets.

So as we look around some of these portfolios and (technical difficulty) how many assets might have been aggregated on these portfolios but if you include price page as well as quality, I think the number is going to be pretty dramatic. We're pretty fixed in terms of what we buy, certainly focused on single tenants and when you add the additional thing of return requirements, additional piece of return requirements, it's pretty difficult for us even if we're able to buy at the aggregator's costs -- it would be pretty difficult for us to be interested in these portfolios and certainly at the numbers that are bandied about or have been evident in some of these recent trades, we would not be -- that would not be of interest.

Our granular acquisition activity is so much more accretive, a couple of 100 basis points, 150 basis points to 200 basis points or perhaps more in some of the more recent trades. Just doesn't feel like a good idea for us to give up that kind of return we can get by continuing our focus on the granular activity.

I would just add to Ben's points two things. First off, we continue to scratch our heads that the private markets continue to price assets at ever compressing cap rates and yet obviously, own stock has gone the other way, recently and so we think that there is obviously a lot of room for compression there.

And then the second thing was with respect to asset quality, as you are aware, one of the things that we're trying to do to get that out into the market is having Investor Day, which we're having in June where we will show about a half dozen assets that we've acquired over the last few years, and I think that the quality of the assets will speak for themselves.

Going back to the -- using OP Units and the stock for acquisitions, if you think about maybe fourth quarter last year, and I know you guys are in IRR shop, so if you think about IRRs and acquisitions in fourth quarter last year versus where they are today, what kind of -- what is the relative returns you're seeing? I know you said they're still highly accretive, but what's the change (multiple speakers)?

We are very focused on maintaining our returns -- on maintaining our thresholds in terms of the returns we'll accept, and those haven't changed. So we're not seeing anything different. What has changed that you've seen our cap rates over the last couple of years -- acquisition cap rates go from [9 to 8] is the expectation of rental growth rate over the next few years, is significantly higher, on the order of two to three times higher per year. So from the sort of 1.5 kind of long term averages to threes and fours and even higher in some sub-markets, and so that has allowed us to maintain by projection expectations, the same kind of IRRs, both levered and unlevered that we've always bought on. We're just able to do it with slightly lower entry point with regards to cap rates. And still our acquisitions are accretive at the outset and given this rental growth projection are getting more accretive more quickly because of the increase in rental rates that we -- I think the entire market is experiencing and expecting.

And putting some numbers around the quarter's acquisitions, our run rate FFO, core FFO that we reported was $0.35, just a simple annualization of that number gets you to about 40 and what we acquired in the first quarter from an FFO standpoint, adjusting for the cost of debt as well as some incremental G&A was in the order of $2.50 a share or greater. So you can see the material accretion from the new acquisitions, and that's quite straightforward, just $97 million at 8% cap rate adjusting for the cost of capital. So very accretive opportunities again and that's with the stock price down in the low-20s obviously still accretive at these levels, still very accretive -- more accretive as the stock improves in value, which we hope it would do.

Stephen Guy, Robert W. Baird.

So you've come across, I guess thousands of opportunities in terms of the assets you see come to market, but is there any particular geography where you've, I guess, essentially entirely pulled back from?

No, I think that we had not focused a lot of resources on certain markets, notably California, Arizona and perhaps Texas, because of the competitive landscape. We side away little from focus there, but I think that the -- what we've described earlier in terms of deploying assets in those markets is a recognition that even if they are competitive, there is still an efficiency in those markets will allow us to find assets that we can buy at threshold returns that we're looking for.

So we're not -- we haven't even in the depth of the global financial crisis, I think Eastern Michigan was probably a market that like everybody else we're very wary off, but our COO, Steve Mecke is from Detroit, so he made us keep looking. And actually, we probably wouldn't -- we've done buying there, that market has been very strong in the last couple of years with great absorption, rental rate increases. And so today when we hear people say Houston oil prices, maybe you should stay away from that market, that's a market that's likely attractive to us, because other people apply our arbitrary decision rules to say the Houston is dangerous obviously with the oil (inaudible) maybe not so many people are wary of Houston these days. But again, it's a market where we would expect to find opportunities simply because everybody else thinks it's a market that they won't find opportunity.

And then going to the renewal leases for the quarter, you have listed retention at 979,000 square feet. Can you just talk about the different between the spreads there and the spreads on 136,000 square feet and just kind of help me understand trend-wise, what's going on there?

One of the things that's interesting as we discussed leasing -- as mostly discussing leasing, retention is about leases that were expired in the quarter and leasing activity is about leases that were signed or not signed in the quarter. So the sample of leases signed in the quarter is a very small sample, [simply two] leases, and it had a flex asset in there. It skewed the flex asset that had -- whose rent was down a bit, it skewed those numbers. I would not put a lot of precinct into the activity number for the first quarter simply because of the size of small sample.

The renewal number was a much bigger sample. Obviously, there were more assets rolled in the quarter than the activity. What we've been talking about generally is the excess demand over supply broadly across the US and specifically in our markets is going to continue to show up as good leasing spreads as were evident in renewal numbers. The actual leasing activity number again is a small sample anomaly.

Michael Salinsky, RBC Capital Markets.

You talked about portfolio transactions, you talked about this incremental transactions with G&A in place, maybe just can you give us a sense as you're looking at new transactions, how accretive is that relative to the in place G&A that's already there?

We are very, very scalable of the margin. And I think that we've talked about this, I think before, if we bought on the order of, in a particular time period $300 million of assets, we would need to add one account and one asset manager and little pieces of maybe some other functions, but you're talking about at most three people and probably a total cost of at most $600,000. That same $300 million at our current cap rates is producing $24 million of new NOI. So you have $600,000 versus $24 million, I think that's 3% -- 2.5% of marginal G&A for adding $300 million.

We've chosen -- obviously as evident by our G&A ramp over the last two years, we have chosen to build the machine in order to not only able to buy 25% growth this year, but with the investments you've made today with the maturation and development of the team over the next few years to be able to continue to buy 25% or more growth in assets per year for the next five years, and that's not been cheap. But we know at the margin how dramatically scalable our enterprise is and that will come into effect over the next that same five years, you're going to see as fully we expect -- you will see our G&A will have to go 15% plus down to 10% or maybe even inside of 10% of NOI and that will have a dramatic impact on our per share numbers at sunrise as we go forward.

Second question, just in terms of your retention below 70% there in the first quarter. Over the back half of the year, any reason why we wouldn't expect your attention to be north of 70%?

No, I think we fully do expect -- I think I've given a little bit of a hint that the second quarter as evidenced, very small amount of rolls in the second quarter and one move-outs can make that -- likely make that quarter a lower retention quarter. But our full expectation on a granular regular basis looking at the tenants and our knowledge of where they are and some of our already signed leases, for the year is 70%, and so the pattern is going to be first quarter a little under 70%, second quarter under 70% and the latter half of the year, we're fully expecting to be very strong retention quarters.

Mitch Germain, JMP Securities.

With 3,000 deals considered last year, obviously, more so this year with the ramp in the team, have you guys done anything to change your underwriting process with regards to how the investment committee starts wedding deals and when guys like Ben and Geoff, you guys can evolve?

It has always been a triaging process, so the outward facing people in conjunction with Steve Mecke who acts as our CIO as well as the senior acquisition people in that group wed down as quickly as they can to a number that is manageable that we actually do underwriting on. But that's still thousands and thousands of transactions a year to get some basic degree of underwriting on.

But if you will, the secret sauce of STAG is our ability to take that very large funnel, and triage down to the things that make sense to focus on and then to be very efficient on the assets that we actually decided to at least do desktop underwriting to be very efficient in how that happens. We also internally have been spending a lot of time and [not insignificant] amounts of money on streamlining our processes with regard to the use of data, the sharing of data, manipulation of data, so that everybody is on the same page, people traveling are basically in contact and part of them -- they don't fall out of the process when they are travelling. All of that is designed to be able to allow us to look at that very large volume of transactions, very broadly across the US markets.

And so again, one of the secret sauce is special advantages I guess, is that ability to look at so many deals and to be able to offer on, be participants in the bid process of so many transactions that allow us to identify those inefficiently priced ones that will deliver alpha returns, if you will, to us and to our shareholders.

And Mitch, I can't resist the opportunity for one more plug for the Investor Day. But our goal and the plan right now is that before we go out and see the half dozen properties, we'll spend an hour or two with the underwriting team and Steve Mecke and the originators as well and walk through how we underwrite a transaction and how our model works. So hopefully, we've got to shed some light on that in the -- I guess what 28 days?

(Operator Instructions) Daniel Donlan, Ladenburg Thalmann.

I was a little bit late getting on the call, but I was just curious, Ben, when you look at your retention and leasing, have you seen any trend amongst kind of a larger tenants or your investment grade rated tenants, what seemingly -- is there any correlation between those two and who is deciding to renew and who is deciding not to renew?

I'll ask David tot talk but I don't think if there is any particular relationship as between tenant credit quality and their behavior in this market. Obviously, better tenant quality and credit quality probably have the better access to build-to-suit opportunities but other than that I -- but in this market, I think if you're willing to sign a 15-year lease as probably a developer will do a build-to-suit for you. So I don't know that there is particular any. Dave, do you have any?

No, I don't think from a retention standpoint, there is much difference, their decision-making process tends to be little longer. But as far as -- and if they are buying out one of our existing tenants, we'd probably have a little bit lower shorter retention. But in general, I don't see any correlation between credit and retention.

So Dave was referring to the M&A activity, if a big company buys a small company, we've learned over time, the retention of the smaller company's assets is probably diminished. The facilities guys from the big company will tend to dominate the new combined companies going forward and they tend to like their own facilities. So it's just something we've observed in the market.

And so Dan, if you've missed the beginning of the call then you must have missed the guarantee section right, where we guarantee things.

I probably did a little bit. (multiple speakers) But the other thing I was kind of curious on as you've seen some of -- at least one of the large triple net companies that historically has been retail has moved into the single-tenant industrial space. But I think most of what they're buying is over 10 years. So I would imagine you're probably not seeing them when you are competing for assets but from a capital deployment standpoint, just kind of curious, your stock price has been up this year a little bit, but would you ever consider kind of if you sign a new lease or you have -- it's for 10 years or 15 years, whatever it may be, would you look to potentially divest for that asset, just because you can get the best cap rate on that. How do you look at that going forward?

Yes, I think, I may have mentioned in the previous calls, I think we signed a new 10-year deal, a building that have become vacant in South Carolina with an investment grade credit. It is our firm belief that asset is worth more to somebody outside our portfolio than it is to us in our portfolio. And that's an asset we'll sell, maybe asset management kicking and screaming because it's an absolutely very easy to manage for the next the 10 years. But, still we're causing the fact that the same model that tells us what an asset is worth when we are buying it, that same model will tell us what it's worth when we sign a new lease. If it's worth more to outside of the portfolio, we'll go ahead and sell it. So very much conscious on that and something that our asset management folks are conscious of that they need to -- as they sign new leases or other commitments made in the space that we need to evaluate the asset as a disposition.

And what percentage of your leases would you say -- what percentage of your rents or you may be by assets are greater than 10 years?

Not many. So it tends to be build-to-suits and sale leasebacks and to a lesser extent, where we or [the Canada] has put a lot of capital and Dave actually has a number here.

Yes, if you look at the lease expiration schedule, 6.3% of our annual revenue is beyond 2024.

And then I guess from an asset management standpoint, how proactive are you with going out to a tenant -- we are seeing some of the single-tenant retail guys do this where there might be five years left on a lease or three years left on the lease, and they give them maybe a break on price, but they extend out the lease five, six, ten years, whatever it may be, is that something that you guys have done or is it something you're looking to do?

I think one of the things about the retail tenancy is that they have sales numbers. And so they are probably more able to tell sort of how much money they are making in that specific location and data maybe you can then send up for the retailer to look to extend the lease. I think that for us, it's a -- the analysis would be what will the [rebel] get between now and the existing exploration, and then evaluating the potential for retention versus what we get and potentially reduced rent in longer term. So it is again a probability assessment of those potential blend and extend transactions and I think if we assume that tenants are (inaudible) beings that they are asking for an blend and extend, they are telling you that they are going to stay, so you may well be better off staying with your existing rent and go ahead and negotiating the cost of the lease expirations.

So again, we think we're rational actors in those types of discussions. We certainly love to do extensions to leases. We're not always interested necessarily in giving up rent to do that when the tenant is likely to stay in the building anyway.

And then lastly, just on the acquisition costs that you guys recognized, how much of that is capitalized because you're buying a property subject to a lease and how much of that is brokerage costs and I realize it probably oscillates every quarter, but maybe just a general rule of thumb?

So you are talking about breakout between leasing intangibles and acquisition costs, so I'll let --

Yes, Dan, in Q1, we acquired the $97 million of acquisitions and $318,000 that was the acquisition cost, which is separately bifurcated on our P&L and expense, it's not capitalized.

Excuse me, well how much of that is brokerage costs. Typically when you break out that property acquisition cost number, how much of that is brokerage cost versus what is --?

So typically, we're not paying brokerage costs in acquisitions. I don't know -- I've a number here, but I'd say probably in 80% or 90% of our transactions, we're not paying any brokerage costs on acquisition. Sometimes on -- I alluded to you before the unsolicited offers, there will be situations where we will take a brokerage cost because it's a transaction where broker sort of has created it, not representing the seller, but again it's fairly rare.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you very much for joining us, everybody, today. It was a good set of questions and we enjoyed every chance to speak to you. One of the things that we (inaudible) think about it is we have had this little run down in our stock prices. We're very confident our ability to produce strong cash flows from our assets, not only today, but going forward. And we strongly believe in the long run that ability to produce cash flow, if you will, win.

So the STAG machine continues to do accretive acquisitions. We're highly confident in our ability to continue to do that and again, highly confident in our ability to produce cash flow for the benefit of shareholders. So we're staying the course. We have referred that our stock price had not moved down over the last month -- few months. It has but -- we still remain very accretive in our acquisitions and we'll continue to do that. And so we look forward to having all of you continue to follow us and support us as we do so. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.