STAG Industrial Inc (STAG) 2015 Q2 法說會逐字稿

Greetings and welcome to the STAG Industrial second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, Matts Pinard, Vice President of Investor Relations. Thank you, sir, you may begin.

Thank you. Welcome to STAG Industrial's conference call covering the second-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 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 informational package available on the Company's website.

As a reminder, forward-looking statements represent management's estimates as of today, Friday, July 24, 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.

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

Presenting today, in addition to me, will be Geoff Jervis, our Chief Financial Officer, who will discuss the bulk of the financial and operational data. 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.

The second quarter marked continued progress on our all operational fronts. This is readily apparent in the strong acquisition results, continued pipeline growth, robust leasing activity and a very successful inaugural Investor Day. Less apparent to the outside world is the continued development our people, systems, and processes. STAG's business opportunities and its execution are stronger now than at any point in the Company's history.

One of the things we find interesting about our experience as a public company is the difficulty in getting people to fully understand our differentiated investment pieces and operating model. It is probably just human nature to seek to categorize, and our model may present some challenges to what is deemed conventional wisdom.

So for the record, we've used STAG as an industrial operating company, not as a net lease company. Like our industrial operating peers, we are active managers of our assets in order to maintain and enhance cash flow. This is evidenced in the depth of our asset management structure, approximately 40 assets per line asset management; the annual leasing activity we accomplish, 10% to 15% of our portfolio annually; the capital projects undertaken, including significant building expansions; and our willingness to embrace vacancy/exposure to market leasing conditions. We acquire shorter-term leases, including occasional known move-outs.

We view the bright clear line that separates the industrial operating companies from net lease companies is how they view/deal with vacancy. At STAG and the other industrial operating companies, we take whatever asset management steps are dictated, renovate, expand, demise, et cetera, towards getting the vacant asset released, to restoring value and cash flow for the long term benefit of our shareholders.

Most net lease REITs, on the other hand, look to sell vacancy, i.e., liquidate assets rather than address the operational issues associated with those vacant assets. In our view, this is short-sighted, as we believe that the real estate assets we own are and will be valuable and productive producers of cash flow for the long term. Vacancy will occur. Underwriting its probability and understand the consequences of exposure to market conditions and being well prepared to address it when it occurs, are critical elements of our long-term investment thesis and operating model.

One thing that sets us apart from the other industrial operating companies is our attitude towards development, and particularly speculative development. Our limited involvement in development activity, expansions of existing buildings and build-to-suit take-outs is not because we dislike development. We don't. Or that we lack the internal capacity to develop industrial real estate. We do have that capacity. It is because we, on a considered basis, believe the returns to our shareholders' equity will be better, and with significantly lower risks, by concentrating on our focused and accretive acquisition activity rather than speculative development.

We strongly believe that our probablistic approach to risk assessment and our general avoidance of decision rules provides us with a greater opportunity set than our industrial operating company brethren. This allows us to be both selective in our investment activity and very active in making accretive transactions. Witness our achievement of and commitment to 25% annual growth in assets.

Now, let's get back to the principal purpose of this call, our second quarter. With that, I will turn it back over to Geoff to review our financial results and provide some detail on our balance sheet and liquidity.

Thank you, Ben, and good morning, everyone. As Ben mentioned, second quarter was another strong operating period for STAG. Starting with acquisitions, during the quarter we acquired 12 properties, plus an additional property post quarter end, for a purchase price of $96 million and a weighted-average cap rate of 8.4%.

In addition, we have contracts to purchase an additional 26 properties for $198 million at comparable cap rates. Inclusive of the $97 million of Q1 acquisitions, year to date we have acquired, or are under price agreement to acquire, $381 million of properties. We have publicly stated that our goal was to grow our asset base by 25% a year and our resultant 2015 acquisition target is $450 million. Our activities to date account for over 80% of the target. Furthermore, our pipeline of potential investments was at a record high of $1.9 billion at quarter end. With five months remaining in the year, we are very confident that we will meet or exceed our target.

I want to take a moment and explain why we are currently so focused on acquisitions. For us, we have a two-pronged test for making an investment. First, does the investment make sense in isolation from a return on equity standpoint? Our 8% unleveraged yields, when capitalized at our 60% equity/40% debt mix, and accounting for incremental G&A, yield 10.5%. We find these double-digit returns to be very attractive, especially in light of the current rate environment.

The second test for us is accretion to our shareholders. Using a $20.50 stock price and the 10.5% equity yield from the example, each new share we raise to capitalize our acquisition activity earns FFO of $2.15 per share. This is extraordinarily accretive when compared to our 2014 FFO per share results of $1.45 for the year. Taking it one step further, our acquisitions are not only accretive at today's stock price but remain accretive through a stock price in the mid teens.

Not only are our acquisitions attractive from a return standpoint, but also from a risk standpoint. As we illustrated at our inaugural Investor Day, we have a differentiated method by which we assess risk in our acquisitions through the use of our proprietary risk assessment model.

I encourage interested parties to listen to the webcast on our website as the leaders of our business units explain in great detail our origination process with specific focus on our sophisticated underwriting model. Furthermore, while our quantitative approach to risk assessment allows us to efficiently assess risk in a broad array of markets, we remain extraordinarily selective. In 2014 we reviewed 1,000 transactions, underwrote 350, bid on 200 and closed 43.

As we look forward, the $1 trillion US industrial market offers us a deep opportunity set. We believe that our target market is approximately $250 billion, and at our current size, we account for less than 1% of our target market. In summary, we are very excited about growth by acquisitions because it generates excellent absolute returns, is extraordinarily accretive to our shareholders, and we have a very long runway for continued accretive selective growth.

Turning to our portfolio, at quarter end, we own 265 buildings in 37 states with a total of 50 million square feet. Occupancy stands at 95% for the portfolio and our average lease term and rent are 4.2 years and $3.97 per square foot, respectively. All of these measures improved from last quarter as we continue to see robust activity in the leasing markets.

This quarter, only 1% of our portfolio's leases expired and a single 313,000 square foot move-out resulted in a 29% retention rate. Over the last 12 months, our retention rate has been 69% with cash rent growth of 5.1%. We continue to expect retention levels to be in the 70% range for 2015.

From a rent standpoint, again, a small sample this quarter, cash rents grew by 3%. Furthermore, as we acquire properties below replacement cost, we believe that our positive rent growth experience is repeatable.

From a market standpoint, we continue to find value in secondary markets. Again, I think there's some confusion on what a secondary market is, so I will list a few. Denver, Orlando, Kansas City, Cincinnati, Louisville, Baltimore, Boston, Detroit, Minneapolis, St. Louis, the Lehigh Valley, Charlotte, Columbus, Pittsburgh, Nashville, and Milwaukee. These markets, while defined by CBRE as secondary, are robust dynamic markets that are an integral part of the economy and the US manufacturing supply and distribution chain.

While we do not target markets, we do target attractive risk-adjusted returns. And while we bid on many assets in primary, secondary and tertiary markets, our model typically identifies the best value in secondary markets today. Evidence is in our acquisition activity since IPO, as we have acquired 65% of our assets in secondary markets, 26% in primary markets and 9% in tertiary markets. If the relative value proposition changes, I promise you that we will as well.

We are not emotional about the markets in which we invest. We reserve our emotion for relative value and therefore enjoy a broad opportunity set that is not arbitrarily limited.

Turning to the quarter's operations. Cash net operative income, or cash NOI, was $43.4 million, representing growth of 29% from the year-ago period. Cash NOI growth comes from two sources: internal, or same-store NOI; and external, or new acquisitions. Obviously our external growth has been strong and remains robust.

We are, however, often criticized for poor internal growth prospects, our your critics often justify their conclusions by criticizing our markets and assets. This is simply not true or fair. Our acquisition model is generally to acquire occupied assets, 100% occupied assets. Over time these assets will stabilize at market occupancy, 93.5% currently. This downward occupancy pressure is underwritten and expected.

True internal growth, however, should be assessed based upon rent and expense growth, and our rent growth has been equal to our peers. Furthermore, with our tenants picking up the operating expenses at our properties, as is customary in warehouse leases, our rent growth will fall more directly to our bottom line. While I will not argue that same-store NOI will have downward pressure due to the impact of stabilizing occupancy, we will argue until we are blue in the face that our real comparative internal growth is as good as any of our peers in the long run.

On a corporate level, adjusted EBITDA, broadly speaking cash NOI less G&A, was $36.5 million, representing growth of 26%. Adjusted EBITDA did not grow at the same pace as cash NOI due to the increase in G&A, as our G&A expense was $7.5 million in Q2 compared to recurring G&A of $5.4 million in the comparable period last year.

Moving down the ledger, core funds from operation, or core FFO, generally speaking adjusted EBITDA less our cost debt capital, was $24.7 million, representing growth of 22% compared to 2014. On a per share basis, core FFO was $0.36 per share, flat compared to last year. This result was due to the aforementioned G&A increases, as well as the fact that we remained on average, over-equitized for the quarter, and due to the fact that we've refinanced 100% of our unsecured debt in the last year, adding 4.5 years of duration to our unsecured liabilities.

All that said, the aggregate impact of these factors was offset entirely by the accretive nature of our acquisitions. In large part, due to our refinancing efforts over the last year, we were rewarded this quarter by an upgrade from Fitch Ratings 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.

G&A has been a topic of much discussion amongst the analysts and investment communities, and appropriately so. The growth in G&A over the last year has caused our bottom line numbers, FFO and FFO per share, to be basically flat for multiple quarters. Had G&A not grown over the last year but held at the Q2 2014 levels, our Q2 2015 FFO per share would have been $0.39 per share, or $0.03 per share higher, than what we reported today. On an annualized basis this would equate to FFO growth of over 10% on a per-share basis.

Obviously, our investment in G&A has impacted results. We firmly believe we have an opportunity, as I described earlier, that warrants the investment. As long we see investment in G&A leading to opportunities akin to what we see today, we will invest in our platform in order to maintain our sophisticated and selective approach to investing.

As G&A growth levels off over the next few years, our G&A is projected to be at least in line with the industry, and this makes sense. We have primarily single-tenant leases, leases where the tenant effectively acts as property manager under a modified net lease structure, therefore only requiring management oversight on our part.

Turning to the balance sheet, at the end of the second quarter, our immediately available liquidity was $375 million. And as of today, we have liquidity in the form of cash and available credit sufficient to fund our projected level of acquisition for all of 2015. Furthermore, we to 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.

We remain committed to a low-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-net to run-rate annualized adjusted EBITDA at five times at quarter end. We continue to strive for a defensive balance sheet and believe we have achieved our goal today, as evidenced by our ratings upgrade to BBB flat.

Looking at our liabilities at year end, we have approximately $765 million of debt outstanding, with a weighted-average remaining term of 7.1 years and a weighted average interest rate of 4.4%. All of our debt is either fixed-rate or has been swapped to fixed-rate with the exception of our revolver. Going forward, we will likely increase the size of our revolver in order to account for our growing investment pipeline, and have initiated those discussions. In addition, we remain committed to financing on long-term investments with long-term capital, and expect that future debt issuances will be in the form of fixed-rate, long-dated private placements.

On the equity front, in order to capitalize our acquisitions, we raised a total of $62 million of equity in Q2 from our ATM programs. On a weighted-average basis, our equity capital was raised at $21.36 per share for the quarter. Going forward, we expect to continue to primarily rely on the ATM and OP unit issuances for our equity needs. And as may be required, look to use discreet follow-on equity offerings like the one we executed last October.

In summary, it was a very good quarter for STAG. Success on the left-hand side of the balance sheet with acquisitions and leasing, as well as success on the right-hand side of the balance sheet with equity capital raises and the upgrade from Fitch. 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.

Before I turn it back to Ben, I want to encourage anyone interested in STAG to go to our website at www.STAGIndustrial.com and navigate to our Investor Day webcast, which can be found on the investor relations page. I think that the webcast will go a long way to demystifying STAG's business model and has left listeners with a new appreciation for the sophistication and selectivity of our origination process.

With that, I will turn it back to Ben.

Thank you, Geoff. Another aspect of conventional wisdom is the notion that some markets are good and other markets are bad. Unfortunately, or perhaps fortunately for STAG, the world is not that simple. Markets and sub-markets are certainly different from one another, but those differences are observable and can be incorporated into our analysis.

That's a part of what our probablistic risk assessment model does. And in doing so, allows us to rationally compare an investment in Ontario, California with one in Dayton, Ohio. We are actively interested in buying assets in either of those markets, but only if the acquired asset will produce sufficient cash flow returns for our shareholders.

One other item that I would like to touch on today is the widely held belief that primary markets always outperform secondary markets. For the purposes of this discussion, we use a CBRE econometric advisor's definition. Primary markets are the top 30 markets, secondary are the next 30. The data we reviewed did not support the contention that primary markets outperform secondary markets.

The performance of these two market segments are largely the same in the aggregate on both occupancy and rental growth. The primary markets exhibit slightly higher volatility, and as a result, can show relatively better or worse metrics depending on the time series chosen, but there are no real long-term differences. This is certainly at odds with the conventional wisdom.

What tends to be very different primary and secondary markets is pricing, the entry point for acquiring an asset. Two very similar investment opportunities, same lease term, building quality age, tenant credit profile, both lease the current market rents, et cetera, will be priced vastly differently depending on whether they are located in a primary or secondary market.

Even if the five-year market rent growth prospects for the two markets are identical, the difference in entry cap rates between these two investment opportunities can easily be 200 basis points and may be significantly higher. 10- and 20-year IRR calculations will show similar disparities. There's simply not economic or financial justification for these types of pricing differentials.

Our willingness to pursue assets across a larger geographic footprint than our peers allows us to garner both higher long-term cash flow returns and greater diversification, a winning combination. Thus, we continue to be excited about the future for our Company over the coming years in the fundamentally strong US industrial markets. As we move forward, we'll maintain our investment discipline and focus on shareholder returns. We thank you for your continued support.

And with that, I will now turn it back to the operator and open the floor for questions.

(Operator Instructions)

Sheila McGrath, Evercore.

Yes, good morning. I was just wondering, Ben or Geoff, if could you talk about your thoughts on the mix of equity, even for the balance of the year. Is it reasonable to assume that you could lower it from the 60% target in the near term, given where the stock price is?

Good morning, Sheila, thank you for the question. I think the answer is, we came in -- we did an equity deal late last year, so we came into the year probably a little over-equitized. And our activity thus far in the year has maintained that slightly over-equitized basis.

So I think that for the year we're still looking to do something in the order of 60%/40% for the year. But we're a little over-equitized now so we could be slightly slower in our equity raises in the near term.

Okay, great. And another question on G&A. You mentioned that you're targeting to level off to a level of peers. I was wondering, are you looking at G&A of peers as a percent of revenues, a percent of total assets? And how long would that take? And finally, on 2016, if we can look at $30 million this year, do you think it could be a more modest growth rate from this year to --

We're talking about leveling off with the other peers as a percentage of NOI. I think that in our models, we have a pretty aggressive growth forecast, as you know, so we're talking about leveling off over the next three to five years. Muted growth in those intervening years, and then getting down to more of a scaling growth relative to the size of our portfolio over that time.

I think our expectations for 2016 are something on the order of 10% growth in G&A. So we're at $30 million this year, $33 million next year. Geoff, do you have anything to add?

No, I think that's right. I think that when we think about where we're going to get in line with peers, we really look at it as G&A as a percentage of NOI. We think we'll get down into the single-digit range on that metric, as Ben mentioned, over the next five years.

Okay, thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you. You put up some good leasing spreads this quarter. Can you give an outlook for what we can expect to see over the next year what your mark to market looks like even on your 2016 roll?

I will turn that over to Dave. What's your view, Dave?

We have pretty good visibility for Q3. We expect the cash presence to be almost identical to this quarter. It gets a little less clear the further out we go. We continue to think we're going to roll slightly up, not dramatically up.

I think that the general market conditions, the most recent Cushman report indicated vacancies going down in 35 out of the 38 markets they track. I think that the back drop for all of the industrial operating companies is for continued rent growth as vacancy continues to decline.

I don't think that there's -- I haven't seen a forecast yet that shows development exceeding -- or new supply exceeding absorption. Of course, at some point it's going to have to, because we're down to near historic lows in vacancy numbers nationally. Certainly some individual markets are very tight. So, I think the backdrop is one where the expectations are for contained rent growth.

Okay. And then year to date, can you talk about any changes you've seen in the type of tenant demand? Either there are certain markets that are picking up more than others, or there are certain types of tenants or types of use on a leasing --

Our business is obviously very broad, and we're agnostic as to markets in the industries except for introducing too much of anything, introducing correlated risk. Post the global financial crisis, auto has been big, home building has been big, energy obviously was big. But, I think we're seeing pretty broad tenant interest. Dave?

Yes, this quarter we have the largest category being air and logistics, in terms of our tenant mix. So we are seeing more logistics companies leasing space rather than end users.

And that's more in secondary markets or more in some of the core markets?

That's across the board.

Broadly across the board.

All right. And then I know you guys spent a lot of time on the call walking through the investment case and why continuing to issue equity makes sense. But as we think about the next year or so, or if the stock remains under pressure, do you guys think internally about any shift in strategy?

Well, I think one of the benefits of our strategy is, at the margin we remain very accretive, even at what some people consider depressed stock prices. Certainly compared to our 52-week high, our stock price is depressed, but very accretive at these levels.

So as opposed to some of the people who might view as stuck because they're looking at an equity price it doesn't make sense to continue to pursue their strategy, that's not the case for us. Our growth remains very accretive. I think that the numbers that we will show going forward will be appreciated by the market. So I don't view us as stuck, in that sense.

Would we rather issue equity at higher numbers? Of course. But we're accretive at these levels, and we will continue to pursue this strategy and grow the Company.

Okay, thank you.

Thanks, Jamie.

Dave Rodgers, Robert W. Baird.

Good morning, guys. Ben, a question for you. You talked in your earlier comments about being operators of industrial. Two questions around that.

One, why not start buying more vacancy at this point in the cycle? I realize I'm asking that question when you bought more vacancy this quarter than you have, but why not be more aggressive doing that?

And then the second question on that is the flip side with the flex office portfolio. Is your desire to lease that up before you sell it, given the 260-basis point negative impact to same-store NOI? Or do you think that, that's something that you can just off-load? Update us on that, please.

I think we remain at least mildly confident of our ability to lease and sell stabilized assets in that area. We will over time make the harder decisions to sell assets that we don't think have good long-term prospects, that are -- basically we can sell them for more than we -- hopefully we're selling them for more than we think they're worth to us within the portfolio.

We had an asset this quarter we sold that fell into that category, a long term vacancy. We took a small impairment on it, but it was the right thing to do from a portfolio perspective.

I think that what we do is -- and perhaps we'll expand our acquisition activities to look at more vacant assets, but we've considered buying vacancy. I'm very confident that our risk assessment model allows us to look at vacancy, again, on a risk-neutral basis to buying occupied assets.

As such, as we increase the scope of what we look at with our larger outward-facing acquisition team, I think it's likely that we will look at more vacant assets. But we're only going to buy them if they can produce the returns at least equal to, if not better than the occupied assets that we're able to buy.

Okay. And then with regard to the acquisition pipeline, what's under contract in LOI? Can you talk about any portfolios in there, cap rate going in? Maybe I will ask the vacancy question there, any slight degree of higher vacancy that you're able to bring on in that portfolio, or that group of assets?

I will let Steve answer that. I don't know if the microphone's close enough.

The contract in LOIs, I think we have one or two in our small portfolio, which is a $2 billion for us. Mostly it's still at the granular assets.

I don't believe that in that group there's any more vacancy that's been mentioned. We do look at it at a consistent basis. It really comes back to a pricing issue, if we're going to be competitive with our brethren out there.

So, yes, the pipeline looks very similar to what it has before. Cap rates are still running around 8%, so we're pretty confident that this is going to be good year.

I would say that, we do feel that cap rates across the markets that we're looking at, and in the assets that we're able to get under contract to acquire, are not falling. They actually may be rising slightly, but we feel very confident about our ability to maintain the rates we have today.

I will say there's one asset that we have, I think it's under letter of intent at this point. It is a larger known move-out; it's a high quality asset; it's a short-term sale lease back coming out of some M&A activity by the tenant. A high quality asset that -- I think it's a one-year sale lease-back. So, that's a kind of acquisition of vacancy.

Last question, Geoff or Ben, thoughts on blending in more debt in the capital structure? One, as you get larger and, two, as the stock price comes down?

We're always evaluating and reevaluating our capital plan. As we indicated earlier in the call, we'll probably remain a little over-equitized. Our run rate debt-to-EBITDA is at 5. It's certainly very, very conservative relative to our peers.

There's potentially some room to do that, but again, we remain very accretive even at these share prices. So I don't think you will see much in the way of drastic moves or anything significant in that area. Geoff?

Yes, I think that my personal preference would be to continue to run the Company at these levels and try and keep getting upgraded to BBB+ and see if we can't drive our cost-to-debt down.

All right, great, thanks, guys.

Mitch Germain, JMP Securities.

Good morning, guys. Are you seeing any landlords put more product on the market because of any concerns about the rate environment?

I think, obviously the rate environment is tied to -- perhaps not directly tied -- but to some degree of lag, tied to the cap rate environment. So I think you've seen, probably starting in 2013, you've seen assets starting to come to market while people are worried about where the future of cap rates are going.

Clearly some of the bids that you've seen in the private market for assets have been very strong. There's been some indication that strength has peaked. We're hearing some of these big portfolios continue to move forward to be sold.

Our pipeline continues to grow, $1.9 billion, because of increasing our outward-facing acquisition effort. I think that is going to be -- allow us to continue to find more and more accretive deals as we move forward.

Great. And last one for me, are you seeing any slowdown in competing against the non-traded REITs?

I don't think we've seen much activity from the non-traded REITs in our core business, really ever. At their height they've come in on larger, longer term deals. We thought because of the nature we're going to probably be priced at the margin of where we might participate. So they've never been a really big factor in our business.

Thanks, Ben.

(Operator Instructions)

Brendan Maiorana, Wells Fargo.

Thanks, good morning. Ben, if you took a pool of assets in your portfolio where you think you've maximized value, and you brought it out to market and let's say it was a reasonable sized portfolio, what do you think it would trade at on a cap rate basis?

So, we could easily take out of our unencumbered pool and create nearly exactly what one of the portfolios that's on the market right now, the Wells portfolio, we could create that portfolio out of our asset -- or something very akin to that portfolio -- out of our asset base. We're being told that, that's going to trade somewhere in the 6% to 6.25% range. I think that's not a bad mark for where we could actually get that.

So, you guys are trading at an 8% right now, an 8% implied cap. And if stuff that you value is at a 6%, and I completely get that every acquisition that you're doing is $2.25 a share accretive versus $1.45 run rate, so it's very accretive from that perspective. But it would seem like a 200-basis point differential between where your stock is trading, where you guys are buying stuff, and where you probably could sell, is probably about as accretive, even though you wouldn't be improving your ratios on a G&A load.

Do you think about, given where the share price is, maybe selling a little bit more as a way to fund acquisitions and still having that be very accretive to earnings? Or is that not something that's contemplated?

I don't think we've given that much in the way of serious consideration at this point. I think that there are, as you've pointed out, there are still some pretty significant returns to scale. That continues to be our focus.

I think that we're buying assets that are long-term cash-flow-productive assets that we think are worth, in the long run worth to our shareholders, where the market would trade if we sold them. So we think holding them for the benefit of our shareholders is probably the best thing to do.

Is part of it the reluctance to asset recycle, that you're looking at, you're building out the platform? You guys have well documented, you got the G&A increase this year and probably looking at increasing G&A above certain inflationary levels for the next couple of years.

To do that, you got to justify it you got to have a bigger portfolio over time. Is that part of the reluctance to be a recycler, because you just don't have the sale that you want to have yet? And maybe ultimately that becomes something that you get to?

I think that's fair as we move through the size levels we're at now. I think ultimately where it would come down is that, the assets have to be worth more to somebody else than they are to us in our portfolio. That's the ultimate test for us.

We're buying assets that we think at a discount to their value based on their ability to produce cash flow. Clearly someone else would have to come to us and pay more than they're worth based on their ability to produce cash flow.

So there's a spread there that we're taking -- by buying them, we're taking advantage for our shareholders. But in the long run, somebody would have to pay more than they were worth. I'm not sure that's necessarily going to happen.

I would add that the reason that we're not selling assets is, because we think that the math is better for us to acquire assets. Obviously, we went over the accretion levels of acquiring assets, $2.15 a share, but the stock price in this range is extraordinarily accretive.

You're right, there is some benefit to scale from bearing G&A. But we think it's a better long-term proposition for the shareholders is to continue to acquire asset at the extraordinary accretive levels that we are, even though the stock price is depressed. It is a very attractive investment opportunity for the equity.

And over time, attempt to continue to get the story out about what we own and normalize our valuation more in line with the operating companies. If we do that, we are going to have extraordinary returns.

If you look at where our peers are trading, we traded a very steep discount to them. We don't think that is warranted. We think that the shareholders ultimately will benefit as that difference compresses.

Yes, I --

That's not in the math.

Yes, and I wasn't suggesting you guys stop acquiring. It was more sell to fund the acquisitions, which I would -- if you guys could sell at a 6% and buy at an 8%, that's pretty accretive too. Issuing shares, even at $20 a share and funding a portion of it with debt is accretive. Geoff --

So, Brendan, that's the private equity model, and if we weren't a public company, that's probably what we would be doing. But this is a permanent capital model, and the long-term benefit to the shareholders is derived from the cash flow.

Fair enough. Geoff, so we understand or have a better sense, when you're looking at G&A as a portion of NOI and getting in line with the peer set, are you thinking 10% G&A load as a portion of run rate NOI is where you would like to level out?

I think that we see long-term our being probably one of, if not the most efficient, so probably well into the single digits. But again, we're a growth Company, which is pretty much unique relative to the established peers. So really comparing us right now doesn't make sense.

I think in the long term we'll compare well. If not, frankly given the operating structure we have, I think that we'll have lower G&A as a percentage of cash NOI than our peers.

Got you. Thanks, guys.

Thanks, Brendan.

Michael Mueller, JPMorgan.

Hi, thanks. Not to beat a dead horse on G&A, but one other one on G&A. I think it was mentioned about 10% growth in 2016.

Out of curiosity, what is that growth funding? Is that additional $3 million? Because it seems like over the past couple of years you built out the acquisitions team. I was curious as to what those funds are earmarked for.

So, Mike, we're adding people during this year. So a significant portion of that is full year, as opposed to partial year. I think that's a big part of it.

Yes, that's almost all of it. It's very much related to the fact that the employees that we have in chairs today are estimated to be in chairs for the full 12 months. Next year and this year a large portion of the employees were in for partial year.

Got it. And basically what sort of seats do the people fill who are being hired this year?

There's certainly analytic capacity in the acquisitions area, but it's also analytic capacity broadly across the platform. We've increased our capacity in support areas like credit, business analytics and corporate analytics, a variety of areas. Asset management continues to grow as our portfolio grows. It's broadly increasing the capacity of the platform.

Okay, that was it, thank you.

Thanks, mike.

(Operator Instructions)

Sheila McGrath, Evercore.

Yes, Ben, you have mentioned in your release you have $142 million under contract. Should we assume the majority of those close in third quarter?

Actually -- Steve Mecke -- it's a mix. There's probably, I think, somewhere around $90 million of that is scheduled for third quarter and the balance is for the fourth quarter. And then some of the LOIs will close third quarter. It's probably close to that, but not the whole $142 million.

Okay, thank you.

Thank you. It appears we have no further questions at this time. Mr. Butcher, I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. One thing, the primary versus secondary market discussion, one thing I'd like to point out is, we're not saying that we like secondary markets, we're saying we don't like primary markets or make anything sort of broad category or market segment call. We look at every market, and indeed every sub-market, where an asset is located. Specifically we look at the asset within context of that sub-market.

There are primary markets where there may be muted rent growth and secondary markets where there may be double-digit rent growth expected over the next couple years. It's one of those things that I think our risk assessment model does a very good job of allowing us to assess the returns that develop from owning an asset in that particular sub-market. Just a little point of clarification.

I wanted to thank you all for joining us this morning. It was a good quarter and we're looking forward to a very good second half of 2015. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.