STAG Industrial Inc (STAG) 2016 Q1 法說會逐字稿

Greetings and welcome to the STAG Industrial first-quarter 2016 earnings conference call. At this 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.

It is now my pleasure to introduce your host, Matt Spenard, Vice President of Investor Relations. Thank you, you may begin.

Thank you. Welcome to STAG Industrial's conference call covering the first quarter 2016 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental information presentation on the Company's website at 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 statements relating to earnings trends, G&A amounts, acquisition and disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends and other matters.

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, Wednesday, May 4, 2016. 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, you will hear from Ben Butcher, our Chief Executive Officer, and Bill Crooker, our Chief Financial Officer. I will now turn the call over to Ben.

Thank you, Matt. Good morning, everybody, and welcome to the first-quarter earnings call for STAG Industrial. We're pleased to have you join us look forward to telling you about the first-quarter results.

Presenting today in addition to myself will be Bill Crooker, 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, and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.

Industrial real estate m-- fundamentals remain very strong. New supply concerns continue to moderate and in most of the markets we operated in, new supply was never really an issue. The combination of continued moderate growth and the relative insularity of the consumer-driven US economy should provide advantageous operating conditions in the coming years.

We continue to see strong tenant demand for our buildings, decline in vacancy, and rising rents across the broad array of markets we operate in. It is important to note again that this tenant demand comes not only from e-commerce, which is itself a broad geographic demand generator, but also from a variety of other industries benefitting from the health and confidence of the US consumers who are responsible for approximately 70% of GDP.

A few thoughts and observations on the topic du jour in industrial real estate: e-commerce. It is without question a driver of incremental industrial demand as square footage shifts from retail real estate into warehouses.

E-commerce activity exists all over the country in all types and sizes of buildings and in a variety of markets. Many buildings serve both traditional retail and supply chain channels as well as e-commerce initiatives. Next-day delivery can be accomplished from anywhere a FedEx or UPS office exists.

The issue with e-commerce is how the last-mile delivery is accomplished, how the package gets to the typical consumer of today. The solution to the last-mile question is likely to be a couple of providers very intensively using their relatively small amount of physical real estate. In our view, last-mile is not likely to have a large impact on general industrial demand and usage.

The first quarter was a solid operational quarter for STAG. This was readily apparent in the continuation of our robust leasing activity, acquisition, and disposition volumes, resultant portfolio improvement, and, most importantly, continued strong earnings growth.

We continue to see widespread opportunities for accretive acquisitions. Our current pipeline consists of over $1.7 billion of transactions that have passed an initial triage and have been underwritten. External growth through accretive acquisitions remains a big part of the STAG story.

There are three principal drivers of accretion on our identified acquisitions: relative value purchases, operating leverage, and financial leverage. We feel that the middle of these drivers, operating leverage, differentiates us and is perhaps the least understood and appreciated.

We've built the STAG machine to efficiently identify and acquire single-tenant industrial assets at good relative value. We believe that we derive significant advantage by selectively acquiring assets granularly versus acquiring already aggregated portfolios.

As we add these selective granular acquisition assets to our aggregated portfolio, our incremental G&A related to the growth in the portfolio will be de minimis. Only [1.2%] of incremental NOI. This is a fraction of the fully cost of STAG G&A, approximately 16% of NOI in 2015, and supports significant marginal per-share accretion in the range of current equity pricing, operating leverage, and debt [cogs].

The existence of very attractive financial leverage only adds to the accretion story. As I stated previously, strong accretive growth will be the feature of the STAG story for years to come.

With that, I'll turn it over to Bill to walk through our first-quarter results.

Thank you, Ben. And good morning, everyone.

The first quarter represents a great start to 2016. We increased our disposition activity, produced strong operational results, and continued to identify good relative value acquisitions. We acquired five buildings for a purchase price of $28 million and a weighted average cap rate of 8.5%.

The first quarter is typically slower on the acquisition front due to the seasonality of the industrial real estate sales market. However, we continue to expect to acquire between $300 million and $400 million in 2016 with cap rates averaging at a low- to mid-eights. We currently have 11 buildings for $113 million that closed subsequent to quarter-end, are under LOI, or under contract.

As we've discussed previously, we continue to execute on our disposition plan. During the first quarter, we disposed of four buildings for $33 million. This level of dispositions is roughly equal to the disposition activity for 2014 and 2015 combined.

These dispositions were a combination of individual opportunistic transactions and the disposition of non-core assets. In 2016, we continue to forecast $100 million to $200 million of dispositions, including an accretive portfolio disposition expected to close in the second half of the year.

At quarter-end, we own 292 buildings with a total of 54 million square feet. Occupancy stands at 94.8% for the portfolio with a weighted average lease term of 4.1 years. The quarter's cash and GAAP rent change was approximately flat and up 4% respectively.

As Ben mentioned, we are seeing strong real estate fundamentals in our markets. Given this environment, we have been able to sign longer term leases. On average, our new leases are 3 to 5 years in term and new leases are approximately 5 years in term. This quarter, we averaged 5 1/2 years of term on renewals and 7 years of term on new leases.

On the retention front, we had a retention rate of 42.4% on the 1.3 million square feet expiring in the first quarter. This lower retention rate was driven by one non-renewal of 376,000 square feet, which was re-let with no down time for the same use. If this square footage was included, the retention number would've been 72.4%.

The cash and GAAP rent change for the tain -- tenants was 3% and 6% respectively. We expect retention for the full year 2016 to be in the 70% range.

From an operations standpoint, cash NOI for the quarter grew by 19% from the prior year. Same-store cash NOI grew by approximately 1% of the same period. Core FFO grew by 17% compared to the first quarter of 2015. On a per-share basis, core FFO was 39 per -- $0.39 per share, up 11.4% compared to the last year.

Included in core FFO was G&A of $8 million. G&A was seasonally high in the first quarter but we continue to expect $31 million in G&A for 2016, exclusive of the one-time severance costs of $3.1 million incurred during the quarter.

Our balance sheet continues to be strong and in line with our Triple B investment grade rating. At quarter-end, our debt to run rate EBITDA was 5.3 times, and our fixed charge coverage ratio was 3.0 times. We continue to operate in our promulgated leverage ranges of 5 times to 6 times debt to run rate EBITDA and greater than 2 1/2 times on a fixed charge coverage ratio.

During the quarter, we executed $75 million preferred equity issuance with a coupon of 6 7/8. This pricing was in line with our expectation and significantly below our $69 million outstanding Series A 9% preferred, which is callable in November of this year.

As of the first quarter, we had $6 million outstanding on our revolver, $476 million of immediately available liquidity, which exclu-- which includes cash on hand of $15 million and an unfunded $150 million five-year term loan. This unfunded term loan is fully swapped out for 2.69% and will be drawn by September 2016.

At quarter-end, we had approximately $920 million of debt outstanding with a weighted average maturity of 6.4 years and a weighted average interest rate of 4.2%. All of this debt is either fixed rate or has been swapped to fixed rate, with the exception of our revolver.

As discussed last quarter, we have enhanced our disclosure on capital expenditures and leasing costs. This can be found on Page 16 of our supplemental reporting package. From a capital standpoint, we have a variety of capital sources we plan on using to execute on our relative value acquisition strategy. The preferred issuance and the strong disposition activity during the quarter will assist us in executing on that strategy.

I will now turn it back over to Ben.

Thanks, Bill. While we were pleased with the recent recovery of our stock price, we continue to make progress on the plans we put forth last summer.

First, we are showing G&A discipline. Our Company is fully staffed to take advantage of the continuing opportunities we see in the market. Any additions to head count in the near te-- in the immediate term will be related to portfolio growth and will be de minimis. This will allow us to demonstrate the significant power of operating leverage.

Second, as prudent and rational allocators of capital, we are both conscious of and open to the various potential sources and uses of our capital. The big three uses of our capital -- buy assets, reduce debt, buy back stock -- will all be considered and capital applied as appropriate at that time. We continue to allocate our available capital to the highest current shareholder return: accretive acquisitions.

Third, we have shown continued earnings growth. Core FFO per share increased 11.4% over 1Q 2015.

Fourth, we are establishing alternative equity capital sources. Two elements of this sourcing were demonstrated in Q1: our recent issuance of preferred equity, and our $30 plus million in dispositions. Additional dispositions of $70 million to $170 million are on the horizon for 2016 and these dispositions will extend our acquisition capacity.

As we move through 2016, we will continue to focus our efforts around the strengths of both our investment pieces and the Company. The continued abundance of acquisition opportunities and the very accretive nature of these acquisitions make for a very bright future for our Company.

We thank you for your time this morning and for your continued support of our Company. I will now turn it back to the operator to open the floor for questions. Thank you.

(Operator Instructions) Sheila McGrath, Evercore.

Ben, I wanted to know on the disposition program, how are you identifying the assets to sell? And also, you mentioned a portfolio for sale. Just wondering how the pricing of the portfolio might compare. Are you getting a premium versus selling those assets individually?

Yes. Thanks, Sheila. Good morning. So the -- as Bill described, there's sort of three types of acquisitions. The portfolio acquisition which you touched on last is a -- we definitely believe there's a premium.

These are assets that we're going to sell in a portfolio. We expect for 100 basis points plus inside of where we bought them on an individual cap rate basis. So we're definitely looking at demonstrating some accretion there.

The other two types of dispositions that Bill described are the opportunistic dispositions on a one-off basis where the assets were some -- worth more to somebody than it is to us in our portfolio. We accomplished two of those in the first quarter in unlevered IRRs in excess of 20%. So very accretive, very opportunistic.

The last and sort of least attractive is the dispositions of assets that we feel are non-core and no longer belong in the portfolio. That was a relatively small amount of dollars and these are assets that simply, for instance, like call centers that we no longer want to own. That we simply have decided to dispose of.

Okay. And then on those dispositions, did you disclose the cap rate that you sold the assets at?

We did not. We're really a -- as we've described through sort of the course of these calls over the years, we're really not a cap rate buyer or seller. I think the cap rate just sort of falls out. As I said, these were very, very accretive transactions with, again, unlevered IRRs north of 20 on the opportunistic dispositions.

Okay. And last one on the dispositions, since you're doing wholly owned asset sales, does -- is this strategy going to take the place of entertaining a joint venture?

I think we have as described the alternate sources of capital that would allow us to continue our very accretive acquisitions. We've sort of listed out those sources and I think the most, I would say the non-alternate source, common equity, is still the -- our most desired form of equity capital.

I think in descending order of attractiveness to us, I think dispositions is next. I think the JV and the preferred equity probably falls in there somewhere. We've already done that. The JV is -- has always been to us the least attractive form of alternate capital because of the confusion of the balance sheet. Potentially other cooks in the kitchen with regard to the asset mix that we acquire, et cetera.

So it's always been the lowest, I think, that with our common equity, current pricing, and hopefully perhaps some continued improvement in that pricing, the joint venture becomes a much dimmer option for us going forward.

Okay, great. Thanks.

Gaurav Mehta, Cantor Fitzgerald.

Ben, going back to your comments on common equity being the most desired form of capital. So when you look at your common equity, do you look at your NAV per share? Or you look at your pricing? And how do you decide when it is attractive or [you go] through equity versus alternative forms of capital?

Well, I'll tell you, I would say we're certainly not unknowing about the NAV discussion. But we're really focused on the accretive nature of our acquisitions. We certainly don't want to irritate or whatever the people that are focused on NAV.

But we are quite confident that at equity pricing similar to where we are today, that we are -- we would be quite accretive if we issued equity today. Having said that, we have virtually no revolver balance, we have cash on hand, we have a, as Bill described, some other sources of liquidity.

We're running at the sort of lower end of our promulgated leverage range. So we don't have any immediate needs for equity capital. So the discussion of where we -- and as we've indicated, we have done some dispositions. And more dispositions are on the way, which extend that capacity, et cetera.

So we're not in a position where we have to make that decision as to which source of capital we're going to access next. It's not a current decision.

Okay. And a second question. I was wondering if you could provide some update on what you're seeing in acquisition market today versus earlier this year.

Yes. I think we mentioned our pipeline is at $1.7 billion which is, I think, cyclically it goes up and down. But $1.7 billion is approaching some of the highest levels we've seen.

Again, that pipeline is assets that have been through an initial triage. So they're assets we've identified that make sense to us on at least a cursory basis -- that have been underwritten on at least a cursory basis.

So we have some degree of confidence that these are assets that we would like to acquire. We're fully cognizant of the fact that in order to maintain our pricing discipline, et cetera, we're not going to be able to buy all these assets.

And certainly they're -- our history has been not. But we're finding the market replete with opportunity. Again, the -- our ability to look broadly across the 60, 75 investable industrial markets in the United States gives us a huge advantage in terms of finding assets to acquire and acquiring them.

We're simply not competing with as much organized capital, say, in markets 25 through 75 as we would be if we focused on markets, say, 0 to 25.

Yes. Additionally, Gaurav, there's $113 million of acquisitions under ROI in contract. And as I said on my prepared remarks, we expect cap rates to be in the low- to mid-eights for this year.

Okay, great. Thank you for taking my questions.

Juan Sanabria, Bank of America.

Just on the disposition front. I know you don't want to talk to first-quarter cap rates. But could you give us a range for expectations for the full year in terms of the numbers you've talked about as part of guidance?

Sure. I think as I just described, we expect the bulk of those -- the acq-- dispositions going forward to be in this portfolio ra-- portfolio dispositions. And those we expect to be on the order of 100 to 100 plus basis points inside of where we acquire them.

The math would then tell you that since we have acquired in the last couple years eight to 8 1/2, that these are probably going to be in the 7 to 7 1/2 range as the portfolio.

Great. And then just on the distribution front --

And one thing I might say there is there's a lot of talk in the market as we listen to other people's calls and talk to other market participants about the disposition market may be getting a little bit weak because of the CNBS dislocation.

We have been in the market with these assets and we do know the nature of the buyers and the likely buyers. And they are not by and large users of CNBS debt. They're more likely to use regional bank relationships for their debt.

So we're not -- we don't have a great deal of concern about the robustness or the buyer market for what we're trying to sell.

Thanks for that additional color. And switching gears. Just on the distribution vis a vis AFFO after adjusted for CapEx. Thank you for that incremental CapEx disclosure.

How do you guys think about the dividend with an all-in CapEx accounting for that non-recurring, from what my understanding, that roofing-related CapEx? And where you'd like that payout ratio to go adjusted for that all-in CapEx?

Yes. That's certainly a metric that we will pay attention to as we go forward. We're projecting, I think, obviously we've given you all the pieces. You and other analysts, other investors can make their determination as to what metric they want to look at relative to the dividend.

We know that our -- certainly there's more dollars being allocated to these non-recurring expenses than simply the recurring CapEx. These are long-term benefit assets, if you will. The roofs, et cetera. I think we've estimated our average roof life is 22 years.

So these are not things that are really operating expenses. They're long-term capital expenses. But having said that, we think that even under the most onerous definition of whether it's cash, funds, whatever available, that our ratios will continue to decline in the coming years. And decline significantly as we will continue to grow our FFO per share.

Okay. And one last quick question for me. How should we think about you financing the repayment presumably in November this year of the 9% preferreds? What kind of --

Well, I like to think that we're using the 2.69 swapped-out five-year term loans, because that means we have a 600 plus basis point accretion. The reality is, it will be financed generally out of our capital structure. So we think about it long-term as financing partially with equity and partially with debt.

Yes. And we'll maintain our promulgated leverage spans of 5 times to 6 times. And greater than 2 1/2 times on a fixed charge coverage. So whether the proceeds come from asset dispositions or the five-year term loan, we'll make sure we're within our promulgated leverage spans.

Thank you.

Dave Rodgers, Robert W. Baird.

Maybe, Ben, for you or Dave can chip in on this, too. But just want to talk about your leasing activities, the tenant decision making process. Are you having more discussions about tenants seeking growth? Is there any risk you lose more tenants? And do you talk about more rationalization of space out there? And any thoughts on (technical difficulty) --

Yes, Dave, this is Dave King. We are seeing a lot more positive attitudes amongst our tenants. And more interest in expanding spaces and expanding buildings. We've got one underway right now and another four in discussion.

So I think the attitude amongst our tenants is very positive. You can see that in the extended leasing terms from this quarter. We've addressed about a third of our roll this year from this day forward. So decisions are coming faster and people are deciding to stay longer term.

Yes. One thing I might add is in terms of tenant retention, we're forecasting 70% or so for the year. That's including the 42% for this quarter, which really was, by our definition of retention, was a non-retention.

But the people and the products and the buildings didn't change. It's just the lessee changed as an operator took back over the operations of a warehouse from a third-party logistics provider.

So we're expecting for the remainder of the year in order to end up at 70% remaining -- we're expecting retention to be above 70% for the remainder of the year.

Okay. And I guess with regard, then, to the demand for more space or growth discussions and an overall positive attitude, do you feel that rents are going to continue to firm? Should we expect spreads to get a little bit better? Or is that pretty much where we're going to be for the rest of the cycle, do you think?

Well, no, there's no question that -- we've talked about some of the dynamics in maybe less glamorous markets like we've been told by the brokerage community that in, for instance, Cleveland, which is a circa 300 million square foot market, that there's basically zero availability of sort of fungible modern warehouse space.

There is availability but it's low clear, antiquated sprinkler systems, not enough docks, et cetera. But if you want sort of adequately docked, 24-foot clear or higher with ESFR sprinklers, basically zero availability over 100,000 square feet.

So those type of dynamics, which maybe not quite as drastic as zero availability, but those types of dynamics exist across most of the middle size or secondary markets where supply is not an issue in terms of bringing in relief to that. So you're going to see rent growth across those markets.

Now having said that, one of the things that we do in tr-- well, not one of the things. Really the only thing we do in trying to put together our portfolio is to maximize the cash flow derived from owning those assets per dollar of equity invested.

We're not building portfolios to have the highest rent growth or the highest same-store NOI or any of these other metrics that I think are interesting metrics but maybe not as descriptive of what the ultimate goal is, is to maximize cash flow.

Great. That's helpful. And then maybe just last one for me. In terms of the acquisition pipeline, you talked about maybe reduced competition, I think, in a previous answer. Can you just expand on your answer about competition that you're seeing for the acquisitions you're looking for? And how that may be impacting time to close?

I don't know that it's affecting time to close so much. I -- we're expecting that the CNBS dislocation, introduction of risk retention later in the year, et cetera, may have an impact on debt availability. The amount of debt and the cost of the debt.

Our competitors are people that, in the secondary markets, are largely people that use either CNBS or bank relationships. And we think that our capital advantage will, I think, increase through the year and allow us to be more competitive on more transactions.

It's all kind of marginal analysis as to whether price elasticity of supply, et cetera, as to whether or not that eventuates in any change in the amount of acquisitions. I don't think we're seeing much difference in the change of time to close. Steve, do you want to --

No, no, no. And I think the -- in terms of the number of competitors on each deal, it really hasn't been dramatically less. We're still seeing the same people -- same type of groups in each market that we're in sort of competing with our deals. So and that definitely the time to close hasn't really extended out at all.

All right. Great, thanks, guys.

Blaine Heck, Wells Fargo.

Ben, following up on acquisitions. Last quarter you talked about cap rates staying stable from your perspective. But there was the possibility for cap rate expansion. And given I guess the small decrease in competitors, have you seen any evidence of that yet? And I guess what's your view on where and when that might take place in the future?

Well, I think, we continue to say we don't think cap rates have moved. I -- what was I alluding to earlier was an expectation that maybe that this would be finally the year when cap rates started to move up.

But like a lot of other prognosticators have said that in prior years. Other prognosticators are usually saying that about interest rates. So I don't know that we've really seen much. Although I will say the very small sample -- our fourth-quarter average cap rate was 8.7, our first quarter average cap rate was 8.5.

Clearly higher numbers. But I -- we don't think that's necessarily indicative of any -- a long-term trend at this point.

Okay, that's helpful. And then, Bill, thanks again for the new disclosure related to CapEx. It looked as if the acquisition CapEx was high during the quarter. I think it was about as high as it was all last year. Does that have to do with the redevelopment spend on the Portland building you acquired?

The acquisition CapEx in the slide is related to acquisitions we have acquired over the past 12 months and the actual spend hitting our books. So it wasn't necessarily all related to the redevelopment this quarter. It was -- some of it related to that.

But I do want to point out, too, as we calculate cap rates, if there is any acquisition CapEx in there, that is included in our cap rate calculation as well.

Okay. It just looked like the $1.2 million in the three months ended March 31 versus kind of the $1.4 million spent all year last year was a little bit off. So did that have to do with acquisitions that you had in prior years as well? Is that correct?

Well, just in the last -- within the last 12 months.

Okay.

So as we define an acquisition CapEx as CapEx-related that we underwrite to spend in the first 12 months. So as we spend that CapEx, it'll impact disclosure.

Okay, that helps. And then just one more thing with you, Bill. We've talked about your targeted leverage being 5 times to 6 times on a debt to EBITDA basis. Do you guys have a target for debt plus preferred to EBITDA? I think you're around 6.5 times now?

Well, it's -- we look at debt to EBITDA as our primary leverage metric. But we also look at fixed charge coverage as that factors in the preferreds. There's the 9% Series A that is coming due in November. So we're going to look hard at potentially calling that in November.

But really, we focus on debt to EBITDA and fixed charge coverage ratio, which we feel captures the preferreds.

All right, great. Thanks, guys.

Thank you.

Michael Carroll, RBC.

Ben, can you talk a little bit more about your earlier JV comments? I know this is not an option you want to pursue, but how long are you willing to wait for the equity markets? And at what point will you decide to pursue this type of transaction?

Well, again, as I said earlier, I think that we would be -- and again, we don't need equity at this point. But I think we would be comfortable somewhere in the vicinity of where we're trading today that issuing equity would be very accretive to our financial metrics and very beneficial to our shareholders.

So that plus the fact that we are having success in the disposition area. We were successful in the preferred offering. All of those combined to push JVs as an option back. So I wouldn't say it's off the table but it's just -- it's moved down. It's under the table right now.

Now, it's just moved down in the order of hierarchy at this point. Again, we think that the negatives associated with a joint venture, the confusion of the balance sheet, another cook in the kitchen, a variety of other things outweigh the potential advantages of it as compared to these other sources of capital.

And if we need to, we can continue to dispose of smaller to medium sized portfolios going forward in future years above and beyond the $100 million, $200 million of dispositions this year.

Okay. And then --

But having (multiple speakers) --

-- is that a good --go ahead, Ben.

No, I was just going to say we are (multiple speakers) --

Is that a way --

Never mind.

All right. I was going to say --

Go ahead. I'm sorry.

Maybe that you could maybe talk a little bit about your disposition activity. You have $100 million to $200 million this year. And, Bill, I think you mentioned you can continue to do something towards that level.

Is that a good way to think about that you'll have some type of small ongoing business act-- disposition activity going forward?

I think I was actually getting ready to answer that. Is the disposition activity that we are undertaking in the portfolios, these are not assets that we don't think are good assets in our portfolio.

We're demonstrating value creation by selling these. We're extending our ability to acquire assets. But we are very much committed to being a net acquirer. So again, we're -- the assets we're selling in these portfolios are not -- they're neither the cream or the bottom. They're sort of representative of our portfolio. And therefore we'd be perfectly happy holding these assets.

But we've decided that in listening to interests of other people and et cetera that it makes sense for us to demonstrate this value creation as well as to extend our capacity to acquire this year through dispositions.

I don't know that you would see us necessarily being a continuing disposer of assets going forward. There are a l-- there certainly will be some level but I don't think it's going to be as programmatic as perhaps this year.

Great. Thank you.

Tom Lesnick, Capital One.

Just a couple of quick ones from me. First, I guess with refer -- regarding the preferred issuance this quarter. Obviously the other issue isn't redeemable until the fall and you have other lower costs versus the capital in the interim.

Did you guys see some sort of dislocation in the preferred market that you wanted to take advantage of pricing wise? Or could you just kind of walk through why you did the preferred issuance so early in the year?

Well, I think prefer is -- it's called preferred equity. And it is equity because you'll never have to pay it back. So we certainly view it as leveraging our common equity.

So we're very comfortable with issuance of preferred equity up to some level of our capital structure. I think in the past we've suggested maybe as much as 10% or 15%. Right now, I think we're around 10%.

Having said that, it is certainly expensive relative to debt. And we view it, though, as a way of extending our acquisition capacity. It was very accretive as a form of equity and in leveraging our common equity. So we were comfortable to issue it.

Now, we did not issue a tremendous amount of it. We issued an amount that is sort of in -- near to the amount of the callable preferred in the fall. And an amount that we thought was co-- we were comfortable that in between it and our disposition activity would provide us all the capital that we needed this year should we stay out of the common equity market.

Got it. Appreciate the insight. And then one last one for me. It looks like the intangible lease amortization burned off a little bit sequentially. I guess how should we be thinking about the trending throughout the year?

You can probably run rate that number. Maybe increase it a little bit. It all depends on the type of leases we acquire and where those are marked day one from a GAAP perspective.

So, yes, you could model it run rate this quarter, maybe increase it a little bit as we continue through the year.

All right, great. Thanks. Appreciate it.

You're welcome.

(Operator Instructions) Dan Conlin (sic), Ladenburg Thalmann.

Just wanted to talk about the lease roll going forward. Are there any notable move-outs that you guys are projecting over the next three quarters?

Well, as we said earlier, there's going to be for the year 70% retention. With 49% in Q1 and a sizeable lease roll in Q1, that retention rate for the rest of the year will be north of 70%.

And given the size of our portfolio and the granularity of it, there's nothing in the portfolio or certainly nothing rolling that we know about that we would deem significant with regard to the operation of the portfolio.

Okay. Yes, that's helpful. And then as we look at your occupancy, Ben, we're -- you're down to 94.8%. That's down from about 95.4% last year around this time. Are we getting close to market level occupancy, you think, for your portfolio? Or do you think we need to (inaudible) maybe 50 or to 100 basis points lower occupancy before you're kind of at that market level? What's your thoughts there?

Yes. Our portfolio has consistently operated at occupancies above the general market than what markets in which we operate in. As the national occupancy rate continues to creep up, I think we think generally that we will continue to outperform the national market.

So there's a bunch of different statistics out there but I don't think that the level that we're at today is necessarily -- or is probably the best indicator of where we'll be going forward. We've always said sort of the 94% to 96% is -- I think we've always said that as kind of a range we operate in. And so we view the current levels of occupancy as not unusual for the portfolio.

Right. But you've been in the high 90s before and I think that's kind of eaten a little bit away at the same-store. So, but I guess it sounds like you feel like that should be a kind of -- that's been a tailwind for you guys and -- or excuse me, a headwind for you guys. And maybe it's going to become less so in the future, I guess is really what I'm asking.

Well, I think the same-store NOI dynamic where we're acquiring largely 100% occupied buildings, there's been -- we certainly have acquired some degree of vacancy in the last few months, anyway. Last quarters.

But we are still focused on buying primarily 100% occupied buildings. So that same-store dynamic, whether it's occupancy normalization, will continue to occur where you sort of have rent growth and rent rolls to market fighting to get the occupancy normalization.

So our circa 1% same-store NOI growth this month is pretty strong, actually, when you consider the fact that we're normalizing occupancy on that -- on those cohorts that have been recently acquired.

Okay. Makes sense. And then as far as your comments on online retailers, given that your portfolio is 27 years old, how does that work? Do they tend to want -- are they okay with kind of older buildings?

Or is it just kind of a function of -- you talked about Cleveland. What's -- there's not basically any -- a certain amount of square footage over a certain size. How does that factor into their decision making? Do you see (inaudible)?

Yes. It's interesting, industrial buildings, warehouses are four walls, a roof and ingress, egress through dock doors, drone slots, or whatever. A building built in 1970 with 26 foot clear and single-side loading is gon-- is -- remains functionally satisfactory or sufficient, if you will, and provides the needed industrial utility for probably 90% of the tenants out there whether they're doing e-commerce or doing supply chain for a factory right next door to them.

I think a lot of buildings end up being utilized for both e-commerce and for sort of more normal supply chain activity. I don't think there's a -- I think the market would like there to be a -- you could drive up and go: Oh, there's an e-commerce building. But the fact of the matter is, what goes on inside the building may differentiate what type of building. Or does differentiate what type of building it is.

And what -- and the nature of things that go on in terms of material handling, equipment, voice activated picking, and RFID and things like that. All those things are changing inside the building. But the buildings themselves, again, that 1975 build or whatever, is probably going to be sufficient for most people.

The -- at the bleeding edge, you have the Amazons of the world who are building very special -- or much more special purpose, expensive buildings to do something specific. But I don't think that's necessarily --

If you remember the trend three years ago as everybody was trying to build million square footers. And now everyone's talking about building 100,000 square footers near city centers.

So as that -- as these ways, the bleeding edge sort of wash back and forth, the 200,000 to 350,000 footers which are -- make up the bulk of our assets continue to be sort of in the middle as the wave washes back and forth around the periphery. These types of buildings have been used and will be used.

The other thing I would say about the portfolio age is for better or for worse, with the exception of I think Duke was a relatively modern portfolio compared to the rest of the world. Most of the industrial reach average ages in the 20s.

So it's not like there's any u-- there's any great rush out there. These are highly occupied buildings, again, across all the public REITs. And they have, again, the -- most of these buildings are the average age is in the mid-20s. Because they're still functional.

Okay. That's very helpful. Last question, on the non-recurring CapEx, I think that's mostly roof replacements. Was just kind of curious how that is going to trend over time.

If I look back at this Page 16, which is -- appreciate the new disclosure there. It's gone up every year. It looks like -- I'm sure this -- I can't really run rate the first quarter. But it's going to come in below -- if I run rate it, it's going to come in below 15.

So how do you think that trends over time? Could it be really, really lumpy and -- or could it kind of potentially be (multiples speakers) -- yes, go ahead.

There's certainly going to be some lumpiness, as these are non-recurring items. It's trended up primarily due to the size of the portfolio. But as we said before, on a per square foot basis, total CapEx has run -- we underwrite $0.25 on total CapEx.

And that has run below that every year since we've been public. There could be spikes where some years it runs north of $0.25. And some years, as we've seen in 2015 and prior, that it's run below that.

So there -- it's certainly going to increase and decrease some, depending on the type of activity or age of some of the roofs we have.

But as Bill points out, as the portfolio increases in size, on a portfolio basis, these expenditures will smooth out and become probably less spikey as the portfolio grows.

Okay. And when you say total CapEx, are you including in terms of $0.25, are you -- you're not including acqui-- are you including the acquisitions and building expansions in that, too? Or is that --

No, just the recurring and non-recurring. The building expansion is really development. And the acquisition we touched on earlier. It's really -- you get a one-for-one purchase price deduct for that. So.

Sure. Sure, got you. Thanks, guys. Appreciate it.

(inaudible)

Mitch Germain, JMP Securities.

Just a quick one. Did you guys give the characteristics of the portfolio you're putting on the market for sale?

Yes. We've -- obviously, it's before we decided what we were going to try and sell. We spent some time talking to the big brokerage houses in -- that are active in the industrial market.

In the sweet spot today for the buyer pool, again, it's probably related to availability of financing, is in the $30 million to $80 million range. So the things that could be financed with regional banks, et cetera.

And since it's going to be focused to the regional lenders, it probably makes sense for ease of purchase and for what we think people are looking for to be geographically approximate.

So we put together four of five cities of -- a collection of assets that are -- could be driven in a day, et cetera. And looked at those collections of assets and decided to put sort of a I-81? Five? I-85 corridor portfolio on the market in the Carolinas and Georgia.

And so that's the -- that's our original focus if we, as Bill suggested, we might bring other portfolios to the market. They will have the same characteristics, geographic proximity. One of the beauties of having 300 assets is we do have collections of assets in geographic proximity. So it's not a huge stress for us to be able to put together those portfolios.

And they (multiple speakers) --

And these are what -- go ahead.

I would just add that these are representative of the rest of the portfolio in terms of quality and sizing.

And so -- but -- and these are warehouse assets, right? Not flex or --

That's right.

Thank you.

Michael Mueller, JPMorgan.

Going back to equity for a second. I know that you're not planning on raising any equity outside of asset sales and stuff over the near term. But do you see yourselves, given the pipeline, using the ATM at all? Or anything like that in calendar 2016, even if it's third or fourth quarter?

I would -- Mike, excellent question. I would say we're seeing lots of opportunity out there. We do have a lot of liquidity and available capital. We are operating sort of at the lower range of our leverage ranges.

But certainly as we develop opportunity and look at our sources and uses, we are not opposed to issuing equity. I think it's h-- I think it's reasonably likely that our first equity issuance would be in a follow-on as opposed to an ATM but that's a decision that hasn't been made.

But having -- I think, the first and foremost is, at this point we don't -- if we raised a dollar of equity today, we'd put it on our balance sheet as cash. We just -- we don't have an immed-- we don't -- unless a lot of REITs, we've not built up a significant amount of revolver balance.

A little bit of Kool-Aid there, that 1.4% debt. Since we're operating without a revolver balance, if and when we were looking for additional sources of capital, it would be to fund acquisitions.

Okay. But if the pipeline's moving along and you have the -- it -- do you see anything in 2016? Or no?

We see lots of accretive acquisitions.

Yes. We're going to -- as Ben said in his prepared remarks, we're going to be prudent (inaudible) is the capital. And look at all sources and uses. So we're certainly happy with the share price appreciation over the last couple months.

But we're going to look at equity, look at preferred, look at asset dispositions at all -- as all sources of equity for the various uses.

Okay. Thanks.

Sheila McGrath, Evercore.

Ben, year-over-year FFO is pretty strong the last two quarters. I'm just wondering how we should think about dividend growth. Any thoughts in picking up the dividend growth?

Yes. We -- obviously, it's a little bit of a legacy from our IPO. We've always been a very high dividend payer. Dramatically higher than the other industrial REITs. And have had -- not always, but have a relatively high payout ratio today.

The capital that we would provide for our acquisition activity by retaining earnings is obviously the cheapest form of capital that we can derive. So a combination of things. The safety of the dividend by lowering the payout ratio and maybe being able to use a little of that internally generated capital are attractive things to us.

So what we've said in the past and will continue to say is we're moderating the growth of our dividend in order to, again, retain a little bit more capital, lower that payout ratio a little bit.

I think we are committed to being a dividend increaser but at a very much moderated rate for the foreseeable future.

And is there a target payout ratio that you have in mind? Just over time, are you trying to get to a certain level, a percent of AFFO?

I think we'd like to see it under 80. But I don't know that we have a promulgated number at this point.

Okay. Great. Thank you.

Thank you, Sheila.

(Operator Instructions) Thank you. We have reached the end of the question and answer session. Mr. Butcher, I would now like to turn the floor back over to you for closing comments.

Thank you for your questions today. We enjoyed the give and take. The STAG machine is fully built out and ready to perform. Resulting operating leverage we now enjoy, combined with our ability to acquire assets at good relative values, and the continued availability of attractively priced debt should provide for compelling growth this year and going forward.

We continue to have strong conviction in the breadth and strength of the opportunities that lie ahead. We appreciate your time this morning and your continued support of STAG. 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.