STAG Industrial Inc (STAG) 2016 Q3 法說會逐字稿

Welcome to the STAG Industrial third-quarter 2016 earnings conference call.

(Operator Instructions)

As reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Spenard. Thank you. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the third-quarter 2016 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental informational 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 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 discussions 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, November 4, 2016. STAG Industrial assumes no obligation to update any forward-looking statements. On our call today, you will hear from Ben Butcher, our Chief Executive Officer, and Bill Crooker, our Chief Financial Officer. And with that, I will now turn the call over to Ben.

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

The third quarter was another very strong one for STAG. We had our second largest quarterly acquisition volume and are projecting acquisition volume in the fourth quarter to be the largest in any quarter in the Company's history. We also enjoyed exceptional operational results as our own portfolio continues to benefit from the very strong industrial fundamentals and our expertise in actively managing our assets.

Our principal focus continues to be on the bottom line and we are happy to report that we grew our quarterly per-share metrics, both sequentially and year over year. We continue to see widespread opportunities for accretive acquisitions as we look broadly across the US industrial landscape. This is reflected in our current dynamic pipeline of $1.9 billion.

The availability of accretive transactions has proven to be a persistent opportunity for us to deliver growth to our shareholders. Because of the very fragmented ownership structure of US industrial assets, we frequently acquire from smaller sellers whose individual reasons for selling are relatively uncorrelated to each other or to macro conditions.

For instance, a seller may be looking to pay for their child's education, to buy a boat, or simply retire and not have to manage the asset. This dynamic drives a persistent and widespread availability of accretive acquisition opportunities.

On the operations side of the business, STAG continues to benefit from the tailwinds and resulting strong fundamentals enjoyed by our peers. The growth of e-commerce continues to be an incremental demand driver for our space. We are seeing strong tenant demand for our buildings, decline in vacancy and rising rents across the markets we operate in.

This is reflected in our strong operational results. Despite these strong fundamentals, we are not seeing speculative supply as an issue in the majority of the markets we participate in. The new supply we do see in our markets tends to be at the build-to-suit variety.

As we mentioned previously, we are selling a small portfolio of our assets which we put under contract in October. This portfolio sale consists of six assets that are representative of the overall STAG portfolio of approximately 300 assets, consistent with the overall portfolio and parameters, such as building size, age, lease term and [finet] credit quality.

This sale demonstrates a portion of the value created by the STAG platform through the aggregation of individual binary risk cash flows into a discrete, diversified portfolio. The resulting capital raised from this transaction will be redeployed into accretive acquisitions with cap rates well above the portfolio execution cap rate. With that, I will turn over to Bill to walk through our third-quarter results.

Thank you, Ben, and good morning, everyone. The third-quarter results demonstrate our continued focus on execution and the strength of the industrial market. The acquisition volume closed this quarter doubled the amount closed in the first half of the year. The previously [messaged] portfolio disposition has been placed under contract with pricing in line with previous guidance and our operational results continue to display the strength of the portfolio.

During the quarter, we acquired 13 buildings for a purchase price of $166 million, with a weighted average cap rate of 7.9%. These attractive acquisition opportunities continue to persist and as our current pipeline suggests, we continue to underwrite a significant number of potential transactions across the markets in which we operate.

We currently have 30 buildings for $331 million that have closed subsequent to quarter end, are under contract, or under LOI. Included in this number are two forward commitments for $51 million related to build-to-suit takeout transactions expected to be completed and funded in 2017. On our last earnings call, we increased our acquisition guidance for the year to between $350 million and $450 million and we are confident they will be at the upper end of that range for 2016, while maintaining our investment returns.

We continue to execute on our disposition plan. In the third quarter, we disposed of three non-core buildings for $835,000 and, as Ben mentioned, we are under contract to sell a portfolio of industrial assets for $80 million, which is expected to close by year end. We continue to expect pricing to be in line with previous guidance in the low 7% cap rate range.

At quarter end, we owned 300 buildings, with a total of 59 million square feet. Occupancy for the operating portfolio stands at 96.4%, with an average lease term of 4.1 years. The quarter's operating portfolio cash and GAAP rent change for signed leases were up 7% and 16%, respectively. We have a retention rate of 92.4% on the 1.3 million square feet expiring in the third quarter.

The operating portfolio's cash and GAAP rent change for their retained tenants were both up 3%. We continue to expect retention for the full-year 2016 to be approximately 70%. From an operations standpoint, cash NOI for the quarter grew 10% from the prior year. Same-store cash NOI grew approximately 3.4% over the same period.

Core FFO grew by 9% compared to the third quarter of 2015 and on a per-share basis, core FFO was $0.40 per share, an increase of approximately 2.6%. Our balance sheet continues to be strong and in line with our BBB investment grade rating, which was reaffirmed by Fitch this quarter. At quarter end, our immediately available liquidity was $468 million.

Our net debt to run rate EBITDA was 5.3 times, and our fixed charge coverage ratio was 3.0 times. At quarter end, we had approximately $1 billion of debt outstanding with a weighted average maturity of 5.7 years and a weighted average interest rate of 4%. All of our debt is either fixed rate or has been swapped to fixed rate, with the exception of our revolver.

During the quarter, we sold 4.2 million shares under our ATM program, with gross proceeds of $101 million, and a weighted average share price of $23.97. Subsequent to the quarter, we sold an additional 3.1 million shares, with gross proceeds of $71 million. Additionally, our Series A Preferred with a coupon of 9% and a notional balance of $69 million was fully repaid on November 2, 2016. I will now turn it back over to Ben.

Thank you, Bill. At least one previous occasion on our earnings call, please let me apologize for what seems to be the overuse of the word, continues. Adherence to a fundamentally sound approach to persisting market opportunity leaves us little choice but to overuse that word in describing our results and future.

We are pleased with the progress we have made this year and our expectations for the fourth quarter and beyond. We will continue to focus on growing the bottom line and delivering the best risk-adjusted returns to our shareholders. Maintaining the strength of our balance sheet and lowering our cost of capital is an important part of delivering these superior risk-adjusted returns.

Our commitment to these goals is demonstrated by our capital markets activity during and subsequent to the quarter, and additional equity raised through the ATM, and the repayment of our 9% coupon Series A Preferred. Since our IPO, we have demonstrated a commitment to providing our shareholders with not only growth but also income.

On November 2, our Board of Directors approved a dividend increase to $1.40 per share annually. We have now raised our dividend every year since we have been public. This continued focus and demonstrated capital discipline, combined with the abundance of accretive acquisition opportunities, 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'll now turn it back to the operator to open the floor for questions. Thank you.

(Operator Instructions)

Tom Lesnick of Capital One Securities.

First, I was just wondering if you could talk about the pipeline a little bit and its composition? How has that changed at all over the past year? Are you seeing any more portfolios meeting your criteria? Bigger buildings, smaller buildings?

I think that the composition of the pipeline tends to be relatively consistent. It rises and falls with quarterly general real estate activity. As we get into the second and third quarter, it tends to get into the larger numbers, as people try and set up deals up to close before year end and tends to trend down a little bit as we get through the fourth quarter and into the first quarter. But it's pretty consistent throughout in terms of the greater opportunities. I don't think that we've seen much in the way of change. Steve, do you --?

No, in terms of portfolios, the larger portfolios are still being priced fairly aggressively. We do compete on the small to mid-sized, $20 million to $50 million portfolios. A little bit more, but a little better than we do on the larger ones but in terms of mix, the mix is pretty consistent quarter to quarter.

Got it. That's helpful. And then I guess along those lines, can you talk at all about how seller motivations may have changed over the last few months? Are you seeing more tax-driven motivations going into year-end? And has the election had any impact on that at all?

I think that the nature of our filter, the way we operate our business and the way we identify assets tends to make for the pipeline consistency. We are very mature and conscious, et cetera. We have a very set way of looking at things, as that ensures the consistency of the pipeline. I don't think we've seen much in the way of changes.

I think every year, there is tax-driven activity with regards to selling. I don't know that anybody has underwritten any great change going forward, at least not among the sellers that we are doing any great change and expectations about capital gains, tax rates or the like.

I think that it's the -- well, we mentioned during the call is that the -- a lot of the sellers we deal with are not looking at macro events and making the decision to sell. Then on a macro basis may have some tax motivation. But it's not a -- we don't see anything massive in terms of a correlated reason for the pipeline changing in any material way.

Got it. Appreciate that and last one for me. Retention was very strong for you this quarter, and frankly, was strong for the industrial group broadly. Heading into next year with about 9.7% of your rent expiring, how do you think that will impact occupancy over the next few quarters? Do you expect retention to remain elevated and do you see that as a tailwind for occupancy?

So I mean, retention, obviously, from quarter to quarter can vary quite a bit depending on which particular tenants are coming up in the quarter for renewal. We have a -- our expectations of how the tenants that will roll next year are going to behave in whether they're going to renew or not.

We actually have a fair amount of visibility of it. We are still thinking that it's going to be in the mid-60%s to 70% range. However, I would say one of the things that is interesting about high retention at this point, with both us and some of our competitors is the most likely reason, by our observations for tenants to leave is actually business is good. The building isn't big enough. Either through consolidation or M&A activity or just general growth of their business.

And so when you run into really good economic times, it's more likely actually the retention goes up than down. But we're seeing a pretty steady state environment right now. I don't think there's been that much projected change in the environment on the next six, 12, 18 months to cause much in the way of change.

All right, guys. Really appreciate it. Thanks a lot and nice quarter.

Thanks Tom.

Blaine Heck of Wells Fargo.

Ben, can you talk a little but more about the disposition environment at this point and whether you have seen any change in the amount of interest at buyers or their ability to obtain financing for the assets you guys are selling? And I guess how does the financing situation change for the buyer with respect to buying a single asset versus buying a portfolio like the one you are selling?

Well, I think there is no question. We've talked about this before that the portfolios are easier to finance and that part of the capital structure and therefore, the pricing of portfolios is going to be stronger. The cost of capital is going to be lower for the debt portion of it.

The portfolio purchase versus a single asset purchase. The single asset was a moderate term lease and it was very difficult -- and may be a private credit; it was a very difficult financing. You drop them into five or six assets with some diversification and it looks a lot like a multi-tenant building or multi-tenant industrial park and you can get much better [fee room] from the lenders.

Our activity in selling assets, we've announced and will close this quarter. A portfolio sale, I think, is reflective of the strength of the financing available to people that are buying portfolios. One of the advantages -- continuation of one of our advantages as we pursue assets on a one-off basis is we are frequently competing with people who don't have the access to capital because of our large portfolio that we do.

We're not trying to finance them on an individual basis, and we have a significant capital advantage over our peers. That portfolio that we're selling, we expect to close on this quarter. As we mentioned on the call, we can buy, we believe, similar assets to what are being sold is significantly -- at a cap rate significantly above where that portfolio will sell because -- and we think that's because of the aggregation and the financing opportunities to that aggregation.

Okay, great. That makes sense. And then from a tenant perspective, have you noticed any change in behavior? Are they looking for longer-term or pushing back at all on rent increases? How does it feel from an operating point of view at this stage in the cycle?

Things are pretty good. Rents are moving pretty good. I think the tenants -- I will let Dave comment as I -- my tendency to answer every question. I think the tenants understand that things are pretty good. They can read the paper -- industrial occupancy is at or near all time highs.

Vacancy is very low, broadly across the markets. And so their expectations for higher rent and higher rent bumps in the lease agreements are certainly there. So the environment is pretty good. I don't think that there is necessarily any great change in tenant behavior. David?

No, I think tenant confidence remains high and therefore, they are willing to sign up for longer terms, as you've seen in some of the recent quarters. Our average lease term on newly executed leases has gone up.

And comparing back to five years ago, when we became public, when our Company -- out of the depths of the global financial crisis. There's certainly much longer lease terms, much better, as Dave refers to, much greater confidence to make commitments to buildings, not only in terms of lease but in terms of the tenants' expenditures within those buildings.

Guess just on that lease term, since you brought it up and I'm probably splitting hairs here but on the new leases signed this quarter, it looked like it was two years so was that just a one-off short-term new lease or what was the situation there?

We ran into some situations with M&A or expansions and consolidations where the tenants are trying to figure out what they are going to do next and we often end up in these situations where a short-term lease will eventually migrate into a much longer-term lease once the corporate supply chain decisions are being made.

And on a small sample.

Right. Okay --

Blaine, to that point for the years, lease term for new leases is 5.5 years and renewals was 4.6 years, so well within and to the higher end of our historical averages.

And we don't see this quarter as a particular -- as a trend in any particular way.

Sure, that's fair. One last one. Quick clarification on the leasing Page 15 of your supplemental.

So on your leasing activity, you report cash rent spreads of 6.6% but when I look down to the retention table, the cash rent spread is 2.5%. What's the difference between those two baskets of leases?

This is an reporting anomaly of you have retention is actually refers to when the lease expired. And leasing activity occurs to when the lease is signed and obviously, those are frequently not the same time period. So if we signed a lease today for a tenant that was rolling in the second quarter of 2017, it would get reported in retention stats of 2017, but in leasing activity of the fourth quarter of 2016.

Got you. Thanks guys.

Gaurav Mehta of Cantor Fitzgerald.

Following up on leasing spreads going forward, should we be expecting leasing spreads somewhat in line with what you guys saw in 3Q?

I think we're -- our expectations for leasing spreads next year are in the low to mid single-digit. Consistent with what we're -- where trends are today.

Okay. And then on the funding of acquisitions going forward, I was wondering if you could talk about how you're thinking about selling more assets versus a common stock issuance and other sources of funding.

Well, I think what -- we -- our expectation of our shareholders and our plan is to be responsive to the capital availability and the capital conditions at the time that we need capital. We've actually -- are moved to a relatively lower level -- on a run rate basis, we are at the lower ranges of our promulgated leverage levels and so we have a fair amount of runway today.

So it's not a decision we need to necessarily today, even though we announced a lot of acquisition activity expected for the fourth quarter and the first quarter. But we are still committed towards issuing common stock as our first alternative. With the other arrows in the quiver, it's issuing preferred stock, selling assets, et cetera, but I think common stock remains our first alternative.

We have -- as we've discussed in the call and in our earnings release, have been quite active under the ATM, which is a pretty efficient way of issuing equity for the benefit of our shareholders in the Company.

Okay and then lastly, on the basis of takeout, I was wondering if you could provide more details addressing more of business to takeout in the market and is that something we should expect from you going forward?

We've always been an active -- at least active in looking to find build-to-suit takeout opportunities. I think it will continue to be a portion of our acquisition activity. I'm not sure that -- I'll ask Steve. I'm not sure it's be a bigger portion of our activities. It will be continue to be a component albeit a relatively small component of our overall acquisition activity.

I agree with that. It's -- well, it looks like it's ramped up in this -- for the first quarter or beginning of next year. It still going to be a fairly small piece of our overall acquisition puzzle.

Okay, thank you.

Joshua Dennerlein from Bank of America Merrill Lynch.

Quick question for me. I saw same-store expenses were down in the quarter. Can you maybe speak to what drove that? I'm trying to figure out if it's a one-off or maybe it's something you're doing across the portfolio to keep the expenses down?

Hey Josh. In our same-store pool, there is always one-off items but in the aggregate, it all evens out over time. There is nothing in particular in this quarter or in last quarter that really drove the change in expenses. So nothing of -- nothing worthy to note to you.

Going forward, we should expect another drop --

No, another drop going forward is unlikely.

Okay, all right. Thank you.

Michael Mueller of JPMorgan.

Just had a quick follow-up on the build-to question. Can you just talk about the economics of it and how the cap rates you're taking the properties out at compare to what you're buying in the open market for existing product?

Yes, As we look at it -- run through our filters for return requirements, et cetera, as we look at assets, we look at a number of things. Obviously, we look at long-term IRR. As we look at long-term average cash flows, we look at FFO per-share generated by the acquisition. Obviously, a build-to-suit takeout is a -- will tend to have a long-term lease, low capital requirements in the early years which would affect a lot of the metrics I just discussed.

So we can garner returns that are commensurate with our more run-of-the-mill acquisition activity in the build-to-suit takeout area with lower entry cap rates. So I think you would expect on a general basis, that the cap rates on the build-to-suits are going to be, when I say lower, they may be 25, 50 basis points lower but they are not much lower than what we -- our average cap rate would be across the portfolio. And again, we can -- we will garner the same overall returns to our shareholders over time because of the fact that it's -- we have very clean and long-term cash flows out of those acquisitions.

Got it. That was it. Thank you.

(Operator Instructions)

Barry Oxford of D.A. Davidson.

Getting back to the equity question, can you guys do in 2017 enough equity on your ATM to satisfy your needs -- or would you be looking more at possibly at some point in 2017, for lack of a better word, a full-blown offering?

It's a question that can be only answered by the market as we issue under the ATM. Our expectations are given the pace of acquisitions that there may will be a point during the year where we would execute some kind of follow-on offering. But I think that the ATM will certainly be an important component of that issuance.

And one follow-up on that. Let's say nobody wants anybody's price to go down but let's say it's at a point that you don't like it. And let's say real estate values are maintaining their value where they are right now. You could obviously probably get better pricing bringing in a JV partner. How do you guys look at that?

I think of the opportunities that we have to fund our acquisitions -- our very accretive acquisitions, I probably should point out. I think JV remains towards the bottom of those alternatives. I think we have in the past our common equity price has not been attractive to us, we have used preferred market to bridge those times.

We are in the fourth quarter now, selling assets -- accretively selling assets. Again, we're going to redeploy that capital significantly above where we exited that small portfolio. So there are alternatives before we get to the joint venture. The joint venture has -- certainly has its place in the quiver of alternatives, but it's certainly not at the top.

Great. Thanks guys.

Richard Schiller of Robert W. Baird.

Following up on the last question. If you guys have issued about 7 million shares in 3Q and 4Q on the ATM, how much left of -- room do you have left on your ATM looking -- on the capacity of it looking out over 2017?

So, great question.

We have $20 million left under our existing program, but that's a program that we're going to continue to refresh and keep active as we find it a cost-effective tool in raising equity. So it's a program that we will be active in for a long time.

Okay great. Thanks and then touching on acquisitions. If you guys do have a record quarter in the fourth quarter here, is there a chance you could overshoot your guidance of $350 million to $450 million of acquisitions for the year?

What we have announced so far in terms of LOI contract, et cetera, certainly would give rise to speculation that we'll be at the upper end, perhaps beyond the upper end. So it's not going to be grandly above but certainly -- there's certainly a chance to be at the upper end or slightly beyond.

Yes, as I said in the prepared remarks. We certainly feel like we will be at the upper end of our guidance and whether we will exceed that will just depend on some of the LOI contract acquisitions and whether those close at the end of 2016 or beginning of 2017.

I might say that we also have in terms of heading into and we're a long way in terms of activity from being in 2017. We are looking at one of the stronger acquisition quarters from this vantage point and it will get better going forward. It's one of stronger first quarters of acquisitions as we've had in our Company's history.

Great, awesome. Thanks guys. Great quarter.

Daniel Donlan of Ladenburg Thalmann.

Actually, it's John on for Dan. Just --

That's okay. We appreciate you being here.

Thanks. Post the portfolio sale, is it fair to assume that all the dispositions are near term -- sorry, intermediate term, will be more opportunistic in nature?

What I mean, so we've described that we have three types of dispositions. We have an opportunistic where an asset is certainly worth more to somebody else than it is to us. There may well be some of those in the coming year. We have -- I know we have a couple of situations that we're looking at that can certainly turn out to that where, for instance, they -- a two-year lease to an investment-grade credit becomes a 15-year lease and maybe that's worth more to somebody else.

So those situation will come up. We don't expect it to be a major part of our capital raising or capital availability. I think our disposition guidance is 25 to 40 or something like that. Certainly, in that range, relatively minimal also we will also continue to do our calling, if you will, the calling of [incurred] of selling assets that did not fit our long-term portfolio goals. I don't believe that you will see -- certainly at this point, I don't think you will see us selling another small portfolio as a way of funding our acquisitions going forth, not in our expectations.

Then just focusing on the culling of the herd maybe pile of assets. I know you guys have talked about the flex office assets being pretty much entirely non-core to your long-term portfolio. As you look to selectively sell these assets, what cap rates do you think you can get in these properties, maybe you even -- if you can't give a number, just relative to the rest of the portfolio?

It all depends on the -- as we sell them opportunistically, it all depends on what leasing we're able to do. It's pretty hard to put a number to that. Certainly, some of these assets will simply be sold in situations where we've decided to move on will be sold for base building value. So really not a cap rate but more of a per square foot disposition.

Okay, understood. That's it for me.

We have reached the end of our question-and-answer session. I would now like to turn the call back over to Management for closing remarks.

Thank you for your questions. We will continue to execute on our business plan to capitalize with persisting investment opportunity and single tenant industrial real estate and the ongoing strength of our portfolio.

Our goal is, and will continue to be, delivering the best-in-class risk-adjusted returns to our shareholders. We appreciate your time this morning and your continued support of STAG.

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