STAG Industrial Inc (STAG) 2017 Q3 法說會逐字稿

Greetings and welcome to STAG Industrial Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Matts Pinard, Vice President, Investor Relations. Thank you. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2017 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 related 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. STAG Industrial assumes no obligation to update any forward-looking statements.

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, Matts. 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 our 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 of 2017 was business as usual for STAG, as we continued to execute on the business plan. This was a successful quarter, both from an operations and acquisitions standpoint. The team continued to identify accretive opportunities, closing $120 million of acquisitions in the third quarter, a 7.5% stabilized cash cap rate. The team was equally busy on the leasing front this quarter, with over 2 million square feet leased, generating robust leasing spreads.

This was our second consecutive quarter demonstrating the powerful combination of growing per share earnings while reducing leverage. Year-over-year for the third quarter, the platform produced 7.5% core FFO per share accretion while reducing leverage from 5.3 times to 5.0 times today.

As we look out for the remainder of the year, we continue to see ample acquisition opportunities. Our pipeline sits at $2.2 billion, our year-to-date acquisitions crossed the $500 million mark, making 2017 our largest acquisition year ever with 2 months left to go. With this, we are updating our acquisition guidance for 2017 to between $625 million and $675 million with an expected stabilized cash cap rate of 7.5%.

The industrial sector is very healthy, both nationwide and in the markets in which we operate. During the quarter, we leased 2 million square feet and produced cash rent changed and GAAP rent changed of 10.5% and 18.7% respectively. These positive rent changes represent the largest quarterly rent increases in the company's history. Our tenant retention for the quarter was 71%, in line with our historical average, with retention predicted to be in the 60% to 65% range for the year.

Our balance sheet is in great shape. We raised $65 million of equity at attractive prices in the quarter through the efficient use of our ATM. The third quarter was another productive one for the STAG platform; accretive acquisitions, healthy leasing results, and efficient and conservative capitalization.

This combination has resulted in another quarter of per share earnings growth. The attractive opportunities continue to persist. The industrial fundamental picture remains strong, and the STAG team continues its robust execution in all phases of our business.

With that, I'll turn it over to Bill to provide more detail on our third quarter results.

Thanks, Ben, and good morning everyone. During the third quarter, we acquired 10 buildings for $120 million with a 7.5% stabilized cap rate, and we also sold 5 buildings for $35 million.

We to expect to have noncore and opportunistic dispositions between $60 million and $80 million in 2017. There were 4 opportunistic dispositions this quarter generating proceeds of $34 million and resulting in unlevered IRRs of approximately 15%.

At quarter end, we owned 347 buildings with a total of approximately 69 million square feet. Occupancy for the operating portfolio stands at 95.4%, with a weighted average lease term of 4.7 years.

Cash NOI for the quarter grew by 19% from the prior year. Same-store cash NOI decreased by 60 basis points over the prior year third quarter, which was driven by an average occupancy reduction of 60 basis points.

Same-store cash NOI was down 30 basis points on a year-to-date basis. It is important to note that our year-to-date same-store pool represents less than 70% of our total portfolio. The 30% of our operating profile excluded from our same-store pool is 96% occupied and has annual fixed rental bumps of approximately 2%.

As we have said in the past, our primary focus is on the bottom line core FFO. During Q3, we grew core FFO by 39% compared to the third quarter 2016. On a diluted per share basis, core FFO was $0.43, an increase of 7.5% compared to $0.40 cents per share last year. The growth in our per share metrics coupled with growth in long term cash flow remains a primary focus for our company and is a central consideration in our acquisition and operating decision making.

G&A for the quarter was $8.4 million. We continue to expect full year 2017 G&A to be between $33.5 million and $34.5 million.

The balance sheet is in the strongest position it has been during our life as a public company. As Ben noted, we raised equity of $65 million through our ATM in Q3 de-levered down to 5.0 times on a net debt to run rate EBITDA basis when compared to the 5.3 times for the same period last year. Our fixed charge coverage ratio is at 4.3 times, and our immediately available liquidity is $360 million.

During the quarter, we executed a $150 million 5.5 year term loan which was fully swapped out for an all-in fixed rate of 3.15%. We also paid off 3 tranches of our secured debt with a principal balance of $88 million and an interest rate of 6.1%.

Since year-end 2015, we have reduced our secured debt outstanding by 74%, reducing the overall cost of debt while also increasing the balance sheet flexibility. Secured debt now accounts for only 5% of our debt outstanding.

At quarter end, we had approximately $1.2 billion of debt outstanding with a weighted average maturity of 4.8 years and a weighted average interest rate of 3.4%. All of our debt is either fixed rate or has been swapped to a fixed rate except for our revolver. Additionally, we have no debt maturing until December of 2019.

With that, I will now turn it back over Ben.

Thanks, Bill. Our focus remains on delivering bottom line performance for our investors. As previously noted, our core FFO per share grew by 7.5% over the third quarter of 2016.

We have consistently 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 $1.42 per share annually. We have increased our dividend every year that we've been a public company. This continued focus and demonstrated capital discipline, combined with the abundance of accretive acquisition opportunities, makes for a very bright future for our company.

We thank you for your time this morning and for your continued support of our company.

(Operator Instructions) Our first question comes from Sheila McGrath of Evercore ISI.

Yes, good morning. Ben, I was wondering if you could give us some updated insight on same-store NOI guidance. I think for the quarter it was tracking down 60 basis points, better than your guidance for the year of down 1% to 1.5%. So any insight on what that might be for the year?

Sheila, I think I'll let Bill handle that.

Hey Sheila. Yes, as you noted, we've obviously outperformed our same-store guidance thus far though the year. Our expectation now is that same store will be down approximately 0.5% on the year, which is obviously exceeding our 1% to 1.5% down that we had for external guidance earlier this year.

Okay, great.

And Sheila, that's being driven by obviously good rent spreads as reflected in the quarter.

Right.

Actually, that was my second question. On the leasing spreads, that was your strongest quarter. Is there one lease in there that's skewing things, or were rollovers in very strong markets? If you could just give us a little more detail there.

That number is reflective of 12 leases. There are a couple of downs and mostly ups; some sizeable ups but not driven by any one lease in particular.

Also those leases, Sheila, are spread across 10 plus markets. So it's not one market either.

Our next question comes from Dave Rodgers with Baird.

Yes, good morning guys. Maybe just following up on the spread and maybe just to ask the question and maybe just put some caution in there, do you expect these kind of spreads to continue in the near term? Were these kind of below market acquisitions? I get that they were spread out, etc., but given the pretty big jump that you had, obviously want to set expectations for your lease rollovers here over the next couple quarters.

Obviously, we've had some pretty strong fundamentals in the market. So these leases may have been acquired at or around market and reflect that.

Always the cautionary note about small sample anomalies, etc. We appreciate this. We're not projecting anything in particular for -- we haven't been giving guidance on same-store. And -- but market fundamentals are strong, but this was a particularly strong quarter.

Okay. And then on the growth in the pipeline and your increase acquisition guidance for the year, obviously you've gotten a long way there so far. Can you talk about maybe what your comparable markets look like in terms of volume changes? Obviously you've added staff to bulk up. And that's added to the pipeline, which has been great to see. But if you looked at stable markets where you've been active for quite some time, what's the comparable year-over-year volume in those markets that you're winning or that you're looking at?

Well, Dave, we're looking at 60 plus markets. And so it's not -- I don't think we have the luxury of saying we look at 10 markets and we're up 3% in this market and down 5% or 7% in the market. We're looking very broadly across the industrial landscape.

And so are we having success in -- more success in some of the markets that we like a bit? Greenville, Spartanburg, I think our volume this year is probably up in that market. But I don't think you can really look at it as transactions increasing or decreasing particularly in any one market, because, again, we're looking at granular transactions, trying to identify those transactions that are most favorable for our shareholders and meet the threshold return requirements that we've set for our shareholders.

On the new leasing front, Ben, obviously you didn't sign any in the quarter. Obviously we don't want to read too much into that. But was it a tougher period in terms of lease signings? Were you just more focused on the renewals? Maybe give us a little color on the new lease activity that you see, especially coming kind of into the fourth quarter.

Yes, I think that was the first 0 that we've posted, and it's really a timing anomaly. Quarter-to-date in the fourth quarter, we've signed more leases than we -- more square footage in new leases than we generally sign in an entire quarter. So the fourth quarter should be very healthy.

Yes, a lot of activity on new leases in the third quarter, just the actual signing slipping into the fourth quarter.

Our next question comes from Gaurav Mehta of Cantor Fitzgerald.

I was wondering if you would comment on what you think is the supply. I think on the last call you mentioned that you're expecting demand to outpace supply at least for the remainder of the year. I was wondering if you still hold that view and you expect that to continue into 2018.

I think generally we do. Obviously we've moved into a period here where demand and supply are a little bit closer together than they were, say, a few years ago. And obviously it depends market to market. A lot of the new supply on a national aggregated basis is in a number of markets. And we are less -- we tend to be less active in those markets. So we feel pretty good about -- say if we're looking at 60 markets and 5 or 6 of them have a lot of the excess supply, the other 55 or so obviously have better supply-demand dynamics. Having said that, there is a price for everything in the market, given the supply-demand characteristics of the market and the resulting potential rent growth and potential downtime. And we believe we are rational underwriters of those risks. And if we can buy an asset for less than we think it's worth based on those parameters, we'll go ahead and buy it.

Okay. And I guess as a follow up on acquisitions, you have been consistently growing at 25% per year. Do you think that is sustainable in 2018 as well?

Yes, it's interesting. I think when we started our life as a public company we knew we were going to grow. I think the 25% a year, which is gotten to be a little bit of a legacy statement, I'm not quite sure. We had to go back and figure out where it really came from. Our stance has always been that we will buy, as I mentioned just previously, assets that we believe -- when we believe we can buy them to have sufficient returns for our shareholders, i.e., we can buy them for less than we think they're actually worth based on their cash flow going forward. So the 25%, which has been -- probably the low is 20%, the high is 35% or 40%. I don't know. One year I think we were well above that in the early years. I think that is our -- as the denominator has grown, the stability of the -- if you will of the growth rate has -- it has become more stable. The limiting factors on us are at this point probably our -- just our ability to identify and process. We still see abundant opportunity out there. And as our staff gets more experience, as we've alluded to earlier, our systems and processes get better, that number increases. Whether in the future it will increase to provide 25% growth, obviously there are some laws of large numbers out there. You would expect that over time to perhaps settle out at a number lower than that. But we're still seeing lots of opportunity and we're still seeing an opportunity to continue to increase our acquisitions as we move forward.

Our next question comes from Blaine Heck of Wells Fargo.

Hey guys, good morning. Bill, looks like expenses were up pretty substantially, almost $2 million quarter-over-quarter and then 20% on a same-store basis. What drove that increase? And was there anything one-time in nature there?

On the same-store expenses, Blaine, sometimes what happens there is you have tenants that pay real estate taxes directly but then, for whatever reason, we pay those real estate taxes. So what happened is when we pay those taxes, they come on our books, but they're offset for a 1-for-1 basis in the revenue line item. So on a percentage basis, it looks like expenses increased at a higher percentage, which they did. But from a dollar standpoint, cash NOI is the same.

Okay, that's helpful. And then, Ben, looking at the acquisitions during the quarter, there were a couple of them in Pennsylvania that you did that were larger buildings but they had a lower remaining term on the leases. Can you talk about whether you're able to get a better price for a building with lower term? And is that anything you guys are kind of actively looking for in kind of tier 1 markets?

Yes. So we're looking, obviously, for places -- I sound like a broken record here, where we can buy assets at what we think is good relative value, i.e., less than we think they're actually worth based on the cash flows going forward. That might be an example of a market anomaly where we believe the retention possibility or potential of that asset is greater than the market does so we see more cash flow. It's not a particular we're going to go out and buy short term leases in top distribution markets. We're looking broadly across the markets to identify those cash flows that'll be attractive for our shareholders to own. So the fact that we bought a couple of larger buildings on shorter term leases in those markets are we believe that the cash flows on those assets will be -- will provide the sufficient returns for what we're looking to do for our shareholders. But it's not a conscious decision to go into the Lehigh Valley and buy short term leases.

Fair enough. And then you guys have about 3 million square feet expiring in the first quarter of 2018. It's a pretty big chunk relative to most quarters. Do you guys have any visibility into those leases? And are there any known move outs that we should be aware of there?

I think as we look across 2018, we're pretty confident of our ability to maintain sort of that 70% retention that we've had across most years. I don't think there's anything sticking out to us really as an anomaly away from that. So again, our expectations are around 70% for the year.

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch.

If you look at your CapEx schedule on page 12 of the supplemental, it looks like your third quarter CapEx was almost half the year-to-date amount. Can you just talk us through some of these buckets? And is this kind of a run rate we should expect to see, or are there kind of one-time projects in here? Just how should we be thinking about CapEx and whether it's a driver of the leasing spreads, or is it just a way you're running -- how you're running your business?

Yes. Hey Jamie, so CapEx, we've communicated before, roughly runs $0.25 to $0.30 on the portfolio. This was a higher quarter, and it just was some of the projects that we did this year were related to assets that -- you can't perform those projects in the winter, so they get done in the second and third quarter.

It's certainly not a run rate number. For modeling purposes, I'd use the $0.25 to $0.30 on a per square foot basis across the portfolio.

Okay. How much…

And it wasn't, Jamie, we did -- the leasing spreads you saw in the quarter were not a result of us spending money in the quarter to get the leasing spreads.

Right.

These are CapEx projects sort of unrelated to -- they're just building maintenance, et cetera.

Okay. And then how much of this gets passed through to tenants?

It really is dependent, Jamie. Some of it gets passed through to tenants and some doesn't. For this $8 million, I don't have the exact details of how much of that gets passed through to tenants. Most of those expenses are roofs. So that -- those roofs would not be passed through to tenants.

Okay. All right, that's helpful. And then do you have an estimate of what you think your current portfolio mark-to-market is?

It's a -- we've been saying for some time now we believe our portfolio is marked at or around market, maybe slightly below. There is a question as to -- internally as we discuss it, is the market we're talking about a vacant asset in that market or the existing tenant's belief of what the rent is in that market. But generally believe our portfolio is at or around market, maybe slightly below. And you get -- obviously as we've talked about before, year-to-year, quarter-to-quarter anomalies and what leasing spreads and mark-to-market on the assets roll in in that quarter look like.

Our next question comes from Neil Malkin of RBC Capital Markets.

Just kind of related to the strong spread you saw this quarter, we don't really talk about the types of tenants you have like we do for some of the traditional Prologises of the world. But I was just wondering, in the quarter did you have, for example, e-commerce tenants who were rolling over that maybe provided you that juice? And if so, can you maybe articulate what type of exposure you have to the e-commerce sector?

I think we have something on the order of 25%, 30% of our buildings have some kind of e-commerce activity going on inside them. It's a little difficult to assess. E-commerce is a kind of a big blanket that gets thrown over the world. If you have a truck leaving sort of a traditional warehouse that goes to an Amazon fulfillment center, does that mean that the building that the truck's leaving from is involved -- it is involved in e-commerce, but maybe not as demonstrably so as that Amazon fulfillment center.

So I don't think that there is any particular industry thread in our leasing spreads this quarter. It's spread across a bunch of industries. There is -- obviously, the industrial market is doing quite well across a lot of areas, including obviously e-commerce.

Yes. In addition to that -- in addition to the 25% to 30% of our tenants which have some type of e-commerce going on in the buildings, 5% to 10% of our tenants have -- 100% of their building is dedicated to e-commerce.

Okay, that's helpful. And terms of the acquisition market, are you finding yourself having to go maybe up the quality curve? Do you think that maybe over the next 12 to 18 months you're going to see more competition or even stronger pricing in some of the markets you play in? What do you kind of foresee the characteristics of the either markets or assets you buy look like?

Well, I'll let Steve answer that. But I'll say first of all, can we borrow your interest rate crystal ball before we answer it? Obviously that will impact…

Yes, no problem.

Yes. But Steve?

Yes, it's interesting. In general, we're seeing most markets broadly, across the ones we look at, the cap rates are fairly stable. In terms of the quality spectrum, we're basically buying the same type of assets we've been buying for years. But there definitely has been -- we've bought a few in the last few quarters, a few build-to-suits, which clearly are brand new building, etc. But in general, we're seeing stable to some markets there is some decline in cap rates. There are -- the markets are all active. Industrial is a hot sector right now, so we're definitely seeing it. But as Ben mentioned, it's all going to depend on what the interest rate crystal ball looks like in the coming quarters.

And we believe that the -- Steve alluded to the strength of the industrial sector. We think that has a lot of legs. There could be a recession sometime in our not too distant future, but industrial is going to continue to be very strong. The e-commerce impact to the extent that there's onshoring of activity, all these things are good for the industrial market and will continue to be good for the foreseeable future. We're fortunate to be involved in this asset class.

Our next question comes from Michael Mueller of JPMorgan.

Just a quick one. What have disposition cap rates been this year?

So we don't disclose disposition cap rates. Our focus on that is really what was the unlevered IRRs we achieved, which we think is a better indicator of the returns we receive from that asset or in that investment. So this quarter, as I mentioned in the prepared remarks, 4 of our dispositions were opportunistic, which resulted in an average unlevered IRR of 15%.

And the other disposition of the 5 dispositions would be part of our, if you will, culling of the herd as we continue to sell down our office/flex portfolio, which, again, is a couple percent of our portfolio.

Our final question comes from Paul Puryear of Raymond James.

You pretty well just answered it. But as far as culling the portfolio, I'm just curious. Are you at all incentivized here to step that up, given the market? And what kind of returns do you think you're getting on some of those assets…

Yes.

You'd just as soon get rid of?

So Paul, we obviously about a year ago demonstrated the accretive nature of dispositions in the portfolio sale that we accomplished last fall. But we still believe that there is ample opportunity to grow our portfolio accretively. And that is a better long term source of growth for -- using new equity is a better long term source of growth for our shareholders, in large part due to the operating leverage that we've discussed before. But we certainly could sell assets, derive gain from doing that, redeploy that money accretively. We are cognitive of the portfolio effect. These individual assets are worth more inside the portfolio than they are outside. And so unless we're looking at portfolio sales, which, again, have operating leverage issues, I think we're going to continue to focus on identifying and acquiring good accretive assets going forward.

Okay. And as far as the fourth quarter leasing, any color there? Any industries stand out? Sounds like you're pretty enthused about what you're seeing.

Demand has been pretty broad-based, as Ben alluded to earlier. It's not confined to any particular sector.

Good enough.

So we're enjoying, like the rest of the industrial operating companies, a very healthy operating environment, not just e-commerce, certainly not just last mile. It's -- the entire industrial infrastructure is in great demand for the reasons we've alluded to earlier.

The next question is a follow up from Jamie Feldman of Bank of America Merrill Lynch.

I'm just wondering, what do you guys typically forecast or expect for downtime when you have a tenant move out before you can get it backfilled? And what's the historic average been?

So obviously that's very building and market dependent. The fungible building in a market that's exactly the right size for the market obviously leases faster than one that may be too big or too small or whatever it might be. There are markets where a 20 foot clear height building leases very quickly, and there are some markets where it might never or almost never lease. And so looking across -- broadly across the different types of buildings and different markets we have, we're -- something around 12 months is sort of our expectation experience. But we have some markets where we underwrite 6 months, and our acquisition guys are telling us that the brokers are telling them, no, it's 3 months. But generally speaking, something around 12 months is our expectation. But again, lots of variability depending on market. It's important, Jamie, obviously not to make -- one of the things that we try and avoid in our analysis is decision rules. So it's important for us to be bespoke, if you will, assumptions by market and building for what you'd expect for that particular asset in that particular submarket that it operates in.

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to Mr. Ben Butcher for closing comments.

Thank you very much, and thank you all for joining us this morning and providing these interesting questions for us to respond to. We are -- continue to pursue our investment thesis. There continues to be great opportunity. Our operating staff is enjoying the strong fundamentals, and our portfolio is operating very well. We continue to use the word continue, and we look forward to continuing to provide both income and growth for our shareholders going forward. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.