STAG Industrial Inc (STAG) 2017 Q4 法說會逐字稿

Greetings and welcome to the STAG Industrial Fourth 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, Matts Pinard, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Welcome to the STAG Industrial's conference call covering the fourth 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 the 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 discussions related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations to 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 fourth quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our fourth quarter and full year results.

Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who'll 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 fourth quarter was another successful quarter for STAG and a great way to close out our 2017. For the year, the team continues to identify accretive opportunities, closing $613 million of acquisitions at 7.4% stabilized cash cap rate. Net acquisitions, $545 million after dispositions, grew by more than 70% over the prior year. We continue to see a persisting opportunity to acquire at an attractive relative value basis in the 60-plus markets that we monitor.

The team was equally busy on the leasing front this quarter, with 2.4 million square feet leased, including approximately 1.3 million square feet of new leases at 5% rollover cash rents. This is our highest leasing -- new leasing total in our company's history. These favorable leasing results enable us to exceed our revised same-store guidance for the year.

This was our third consecutive quarter demonstrating the powerful combination of growing per share earnings while reducing leverage. For the fourth quarter, the platform produced 4.8% core FFO per share accretion, while reducing leverage from 5.1x to 4.9x debt to EBITDA when compared to the same quarter in 2016.

The industrial sector is very healthy both generally and specifically in the markets in which we operate. We are seeing strong tenant demand for our buildings, declining vacancy and rising rents across the majority of these markets. Industrial rents are highly correlated to GDP, and with continued GDP growth expected, we are confident in our ability to reprice our expiring leases.

The macro events for the first quarter 2018 has significantly impacted the valuations in the REIT market. The broad equity markets rallied to all-time highs and have recently corrected. The 10-year treasury rate has recently spiked to a 4-year high and has weighed on REIT shares. This key interest rate remains volatile and the strategic course remains, to some degree, unknown.

We entered 2018 well prepared should this rise in interest rates persists. First, we have a well laddered and almost entirely fixed-rate balance sheet. Second, a rise in interest rates is likely the result of continued economic growth, good for both rents and the occupancy of our buildings.

Third, our acquisitions remain accretive with a moderate rise in interest rates. Fourth, after a lag period, cap rates will likely also rise. Fifth, our principal competition, which is local private buyers, to acquire buildings are more dependent on levers than we are. Interest rate increases will impact them more adversely than us.

2017 was another productive year for the STAG platform. Accretive acquisitions, healthy leasing results and efficient and conservative capitalization has resulted in another year of per share earnings growth. The attractive opportunist 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 fourth quarter and full year results.

Thank you, Ben, and good morning, everyone. I will discuss our results for the quarter and for the full year, followed by the introduction of our 2018 guidance.

The fourth quarter was a strong finish to a very successful 2017. Core FFO was $0.44 for the quarter and $1.69 for the year, an increase of 7% as compared to the full year 2016. This growth in core FFO per share was achieved while simultaneously deleveraging the balance sheet, which resulted in putting the company in a great position as we begin 2018.

On the operations side, retention for the quarter was 53% and 59% for the year. These lower retention numbers were the result of certain operational decisions made over the course of the year to let tenant leases expire in order to generate higher rental rates or opportunistic vacant property sales. These decisions produced great outcomes for our shareholders, but ultimately resulted in the lower disclosed retention rates.

The impact of these operational decisions reduced the retention metric from 73% to 59% with minimal impact to portfolio occupancy. Portfolio occupancy at year-end was 95.3% as compared to 94.7% in 2016.

Same-store cash NOI decreased by 10 basis points when comparing full year 2017 to full year 2016. This result exceeded our previously revised expectation communicated on the November call. The annual same-store decline was driven by an average occupancy reduction of 50 basis points, the beat to our guidance related to signing leases earlier in the quarter than budgeted.

The 2017 annual same-store pool represents approximately 2/3 of our total portfolio. The 1/3 of our portfolio excluded from our 2017 annual same-store pool has annual fixed rental bumps of approximately 2%. While these assets and this contractual rent growth is excluded from the traditional same-store metric, these assets are a part of the portfolio and are meaningful contributors to our core FFO.

The balance sheet continues to strengthen. We raised $88 million of equity through our ATM issuance in Q4 and delevered slightly to 4.9x on a net debt to run rate EBITDA basis. Our fixed charge coverage ratio is 4.3x and our liquidity is $348 million, which includes a swapped unfunded $150 million term loan available immediately.

Turning our attention to 2018. We have enhanced our disclosure in our supplemental and added a 2018 guidance slide. The 2018 guidance presented in corporates to standardize definitions as agreed to with the other industrial repairs as referenced in our press release last month. The conforming of these definitions with our peers did not have a material impact on our prior period disclosure.

We expect to acquire between $500 million and $700 million in 2018, with a stabilized cap rate range of 6.75% to 7.25% and an expected disposition volume range between $100 million and $200 million.

We expect the 2018 annual same-store pools NOI growth to be flat to positive 50 basis points. Note that the 2018 annual same-store pool accounts for approximately 80% of the portfolio as year-end 2017. Retention is projected to be between 70% and 80% for the year. 2018 G&A is expected to be between $35 million and $36 million for the year.

For the first quarter of 2018, we expect to acquire between $120 million and $135 million, with approximately 1/3 NOI contribution to the quarter, which is a result of the expected closing dates. Disposition proceeds are projected to be between $50 million and $60 million for the quarter.

For the first quarter of 2018, we expect same-store cash NOI to be down approximately 1.5% to 2% and grow throughout the year, resulting in flat to positive 50 basis points in same-store cash NOI for the full year. G&A for the quarter is expected to be between $9.25 million and $9.75 million.

I will now turn it back over to Ben.

Thank you, Bill. Our focus remains on delivering bottom line performance for our investors. As previously noted, our annual core FFO per share grew by 7% over the full year 2016. Our balance sheet is flexible as we look to deploy our available capital to its highest return, which currently is our accretive acquisitions.

As demonstrated in the past, we have the ability to execute on various sources of capital, which include asset sales. During the first quarter of 2018, we executed one of these asset sales and sold a single tenant building for a 6.2% cap rate, generating $32 million in proceeds. We acquired this asset in 2010 for a 9.2% cap rate.

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.

(Operator Instructions) Our first question comes from the line of Sheila McGrath with Evercore.

Ben, you sold more assets than historically over the past around 18 months, and you're guiding even more -- for more dispositions this year. Can you talk about your philosophy on dispositions? Are these the bottom end of the quality spectrum or opportunistic owner/user sales? Just give us some insights on asset sales.

Yes. Thank you, Sheila, and good morning to you. I think that we always have thought about our asset sales primarily in the basis of we'll sell when they're worth more to somebody else than they are to us within our portfolio. And the asset sale that we accomplished in the first quarter this year was certainly one of those instances, although a fine asset -- some of those valued higher than we would have valued it within our portfolio. We also continue to sell our noncore legacy flex/office assets, hopefully at good prices, as we opportunistically lease those up. So the dispositions that we've planned for the year, thus far, are opportunistic and strategic. The potential for a capital sourcing disposition exists, but it's not necessarily a thing that we would contemplate in the near term. But it's certainly something that is there as an arrow in the quiver as we move through the year.

Okay. And as a follow-up, cap rate guidance on acquisitions is lower than your historical range. I wonder if you could talk about, have you changed your IRR hurdles? Or are you thinking there's more embedded rent growth in acquisitions today? Just some thoughts on that cap rate range.

Well, it's not -- it's embedded rent growth, it's longer lease terms. I think the focus on buying good accretive assets to add to our FFO per share remains primary. But I think it's more reflective of expected mix change. Again, in terms of lease term, as you suggested, embedded rent growth. And indeed, also, sort of market perception of -- or perception of market quality as well as asset quality. So mix change without giving up accretion.

Yes, Sheila. And to put that in context for 2017, our GAAP cap rate for our 2017 acquisitions was 80 to 90 basis points higher than our cash cap rate.

Okay. And -- but you haven't changed your IRR underwriting? Or...

No, that's still a feature of our analysis.

Our next question comes from the line of Michael Carroll with RBC Capital Markets.

I just wanted to follow up on Sheila's questions on your cap rate guidance. I know, Ben, in your comments, your prepared remarks, you're kind of highlighting that higher interest rates could push cap rates higher and then your cap rate assumptions right now are a little bit lower. Do you see pricing kind of adjusting in the secondary markets that you're pursuing? Or are you going after just better quality assets, in general, and that's why your assumptions are coming a little bit lower?

Yes, well, I think that we are -- our promulgated range is conservative and reflective of conditions today. If interest rates stay where they are today or even drift higher, I'm very certain that you'll see cap rates, after some lag period, also move up. I also would suggest that we do buy-in across both primary and secondary markets. And I think that the concentration, if you will, in the primary market is likely to continue to rise as a part of our portfolio. So again, I think it's a bit of a mix change, and the promulgated 6.75% and 7.25% is reflective of more current conditions than it is perhaps of a conservative view of the year going forward. I would expect that the market may indeed have some release of the cap rate compression that's occurred over the last number of years. But we're not showing that in our numbers at this point.

Okay. And then the cap rates that you're quoting, are those GAAP or cash?

Those are cash.

Those are cash, yes.

Okay, cash cap rates. Great. And then...

It is. And Mike -- as Bill just pointed out, last year, for 2017, our GAAP rates were 90 basis points above the cash rates.

Okay, great. And then, Bill, maybe can you talk a little bit about your same-store growth guidance and maybe break it out between the seasoned assets within our portfolio and the recent acquisitions. How much headwind do you expect to see from occupancy resetting on your recent acquisitions impacting that same store guidance?

Well, there's a number of things that impact same store. So as we mentioned in the prepared remarks, the same-store pool for 2018 will represent about 80% of the portfolio. So that'll be a mix of average occupancy throughout the year, our retention rates, which was 70% to 80% for the year as well as rollover rents. We view the near-term rollover rents to be slightly below market, so we should see a little bit of increase in rollover cash rents as well.

And do you expect to see much headwind from your recent acquisitions, resetting occupancy at the lower rates since you're buying them pretty much fully leased and you expect it to have a 95% run rate, in general?

Mike...

Not on the recent acquisitions, Mike, for a couple -- one, they're not in the same-store pool; but two, generally, those lease terms are 5 to 7 years. So those leases won't roll for some period of time.

Our next question is from the line of Dave Rodgers with Robert W. Baird.

Ben or Bill, maybe following up a little bit on retention and same store. As you look at the first quarter, Bill, what's driving the negative 1 to negative 2 number that then, obviously, reverses to something into the plus 1 to plus 2 probably by the fourth quarter? Is that, I guess -- 2 questions. One is what's the retention in the first quarter? And what then would be the impact of asset sales to occupancy or the same-store pool as you move through the year?

I mean, it really is a -- it's a mix of a number of things. Retention for the first quarter is going to be, call it, in that 80% range, so positive retention there. It is a cash same-store number, so some of it is -- some leasing assumptions in the later quarters to the year as well as some free rent in Q1 that will be cash rent in the future quarter. So we feel very comfortable with our same-store guidance for the year of 0 to 50 basis points positive, which is an improvement over this last year.

Ben, when you look at your disposition guidance, how much of that was a function or is a function of kind of what's happened in the stock market over the last 3, 4, 5 weeks? And would you anticipate kind of adjusting that guidance depending on where the stock ends up trading over the rest of the year?

Well, when the stock reverts back to the more normal levels, and obviously, we'll be issuing equity and we wouldn't be looking to capital -- use capital sourcing from dispositions. The guidance that we've shown today remains what we expect to do on an opportunistic basis. We're not selling assets that we would like to hold as a source of capital. That's not a part of the plan. Today, it's certainly available to us. We have identified portfolios that if we wanted to do capital sourcing, we could use those portfolios to -- for that purpose, but it is not part of that plan. The disposition numbers are more opportunistic and related to the specifics of those assets, so it's really not a reaction to the stock market. As Bill pointed out, at the end of the year, we're at -- our debt-to-EBITDA is at 4.9. We have lots of capacity in some of the other arrow -- if you will, arrows in the quiver to source capital before we would need to go to asset sales as a source of capital.

And Dave, if we did go to asset sales as a source of capital, we're very confident that those portfolio sales would generate 100 to 150 basis points of cap rate compressions inside of where we acquired those individual assets.

Our next question comes from the line of Michael Mueller with JPMorgan.

A couple of questions here. First of all, on the disposition cap rates and the whole commentary around that. Ben, trying to understand, did you make the comment that you were looking more primary markets as opposed to secondary markets, and that was part of the reason for it?

This is on the acquisition side, so we're cognitive of the fact that there is a -- the primary markets hold a lot of assets and our ability to identify relative value exists across all markets. So we're very -- our expectation is that a concentration of primary market assets in our portfolio will increase over time.

And Mike, as a reminder, the definition of primary markets is markets that have greater than 200 million net rentable square feet, which was a definition promulgated by the CBRE Econometric Advisors back at our IPO. So really, it's a size-based definition.

Okay. And I mean, just thinking about in the past, I mean, the whole idea of avoiding those markets was less competitions, smaller deal sizes and you could sit there and knock out the types of acquisitions you wanted to. Do you expect to be able to still do that as you shift the markets a little bit?

Well, I think one of the things we talk about internally as an internal concept, if you will, of an external concept, a growth at a reasonable price. The primary markets and the markets that have over 200 million of square feet, by the numbers we're looking at, is about 34 markets. There's a variety of, if you will, GARP numbers that come out of those markets. So some of those markets have better expected cap rate, i.e., higher cap rates with perhaps the same growth as some of the lower cap rate markets. So we're -- we'll be looking across those 34 markets to find individual assets that will produce the cash flow returns, the realm of value that we've always looked for. So it's not -- we're not saying we're going to go compete with the 3.5 cap purchases to just get into the primary market. We're still focused on relative value and cash flow over time.

Got it, okay. And then just one other question. For the disposition targets for 2017, what are the cap rates expected to be there? I got them for acquisitions, but I didn't hear anything on the dispo side.

Well, we don't promulgate cap rates there, it's more opportunistic and individual asset oriented. It'll depend on the mix of assets sold. Again, some of them will be sold opportunistically simply because they're worth more to somebody else, and some will be our continued culling of the herd and getting rid of the legacy flex/office assets opportunistically.

Yes. And Mike, if there was a portfolio sell, that's something we'd likely give you a cap rate for when we source capital that way. But as Ben said, it's more mix of opportunistic in noncore. And our opportunistic dispositions in 2017 yielded a 12-plus unlevered IRR.

Your next question comes from the line of Mitch Germain with JMP Securities.

Has there been any change in the dynamic in terms of your competition for acquisitions? I know you mentioned private buyers feeling a little squeeze from the higher rates. But are you seeing any increases in institutional capital, particularly as you look to upgrade some of your markets?

I think that the dynamic in the market is, at 50,000 feet, is not -- hasn't changed very much. You see ebbs and flows. We've seen, over the last couple of years, Gramercy being more involved. We certainly see some of the private players -- continue to see some of the private payers involved. But I don't think that the -- there's any -- been any grand change in that dynamic. There's certainly press people continue to talk about going to secondary markets in search of more yield. I think there's been a fair amount of press and sort of the recognition that the whole e-commerce and last mile is not limited to 3 or 4 markets, it's a broad opportunity and it exists anywhere there's population. So the 34 primary markets and the 30-or-so secondary markets all have that impact as well.

Excellent. And just one last question from me. I think, Bill, you mentioned some opportunistic, I guess, nonrenewals to try to lock in higher rates. Maybe you could just talk a little bit more about that, please?

Sure.

So -- yes, so we have assets where there may be a tenant who's just a -- who's very focused on low rents and they're not willing to pay what the building is actually worth. So in these instances we will have not renewed those tenants and look to move to -- more closely to market rents. Or we may be in a situation where we know there's a user that will pay more for the building than the existing tenant would pay in rent, or a situation where a tenant doesn't want to pay rent anymore, who's willing to buy the building at a -- again, at an opportunistically advantageous number to us.

Yes, Mitch. And there was a handful of those this year, some of which we've mentioned on previous earnings calls. There's 2 leases in Q1 where we rolled the new tenant up to market and let the old tenant roll out. That obviously hit our headline retention number, but was a positive for the portfolio and core FFO. So ultimately, the handful of decisions we made to let tenants roll out and then opportunistically either lease them up to new tenants in a short to no-downtime situation, or sell the asset to a user, would have resulted in 73% retention rate for the year.

Next question comes from the line of John Massocca with Ladenburg Thalmann.

So 2017 acquisition volume came in a little bit light versus the guidance you guys were giving at 3Q '17. Was that a result of just transaction slipping past the end of the year? Or was there kind of a slowdown in the market at year-end?

There were 3 transactions that were identified as likely '17 closes that slid into the first quarter, that would have taken us in -- to the midpoint of the range or slightly above.

And you'll see those in our subsequent to quarter-end acquisitions, it's about $42 million.

Yes, so that was reflected there. All right. And then kind of looking at the 2018 guidance, the retention ratio is slightly above what you guys have historically been expecting. Is there some reason for that? Is there -- do you think tenants are going to be a little stickier in the market or you think that they're more willing to pay kind of increased rents you want? Or was there something else driving that?

The long run average has been 70% across the portfolio. And in some years, you're a little bit below that and some years you're a little bit above that. And in 2018, we expect to be above that range. And I think it's just a -- it's a mix of tenant confidence and the demand for our buildings.

And again, it's also, obviously, the particular leases that are rolling. The sample is not small, but it's also not huge. So you can get variability in the retention rate just depending on the mix in that particular year.

The next question is from the line of Chris Lucas with Capital One Securities.

Just 2 quick ones from me. I guess, Ben, just on your commentary about rates and how that may or may not impact cap rates going forward. Just curious as to whether the pace of dispositions would be front-end loaded and acquisitions we should be thinking about maybe more back-end loaded for the year.

Our expectations are -- we've obviously accomplished a pretty significant single-asset disposition already, but our expectations are, I think, pretty -- the dispositions will be spread across the year and our acquisitions will fall. Some cyclicity as they almost always do, but again, spread across the year.

Okay. And then just maybe some color on just how you're seeing the cap rate spread between primary and secondary markets over, say, the last 12 months. What's that spread done?

Yes. I mean, we're so focused on single assets and identifying relevant value on single-asset purchases that we don't spend a lot of time looking at sort of on a grand primary versus secondary cap rate basis. And again, within the primary markets, there are [plenty of] markets that have cap rates in the 6s, there are markets that have cap rates in the 4s. And so we just -- we're really not looking it at that scale, we're really looking at it at an individual submarket and, actually, individual asset basis.

(Operator Instructions) Our next question comes from the line of Jon Petersen with Jefferies.

So thinking about your acquisition pipeline and guidance for 2018 and how you guys are going to fund that. Just kind curious on your thoughts on how we should be modeling funding those acquisitions in light of your stock is pulled back a little bit of this year with the rising rate environment that you guys have addressed and also your leverage is towards the low end of your target range. So is it fair to assume that this will be a year of increasing leverage? And then, I guess, kind of the follow-up on that is what's your preference in terms of term on new debt you might issue in the year?

Yes, so I'll address the first part and Bill will address the second part. I think that one of the things we hope we've demonstrated over the last number of years is that we're prudent allocators of capital and prudent sources of capital. So in the very short term, certainly we'll use -- be using debt as a source of capital for these accretive acquisitions. We'll be looking at other arrows in the quiver. Hopefully, a common equity will be a source. But if it's not a source, preferred equity is a source, asset sales is a source. So we will continue to look at sources and use the one that -- as again, hopefully we've demonstrated, use the one that's best for our shareholders.

Jon, and if you look at the guidance that we put forth, it's -- you can hit the midpoint of all those ranges, including our leverage band, and come to the conclusion that no equity would be needed if we were to hit the midpoint of all of those. So we're very comfortable where we are heading into 2018. From a debt standpoint, we'll certainly raise some debt this year, and it'll be a blend of 5-, 7- and potential 10-year paper across private placement markets and term loans -- unsecured bank term loans.

Okay. And then I guess, on underwriting acquisitions, maybe you guys kind of already answered you this, but I'm just curious what -- when the stock pulls back like this -- and it's not just you guys, it's the whole REIT sector, so not that I'm picking on you necessarily. But when stock prices pull back like this, do you slow down on the acquisition underwriting just to kind of see how things shake out and how things change? Or is it kind of full speed ahead, you're comfortable because your leverage is in check and all that stuff?

I think there's a level of aggression, perhaps, that we look at in terms of how we're looking at transactions. But what we're really looking at is the accretion potential of each acquisition. And so pricing our capital off current stock prices, the accretion is lower than it would be if we were $28 a share. And so that tempers our enthusiasm on an individual asset basis. There's not a -- our deal meeting doesn't have a red light, green light in it, or yellow light in it, it's more a lower stock price means higher cost of capital means less accretion, which in and of itself tempers our enthusiasm.

At this time, I'll turn the floor back to Ben Butcher for closing remarks.

Thank you, everybody, for joining us today. We're very, very happy with where we sit with our leverage at its low level at the end of the year, with the pipeline that we're looking at. Very enthused about the progress that we continue to make internally in terms of efficiency and accuracy, if you will, in our underwriting.

So I think we're in very good shape. I hope the investors -- you, our investors, appreciate our continued FFO per share growth and our continued focus on that important metric. We are highly focused on continuing to deliver both growth and income to our investors. Thank you for joining us today.

Thank you. Today's conference has concluded. You may now disconnect your lines at this time. Thank you for your participation.