U.S. Markets close in 1 hr 33 mins

Edited Transcript of STAG earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 STAG Industrial Inc Earnings Call

BOSTON Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of STAG Industrial Inc earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Benjamin S. Butcher

STAG Industrial, Inc. - Chairman, CEO & President

* David G. King

STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations

* Matts Pinard

STAG Industrial, Inc. - VP

* Stephen C. Mecke

STAG Industrial, Inc. - Executive VP & COO

* William R. Crooker

STAG Industrial, Inc. - CFO, Executive VP & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Michael Albert Carroll

RBC Capital Markets, Research Division - Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the STAG Industrial Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matts Pinard, Senior Vice President of Investor Relations. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

Matts Pinard, STAG Industrial, Inc. - VP [2]

--------------------------------------------------------------------------------

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2019 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 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 also 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.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

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.

Yesterday, we announced acquisition volume of just over $300 million for the third quarter. This brings our year-to-date total, including acquisitions that have closed subsequent to quarter end, to approximately $875 million. As a result, we have raised the top end of our 2019 acquisition guidance to $1.2 billion, a significant increase from our initial volume guidance. We have already closed well in excess of any previous year's acquisition totals, ensuring this will be the company's most successful year on the external growth front.

At the same time, our operating metrics for the first 3 quarters of 2019 remain strong. We achieved cash re-leasing spreads of 11.4%, retention of 74% and same-store cash NOI growth of 1.9%. All of these metrics meet or have surpassed our initial and any subsequently increased 2019 guidance. This has prompted a further upward revision to our 2019 same-store NOI guidance this quarter that Bill will describe in his remarks. This marks one of the company's most successful years producing internal growth. STAG has demonstrated the rare ability to provide both external and internal growth.

Growing GDP and, in particular, continued strong consumer spending, provides strong demand support for the industrial sector. The continued growth of e-commerce, the associated supply chain reconfiguration and the increased inventory needs are large additive drivers of industrial demand. As we have previously highlighted, STAG's portfolio is located proximate to centers of population and is directly benefiting from these secular tailwinds.

Consistent with headlines and various industry reports, STAG's markets continue to benefit from healthy demographic trends. The trends in population and employment growth, which drive income growth and industrial demand, have generally been positive nationwide, and this holds true when looking at our largest market exposures. Population growth, and specifically growth in prime working-age population, helped drive metro GDP growth. Metro GDP is projected to grow across our top market exposures and broadly across our portfolio-wide market exposure. This has driven our robust portfolio operating metrics for this year.

This fall, we rolled out our third annual comprehensive tenant survey. This survey has proven to be a valuable tool that allows us to gain additional insights into our tenants' view on their business, the world and how their current and future real estate needs are being met. Consistent with last year, the results from the survey show an increase in business activity, both at the corporate and building level. 52% of respondents indicated business activity is increasing at the corporate level and 41% indicated an increase at the building level.

The macro environment continues to be uncertain, specifically with regard to trade wars. In response to a direct question related to the impact of tariffs and other restrictions, our tenants indicated that on average, there was a small negative impact to their business, with responses ranging from a large negative impact to a small benefit. We continue to believe it's too early to tell what these impacts will be, but note that the results from the tenant survey indicate that the tone has become more cautious compared to our survey from 1 year ago. STAG's emphasis on geographic and industry diversification should provide a level of protection should negative trade impacts start to be evident.

E-commerce is clearly an important and growing incremental demand driver at -- 44% of our portfolio's buildings are currently handling e-commerce activity and 47% of respondents indicate that e-commerce activity has increased in their facility over the past year. These responses have grown compared to last year, and we expect this trend to continue.

It is important to note that the traditional demand drivers for industrial real estate, such as GDP growth and improved business confidence, continue to provide baseline support to industrial fundamentals. The survey results are consistent with our operating results. The increase in business activity and increasing importance of e-commerce to our tenants' businesses have directly contributed to our strong operating results over the past several quarters.

With that, I'll turn it over to Bill, who will discuss our operational results.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [4]

--------------------------------------------------------------------------------

Thank you, Ben, and good morning, everyone. Core FFO was $0.46 for the quarter, an increase of 2.2% compared to the third quarter 2018. Leverage remains at the low end of our guidance with net debt to run rate adjusted EBITDA of 4.7x. Acquisition volume for the third quarter totaled $303 million with a stabilized cash cap rate of 6.8% and a straight line cap rate of 7.2%. The straight line cap rate incorporates weighted average rental escalators of 2% associated with this quarter's acquisitions. This brings acquisition volume through Q3 to $748 million with stabilized cash and straight line cap rates of 6.5% and 7.1%, respectively.

Subsequent to quarter end, our acquisition volume to date is $126 million. The demand for our buildings continue to be reflected in our portfolio operating results with new and renewal cash leasing spreads of 19.7% and 8.6%, respectively.

Straight line re-leasing spreads for the quarter were robust as well with new and renewal straight line re-leasing spreads of 24.7% and 14.8%, respectively. Retention for the quarter was 61%.

Same-store cash NOI grew by 1.3% for the quarter, which was positively impacted by our retention and cash re-leasing spreads and partially offset by a decline in occupancy within the same-store pool in the third quarter. Year-to-date, same-store cash NOI has grown 1.9% driven by a retention rate of 74% and cash re-leasing spreads of 11.4%. This was partially offset with the decline in occupancy in the year-to-date same-store pool. As Ben mentioned, these metrics have exceeded our budgets and have contributed to our increase in same-store cash NOI guidance for 2019.

Moving to our capital market activity. As previously discussed on the second quarter call, we funded term loan E and originated term loan F. Term loan E has a notional of $175 million and is fully swapped with a fixed rate of 3.92%. Term loan F has a delayed draw feature and is currently undrawn with a notional of $200 million and is fully swapped at a fixed rate of 3.11%.

On September 24, we completed an equity offering at $29 per share, which resulted in aggregate net proceeds of approximately $362 million with a portion of those proceeds to be received on a forward basis. We received net proceeds of $157 million in September and expect to settle the forward contract and to receive the remaining $205 million in the next few months. The $157 million of immediate proceeds were used to fund our third quarter acquisitions, and the $205 million of proceeds to be forward settled will help fund upcoming identified acquisitions.

At quarter end, net debt to run rate adjusted EBITDA was 4.7x. Our fixed charge coverage equals 5x, and our available liquidity is $623 million.

We have updated our public guidance to reflect our activity to date. We now expect acquisition volume to be between $1.1 billion and $1.2 billion. This includes between $50 million and $100 million of value-add acquisitions. The stabilized cash cap rate guidance has also been updated to a range of 6.3% to 6.5%, and we expect the straight line stabilized cap rate to be approximately 50 basis points higher.

G&A guidance has been decreased to a range of $36 million to $36.5 million. We have reduced our granular disposition guidance range between $50 million and $75 million and refined retention guidance to 75%. Finally, we have increased our same-store cash NOI guidance to a range of 2% to 2.25%, which reflects the impact of our leasing success year-to-date.

All 2019 guidance can be found on the supplemental posted to our website in the Investor Relations section. I will now turn it back over to Ben.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

Thanks, Bill. This quarter and for the year-to-date, STAG has again demonstrated the strength of our portfolio, of our operating platform and of our investment thesis. This strength was evidenced by our historic quarter for acquisitions and our outstanding third quarter and year-to-date operating metrics. With our successful equity transaction in September, our conservative balance sheet and our healthy pipeline of potential accretive acquisitions, the company is well positioned to close out a very successful 2019.

We thank you for your time this morning and for your continued support of our company. I'll now turn it over to the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

--------------------------------------------------------------------------------

Ben, acquisition volume in the quarter was a record and you upped guidance meaningfully. We keep hearing how competitive it is to acquire industrial buildings. Just wondering if you could give us some insight how you're able to continue to capture this kind of volume at attractive cap rates.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Thank you for participating, and thank you for the question. As we've talked about in previous quarters, we have built and continue to augment and the experience of the team continues to grow. So it's really by covering a broad swath of the fungible industrial market, and a lot of it is in areas where we don't have significant institutional competition. So we look at 60-or-so markets, and again, in a lot of those markets, we're not competing with large potential buyers. So it's an iterative process. We still only buy about 15% of what we underwrite, and we underwrite a very small portion of the things that we identify, only the things that we think we have a reasonable chance of acquiring. So it's a large iterative process that, by virtue of the experience and the maturing of the organization and the growth of the organization, allows us to identify and acquire at those types of volumes.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

--------------------------------------------------------------------------------

Have you added to the acquisition team this year?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

We have -- we made a decision a number of years ago to grow our own acquisition people. And so we are -- have people that have moved up through the ranks of financial analysts, the senior financial analysts and now have been rotated out into the field and are picking up coverage in markets. So where the number of people we have outward facing has gone from effectively 5 or so to 8 or so, they're out there interacting with brokers, identifying assets and helping us identify those acquisitions that you see in the acquisition totals.

--------------------------------------------------------------------------------

Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

--------------------------------------------------------------------------------

Okay. Great. And any update on your New Jersey development project?

--------------------------------------------------------------------------------

David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [7]

--------------------------------------------------------------------------------

Yes, Sheila. This is Dave King. That project is due to deliver in December. It is both on time and on budget, and we expect to meet and most likely exceed pro forma on that.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Ben, can you talk a little bit about your near term, I guess, investment activity? What's driving the lower acquisition yields? Do you have any other lumpier transactions coming in, in the fourth quarter?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [10]

--------------------------------------------------------------------------------

So the acquisition yields, I mean I think you're referring to cap rates. Cap rates, as we've discussed, were a point in time measure. We're still adhering to and exceeding our long-term return metrics in terms of IRR, FFO or CAD per share over time. And so -- and from quarter-to-quarter, we see cap rates move up or down depending on the mix of what we're acquiring. Long-term leases with little capital expenditure and good contractual rental bumps obviously can be bought at lower cap rates and still deliver the same kind of returns. So I don't think you're going to -- we're very comfortable that our acquisition guidance for the year remains solid in terms of cap rates expected. So I don't think you're -- really shouldn't expect to see anything different in the fourth quarter than what we normally acquire. It's just there are mix changes from quarter-to-quarter that result in different reported cap rates.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Okay. Do you have another, I guess, larger acquisition coming in the fourth quarter with an expanded lease term, and that's what's driving it a little bit lower?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

No. Again, it's just the same mix that we always buy. There could be -- depending on the mix, I don't know particularly, but it could be some sale leasebacks in there or something that is longer term with -- again, which would have a lower initial cap rate -- lower -- and again, with rent bumps, et cetera.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [13]

--------------------------------------------------------------------------------

Yes, Mike. I mean, for the year, we're at 6.5% on a cash cap rate, and that's within the range of our guidance for the year. So the only quarter that we dipped really below that was Q2. So we're not expecting anything like a Q2 cap rate for Q4.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [14]

--------------------------------------------------------------------------------

Okay. Great. And then can you talk a little bit about your, I guess, new same-store guidance that you raised this quarter? What's driving this improvement? Is it just the strong year-to-date leasing trends that you've been able to record?

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [15]

--------------------------------------------------------------------------------

That's the big -- that's one of the biggest drivers, Mike, is just the -- you're seeing the strong leasing trends. You're seeing the cash rollover rents that and as -- just to remind you, those are leases that have commenced. So if they've commenced later in Q3, you're going to see that roll through the rest of the -- in Q4 and drive the year-to-date results.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from Blaine Heck with Wells Fargo.

--------------------------------------------------------------------------------

Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [17]

--------------------------------------------------------------------------------

Ben, there's been a lot of discussion in the industrial sector about rent growth differential between smaller buildings and big box, with smaller reportedly seeing better growth. You guys have a pretty good mix between the 2. So I wanted to get your take on the subject and whether it's size that's the biggest determinant of rent growth or if it's more based on the submarket or availability of land or some other factor.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [18]

--------------------------------------------------------------------------------

Well, I think the long -- very long-term rent growth in industrial markets is cost-based, tends to be cost-based. So when you have very hot markets and land prices go up, you can see unusual rent growth in those markets for a period of time. The history has been -- and of course, we can accept that this time may be different, but the history has been that rental growth for industrial properties is pretty much the same across all the top 50-or-so markets. It has different variability depending on where you are in the cycle. And that's also true -- likely true for smaller versus larger. I would say smaller spaces are more expensive to build and maintain and therefore, may have some type of underpinning for higher rent. But I don't think that's underpinning for higher rent growth as much as it is for higher absolute rent. So I think our belief is that the smaller spaces are -- to the extent that they're outperforming in this market, it's more of a cyclical -- I wouldn't even say anomaly but more of a cyclical feature.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [19]

--------------------------------------------------------------------------------

Yes. Blaine, when you look at the stats within our portfolio, we're not seeing that. Our large boxes are producing as good as rent growth as the small boxes.

--------------------------------------------------------------------------------

Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [20]

--------------------------------------------------------------------------------

All right. That's helpful. And you guys bought a building in Memphis over 1 million square feet, which I think is the only 1 that size you bought in a while. Can you just talk about what attracted you to that asset and whether we should expect you guys to purchase some of these larger buildings going forward?

--------------------------------------------------------------------------------

Stephen C. Mecke, STAG Industrial, Inc. - Executive VP & COO [21]

--------------------------------------------------------------------------------

Sure. It's Steve. This building, what attracted it to us, it's a Class A building with a long-term tenant in it that just recently expanded into -- it was originally a 2-tenant building. The tenants have sort of now expanded into the balance of the building. It's in a great logistics location. It's near the BNSF intermodal yard in Memphis and near the airport. So we are very bullish on the property. And to the extent that the tenant ever decides to leave, and the tenant's been there almost -- in the 19 or 20 years, we're very comfortable with the re-leasing prospects of that site as well.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [22]

--------------------------------------------------------------------------------

And I think to the -- generally, the question about whether or not we're comfortable buying 1 million square-foot buildings, like everybody else in the industry, we have -- there's some degree of consideration of the fact that there haven't been a lot of million square-foot buildings that have rolled. We have been looking at the statistics on that, and we derive comfort from the statistics on second-generation space leasing of those buildings. But it's certainly something that we pay attention to as we do with all the buildings underwriting what -- how the reuse of that building would occur should the tenant leave.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Dave Rodgers with Baird.

--------------------------------------------------------------------------------

David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

--------------------------------------------------------------------------------

Ben, maybe on the acquisition front. You guys have done a lot of the acquisitions this year on a one-off basis, which again, is a good testament to the strategy you've got. But talk about maybe why you haven't been able to find as many value-add opportunities. As you increased guidance, that was not an increase. And then can you also talk about the portfolio premium for your type of assets in your markets that are keeping you back to the single-asset trade?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [25]

--------------------------------------------------------------------------------

So I'll address the second one first. The portfolio premium in markets that are deemed more risky, whether they are or not, is a subject that we would be happy to discuss at length. But in the markets that are deemed more risky on an individual asset basis, the premium is higher. If you bought -- I mean it goes to the ridiculous extreme. If you buy 50 treasury bills, the risk is the same as if you buy 1. I think some people view assets in, for instance, Inland Empire West as being relatively low risk. The portfolio premium you would see on a collection of assets in Exit 8A in New Jersey or in Ontario, California, or in Long Beach, those types of things have very little in the way of portfolio premium.

If you have a collection of assets in fungible markets, like, say, Cincinnati and Indianapolis, which are deemed a little bit more risky generally, you'll see a bigger portfolio premium. And so we believe that as we work across the 60-or-so markets that we operate in, we see different levels of portfolio premium accruing to the -- accruing to those assets we acquire in those various markets. I'm sorry, the first part of the question, I've forgotten.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [26]

--------------------------------------------------------------------------------

Value add.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [27]

--------------------------------------------------------------------------------

Oh, value add. So we have a level of inquiry that we have with regard to value add. We have -- we're out looking for value-add transactions, and we acquire them as they come through our filter and we can buy them for the returns that we're looking for. So we may identify a great value-add asset, but somebody else is willing to pay more than will allow us to achieve the returns we're looking for.

So we are, throughout the year, continuing to look. We don't have a cap on the amount of value add per se. It's our expectation that the value add will be on the range of maybe 5% to 10% of our asset acquisitions for the year. And the timing of those acquisitions, you could see a quarter where all 5% to 10% occurred in 1 quarter, or you could see it spread throughout the year. But the -- we are open to acquiring them. We're looking for them, and we'll acquire them if, again, we can get the returns that we're looking for in those acquisitions.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [28]

--------------------------------------------------------------------------------

And Dave, just regarding the portfolios, I mean we still underwrite portfolios. About 20% of our pipeline is portfolios. It's just we're very disciplined on price and have not been able to acquire those portfolios due to price.

--------------------------------------------------------------------------------

David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

--------------------------------------------------------------------------------

Got you. That's helpful. And then maybe on the disposition side. You actually took guidance down, and I realize there's a high level of scale in your business, Ben. But as you kind of think about increasing the guidance for acquisitions to $1.2 billion at the top end, nothing really kind of bubbles up that you kind of start to say, hey, we need to do a little bit more of the recycling on...

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [30]

--------------------------------------------------------------------------------

Well, I mean I think it's a little bit of the same thing. We have filters that we've set up in terms of disposition, and we've talked about those filters in the past. From quarter-to-quarter, we'll have different levels of disposition. But we're always looking at and evaluating potential dispositions. This is separate and aside from sort of capital raising dispositions, which we've done a couple of times in the past. But as we look at our portfolio, as we've talked about in the past, there are assets that we are interested in owning long term. That would be the vast preponderance of our portfolio, but there are some assets -- the flex/office assets that we've discussed, we will get rid of over time. I shouldn't say get rid, dispose of over time, and we continue to look to do that on an opportunistic basis. As we look at our portfolio, there may be times where we decide that there's another subsegment that we would look to dispose of. But mostly, we're looking at it on the same way as we do on acquisitions, on a granular basis, on an opportunistic basis.

--------------------------------------------------------------------------------

David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

--------------------------------------------------------------------------------

And last question for me just on the retention. Year-to-date, your retention is in line. In the quarter, it was a little bit lower. Kind of remind us what's going on there and then the backfill of any opportunities. And then as you look out into the early part of 2020, any tenants that we should be kind of paying attention to?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [32]

--------------------------------------------------------------------------------

Yes, Dave. Thanks for the question. I mean we're very comfortable with our guidance for the year. Our long-term retention has been in that range, and so we don't expect anything unusual from -- and as we've discussed from quarter-to-quarter, you're going to see lower and higher numbers, but we're comfortable with our guidance for the year.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [34]

--------------------------------------------------------------------------------

Can you talk more about the study you mentioned? It sounded like you're seeing an increase in e-commerce type tenants in the portfolio or at least e-commerce activities. Maybe you could just provide more color on exactly what people are saying. And are there certain sectors that are using your assets more than they were in the past? Anything you can provide would be really helpful.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [35]

--------------------------------------------------------------------------------

Yes. So Jamie, that's -- were you referring to our tenant survey? Well, this is our second year of doing the comprehensive -- third year of doing the comprehensive survey. Time does fly. And so the survey is an indicator, we get -- we ask our tenants specifically what they're doing in the building with regard to e-commerce.

Now I'm not going to tell you that it's granular household goods or anything like that. It's just general e-commerce activity that we're inquiring about. And as you might expect, since our portfolio was representative of the industrial assets in the United States, our portfolio -- as e-commerce activity's increasing generally across the United States, our portfolio is experiencing that same increase.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [36]

--------------------------------------------------------------------------------

Okay. Are there certain regions or certain property sizes or certain locations within markets that tend to be getting more [action]?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [37]

--------------------------------------------------------------------------------

So e-commerce activity tends to occur near populations. Our assets are located proximate to populations. I think it's important to note that sort of, whether you're talking about last mile or last touch, that doesn't mean 1-mile, 5-mile radius is -- the last touch assets are, in most population centers, are out and around the beltways around those population centers, which may be 10 or 15 miles away from sort of the most dense population. And I know in particular, as an example, in Boston, the last touch stuff's all occurring out around 128 and beyond. And so our assets are proximate enough to those population centers and to how the people that are delivering to those last-touch consumers, they're proximate enough for the purposes of those -- that activity.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [38]

--------------------------------------------------------------------------------

And then what about other characteristics like dock doors on both sides of the building or truck courts, certain sizes of that? I mean are there any trends you're seeing that even help you as you think about your next round of acquisitions, certain characteristics that matter more than others?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [39]

--------------------------------------------------------------------------------

So as you know, when we underwrite an acquisition, we're looking at the features of the building that will affect, obviously, the tenant retention. So we want to know if the building is fungible -- excuse me, has the features that our tenant -- current tenant uses. But we also want to know, if and when that tenant leaves, does this building have features that are attractive to the tenants in that specific market and submarket. And as we underwrite those buildings, if the building is short on dock doors or if the market is a market where they want cross-dock instead of single loaded, we put in our underwriting the capital cost of converting that building to that -- to have those features. And if the building is not -- if it's a building with no side yards or something like that, so you actually can't add a cross-dock facility in its market, we're either going to assume that we can't lease it for a longer period of time or assume we'll have to lease it for less rent because it's a less fully featured building. All that's part of the underwriting. And as we look at assets individually, which is again is the -- predominantly how we buy assets, we're able to, again, identify and acquire assets that have good long-term viability in those markets.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [40]

--------------------------------------------------------------------------------

But are there certain characteristics of a building today that would -- you wouldn't even consider them, where maybe 3 or 4 years ago, you would have? Like has the market changed that much or not really?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [41]

--------------------------------------------------------------------------------

No, the market hasn't changed that much.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [42]

--------------------------------------------------------------------------------

Okay. And then following up on the same-store question. You guys have had pretty healthy leasing spreads, accelerating leasing spreads for many quarters now. What is -- how do you think about your same-store potential in 2020 versus 2019? I mean can you see accelerating growth based on how you...

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [43]

--------------------------------------------------------------------------------

Well, we were -- obviously, we're not in a position yet to talk about our -- to give guidance on 2020. I think one of the things -- as we think about same-store NOI, one of the things that I like to think about is we have a different acronym, SANG, which is stabilized asset NOI growth. We have a -- our same-store pool is, at the end of the year, is probably going to be about 70% of all of our assets. And another 20%, 25% of our assets -- 25% of assets are actually stabilized. So we have a significant portion of our -- of owned assets that are not in our same-store pool but are producing 2.5% or so growth through contractual rent bumps. They're stabilized assets. And so we think that the SSNOI stat is a little misleading with regard to our portfolio in particular. But we're very comfortable with our projection -- with our recently revised projection for the year, and we're very comfortable that our portfolio will continue to operate well. And we will visit guidance as we move into 2020.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [44]

--------------------------------------------------------------------------------

Yes. But Jamie, as you pointed out, the leasing spreads has been a big driver in the acceleration of our same-store NOI over the past several years.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [45]

--------------------------------------------------------------------------------

All right. Did you have a sense of what your mark to market looks like for '20?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [46]

--------------------------------------------------------------------------------

So I think that still gets into guidance for 2020. We've told you -- we've mentioned from time to time that the -- we believe our portfolio is, in aggregate, slightly under market. We can -- continue to have that belief.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Our next question comes from John Massocca with Ladenburg Thalmann.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [48]

--------------------------------------------------------------------------------

So just as I look on the balance sheet side of things, you've been a little bit lighter in terms of the issuance on the ATM. Obviously, having the 2 offerings in place recently probably drove that. Was that more of a structural shift, where that will be more of a capital raising focus going forward and maybe less emphasis on the ATM? Or is it just a matter of the deal flow for acquisitions being what it was that bigger chunks of equity made more sense? And if it becomes more granular, say, the start of next year, ATM is still kind of the primary equity raising vehicle?

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [49]

--------------------------------------------------------------------------------

Yes. Just taking a step back, John. I think, ideally, we like to match fund our acquisitions with both debt and equity. Historically, the ATM has been a great tool to do that. Given the increased deal volume, we elected to do some larger bought deals. And this recent bought deal had a forward component, which allowed us to match fund identified acquisitions both under contract and LOI. And we'll continue to be flexible with how we raise equity and try to match fund as best we can our acquisitions.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [50]

--------------------------------------------------------------------------------

And I would say that -- to sort of confirm and reiterate what Bill's saying, is we're happy with the ways that we have raised equity, and we're happy with the fact that we have multiple ways to access the equity markets.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [51]

--------------------------------------------------------------------------------

Okay. And I know it's probably a little bit early days. But did you see any impact potentially on your automotive supplier tenants from the GM labor stoppage at all? Is there anything notable?

--------------------------------------------------------------------------------

David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [52]

--------------------------------------------------------------------------------

No, we checked in with them, obviously, on the news of the strike. There seemed to be a degree of concern, but no real impact.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [53]

--------------------------------------------------------------------------------

Okay. And then one quick detail one. How much of the expected value-add volume this year has been completed already? And how much is kind of remaining, let's say, at the midpoint of guidance, that $75 million?

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [54]

--------------------------------------------------------------------------------

We've completed -- I mean right now, if we don't complete any other value-add deals for the year, we will be within our guidance range.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [56]

--------------------------------------------------------------------------------

I wanted to ask about your G&A in the context of you guys lowered it this quarter and now you're a company that's acquiring $1 billion of properties a year. You guys have been able to keep that line pretty well under control the past few years, but just kind of curious, given the increased momentum and activity in the business over the last year, whether you think you can continue to scale that number over the next couple years.

--------------------------------------------------------------------------------

William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [57]

--------------------------------------------------------------------------------

Yes. I think we'll be able to continue to scale that number. And if you look back several years, G&A as a percentage of NOI was mid- to low teens. We continue to drive that number down. And there was a variety of items that drove the reduction in G&A guidance this year, but we're very comfortable with the revised guidance for the rest of the year.

--------------------------------------------------------------------------------

Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [58]

--------------------------------------------------------------------------------

Okay. And then I just wanted to ask about property taxes. It seems like across most real estate types, municipalities are getting more aggressive with trying to increase people's property taxes. I know you guys pass those through to customers. But I'm kind of curious just in the negotiations with customers on rents, whether they look at things in terms of total cost of occupancy and whether that increased property taxes have any impact on their willingness and ability to pay rent, or whether those sort of things are thought about separately.

--------------------------------------------------------------------------------

David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [59]

--------------------------------------------------------------------------------

I think, by and large, our tenants do look at total operating costs. We are -- we aggressively appeal our property taxes and are successful in many, many cases. But you're right. They are passed through to the tenants, so we don't necessarily feel the immediate impact of those. We do perhaps see in an abatement rolling-off situation or something like that, our net rents might change, but incremental increases in property taxes haven't been that significant to change our net rents.

--------------------------------------------------------------------------------

Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [60]

--------------------------------------------------------------------------------

Okay. And then just one more. I apologize if I missed this. But did you guys give any update on the development in New Jersey?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [61]

--------------------------------------------------------------------------------

We did. You want to know what it is?

--------------------------------------------------------------------------------

Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [62]

--------------------------------------------------------------------------------

Yes, yes. Could you repeat it for me? Did you lease it?

--------------------------------------------------------------------------------

David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [63]

--------------------------------------------------------------------------------

On time, on budget, on pro forma or better.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [65]

--------------------------------------------------------------------------------

Just a quick follow-up. I just wanted to get your thoughts. Given we've been in this recovery for a while now, we're starting to see construction rise. Just how are you guys thinking about the supply risk in your markets or supply growing in your markets versus maybe this time last year? And what's the implications for the ability to push rent? There's certainly other markets...

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [66]

--------------------------------------------------------------------------------

Yes. I think that there's no question that if you look on a national aggregated scale that supply is more of an issue than it was a year ago. Most of our portfolio and a lot of our activity is in markets that are less impacted by excess supply. There continues to be -- preponderance of supply continues to be in a few of the top 10 markets of the oversupply, if you will. So there's no question that it impacts rents. And I think in places like South Dallas, your -- the expectations are for continued negative rent growth. We are -- as our portfolio is -- we think it remains pretty balanced with regard to supply and demand, so we're not expecting any material impact on rent growth because of that.

--------------------------------------------------------------------------------

James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [67]

--------------------------------------------------------------------------------

So could you see rents accelerating still in your markets?

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [68]

--------------------------------------------------------------------------------

I think rents will continue to move up at a measured pace. We've always had a long run of very high rental growth. We expect to see continued rental growth. But what's important, I think, in the exercise of our investment thesis is we underwrite every market, every submarket and indeed, the building itself, the characteristics of the building itself to understand and/or project the rent growth for that building in that submarket. So again, we're not really a top-down Dallas is going to grow at 3%. It's what's going on in this particular industrial park in Dallas or in Cincinnati or wherever. So we're very granular on how we look at rent growth, and I think that has provided us a cushion of safety and conservatism in our underwriting.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

We have reached the end of our question-and-answer session, so I'd like to pass the floor back over to Mr. Butcher for any additional concluding comments.

--------------------------------------------------------------------------------

Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [70]

--------------------------------------------------------------------------------

Well, thank you very much, operator, and thank you all for joining us this morning. I think our results, both on the acquisition and operating side, as we mentioned in our comments -- initial comments, are reflective of an investment thesis that is -- has worked and it continues to work, and we're very excited about the prospects of continuing to execute it as we move forward. Again, thank you for your time this morning.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.