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Edited Transcript of STAG earnings conference call or presentation 2-May-18 2:00pm GMT

Q1 2018 STAG Industrial Inc Earnings Call

BOSTON May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of STAG Industrial Inc earnings conference call or presentation Wednesday, May 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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 of Capital Markets & Investor Relations

* William R. Crooker

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

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Conference Call Participants

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* Blaine Matthew Heck

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

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP& Lead Equity Research 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

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Sheila Kathleen McGrath

Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the STAG Industrial First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matts Pinard, Vice President of Investor Relations. Thank you, sir. You may begin.

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Matts Pinard, STAG Industrial, Inc. - VP of Capital Markets & Investor Relations [2]

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Thank you. Welcome to STAG Industrial's conference call, covering the first quarter 2018 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental information presentation on the company's website at stagindustrial.com under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements relating to earnings trends, G&A amounts, acquisition and disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends, and other matters.

We encourage all of our listeners to review the more detailed 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.

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

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

Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who will discuss the bulk of the financial and operational data. Also with me today are Steve Mecke, our Chief Operating Officer; and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.

The first quarter was a great way to start 2018. The team was very busy on all fronts. For the quarter, the platform produced 4.9% core FFO per share accretion, while maintaining leverage at the low end of our target range. We continued to identify accretive opportunities, closing $79 million of acquisitions at a 6.7% stabilized cash cap rate. The team also closed on $50 million of opportunistic dispositions, resulting in a gain of $23 million and an unlevered IRR of 13.5%. Particularly notable was the disposition that generated $32 million of proceeds, and was sold at a 6.2% cap rate after we accomplished various building improvements and extended the lease. We acquired this building in 2010 at a 9.2% cap rate.

The leasing team was just as busy during the quarter that featured our largest lease expiration schedule to date. The team signed leases for 3.3 million square feet, resulting in 9% positive leasing spreads. Notably, we achieved an 83% retention rate for the quarter.

Tenant confident continues to be very high. Tenants are signing longer-term leases with higher contractual rent bumps, generally between 2.5% and 3%. This quarter, we were able to achieve greater than 5 years of term on our renewal leases and over 7 years of term on our new leases, both longer than our historical average. Our operating platform delivered results that clearly demonstrate the strength of the industrial sector.

The industrial sector's health is both general and specific to the markets in which we operate. We are seeing strong tenant demand for our buildings, decline in vacancy and rising rents across the majority of these markets. By most accounts, the supply-demand imbalance is at/or near equal event for the U.S. as a whole. However, there is excess supply being delivered in 5 or so large primary markets. This would suggest that the remainder of the primary markets, which are 200 million square feet or greater, and secondary markets, 25 to 200 million square feet, must have relatively better supply demand characteristics than those few oversupplied primary markets.

The demand for our buildings is generally tied to consumer demand and population, and GDP growth, but we continue to see the incremental demand from the growth of e-commerce. Our exposure in e-commerce in our portfolio has risen greatly over the past 2 years, with now approximately 35% of our buildings having e-commerce activity within the building. We believe this incremental demand driver will persist for the foreseeable future.

We are very optimistic for 2018. We've had a great start to the year, and we plan to take advantage of the persisting opportunity to acquire accretive acquisitions. We plan to do this while simultaneously recycling assets at attractive prices.

In March, we announced the appointment of Michelle Dilley to our Board of Directors. She brings a strong background in supply chain management and logistics expertise, as well as valuable perspective into the evolving needs of distribution and warehouse tenants.

With that, I will turn it over to Bill to provide more detail on our first-quarter results.

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

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Good morning, everyone.

Before I begin, I would like to remind everyone that beginning this quarter, STAG's disclosure of certain non-GAAP operating metrics, such as same-store, retention and re-leasing spreads, are consistent with our industrial operating peers, as discussed in our joint release from January. These changes did not have a material impact to our disclosures. Additionally, effective January 1, we have adopted a GICs classification for our industry disclosure in our supplemental reporting package.

The first quarter puts the company in position to achieve and potentially exceed the 2018 business plan communicated in February. Core FFO was $0.43 for the quarter, an increase of 4.9%, as compared to the first quarter of 2017. Retention was 83% on the 5.6 million square feet expiring in the quarter. For context, the 4.6 million square feet renewed in the first quarter of 2018 was greater than the amount of space renewed for any given calendar year during the company history.

Same-store cash NOI decreased by 80 basis points, which was better than previously forecasted due to the higher than expected retention and re-leasing spreads for the quarter. Given this outperformance, we are raising our annual same-store guidance to positive 25 to 75 basis points from our previous guidance of flat to positive 50 basis points. We are also increasing our expected retention guidance for the year to between 75% and 80%.

The 2018 annual same-store pool represents approximately 80% of our total portfolio as of the first quarter. The 20% of the portfolio that is not included in 2018 same-store pool has annual fixed rental bumps of approximately 2%. While excluded from this same-store metric, these assets contribute to core FFO.

Our balance sheet continues to be very strong, as evidenced by a BBB rating, which is affirmed by Fitch in March. We have not issued common equity this year, and leverage was 5.1x on a net debt to run rate EBITDA basis at quarter end. Including subsequent acquisitions and dispositions, our leverage remains at 5.1x today. Our fixed charge coverage ratio was 4.2x, and our liquidity is $312 million.

In March, we drew $75 million of the previously undrawn $150 million term loan. This term loan is fully swapped, with an all-in interest rate of 3.15%.

In April, we closed a $175 million private placement transaction, with a weighted average interest rate of 4.2%. The transaction consists of 2 tranches: $75 million of 7-year notes, with a coupon of 4.1%, and $100 million of 10-year notes, with a coupon of 4.27%. Funding is expected to occur in June.

For comparison purposes, the 10-year treasury had risen 50 basis points in the 3.5 years since our last 10-year private placement transaction. Despite that increase, and because of the contraction in credit spreads, the all-in rate for this transaction reflects a 5 basis point decrease when compared to this previous transaction. Also, the 7-year treasury had risen 100 basis points in the 2.5 years since our last 7-year private placement transaction, and the increase in the cost of debt for this tenor was only 12 basis points when compared to the previous transaction. Although long-term rates have increased over the past few years, spreads have compressed almost on a one-for-one basis, resulting in little to no increase in the overall cost of long-term private placement debt.

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

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

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Thank you, Bill. Our focus remains on delivering bottom line performance for our investors, while maintaining the defensive balance sheet. As previously noted, our core FFO per share grew by 4.9% and leverage remains conservative. We intend to maintain balance sheet flexibility and keep our leverage comfortably below the upper end of our target range of 5x to 6x.

We will continue to look to deploy our available capital to its highest return. Currently, this is further accretive acquisitions. As demonstrated this quarter and in the past, we have and will execute on asset and portfolio sales as a source of capital.

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

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Questions and Answers

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Operator [1]

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

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst [2]

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Dispositions were larger than we had expected in first quarter. I was just wondering if you could give us any more color on pricing, IRR, or why those assets were chosen for sale, and any guidance for dispositions for the year?

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

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Those were opportunistic dispositions, so they tied into when the buyers were interested in buying these assets. We gave a little bit of color on the IRR and the cap rates at the -- in the body of the -- of our remarks today. We continue to expect to sell...

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

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Between -- yes, Sheila, I think we continue to expect to sell between 100 million and 200 million for the year. And as Ben mentioned in prepared remarks, it was a 13.5% unlevered IRR on the 2 dispositions in Q1. Both were opportunistic.

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD & Fundamental Research Analyst [5]

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Okay. Sorry, I missed that. And then just curious, Ben, on your big picture thoughts on the DCT news. Are there premiums paid for aggregated industrial portfolios? Just your thoughts on the transaction market in that portfolio.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [6]

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Well, I think -- yes, I was -- well, I'll start off by saying I was a little surprised on a public to public transaction occurring these days of such aggregated private capital. But having said that, when in the past, our experience has been aggregating portfolios of the smaller variety, 5 to 10 assets, we've seen, in our history of doing that, and some of them 100 to 150 basis points of cap rate compression between the individual asset pricing and the portfolio pricing.

We have suggested in the past that there's another leg in that transaction that you move from that small portfolio to an enterprise, i.e., assets that are being operated by an operating entity, there should be another 100 or more basis points of cap rate compression. We would look at the DCT transaction -- we're not surprised that DCT was the target of acquisition attempt. It's a well-run company with nice assets, a very clean story, but the 4.1% or 4.2% cap rate to us represents that next leg up in terms of it's an enterprise with operating characters, in their instance, development expertise.

It's worth noting, however, that PLD already had that development expertise, so presumably, that wasn't much of the equation. Perhaps, the development opportunity but not the expertise. We are very confident of our ability to produce growth going forward, through our execution of relevant value purchase that is similar to what we think some of our peers, like DCT, can produce by developing assets. So we're very encouraged by the mark that occurred with the DCT purchase. And we think it's consistent with the opportunities that exist within the industrial market.

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Operator [7]

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

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [8]

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I guess, can you just talk about the leasing market? And maybe just across your different -- whether it's asset quality or locations, where you are seeing the most demand across the portfolio?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [9]

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I think we're seeing general tenant confidence. I think the industrial tenants probably have been, by our observation, as encouraged by the tax law change as any group out there. We're seeing capital expenditures in the assets, longer lease terms, shorter downtimes, all the things you might expect from more confident tenants. I don't think that there is particularly any particular class or sector of asset that's more relevant, more in demand than others. Dave?

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David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [10]

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No, it's pretty broad based, Jamie. We -- the major point of sensitivity for tenants is -- remains labor. So provided we have a good labor pool surrounding our buildings, they're going to compete well, but the demand seems to be pretty broad based.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [11]

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Jamie, on that point, you've heard I'm sure from some of the other CEOs and other market commentators, the evolution of the Amazon effect which was it used to be everyone has got excited when Amazon announced they were going into the neighborhood where they had a building, and now there's some level of trepidation because they might suck up all the available labor. So the Amazon effect has reversed over the last few years, where they now are considered a very tough competitor for labor.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [12]

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That's interesting. I'm sorry I missed it. The -- I just want to make sure I heard you right. Did you say $100 million to $200 million of dispositions this year or did you say $200 million?

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

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Yes, that's right.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [14]

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$100 million to $200 million? Okay.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [15]

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Yes. And then it predates our -- in the body of our remarks to that, I think we're a little stronger in our statements about the consideration of portfolio sales. The $100 million to $200 million was based on opportunistic and non-core dispositions, if you will, granular dispositions. We are now saying that we will contemplate a portfolio sale within the year.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [16]

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And at what magnitude?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [17]

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It could -- if, indeed, pursued, could add to that number. We're not committing to add to that number at this point, but it could. It's certainly something we will actively consider.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [18]

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Okay. And then I guess just thinking more broadly, so you said 2.5% to 3% rent bumps. Can you just help us through like the growth that this company can produce in kind of a normalized state? So if you are getting 2.5% to 3% rent bumps, so what does like a normalized internal growth rate look like? And then...

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [19]

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Well, I think, yes, the normalized internal growth rate, Jamie, would be after we had a stabilized portfolio. As we've discussed in the past, as we acquire primarily 100% occupied building, there is an occupancy normalization weight that goes against that.

In a normalized portfolio with no rent growth, I think you're a looking at that 2.5% is probably -- 2% to 2.5% is probably a reasonable number. Obviously, there's embedded rate, as long as the markets continue to have rent growth that exceeds sort of the contractual rent bumps, then you'll see -- you might see growth that's larger than that to the extent we move into a point of the cycle where rent growth falls off to -- the lower the contractual rent bumps, that will weigh on same-store numbers going forward.

We think that our portfolio will produce through the course of the cycle at or about the same internal growth as a portfolio that was more concentrated in primary markets or more concentrated in coastal markets or whatever. That has been the history. That's what the data shows. Could the world have changed around us? Possibly. But again, that's what the history has shown.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [20]

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Okay. And then I guess I was also going to ask about the external growth piece of it. So you didn't hit the ATM this quarter. You've done some asset sales. Like how do we think about your ability to recycle capital and generate growth through that based on the size of capital, (inaudible) pricing and then yields?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [21]

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Yes. I think, well, we've suggested earlier in our responses was our experience has been on small portfolio sales on the level of 100 to 150 basis points of cap rate compression, contemporaneous cap rate compression, between where we can buy those individual assets and where we can sell the portfolios.

And having said that, obviously, it's a very accretive transaction for us to buy assets, say, at 8 and sell them at 6.5, and if that was the type of accretion that occurred. So we can do that. We have -- it has been better for us to raise new equity and buy assets as long as equity pricing is sufficiently attractive. We have not raised equity, as you've noted in the first quarter. We've taken advantage of the fact that we were at the lower -- indeed, below the lower end of our leverage range going into the year.

So we've used asset sales, combined with leverage, to execute on our acquisitions to date. And we can continue to do that throughout the year without having to raise equity and stay within our promulgated bounds. We are not likely to do that because we are -- our goal is to maintain a defensive balance sheet. So we will look to continue to do dispositions, hopefully, with some recovery in equity pricing to issue equity. But we have the flexibility through asset disposition, through the use of leverage to operate for a considerable period of time without having to raise equity.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [22]

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I guess what I'm also asking is this, what's the spread between where you can sell and where you can buy? I know you can buy and shrink cap rate or compress cap rates before you sell, but in terms of like, in a same year basis, what's the spread?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [23]

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In contemporaneous, it's 100 to 150 basis points. We can -- that portfolio of sale we did in the Charlotte/Atlanta area, those assets, we were buying exactly at the same time roughly exactly the same time as we're selling the portfolio at a 6.9% cap, we were buying equivalent assets at an 8.4% cap.

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Operator [24]

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Our next question comes from the line of Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [25]

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Ben, you hit on this briefly. But in looking at the portfolio characteristics, you guys are roughly 41% in primary markets, 51% in secondary, and 7% in tertiary. At this point last year, those figures were 25% in primary, 65% in secondary and 10% in tertiary. It seems like a big, big shift. Is any of that shift reclassification of the markets? Or is it all through asset recycling? And then where do you guys see those figures in -- this time next year or maybe the year after?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [26]

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It's a combination. So we have been buying probably in more primary markets, but we also went through in -- the classification that we use for primary market is 200 million square feet or greater. We had been using a market list that was derived at or around the time of our IPO. And there are now 5 more markets that have risen to be in the primary markets. So there is a total of 34 markets that are 200 million square feet. For instance, Charlotte has gone from sub 200 million to over 200 million, so a market that we're particularly active in. So a fair amount of that is because of reclassification. However, we also have been buying more assets in the primary market, so it is, to some degree, mixed as well.

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [27]

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And we have not been acquiring really in the tertiary markets at all, Blaine.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [28]

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And as to your question of where we're going, I think you would expect to -- the primary market concentration to continue to increase.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [29]

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Okay. Bill, we've talked about this before. But it looked like, again, expenses were up pretty substantially, 12% on a same-store basis. Is that still just higher taxes that are fully recoverable as we've discussed before? Is there anything else going on that we should be aware of?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [30]

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This one's really just driven by occupancy change of the same-store pool. So you're getting some recovery of that, but the occupancy change increased the -- the occupancy decreased and same-store pool increased the expenses.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [31]

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Got it, okay. And then on the retention, just wondering if there's any reason for the higher retention than expected this quarter. You guys, typically, I think point to tenant expansions as the reason for most of your move outs. So was this maybe a tenant that was going to expand that decided to stay put or something else going on there?

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

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I'd put it to mix. We're having -- our long-term expectations for retention probably haven't changed very much. We're hitting a bunch, and it's not a small group of tenants. We had the largest roll ever in the first quarter. It's just tenants are happy with the buildings that they're in and aren't seeing a reason to move.

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [33]

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Yes, and I mean the guidance, really, is just a budgetary exercise, so we had made some calls on some stays and goes, and we were able to exceed that this quarter, and that's therefore up -- increased our guidance for the year.

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Operator [34]

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

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Ben and Bill, I wanted to touch on more on the leasing activity that you saw during this quarter and how it compared to your expectations. So I just want to get this straight. The increase in guidance, was that mainly due to the strong activity you saw in their first quarter? Or do you expect to see better activity throughout the year?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [36]

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I think, primarily, the increase in guidance for the year was due to the higher than expected retention. The new leases contribute to it a little bit, but it was really the retention that drove the increase in the same-store guidance for the year.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [37]

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And that was retention that you already realized this quarter and not what you expect to realize, going forward?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [38]

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That's right.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [39]

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Okay. And then can you talk a little bit about your leasing spreads? I know you guys had some pretty good leasing spreads you recognized during the quarter. What really drove those, that bump in cash rent?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [40]

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On the new lease side, it was a -- there was a handful of tenants that rolled that we signed within the 900,000 square feet, one of which was a below-market lease, which we rolled up almost 50% to market. And the other 4 rolled up, on average, mid-single digits. So it's fairly widespread, but driven primarily by that one large rollover rent.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [41]

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And those are just typical industrial buildings?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [42]

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Those are standard individual buildings, warehouse distribution, and the large roll was in the Greenville Spartanburg area where we were able to successfully acquire 2 additional buildings this quarter in that same market.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [43]

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Okay. And then what would the spread be on the leasing statistics if you exclude some of those positive roll-ups?

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

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Well, if we exclude that one, as I mentioned, it would be mid-single digits on the new leases. So call it mid-single digits on the total weighted average because that's where the renewals were, but there's a -- it's a blend.

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Operator [45]

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(Operator Instructions) Our next question comes from the line of Mitch Germain with JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [46]

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Has anything changed with regards to the -- your underwriting in terms of maybe markets, the type of tenants, the industry? Is there a specific focus? I know you mentioned e-commerce previously. Is there any sort of shift that you're making?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [47]

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Mitch, our focus is on delivering the most cash flow we can to our shareholders, not only today, but tomorrow and going forward through time. And we find that by looking assiduously across 65 or so markets for the best individual transactions on a relative value basis that we can find.

Our mission is to identify and underwrite the risk, so we're not only getting return, but we're getting good risk-adjusted return for the expenditures that we make in acquiring these assets. So we're conscious of introducing risk into the portfolio by undue correlation. So for instance, our auto exposure and some other things are things that we pay attention to, but we're confident that our -- we have not introduced a lot of correlated risk into the portfolio because we have paid attention to those particular metrics.

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Operator [48]

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

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [49]

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So going back and retouching on the potential for portfolio transactions, are those maybe more attractive today versus, say, a year ago, given the price compression where you bought the assets that would be in a portfolio versus where you could sell them today as opposed to kind of where you could redeploy the capital versus where you could sell the portfolio?

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

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I think that there's no question that whatever cap rate compression that occurred last year, it might be reflected in the portfolio valuation, but it's also reflected in the individual assets. So I don't think that, at least, we have not yet identified a increasing spread between the individual asset cap rates and the portfolio cap rates. Should we market a portfolio, we'd be happy to discover that it's gotten bigger, but our expectations are that, that kind of spread has not changed. So again, contemporaneous individual asset versus portfolio, we're continuing to expect at 100 to 150 basis points.

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

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Understood. And then G&A came in pretty well below guidance, but your full year guidance remained unchanged. Is there something in that, that maybe you're kind of expecting -- I would say you were expecting in 1Q that's going to maybe get shifted out to later quarters in terms of the G&A hit.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [52]

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We are fair valuing, if you will. We're trying to estimate what our compensation will be, especially the noncash compensation, which varies with total shareholder return performance. And frankly, our performance this year has not been at a level that would get us to the midpoint of the range, which is reflected in our budgeting.

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [53]

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Right. And given that it's so early in the year, we didn't change our guidance. But if performance continued throughout the year, we'd probably be at the low end of our G&A guidance for the year.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [54]

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Understood. And then in terms of the balance sheet, as you look at the remainder of that term loan D, is that something you'd be thinking of pulling down before July, especially with the private placement expected to close in June?

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [55]

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Yes. We'll pull that down. We left some dollars on the revolver at quarter-end just to maintain some flexibility on the cost [of] that term loan. The term loan's already swapped, so putting on the revolver or drawing the term loan early doesn't matter. So we'll draw that down before July, and then we'll fund the private placements in June.

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Operator [56]

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Our next question comes from the line of Chris Lucas with Capital One.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP& Lead Equity Research Analyst [57]

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Just a quick question on that portfolio opportunity. I guess just in terms of the characteristics that you would be looking for in terms of the kinds of assets or markets or tenants that would potentially go into this. And then secondarily, if you could maybe provide some sense of size and whether size is potentially dictated by sort of where the stock price is.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [58]

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I think the -- what we're going to do is work with some of our friends in the brokerage community to assess where the sweet spots are in terms of portfolio size and market response, in addition to which, we would look at -- to work with the brokers to identify the makeup of a portfolio that would be best received by the market.

When we sold that last portfolio, there was a very strong message from the brokerage community, that geographic proximity, i.e. stuff you could drive in a day, was very important to the potential buyer pool. I think there has been in the market recently a lot of appreciation for term, so maybe we'll look at a portfolio that has longer-term leases in it. But again, that will be a determination we'll make in concert with our friends in the brokerage community about what the appetite is from buyers out there.

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Operator [59]

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

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [60]

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Ben, maybe for you or Dave. I wanted to talk a little bit about just any signs of bad debt that you're seeing, and I did jump on late, so I apologize if you addressed this. I'll go back and read it. But any signs of bad debt? Any thoughts in your own heads about recycling assets faster, either in retail or some sort of other sector that you may be worried about or seeing some stress in?

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

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Well, I mean, I'll let Dave get into specifics. But I would say that the -- within the concept that we bet on overlays, so if our perception of credit risk on a tenant is higher than the markets, that's an asset probably we could do well selling. If our perception of credit risk is lower than the markets, we understand, for instance, the situation we had in -- with Oneida a few years ago, where we were pretty sure that they were going to reaffirm the lease even if they went through bankruptcy. That's a place where probably it would make sense for us to hold on to the asset because we're going to get relatively more cash flow out of owning that asset than the market ascribes.

The opposite obviously could occur too, where we were -- held an asset that we were pretty sure they were going to reject the lease in a bankruptcy, and the market thought that, that was not the case and was willing to ascribe more cash flow in the future from that asset. That's a situation where it probably makes sense for us to sell. But Dave?

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David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [62]

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The one specific challenge we have right now is -- you've probably read about Bon-Ton stores, liquidating your tenant in one of our assets, it's in the Dayton market. We're eager to get the building back. It's well located. It's got great characteristics. So we're -- we view that as an opportunity rather than as a threat.

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William R. Crooker, STAG Industrial, Inc. - Executive VP, CFO & Treasurer [63]

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And Dave, from a financial standpoint, that tenant does not contribute a material amount of ABR to our portfolio.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [64]

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So I think the overarching answer is there's not a lot of -- we don't see a lot of risk in the portfolio. We have a pretty de minimis exposure to brick-and-mortar retail, and the exposure we have we feel pretty good about.

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Operator [65]

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Mr. Butcher, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

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

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Great. Well, thank you, everybody, for joining us. We're very encouraged about the fundamental strength of the industrial market, the continuing opportunities to identify accretive acquisitions and the strength of tenant demand and tenant confidence. We look forward to delivering good results for the rest of 2018, and thank you for your participation today.

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Operator [67]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.