STAG Industrial, Inc. (NYSE:STAG) Q4 2023 Earnings Call Transcript
STAG Industrial, Inc. (NYSE:STAG) Q4 2023 Earnings Call Transcript February 14, 2024
STAG Industrial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the STAG Industrial Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Investor Relations. Thank you, sir. You may begin.
Steve Xiarhos: Thank you. Welcome to STAG Industrial's conference call covering the fourth quarter 2023 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the Company's website, www.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 forecast of core FFO, same-store NOI, G&A, acquisition, disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters.
We encourage all 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 information 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 Bill Crooker, our Chief Executive Officer; and Matts Pinard, Chief Financial Officer. Also here with us today is Mike Chase, our Chief Investment Officer; and Steve Kimball, EVP of Real Estate Operations, who are available to answer questions specific to the areas of focus.
I'll now turn the call over to Bill.
Bill Crooker: Thank you, Steve. Good morning, everybody, and welcome to the fourth quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about the fourth quarter and full year 2023 results. 2023 was one of the best operational years we had as a public company. We produced record leasing spreads and record cash same-store NOI. These leasing spreads and same-store NOI growth were driven by continued market rent growth in our portfolio. 2023 market rent growth for our portfolio was high single digits. On national, market rent growth has generally experienced a degree of normalization, non-coastal markets outperformed coastal markets in 2023. Recent retail sales prints have been strong, especially in e-commerce, indicating that consumer health remains intact.
Secular tailwinds, including near-shoring and on-shoring, have contributed to a boom in domestic manufacturing requirements, which grew by 60% in 2023. Some of the largest markets for manufacturing space in the U.S., including Chicago, Detroit, Minneapolis and Greenville, experienced some of the highest rent growth last year. These are markets that we have a strong presence in. While STAG has minimal direct exposure to manufacturing plants, this increased manufacturing activity is expected to further drive demand for warehouse distribution facilities. 2023 deliveries totaled approximately 3% of stock. While the existing supply is being absorbed at a healthy rate, vacancy ended the year above last quarter's expectations at 4.9%. While supply remains elevated, new construction starts have declined nationally by approximately 65% on a year-over-year basis as of Q4 of 2023.
In addition, forecast for 2024 and 2025 deliveries are expected to decrease to just 2.2% of stock. Vacancy rates will likely continue to rise in the near term, but we expect the peak to occur sometime in the second half of 2024, with normalization around year-end. We still expect market rent growth for our portfolio to be in the mid-single digits for 2024. We are proud to report cash and straight-line leasing spreads of 31% and 44% in 2023. As of today, we have achieved 69% of leasing we expect to accomplish in 2024 or approximately 9 million square feet at cash leasing spreads of 29.5%. Moving to acquisitions and development. As discussed on our last call, spiking interest rates put the transaction market back on hold for the latter part of 2023.
Our acquisition volume for the fourth quarter totaled $48.7 million. This consisted of two buildings with cash and straight-line cap rates of 6.5% and 6.9%, respectively. In October, STAG closed on a 165,000 square foot front-load building for $30 million at a reported cap rate of 6.1%. Located in the spark submarket of Reno, Nevada, the building benefits from both its central infill location within Reno as well as close proximity to I-80, with a weighted average lease term of 1.9 years and approximately 33% below market rents, the building offers a high-growth mark-to-market opportunity within a low vacancy submarket. Also in October, STAG closed on one vacant, newly developed spec building, totaling 233,000 square feet for $18.7 million at a cap rate of 7.1% upon stabilization.
As part of this transaction, we also acquired one asset on development for $18.7 million. The adjacent buildings are well located in the Spartanburg County, South Carolina, with direct frontage on in visibility to I-85. STAG's ability to source the deal off market after another buyer failed to perform, gave STAG the opportunity to buy the assets at a below-market basis. STAG was able to negotiate a lease staring diligence and immediately after closing, signed a full building lease on the completed building, allowing us to exceed both our underwritten rent and downtime. There's good activity on the second 233,000 square foot building, which has an expected construction completion date in the second quarter of 2024. Including the previous project, we have over 1.2 million square feet of development and value-add activity across three projects located in the Southeast and U.S. We achieved substantial shell completion and our performing office build out work on our two building 715,000 square foot project in Greer.
This project is located next to the inland port, airport, BMW manufacturing facility and I-85 in the Greenville, Spartanburg, South Carolina market. Activity remains healthy, and we anticipate leasing a meaningful amount of the space in the first half of 2024. The third development project is our two building, 298,000 square foot project in Tampa, Florida. These buildings are under construction, with a Q4 2024 estimated delivery date and stabilization in 2025. The suite sizes of approximately 50,000 square feet align well with demand in this high barrier to entry low vacancy market. The acquisition market appears to be heading in a positive direction as we start 2024. We have underwritten more deals in January and the entire fourth quarter of 2023.
While there is still some price discovery to be made, we expect a more stable acquisition market in 2024. With that, I will turn it over to Matts, who will cover the remaining results and our guidance for 2024.
Matts Pinard: Thank you, Bill, and good morning, everyone. Core FFO per share was $0.58 for the quarter and $2.29 for the year, an increase of 3.6% as compared to 2022. Cash available for distribution totaled $361.3 million in 2023, a year-over-year increase of 5.4%. Consistent with our previous messaging, the dividend payout ratio continues to moderate, declining from 78% at year-end 2022 to 75% at year-end 2023. This past year, we retained approximately $90 million of free cash flow after dividends paid. These dollars are available for incremental investment opportunities, debt repayment and other general corporate purposes. Leverage remains below the low end of our guide range, with net debt to annualized run rate adjusted EBITDA equal to 4.9x.
Liquidity stood at $657 million at year-end, inclusive of available forward ATM proceeds issued in the fourth quarter. During the quarter, we commenced 23 leases totaling 2.6 million square feet, which generated cash and straight-line leasing spreads of 36.2% and 50.5%, respectively. Retention was 88% for the quarter and 77.7% for the year. When adjusted for instances of minimal downtime in immediate backfills, adjusted retention was 87.2% for 2023. Average same-store occupancy declined 30 basis points in 2023, outperforming our initial expectations of a 50 basis point decline. Moving to capital market activity. In the fourth quarter, we issued 1.1 million shares on a forward basis under our ATM program at a gross average share price of $38, resulting in gross proceeds of $41.8 million.
Subsequent to quarter end, we issued approximately 567,000 shares on a forward basis on our ATM program at a gross share price of approximately $38.88, resulting in gross proceeds of $22.1 million. As of today, we have approximately $63 million of forward equity proceeds to be able to fund at our discretion. The equity will be used to match fund our acquisition development pipeline. There are minimal debt maturities coming up this year, with a $50 million private placement note maturing in 2024. Same-store cash NOI grew 6.8% for the quarter and 5.6% for the year, representing another annual same-store cash NOI growth record for STAG. We experienced 13 basis points of credit loss in 2023, well below our initial guidance of 50 basis points. As mentioned by Bill, we continue to see healthy dynamics across the portfolio.
Our 2024 guidance range for same-store cash NOI growth is 4.75% to 5.25% incurred by a weighted average rental escalators in the 2.7% area. We expect retention in the 70% to 75% area. Cash leasing spreads are expected to be between 25% to 30% and 13 million to 14 million square feet of projected new and renewal leasing for the year. As Bill mentioned, approximately 69% of our projected 2024 leasing has been addressed, with the aggregate cash leasing spreads of 29.5% accomplished to date. Our detailed 2024 guidance can be found on Page 19 of our supplemental package, which is available in the Investor Relations section of our website. Components of guidance include core FFO per share to range between $2.36 and $2.40 per share. We expect same-store cash NOI growth to be between 4.75% and 5.25% for the year.
Average same-store portfolio occupancy is expected to decline by 50 basis points. Cash leasing spreads will be between 25% to 30%. Acquisition volume guidance is a range of $350 million to $650 million, with a cash capitalization rate between 6% and 6.5%. Disposition volume guidance in a range of $75 million to $125 million. G&A is expected to be between $49 million and $51 million. And finally, we expect net debt to annualized run rate adjusted EBITDA to be between 5x and 5.5x. I will now turn it back over to Bill.
Bill Crooker: Thank you, Matts. I want to thank our team for their continued hard work and achievement of our 2023 goals. Our team continues to drive value in all macro environments. STAG is extremely well positioned for sustained growth through our operating and acquisition platform. With that, I will turn it back to the operator for questions.
See also Top 15 Electric Bike Brands According to Reddit and 30 Highest-Grossing Media Franchises of All Time.
To continue reading the Q&A session, please click here.
