Q3 2020 STAG Industrial Inc Earnings Call
Distributed yesterday, we posted an unaudited quarterly supplemental information presentation to the company's website at stag industrial dotcom under the Investor Relations section.
On today's call.
The company's prepared remarks and answers your questions will contain forward looking statements as defined in the private Securities Litigation Reform Act you mentioned 95.
Forward looking statements address matters are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
Examples of forward looking statements include forecasts of core FFO.
Same store NOI GNS acquisition disposition volume retention rates and other guidance leasing prospects when collections industry and economic trends and other matters. We encourage our listeners to review the more detailed discussions related to these forward looking statements contained in the Companys filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the.
Supplemental informational package available on the company's website.
As a reminder, forward looking statements represent managements estimates as of today Stag industrial assumes no obligation to update any forward looking statements on today's call you will hear from Ben Butcher, Our Chief Executive Officer, and Bill Crooker, Our Chief Financial Officer, I will now turn the call over to Ben.
Thank you, Matt Good morning, everybody and welcome to the third quarter earnings call for Stag Industrial we're pleased that 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 admitted there 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.
A phrase that I've heard fleet frequently over the past few months has been it's good to be in industrial and that is certainly true.
Industrial remains one of the few favorite asset classes in commercial real estate fundamentals are strong tenant leasing demand slowed only briefly at the outset of the pandemic that resume quickly as it has continued to be strong throughout the quarter. This resilience has been seen across virtually all markets with E commerce supply chain it build out leading the way.
Supply remains a concern, but most markers are at or near equilibrium and our EPS.
Under operating and occupancy levels, where the levels of incremental supply or not unwelcome capital is readily available for acquisition opportunities abound.
Not surprisingly our portfolio continues to perform well despite somewhat uncertain economic conditions.
The demand for our space is broad based the 5.6 million square feet leased in the third quarter represents the largest total square footage leased or in a single quarter and stags history, our occupancy level remains high at 96.3% at quarter end reflection of solid retention and shorter downtime experience and.
Included in this quarter's leasing activity was successful backfill for a 1 million square foot building located in the handset, Maryland, one of the 2 million square foot facilities with tenant nonrenewal expected to occur in 2020.
We budgeted between 12 and 18 months of downtime prior to re tenant in this facility given its size and location.
Thanks to the efforts of our asset management team, we significantly outperformed our budget and successfully released the bill into a single user while incurring no downtime the.
The building is leased to a substantial credit for over five years with minimal tenant improvement work and 3% annual rental escalators.
The second 1 million square foot building. We've we've discussed is our Geo say building located at exit six say of the Jersey Turnpike in Burlington, New Jersey. This.
This is one of the Premier Submarkets on the east coast and a burgeoning ecommerce hub.
Our current budgets reflect the midpoint of nine months downtime for this asset we continue to receive interest from both potential buyers and potential uses for this building and it's included 500000 square foot potential additional development.
Guidance assumes we hold this asset for the foreseeable future. However, given the attractive returns of a potential sale. We believe there is an increased likelihood that we monetize this asset.
As expected the acquisition market has returned to pre pandemic levels, both in terms of investment opportunity and pricing.
Sentimental strength of industrial real estate sector going forward has not been lost on investors as a result, investor appetite for industrial real estate continues to grow however, our acquisition platform as well as Strauss established across many markets in which we operate our ability to identify relative value investment opportunities is reflected in our acquisition pipe.
Fine.
Amount of over $2.8 billion today.
We recently completed our fourth annual tenant surveyor not surprisingly there are more and less fortunate industries. During the pandemic more fortunate to include third party logistics providers and the home improvement industry and of course anything E. Commerce related less fortunate include tenants in the trade show industry in certain small automobile tenants.
E Commerce remains a dominant theme approximately 40% of our respondents across our portfolio utilize a portion of their space to conduct E commerce activity and approximately 15% of our buildings are solely dedicated to E. Commerce, our tenants reported an increase in the breast centers their warehouse footprint focus on E commerce activity, an increase from 30% in 2018.
Almost 40% in 2020.
Stag isn't an enviable position as we approach the end of the year, our balance sheet is defensively position and our liquidity is high the stag team is working effectively and efficiently in the current work from home environment strong engagement across the organization and a resilient culture.
With that I'll turn it over to Bill who will discuss our third quarter operational results and updates to our 2020 guidance. Thank you Ben good morning, everyone core.
Core FFO was 46 cents for the quarter and leverage remains at the low end of our guidance range.
Net debt to run rate adjusted EBITDA was 4.4 times prior to factoring in the outstanding forward equity proceeds related to our January equity offering.
And 4.0 times when those proceeds are included.
Acquisition volume for the third quarter totaled $64.7 million, the stabilized cash and straight line cap rate of 6.3% and 6.8% respectively.
Subsequent to quarter end, we have acquired an additional nine buildings for $258 million.
This brings 2020 closed acquisition volume to $454 million through today.
Additionally.
We have acquisitions totaling $216 million currently under contract or something like two letters of intent scheduled to close by year end.
Green 2020, total acquisition volume to $670 million as of today.
For the quarter 5.6 million square feet of leases commenced with cash and straight line, we leasing spreads of 1.3% and 4.7% respectively.
New leasing spreads were negative 4.7% this quarter, which was driven by two leases the new lease related to the 1 million square foot asset located in Hampstead Mellon as discussed by Ben resulted in a roll down of 2.2%.
Note. This lease wasn't as his transaction and require minimal tenant tenant improvement or other capital work.
The second lease reflects the phase negotiation of a long term lease.
With the tenant initially agreeing to a one year lease at below market rents, while simultaneously negotiating in market rate long term lease.
Excluding these two leases new leasing spreads increased to 12.4% on a cash basis and 21.5% on a straight line basis for the quarter.
Additionally, released 82000 square feet of value add buildings during the quarter.
Well intentioned, the 72.1% for the quarter.
Kind of 81.4% for the year.
Both of which include the impact of the 1 million square foot solo Cup non renewal, which is back filled with zero downtime.
Potential is equal to 88.6% for the quarter and 91.5% for the year when excluding the impact of the solo Cup non retention.
Same store cash NOI increased 0.8% for the quarter and 1% 1.8% year to date.
For the third quarter, we collected 98.2% of a base rental billings of the remaining 1.8% 60 basis points has been deferred with repayment generally expected by year end.
As of November 5th we have collected 96.9% of October base rental billings, an additional 60 basis points of October based rental billings, yet to be received relates to investment grade tenants and tenants who painters.
We expect these tenants to remit payment within the next two weeks, bringing the total to 97.5%.
The timing of these expected payments is consistent with past practices.
The remaining 2.5% of uncollected base rental billings.
1% has been deferred and 1.5% is associated with smaller tenants that had been impacted by the pandemic.
We have not received any new rent deferral increase in the third quarter.
We incurred a total of $1.8 million of credit loss in the third quarter approximately $850000 loss related to the write off of straight line rent and approximately $950000 of that loss related to cash credit loss.
We have updated guidance the remainder of 2020.
We acknowledge the continued uncertainty related to the health of the economy, and we will continue to update the market as warranted.
Components of our updated 2020 guidance are as follows we have increased our expected acquisition volume range now projecting between 650 and $750 million with an expected cash cap rate range of 6% to 6.25% and expected straight line cap rate range of.
6.5% to 6.75%.
We have increased our 2020 disposition volume range now projecting between a $150 million and $200 million.
We have increased our expected retention range now projected between 70% and 75% for the year, which includes 2 million square feet of non retention associated with the solo Cup and GSK facilities.
We have increased our expected annual cash same short range.
Now projecting 2020 annual same store pools cash NOI growth to be between 75, and 125 basis points for the year. This.
This range includes a reduction in our annual credit loss guidance to a range of 75 to 125 basis points.
We continue to expect gionee to be between 39 and $41 million for the year.
We expect around leverage between four and a half and 5.25 times for the year.
Capital expenditures per average square foot is still expected to be between 27 and 31 cents for the year.
We have increased the expected range of core FFO per share to be between $1.86 and $1.88 for the year, representing a midpoint increase of three cents with that I will now turn it back over to Ben.
Thanks Bill.
These remain challenging times as we head towards the end of an unprecedented year challenging but not unworkable. After a pause for most of the second quarter. The industrial acquisition market has found firmer footing tenant demand for industrial space is broadly healthy and appears to have substantial legs.
We are bullish on the opportunity for stag that lie ahead. As a reminder, we will provide granular 2020 on guidance during our fourth quarter call.
In closing, let me mention that as part of our continuing focus on various CSG initiatives. We have recently set up the stag industrial charitable action fund the fund as a way to formalize and channel our corporate given this was done in recognition of and in concert with our augmented commitment to providing substantial financial support to causes and organizations. We believe it. Thank you.
For your time this morning, I'll now turn it back to the operator for questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation Tom will indicate your line is in the question queue at any time, if you wish to remove your question from the queue. Please press star two for participants using speaker equipment, maybe that's it.
Fair to pick up your hands EPS pressing the star keys.
Our first question is from Danny Corbin with Citi.
Hey, guys good morning.
Maybe just wondering maybe.
Disposition.
Our plans have you changed the composition of what you might sell or where you might sell given sort of the way that the market has shifted.
I think.
And now I acknowledge that it's maybe not Danny I'll.
I think that we maintain our our general philosophy I will sell assets when somebody else. Thanks are worth more than we do as a part of our portfolio.
That having been said, we are getting opportunistically people, reaching out to us to acquire individual assets.
We do not have plans for a portfolio sale.
We certainly when we signed new leases on buildings that extend to extend the term of they may become more attractive too.
The people that are looking for that kind of kind of assets. We may look at selling things certainly.
The asset GSK asset is an asset that we're looking at at all times and I want to buy or sell.
Because of its relative attractiveness on the number of people are interested in that asset. We're also interested in that asset and we'll do what's best for our shareholders.
Hey, Matt It's Bill we also increased our disposition guidance going into the fourth quarter, primarily related to an asset that we had a reverse inquiry on.
We expect strong results from that transaction.
And just could you give us an idea of what you think the spread difference might be in cap rates between what you are selling and what youre buying.
I think it varies.
But I will say it varies obviously on the asset the market et cetera, what I will say is on these opportunity investments we have experienced double digit IR, our unlevered ROI returns and so that doesn't mean, it's not necessarily a.
So we tend to compare the return on the asset to where we're redeploying the equity, but having said that the asset. The bill was just talking about is a is a.
We will be able to redeploy those proceeds accretively and just a reminder, that the assets that we sold it in.
The first quarter were also a sub five cap. So those asked those those proceeds are redeployed accretively as well.
Right and then thinking about your acquisition pipeline that increased meaningfully in the quarter.
Have you changed anything there in terms of the types of assets in the market you're looking at in certain maybe widened the target a little.
No. It's really we've talked about this before and as it certainly met our expectations is that one of the impacts of.
Downturn likely of the dramatic downturn, we had with the onset of covert is people are reluctant to bring assets to market till that until they have a better understanding of where the market might clear. So you had a big pullback from sellers and brokers advising sellers.
During the second quarter. The expectation was again, we're hearing anecdotally from brokers and to some extent sellers that towards the end of the summer going into the fall you would have thought that pent up supply of assets to be traded come to market. Indeed that has happened and.
From talking to brokers you made it will continue to happen.
There was perhaps have dissipated a little now some belief that fair need assets needs to be sold before year end.
Tax law changes, perhaps that's dissipated a little of the results to date on the election.
But were going again the pipeline is reflective of the same kind of filters, we've always used for what get on gets onto the pipeline.
It's just expanded because they're more assets in the market.
Great. Thanks, everyone.
Thank you Manny Thanks Manny.
Our next question is from Sheila Mcgrath with Evercore.
I guess good morning, Ben.
Then the new acquisition guidance implies is very active fourth quarter, maybe even a record for sag.
Can you give us some insight do you have additional assets under contract right now and then also you guided on the cap rate a little lower and I'm wondering if that cap rate compression in the market where is that the mix of assets you're acquiring.
So as bill alluded to during the during our prepared remarks, the we have 200 plus million other contract around that why and we're still evaluating assets that might close this year reflective of the increased pipeline number of assets, Canada market et cetera.
So where we indeed are looking at a fourth quarter that is.
It could be the same as last year's fourth quarter, even larger you know it depends on how asset shakeout in terms of whether things close and not.
Even though the contract was closer certainly letter of intent on always close, but we have a high degree of probability that the that will get into those kinds of volumes the cap rate.
Cap rates have moved south a little bit.
But then most south because of mix change longer leases less capex in particular, when we buy build to suit transactions. These are very clean from a.
Capital required perspective.
The longer lease terms et cetera. So one thing I will say is that we have maintained our our goal on buying accretive transactions and indeed these transactions are.
Began to modestly accretive on both.
Core AFFO on a CAD basis.
Okay, and sorry, if I missed this but.
You did increase your disposition guidance, what kind of assets are you selling and what's the motivation score.
Increasing sales right now.
I can let bill handle this issue this theres the increase in disposition guidance relates to our one asset that we were not expecting to sell but we got a reverse inquiry on and that asset will be an accretive redeployment of proceeds once we saw that and redeploy it. So it's a it's an attractive return for us and Thats the primary.
And why we increased disposition proceeds for the fourth quarter, Yes, Sheila as you know we have three reasons to sell assets. One is opportunistically, which this is bill just referred to as reflective of two is sort of the culling of the herd our ongoing sale of our relatively de Minimis office flex portfolio.
I don't believe we have any assets that will be in the remainder of 2020, it will fall into that bucket and the last bucket is when we aren't happy with our cost of capital from from regular common or preferred equity issuance, we would sell assets.
None of that is planned.
Obviously its capital is attractive.
The other sources of capital are attractive today.
Okay, great. Thank you thank.
Thank you Sheila.
Our next question is from James Feldman with Bank of America.
Hi, Good morning. This is all this rodriguez on for Jamie.
Just I guess as we think about funding the acquisition pipeline and some of the equity forward you have.
You know the stock your stock today is trading about a dollar above where you did the deal in January how are you thinking about pulling down that equity this year versus potentially doing.
Another equity deal to fund the 2.8 billion pipeline.
You have laid out for us.
All of US obviously, the pipeline historically bought something.
Relatively small portion of whats on that pipeline actually guest gets close but the pipeline is dynamic so assets come on and off at all the time, but.
We're certainly not expected to close or anything like that that large number.
The.
I'm sorry, if this was asked another way yes. This is bill and in terms of where we are from a leverage standpoint as I noted with our forward equity proceeds were at four times levered, so sufficient runway there.
To get to our five and a quarter leverage range. This year as we noted in our investor presentation on our long term leverage ranges for 75 to six times. So if you were to look at where we're at today, including subsequent acquisitions and the forward equity we could acquire $850 million.
With all debt to get to the upper end of that long term leverage range. So we have sufficient capacity here and in regards to the taking down the forward equity component. We have until I think mid January to do that obviously, given the amount of acquisitions et cetera will be you could surmise that we will be using that equity that's right.
Okay well my question was would you do another deal in lieu of that deal given your stock is $1 higher today.
I don't think but yes, I was I'm sorry, if we didnt answer that question I think they're they're.
They are not necessarily related we have capital we have attractive capital available to us and we have capital needs that we can deploy it creatively.
So they're not it's not either or I.
I think it's as I said, it's highly likely we would exercise take down that equity, but that doesn't mean.
That we won't have additional equity needs that we will approach the market on.
Appreciate that and then just one more question 21 exploration, Jim about 9 million square feet.
Leases expiring next year.
Any chance you can share what the mark to market on those leases are.
I think that weighed on what we've said before is that we believe our assets are at or slightly below market.
I think as we've looked granularly at 2021, we believe that to be the case for 2021 also.
For those assets in particular, the other thing I would say is there is nothing very bulky and 2021 that would be the 2 million square foot as we had rolled this year, we don't have anything like that in 2021.
Okay Thats very helpful. Thanks, guys great quarter.
Thanks, Alex.
Our next question is from Brendan then with Wells Fargo.
Hey, guys good morning.
Yes.
Term on new leases signed this quarter was really not yours.
Was it was the lowest since 2017.
Was that impacted by those seem leases.
You guys mentioned in the prepared remarks that had an impact on.
The spreads or you would seem shorter lease term just across the board.
But I'm going to give this bill to answer, but I mean, generally speaking lease renewals tend to be three to five years. So in the long run trends, that's not an unusual number but I will turn to bill, Yes, Hey, Brett and that was driven by really really one lease and that was one of the leases that roll down this was a.
Oh lease that we.
We sign for a little over one year with the expenses expectation that we can negotiate with the tenant for a longer term lease.
In the first year lease was.
Call it a teaser rate it rolled down 18%, but we expect market is.
To roll back up about 12% in a year so.
It's a little nuance with the way it gets accounted for but it was a little over one year lease which drove the weighted average lease term on new leases down a bit.
And I'll get the Brendan I guess he is one of my favorite terms, a small sample anomaly.
Sounds good guys.
And then that's wanted to clarify your comments on your plan for the year.
Facility. So are you going to use that spurs.
Then sell it or would you be open to selling.
Before signing a lease there and then similarly are you looking to potentially sell the 40 Gees lender once you get.
Entitlements for development, there or you only going to sell the building and they'll just continue will.
Developing on those adjacent parcels.
I think the answer is that we are moving forward on all fronts. We are moving forward to permit the development. It would continue to talk to people who are interested in portions are all of the building and the same time, we're talking to people that are interested in buying any or all in any mix.
As we move forward, Dave you have anything thats accurate.
Thanks, guys.
It's just it's an attractive collection of opportunities between the existing building the development potential.
Theres, even people who are looking at buying the existing building scraping and building a new building, we think you could put.
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Close to a million and half square feet I think on their on a brand new building.
And although we bought.
An existing structure the the value of the land on that very attractive Submarket has got to the point, where the land bio maybe as much as the existing building and the development potential. So it's a collection of very attractive opportunities.
As a reminder to the audience if you'd like to ask a question. Please press star one. Our next question is from John Massocca with Ladenburg Thalmann.
Good morning.
Morning.
So if I look at a transaction that closed kind of subsequent quarter end they seem to be kind of just divide the gross numbers by the amount of asset she does.
Closed on it a little bit larger in both in terms of square footage and then kind of tossed per asset and is there some larger assets and there may be skewing that or is it just.
Slightly larger assets all around as you're buying.
In October.
Yeah, John I'm going to give that the bill the answer the answer is yes larger assets, but those will give you some detail, yes, that's right I mean, John it's simple math, there, but there is a mix and these are assets that meet our long term investment thresholds.
As with every year, there's there's smaller assets and larger assets that we acquire I mean, even looking at this quarter, we acquired a small that asset 50000 square feet and and as largest to 76, but subsequent to quarter end. There certainly are some larger assets in there.
I guess, it's kind of an arbitrary number but I guess, there's a million square footers that are kind of skewing that those numbers in there.
Not millions square footers, but big buildings.
Okay understood.
Understood and then maybe as you think about kind of the lit.
The deferrals in the kind of non cash payments in that 1.5% how is that broken out between people.
We are having either negotiated or have been able to have a negotiation in tenants that are currently in default.
Okay, then bankruptcy.
Tenants that have been impacted by the by the pandemic come in they are not in bankruptcy, but.
But we're having discussions with them some of them are we're having discussions about potentially of deferment or a payment schedule others. There were just working with them to understand their situation. So it's just a it's a mix of assets I will say and as we said before all of this is reflected in our credit loss guidance for the year. So I think when you take a step back.
Thats the focus Thats theory should focus on is what's in our same store, what's your credit loss guidance, what's your AFFO guidance, all factor into that and given call. It six seven weeks left in the year, we feel really confident with our guidance we put forth.
I know I'm asking a bit for kind of early 2021 guidance, but do you think that kind of credit loss outlook flows into next year. Do you think you can get some recovery on on those smaller amounts yes.
As Ben said, we'll give our guidance in February for 2021, I will say the stimulus has been probably the biggest thing we struggle to estimate and how that impacts our tenants and thus far it's been outperforming our estimates in terms of the recovery as you as you can see what the guidance. This year a credit loss guidance has continued.
To come down as we move through the year.
Okay understood and then on the investment.
But.
How do you think maybe a potential what kind of surge here in in pandemic could impact you.
The ability to close deals either for Q2, and maybe even one key 21 I'm.
Just given what happened earlier in the year in terms of deal volume with kind of the first phase phase of the pandemic.
So the impact on deal volume earlier was not maybe for a very short period of time was reflective of the fact that we couldn't get people out to see buildings are people weren't working or anything like that the the closing process was impacted by that we have.
Have been able to utilizing.
The third parties.
Some level of travel.
Google maps whatever else.
Third party consultants, obviously to get to closing process that is I believe is pretty resilient to whatever happens with the pandemic.
Short of a total locked down which I don't think anybody really expect at this point. So we're feeling very good about our ability to transact.
Again people have gotten used to to to operate in particularly we have been used to operate in this environment. So.
We're feeling pretty good about our ability to transact going forward and the sellers are you know the initial draw back from operating assets to the market.
Certainly has dissipated disappeared completely.
Understood Thats. It for me. Thank you all very much thank.
Thank you John Thanks, Jeff.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Ben Butcher for closing remarks.
Thank you all for joining us this morning.
The the word unprecedented gives it gets used a lot but.
Certainly we are unprecedented times generally I think that the.
As I just stated the our ability to operate here has been demonstrated the opportunities abound. The short term Malays that may affect the country as we work through the end of this election I believe would be just that short term. We don't expect that to have any long term impact on our business and hopefully no long term impact on our country again, we thank you.
For your time this morning, and look forward to continue to provide good results for our shareholders.
This concludes today's conference. Thank international Thanks, you for your participation you may disconnect your lines at this time.
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