Q4 2020 STAG Industrial Inc Earnings Call
[music].
Greetings welcome to Stag Industrial's fourth quarter 2020 earnings conference call at.
At this time all participants are in a listen only mode. The brea.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
Now I'll turn the conference over to Matts Pinard, Vice President of Investor Relations. Please go ahead.
Thank you welcome to the Stag industrial conference call of Covenant.
On the 20th results. In addition to the press release distributed yesterday, we posted an unaudited quarterly.
The supplemental information presentation on the company's website at stag industrial Dot com under the Investor Relations section.
On today's call of the company's prepared remarks and answers 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 the gas today. Examples of forward. Looking statements include forecast of course first of all same store NOI G&A acquisition and disposition volumes retention rates in the other guidance the eastern prospects when collection industry the economic trends.
As well as the other matters Inc.
First of all of our listeners would be the more detailed discussions related to forward looking statements contained in the company's filings with the SEC 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 talking about the show assumes no obligation to update any forward looking statements.
On today's call, you'll hear from Ben Butcher, Our Chief Executive Officer, and Bill Crooker, Our Chief Financial Officer also here with US are Steve Mackey, our Chief operating officer, and Dave King Our director of real estate operations. They will be available to answer the questions specific to the areas of focus I will now turn the call over the back.
Thank you, Matt Good morning, everybody and welcome to the fourth quarter earnings call for Stag industrial we're.
We're pleased to have you join us and look forward to telling you about our fourth quarter results.
2020 was a challenging year for our company our country in the world as a whole the.
Despite the ravages of a global pandemic significant social unrest and of contentious political climate, we're able to efficiently and successfully navigate the year I want to thank our team for the excellent work they have done in facing up to these challenges through their efforts, we're able to meet our original pre pandemic financial guidance for core <unk> per share and exceed on the <unk>.
Same store cash NOI. We also finished the year with our largest acquisition quarter in the company's history.
As we begin 2021, there are reasons for optimism as we move forward towards the new normal hydro.
Highlighting this has been the development and initial distribution of multiple highly effective vaccine.
Temporary and that optimism has many of the emergence of virus variants of mutations. These two will be overcome as they move forward to that new normal.
In our corner of the World Industrial real estate, we continue to enjoy strong tenant demand and positive fundamentals E. Commerce continues to be of significant incremental demand driver and can reasonably be expected to continue for the foreseeable future.
Online shopping we will continue to grow.
Not surprisingly after many years of falling vacancy supply has finally caught up with the man for the country as a whole, albeit at heightened levels for both.
As has been the case in recent years, the excess supply of tends to be concentrated in larger markets is not expected to significantly dampen the prospects for rent growth.
The supply demand of valuations needed to be done on a market by market basis and updated periodically the.
These market specific of valuations arent integral part of the stag underwriting process.
In March we paused, our external acquisition efforts in order to more fully understand the scope of of the pandemic and that's the impact on both capital markets generally and the industrial real estate sector in particular.
Over the next couple of months, we observe tenant and seller behavior to try and get a sense of the new market equilibrium.
During this time the team also identified and completed internal projects and data utilization and modeling that will support our long term acquisition efforts.
Towards the latter half of the second quarter. It became clear that market conditions in industrial fundamentals are supportive of the full return to our acquisition program.
The pace of acquisitions accelerated in the back half of the year as we and sellers gained confidence in pricing levels and assets returned to market.
The 32 building stag acquired in the fourth quarter for an aggregate price of $579 $9 million represent the largest quarterly acquisition volume in our history.
For 2021, we see acquisition volume continued at a strong pace with guidance of $800 million to $1 2 billion.
This guy in the range guidance range of supported by our current $2 1 billion dollar acquisition pipeline reflects the large and attractive opportunity set we see today.
2020 was also our company's largest share for dispositions highlighted by large granular dispositions in California, and New Jersey.
Seven buildings were sold during the year with gross proceeds of $279 $4 million.
These proceeds resulted in the aggregate disposition cap rate of five 4% the for.
From these sales would then accretively redeploy the funds the fungible industrial assets.
Our portfolio performed exceedingly well during this pandemic here, we collected 99, 6% of rental billings for the year. The handful of rental deferrals regretted have concluded and the repayment is proceeding as scheduled.
Demonstration of portfolio of resilience was at a level at least in line for the experience of our public peers.
We spent a significant amount of time over the last year of discussing two large known vacates. The 1 million square foot building at least the solo Cup in Hampstead, Maryland, and the millions of square foot building leased the GSA in Burlington New Jersey.
Both lease maturities have been successfully resolved the great outcomes.
The hamster building was backfill to of strong credit tenant with zero downtime occurred.
Burlington building was sold and produced outsized returns a nominal gain of $41 $5 million at a five 4% cash cap rate.
This year, we returned to a more normalized lease exploration schedule with no one large tenant lease maturities.
The level of annual credit loss, we expected. The current 2020 was heightened by the onset of the pandemic and the associated and the economic downturn as.
As credit concerns moderated through the year, we were able to increase our cash same store guidance. We continue to benefit from the combination of widespread tenant demand and declining credit concerns across the portfolio.
This is reflected in a more normal 2021 cash same store guidance range of 2% to 3%.
Bill will discuss all of our 'twenty and 'twenty one guidance in detail for the takeaway is that our business remains vibrant and our guidance reflects the return to more normal conditions in particular, our core <unk> per share guidance implies solid accretion supported by a defense of balance sheet and ample liquidity.
With that I'll turn it over to Bill who will discuss our fourth quarter and annual operation of results and our 2021 guidance.
Thank you Ben good morning, everyone.
Core for <unk> was 49 for the quarter and the $1 89 for the year, an increase of two 7% compared to 2019 and equal to the midpoint of our original pre Covid 2020 guidance given last February.
Leverage at quarter end remained at the low end of our guidance range with the net debt to run rate adjusted EBITDA.
The four six times prior to factoring in the outstanding forward equity proceeds.
And for two times when those proceeds are included.
Acquisition volume for the fourth quarter totaled $579 $9 million with stabilized cash and straight line cap rates of five 8% and six 2% respectively. The.
This brings our full year of acquisition volume to $775 $8 million with stabilized cash and straight line cap rates of 6% and six 4% respectively.
Disposition volume for the fourth quarter totaled $155 $5 million.
The fourth quarter dispositions were highlighted by the sale of our GSA asset in Burlington, New Jersey for $110 $5 million out of five 4% cash cap rate, which compares to an acquisition cash cap rate of nine 5%.
This brings our full year disposition volume to $279 $4 million with the cash cap rate of $5 four per cent.
Yeah.
The retention for the quarter was 63, 9% and.
78, 4% for the year, which exceeded the high end of our original pre Covid 2020 guidance of 75 per cent given last February.
Cash and straight line leasing spreads were four 9% and $12 nine per cent for the quarter.
And two 2% and eight 2% for the year respectively.
Cash same store NOI grew one 7% during 2020 at the high end of our revised guidance range provided in December and.
And above the midpoint of one five per cent of our original pre Covid 2020 guidance given in February.
We collected 99, 6% of our base rental building billings for 2020 and of collected 97, 3% of our base rental billings for January as of today.
System with our experience in 2020.
We did not receive any new rent deferral of increase in the fourth quarter.
Yeah.
Moving to the capital market activity in the fourth quarter, we completed the forward equity offering at $30 40 per share, which resulted in aggregate net proceeds of $276 $2 million.
On December 23rd we partially settled the forward equity component of this transaction and received $135 million of net proceeds which were used to fund the fourth quarter acquisitions.
Additionally on December 23rd we fully settled the forward equity component of our January 2020 equity transaction and.
And received $131 $2 million in net proceeds which were also used to fund the fourth quarter 2020 acquisitions.
In total we received $266 $2 million in net proceeds from the two forward equity transactions.
As of year end, we have an additional $139 3 million of net proceeds available at our option to fund future acquisitions.
Subsequent to quarter end on February 5th.
We refinanced our $300 million term loan G, which was scheduled to mature in April of this year subject to two one year extension options.
The refinancing extended the majority of maturity date, an additional five years to February 2026.
We're also able to reduce the credit spread by 50 basis points to.
To the pre COVID-19 spread of 100 basis points.
In conjunction with the refinance of terminal Engie.
We upsized the revolver credit facility to a notional of $750 million by exercising the accordion feature within our loan document.
This represents an increase in revolver capacity of $250 million and no change to the current maturity date.
As a result of these debt transactions and including the forward equity proceeds available to us.
The liquidity stands at $795 million.
Our initial 2021 guidance can be found on page 22 of our supplemental package, which is available in the Investor Relations section of our website.
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 initial 2021 guidance are as follows.
Our 2021 core for flow per share guidance is in the range of $1 94 to $2 per share with the midpoint of $1 97.
We expect the acquisition volume to be between $800 million and $1 2 billion for 2021.
With an expected cash capitalization rate of 575%.
2625 per cent.
We expect straight line cap rates to be 50 basis points higher than cash cap rates.
We also expect disposition volume to be between $100 million and $200 million for 2021.
We expect the 2021 annual same store pools cash NOI growth to be between 2% and 3% for the year.
2021, G&A is expected to be between 43 and $46 million for the year.
Note that this range include excludes a one time expense of $2 $3 million related to the adoption of our retirement plan.
We expect net debt to run rate adjusted EBITDA to be the between 475 times and five five times.
With that I will now turn it back over to Beth.
Thanks Bill.
We see many reasons to be optimistic about our business as we head into 2021.
The momentum behind our acquisition efforts the strength of the portfolio will continue to drive internal growth and our balance sheet is well positioned to support our business.
Thank you for your time this morning, I will now turn it back for the operator for questions.
Thank you.
At this time well be conducting a question and answer session.
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One of them. Please while we poll for questions.
Yeah.
Thank you and our first question comes from the line of Sheila Mcgrath with Evercore ISI. Please proceed with your questions.
Yes. Good morning, Dan I was wondering if you could talk about the mix of the acquisitions in the quarter some activity in Florida, and California markets, where you're not previously that been that active how competitive are those markets was that the driver of the slightly lower acquisition cap rate in the quarter.
I think that the answer to that you're correct in your assessment, but I'll turn it over to bill for a little more detail.
Hey, Sheila Yeah, I mean, the the fourth quarter was.
Our mix of assets, we were able to break in to some markets. We were not previously and as you said South Florida was one of those.
The example of that market was we were able to acquire a sale leaseback portfolio with little over eight years of lease term net portfolio is well below market on the buildings fit the sub market as well.
And I think other.
We didn't have the eight years of lease term and it was something in the order of three years. It would have been a much more competitive transaction and thats the benefit of what we do we're able to.
Find relative value across the markets we operate in and this is just one example.
There were of similar examples then.
Of the California markets, we're investing it wasn't a little bit of of driver as to the lower cap rate.
This quarter, but for the year it was a 6% cap rate and that's what we're projecting for 2021.
Yeah, Okay, great. We look at the I think we look at the reduction in cap rate is a little bit of cap rate compression.
Probably half cap rate compression of half mix.
Okay Perfect and then you did mentioned two average.
<unk> sales in fourth quarter, I think you've gone in detail over the South Jersey sale of what was the other sale in the quarter and sorry, if I missed you, saying.
It was a sales to it excuse me we didn't include it in the script there was a sale to of tenants.
In Memphis.
A significant sale again consistent with that overall aggregate of disposition cap rate of five 4% of a tenant who had.
The margin commitment to the building.
Probably looking at the at the reduced cost of data the decided that they would rather own the building and continue the Lisa obviously was a great result for us.
And consistent probably with the returns we had gotten from the from leasing the building.
Okay. Thank you.
The next question is from the line of manual Korchman with Citi. Please proceed with your questions.
Hey, this is out of Christmas carry on for a man here I was wondering if you could discuss some of your funding sources and potential need to tap equity throughout the year.
Yes, I'm going to say.
Say that we have demonstrated in the prior years that we are pretty good stewards, both of deploying capital and accessing capital.
And have shown the.
We can access different types of capital, but I'll turn that over to bill as well for a little more detail.
Hey, Thanks, Chris I mean, we have been operating the balance sheet at very low leverage and 2020 and that was partially to be defensive given the macro.
Conditions of the market.
In 2021 were reverting back to a more normalized leverage range of 475 to five five times.
And the the equity will be a mix of what we've done over the past several years it'll be larger transactions supplemented by.
The ATM and we will look to match fund our acquisitions.
As best we can and we've been able to execute on that through Atms and forward equity raises.
Okay got it and just a quick follow up could you discuss the bifurcation between some of your larger and smaller tenants and what trends you're seeing between those two.
The tenant tenant demand and tenant health is has been very strong.
Throughout the pandemic of throughout 2020 of which are basically the same thing.
There has been certainly a trend towards larger tenant demand the big boxes have.
Probably inflect the reflection of E commerce demand have been in the probably we've seen more increase of demand for the big box is it isn't so much that we see.
The drop off in some of the smaller suite sizes and again for US smaller suite is generally over 100000 square feet.
Because of the size of our of the buildings in our portfolio, but there certainly has been across the markets increased demand for larger boxes, and you've seen that in the sort of the return to health for Submarkets that.
Perhaps for a little challenged pre pandemic and pre the surge in online shopping such as.
South Dallas Lehigh Valley.
Et cetera, where you have a lot of large newer buildings for.
We're struggling to find tenants of those markets have become much healthier.
Indeed, our big building solo Cup, which we had projected downtime of 12 to 18 months at least up with no downtime again a.
The big tenants with sophisticated needs or.
The active during the pandemic.
Yeah makes sense, thanks for the color.
Thank you. Thank you.
Our next question is from the line of Brendan Finn with Wells Fargo. Please proceed with your questions.
Yeah. Thanks, guys I wanted to talk about the cap rate trends.
Are you guys expecting further cap rate compression. This year I mean, how have the cap rates trended in your primary markets relative to.
For those in your secondary and tertiary markets.
Well, we're not active in tertiary markets as we've talked about previously we also would would further comment the cap rates for a point in time measure.
They'll necessarily capture the essence of the investment we focus on.
Three five.
And sometimes 10 year core and Tad per share we focus on 10 year Levered IRR to try and capture what that ASUR will do for us in the portfolio going forward rather than focusing just on cap rates haven't said that.
Certainly cap rates have compressed.
The more so in the as you move up to the higher markets.
The size of markets and.
Perhaps the and attracted to investor markets and so we continue to beat the see the returns that could be derived from investing in generally in say the top five markets and maybe even the top 10 markets is insufficient for us to deploy capital there. The returns just aren't good enough because the demand for those assets is too great. We underwrite every mark.
Based on our ability.
Two or not our ability of our view on the market.
The market rent growth going forward, obviously, the difference between marketing contractual rent the other parameters of the deal et cetera of capital costs going forward.
Our focus has been and continues to be on the cash flow will be derived from owning that asset. So we're not really making.
Assessments on primary versus secondary.
So much as looking at individual transactions in the context of the market that they're in.
Yeah, and the cap rates for the cap rates for 'twenty, 'twenty, one or 6% cash basis on.
The average yields are another 40 to 50 basis points higher when you factor in the straight line component of our guidance for 'twenty and 'twenty, one as the midpoint of 6%.
And another 50 basis points on the straight line.
Cap rates and that's largely due to the bumps we are seeing in some of the longer term leases, we're acquiring which are I would say the minimum two and a half.
<unk> seen some as high of three and a half so of bumps share a lot higher in some of these transactions that we've been acquiring over the last 12 to 18 months.
Great Yeah that makes sense and then I apologize if I missed this but in terms of acquisitions this year.
What is the split you're targeting in terms of stabilized acquisitions versus other value add acquisitions.
We value as I'm looking at Oh, sorry about.
No no go ahead bill.
So the value add is usually up to 10%. This year. It was just a lot lower we didn't see as many value add deals come to the market just just given the market conditions and we're certainly underwriting a lot more now.
Now and in our $2 $1 billion pipeline, it's a similar percentage of value add deals that we've seen over the years.
And those value add deals obviously, you have to meet our return thresholds.
Just as a stabilized the deals with.
Thanks, guys.
Our next question is from the line of Elvis Rodriguez with Bank of America. Please proceed with your questions.
Hey, good morning, guys and thank you for taking my question.
Just the only thing that Youre on your portfolio of diversification you added another Amazon leased this quarter.
I'm, taking away the art of three eight per cent from two nine and three Q, perhaps you could share a little bit more detail, there and what sort of exposure you're comfortable with two of single tenant and the longer term.
Well you know.
If youre going to pick a in today's environment of your pick of credit too to be close to Amazon, It's probably not a bad wants to be close to.
And indeed, where because of the Amazons the position of the market position within the overall demand structure by tenants.
The tenant relationship with Amazon or are important so.
We obviously are very cognizant of the fact that they are.
That relationship with Amazon is important to us if we have of building or look at the building of that their interest and we obviously are going to be interested in doing business with them.
The three 8% as our highest credit exposure again. This is the credit we're very comfortable with and think they are an important tenant to the company going forward.
We're very comfortable of that credit exposure I think that the it.
It would probably could go somewhat higher than that five per cent or more even with Amazon.
With that particular credit.
Thank the generally speaking we have focused on diversification.
Indeed have a very wide diversification on individual tenant credit exposure.
The gain per share of well the weighted average.
Alright, okay.
Just adding on to that of our diversification within that exposure, we have various lease terms.
It's across various markets and theres different uses for the facilities.
So that.
That exposure to Amazon of three eight per cent is further diversified.
As you mentioned are you able to share what the weighted average lease term is of those leases.
It's probably closer to 10 years all of this without having the exact number and we have some longer term leases the.
The lease we bought this year is in the seven year range, which was a good.
Sweet spot for us and we were able to achieve some some good relative value when you start.
Evaluating and bidding on these type of assets with longer term leases double digit lease terms it gets really competitive.
This asset it was in the Columbus, Ohio market.
Big distribution market, but with seven years of lease term.
That weeded out some long term investors in the market are weeded out some of US as we were able to get this at a pretty attractive return.
The strong rental escalators.
And overall, we feel like a very good investment.
Great. Thank you.
And Ben or Steve how should we think about the cadence of your acquisition pipeline. This year will it be back weighted in the you know in the <unk>.
Back half of the year I know the pandemic, obviously pushed some of the activity last year, but how should we think about the cadence throughout the year of acquisitions, yes. So Alex. Thank you I mean, our cadence has always been fourth quarter heavy.
The the the top.
I'm trying to think of the top five quarters in volume I think for at least four of them are fourth quarter. So you would always look to have the third and fourth quarter be the heavier quarters and occasionally the second of the first quarter is almost always the lightest quarter. It wasn't last year because of the pandemic, but I think thats, probably not a bad.
A bad way to view of the year sort of a.
Starting slow second quarter and.
Third quarter, probably of similar volumes in the on the fourth quarter, usually it's the largest.
Bill I don't know all of us with it.
Yeah, I think that's right I mean typically the answer is hey look at the last year and use that cadence that's not the case with 'twenty 'twenty, just given everything that happened, but I think if you look at 2019 2018 of look at the cadence of those years, that's probably a pretty good estimate in terms of cadence for 'twenty one.
Great. Thanks, guys for the time great.
Great quarter, Thanks sales.
The next question from the line of Michael Carroll with RBC capital markets. Please share with your questions.
Yeah, Thanks, but I wanted to talk a little bit about the the competitive landscape for some of these industrial products that you guys are looking for how has that changed I guess over the past 12 months of the interest from other institutional capital sources have picked up in other youre seeing the the mix of the buyers of the assets you're targeting is that different.
Yeah, I mean, there there continues to be capital flowing into industrial real estate on the.
Players who are involved in industrial real estate.
Seem to be interested in the industrial real estate has widened.
The.
The places where we find the best returns are probably not where all of that capital is flowing I think bill alluded to in the last question about the fact that the you know if you get 10 years of term Theres a lot of people view that as the perhaps more of a little bit more of a financial transaction as opposed to of real estate transactions. So lots of capital pass of Andy.
The war less sophisticated capital.
We will be pursuing those and you'll see cap rates on.
Going back sort of the CTO of the credit tenant leaves you know long term good credit good location those things tend to get bid down.
The levels that we would find unattractive. So I think that the the increase in capital has been weighted towards the.
The less risky and of the of the continuum.
We continue to see lots of transactions being brought the market and good strong secondary markets with medium lease term.
Good good rents relative to market.
Not not way above market.
Well, we can find relative value and as we've always done we're looking broadly and deeply to find those relative values, where last year were under 15% hit rate. So of the deals that we actually thoroughly underwrote, we bought less than 50% of of in virtually every case of the reason was someone else is willing to pay more so yes, we are seeing more comp.
Petition.
From new sources.
The that has not changed the.
What we see as the opportunity set there is still a large opportunity set what we will be successful in that sort of 58 per cent or maybe a little bit better.
Our hit rate.
I mean is that capital sources coming in are they more interested in those larger transactions I guess, if so are you seeing a agree of bigger premium on those portfolio type deals.
There are always been has been a I mean, one of the the the the <unk>.
Truisms of industrial real estate is that it comes in small chunks and so if you're looking at somebody looking to employ the 1 billion or billions of dollars. It's hard to justify go ahead and spend the time to buy of $5 million of assets.
And so it has always been the case that if you get to 2000 $25 million of assets that are of more people, who are willing to spend the time or actually can afford to spend the time to focus on those assets.
As always been the case that as you get up to 100, 200 250 million 300 millions of our portfolios. There is yet another yet again another tier that comes in the just willing to and can afford to spend the time for it can rationalize spending the time on those assets. So yes, there is a.
The returns as the size of the transaction goes up the required returns by the potential investors goes down.
Is there at a point, where you'd be willing to bring another portfolio of the market I think you've done two in the past the five years or so just on the disposition side to try to capitalize on that.
The portfolio of premium that's out there and the increased interest yeah. So I mean, we're very very cognizant of the fact that.
We're in a market where industrial is very highly valued and our assessment is between various sources of capital raising.
The more sense to raise common equity.
Or.
Sell assets and redeploy that that that the.
Net equity that was derived from the asset sales I mean, there's a couple of things that factor into that obviously, we run the numbers.
The C, which one is more attractive for our shareholders the operating leverage that exists.
Adding to the portfolio versus a sale of a subtraction of the portfolio and the sort of anti of scaling.
It comes into play so we are looking at.
Whether it makes more sense the raise common equity at current equity price versus selling assets. The other thing to keep in mind is raising common equity can be done in the matter of days selling assets. You know it takes of it takes some time.
Some of the two portfolio sales you alluded to.
It made sense to sell those assets at the time, we started the sales it was less clear at the time because of the recovery in our common equity pricing is less clear at the time, we executed those sales whether it actually it still made sense from a pure math.
Exercised one of the still makes sense the sell the assets we had committed to it was accretive.
The market appreciated it.
But again, we will continue to look at these the sources of equity whether at the portfolio of sales, we're raising common equity or some of the more.
The esoteric ways of raising funds will continue to look at all of those but we will do what we think is in the best interest of long term shareholder accretion.
Okay, great. Thanks for that.
Thank you Mike.
Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yes, good morning, Dan wanted to maybe just talk about the shorter term leases in the market.
One question of are you seeing more of this type of activity or at least more inquiries when youre doing leasing.
And then maybe the second part of that question is on reverse logistics that how big of that then kind of in the fourth quarter and as the pandemic kind of unfolded last year and.
Is that of trends that you saw.
Well I'm going to I'm going to turn it over to Dave to talk about short term license for just the stock but the art.
Our view on online shopping and what happened during the pandemic.
There was online shopping it got pulled forward.
The the adoption of the got pulled forward multiple years, maybe five years. So you jumped from <unk>.
The low teens percent of share of our goods.
<unk> sold to mid twenties.
Kind of per cent of goods sold and so the infrastructure both on the logistics and the reverse logistics has been struggling to catch up.
To that sort of new normal.
I don't believe they have caught up yet that the.
Non driver on both outgoing in reverse we will continue to be I think the factor in the market for sometime to come Dave would you comment on the short term leasing.
Yeah.
Sure.
The short term leasing is has been a part of our of our business of our leasing efforts for a long time, it's usually is a fairly small percentage of dilution that we do.
And often it leads.
The sort of for proof of concept into the longer term deals so tenants that are expanding or consolidating let's.
Let's say short term expense that then turns into a long term deal.
So it's we view it as a positive.
On an opportunity.
But it.
Tends to remain a small part of our business.
And then Dave maybe sticking with you Ben feel free to jump in and you guys look at the the utilization of the space within your building.
Can you talk about kind of where inventory levels would be for maybe your warehouse oriented customers and are you seeing them using the space any differently I E. More racking or are you getting into buildings with more racking is of course, the floor space utilization and any kind of broader comments that you've seen in the last year or so.
With respect.
Okay.
Totally the capacity utilization is up.
We don't have a tremendous amount of unrest building sort of just throughput.
So racking is quite comment on <unk>.
And.
And again the restrictions on travel we don't get to see those personally but we certainly are.
Folks that the.
Checking all of our tenants on the.
Capacity utilization is up when the law.
Last 12 months.
Great last question I know you mentioned the retirement cost and I know that's an accounting thing that you guys are I think for forced the taken in the year ahead, it sounds like but the spend.
Does that imply any change in plan or succession or retirement in the near future.
I think we're evaluating all of our analysts of potential new executive officers of the company.
I would ask better credit.
[laughter] no it's simply a maturation of the business, we did not have of retirement policy in place.
That's something that the.
As we were building the business, maybe we didnt.
Think about initially.
But it's something that certainly makes sense as we have.
Most of the employees with 15 years of experience with it including the.
The pre public company experience the prep.
Assessor of companies. So just it just makes sense, it's something that the board was a lot of made sense to put into place in.
It obviously happens at some time so it gets reflected in accounting numbers of the at the time that it has put into place it's been a topic the.
Has come up a few times in the past, but it's sort of unrelated to anything other than the maturation of the company.
Fair enough. Thank you all.
Okay.
Thank you.
Our next our next question is from the line of John <unk> with Ladenburg Thalmann. Please proceed with your questions.
Thank you and good morning.
Good morning.
Digging into the same store NOI growth expectations, how much of your expectations come from fixed rent bumps and how much from kind of leasing expectations.
Yeah.
Bill you want to address that.
Sure Yeah, I mean, the big part of his lease bumps or at least pumps have been inc.
Creasing annually.
Annually.
We have.
So on average about 2.25% bumps in our same store pool. So escalators are a big driving force there and then the.
The other impact to same store NOI.
Is the rollover rents.
Which have been averaging call it mid single digits over the years.
And then.
Just the occupancy average occupancy which is.
Which has been positive for us and downtime so have been improving and you saw that as an example of the solo Cup lease earlier. This year. So it is the mix every year and there is some free rent that we're getting a bump in our same store cash NOI in 2021 as well as we've discussed the previous call. So it.
It is the mix, but escalators of big part of the job.
Okay.
And then thinking about the rent collection in January at the risk and kind of splitting hairs. Here does that include the kind of 50 to 60 basis points of month end payment in the portfolio and is there any ongoing deferrals that are flowing through that I kind of remember you, saying, there's no new deferrals, but I can't remember if there were any ongoing.
Hurdles as of January.
There's a few ongoing deferrals John.
We tried to structure of referrals to be paid back by year end. Some tenants just need a little bit more time, all of our deferrals of being paid on time or ahead of schedule.
And there are some call it month and payers some of those pay subsequent to.
For the end of the month that are that are still outstanding and that number overall I think of better representation of collections is what you saw in 'twenty 'twenty is the 99, 6% and a lot of that.
<unk> outstanding collections will be completed in due time.
But as I think about the reported kind of January collections, and maybe some of the like for instance October collections I reported at <unk> I mean, those numbers in terms of what's flowing through there are fairly.
Copacetic, even though you've got a couple of extra weeks here.
In terms of collection for January of versus when you're part of Dover.
Yep.
Okay.
And then one last one of them the balance sheet as we think about the preferred that's kind of callable here I mean are there any plans in mind for that how does maybe debt versus.
The new preferred versus just kind of holding on to the existing per.
Preferred shares stack up and how you are evaluating your balance sheet.
It's something we're evaluating.
That piece of paper is callable in the next month or so.
Where we're looking at a variety of options.
Our prior preferreds were redeemed with equity.
And both of those redemptions were accretive with the equity redeemed the preferred with so.
We're looking at.
Potentially redeeming it with with common equity and also the other options in line.
We make a decision certainly that'll be something that we announced publicly.
Do you feel like you have the ability of the issue maybe you know fairly long duration that are that attractive.
Long duration debt today for us private placement market as you know call. It 275, so that's very accretive if we were the team, but with that if we redeemed.
Of the preferred with a forward equity that's still outstanding.
That would still be accretive.
Deleveraging of that in the eyes of a lot of our shareholders. So again theres a lot of options here and once we make a decision we'll make sure to let the market now.
Okay. That's very helpful and that's it for me. Thank you all very much.
Thanks for thank you.
Our next question is from the line of Bill Crow with Raymond James. Please proceed with your questions.
Hey, good morning, guys.
Bill maybe for you going back to the topic, we haven't heard of.
The dove into it for a couple of years, but.
G&A now has gone from kind of $35 million of 40 to 45.
Pretty significant step up if you could just talk about the underlying reasons like I get the growth part of it is there anything else besides simply portfolio size of describing that.
I mean, we continue to make investments in the platform Bill I mean, its growth in the portfolio of size, which.
Some some new hires in the accounting and the asset management side of the business, but then you've also got some investment in our technology platform.
We continue to improve on as well as growth in and the outward facing acquisition folks and we added.
A couple of members to our Dallas office this past year.
Including the acquisition person down there and analyst of capital person. So it's growth in the portfolio and what we're anticipating for for future growth, we certainly don't want to get.
Behind the curve in terms of making investments in the platform and we believe these investments are in the long term best interest of the shareholders.
Yes.
Yeah, I'll just add to that I mean, there I think of the increase in G&A in two lines. One is scaling of the size of the portfolio.
I believe those would be relatively de minimis, adding an asset manager for every 50 assets or something like that some accounting et cetera, but as bill pointed out we are we are investing in.
Larger acquisition totals more intelligent acquisition totals more efficient processing of transactions.
That our that our growth vehicles and have a return.
I have the.
Well defined and we think very healthy return on investment. So theyre not we saw a very scalable business. We've just chosen to make additional investments over in G&A over and above that scalable requirement.
So I suppose look beyond 'twenty 'twenty, one would you start to see that growth rates start to decline as you both of the scale.
Well, yes, unless we see further investment in G&A that has really good return on investment. So there may be continuing opportunities to become a more efficient.
More prolific.
And more efficacious.
Identifier purchaser and the owner of industrial real estate. So again, the there are pieces of our business that have to grow as the portfolio grows and the other pieces of the business that we choose to grow because we want to be.
And those things again have very strong return on investment.
Okay.
So I'm trying to drive we're still trying to drive that G&A number is the percentage of NOI.
And we've continued to do that over the years.
Great. Thank you.
Thanks.
The next question is coming from the line of Chris Lucas with capital One Securities. Please proceed with your questions.
Hi, Good morning, guys, just a couple of quick ones for me.
Dan you talked a little bit about like the competitive level of both 10 year lease maturity and then sort of the sweet spot for you guys is probably upper single digits, but you did acquire a few of these.
The net shorter duration to them can you maybe provide some sense as to what we're looking for in the sort of sub three year left on the maturity and.
How that might play either of larger bigger role in terms of the portfolio acquisitions over the bulk of the year.
Well you know we have been historically, we've been willing to and the have countenance the acquisitions with lease terms of shortage zero.
And as long as I think the longest term when everybody was 25 years and what we look at in all of these things just to make sure that we are getting paid for the risk.
Sure, it's probably a little over statement, but on a probabilistic basement of basis.
Believe or establish that we're getting paid for the risk we're taking the indeed.
Then overlay of sounds so we're getting overpaid for the risk we're taking.
So when we look at of a.
A three year lease for a two year lease. We're obviously spending a lot of time thinking about the number of claims, but actually everything that will affect the cash flow going forward, but in the shorter leases retention is obviously, a big a big items.
Potential capital cost of the big items.
Current rent versus market rent.
There's a big items.
Less important on the short term leases and the stunning credit.
The impact of.
Potential the fault.
On a tenant that's the only they are only contractually there for a short period of time is less important. So again there on a probabilistic basis, we're going to look at the cash flows that we think will be derived from them in any of that building and make a determination of whether it makes sense to put it into our portfolio. We take solace in the fact that you know.
With more <unk>.
The decision point early decision points I E. The lease explorations that the the standard deviation of returns maybe larger on the other on that asset they would be on a 10 year asset to a double b credit.
But we have a lot of assets that have low correlation between them and.
And we can take solace in the the aggregated whole will produce cat aggregate of the cash flows that are quite predictable.
Buying those riskier assets in terms of short of lease exploration is still part of the overall portfolio strategy.
Yeah.
Okay, and then just kind of going back to the G&A questions.
When you talk about investing in the platform I guess I'm, just curious as to sort of when you think about the sort of incremental.
Growth in G&A. This year are just historically you know what's the split between people and technology for.
For the onetime components because of the technology cost investment.
Essentially liberal hub in the future years or is that something that sort of just keeps recurring.
Yeah. The technology piece has you know.
Software or you know various and sundry prop tech investments that may have an upfront cost as well as the team at cost.
I think most of the investments that we're talking about doing a more people. So we're looking at you know we just hired up the.
Data analyst. These are things that will make us better at what we are.
And what we're doing in the data area. So we historically have thought about the scalable or the.
The cost of our associated with growing the portfolio or something they were one and a half to two per cent of NOI. Obviously, we are in 10% plus of NOI on a.
On the average cost base the average G&A cost basis. So the scalability is in that you know on that.
And the one and a half the 2% of NOI now there over and above that.
Each year of G&A is going out of some kind of cost of living.
As well as a maturation of the staff component to it.
But the truly need the scale of portion of it is on the one and a half of 2% range.
Okay and the last question for me Costco shows up as the top 20 tenants this quarter.
Was that just an incremental lease of work both leases acquired in the quarter.
The there was the name of the shouldn't.
Oh, Yeah Oh.
Yes, it wasn't incremental acquisition this quarter.
And I again, an acquisition that we feel really good about the long run returns strong rental bumps.
In pits into that six to seven year lease term.
So anything you know double digits as I said earlier, probably we get outbid on.
Or if it sits in the I'll call. It a top five top six market, we'd probably get outbid on but.
It's in a market that we've been great broker relationships and and that was a key part of winning winning that transaction.
Yeah.
That's all I had thank you.
Thank you.
Thank you to ask the question today, you May press Star one from your telephone keypad. The next question is kind of from the line of manual Korchman with Citi. Please proceed with your questions.
Hey, guys, it's Manny here.
But going back to your earlier comments on the tertiary markets I guess youre not expanding in those markets.
The the capital chasing the industrial spaces.
At highs if not all time highs.
Why not accelerate the disposition program there get out of those tertiary assets.
Where there is a.
Better cost of capital. If you will is there has been and then use those proceeds to go into sort of the the.
The primary and secondary assets in markets that you're now targeting.
Look at the similar to sort of what Duke announced this quarter, where they're selling a lot of the stuff.
Frankly that you guys are buying but theyre not doing it because they need the capital or.
Yeah, they hate Amazon, they're doing it because the pricing there.
It is good and so they can rotate that into other types of assets.
Yeah. So I mean, I think many of the the answer is the pricing is good and we look at that pricing on the individual asset basis and.
I'm trying to assess given our return requirements of the cash although we expect the derived from one of the continued on that asset versus the funds we receive from selling it with a little bit of an overlay of we are of disposing of the tertiary assets, but still our mantra is if it's worth more to Watson or it has to someone else is willing to pay we're not likely to sell that again.
With the little bit of of an overlay that we are disposing of tertiary market assets. So we think we're being rational in this.
We have not made sort of an overlay of corporate decision.
The two exit the you know all of our tertiary markets. We are opportunistically and we think intelligently disposing of those when the situation allows us to derive at least the buyer that we think.
We derived from all of the continuing on that building.
Yeah.
Alright. Thanks.
Thank you Manny. Thank you at this time, we've reached the end of the question answer session I'll turn the call over to Ben Butcher for closing remarks.
Excuse me. Thank you operator, and thank you all for joining US this morning, I'm obviously of.
Great performance by the team through.
Through the pandemic year operating remotely learning how to continue to be a good acquirer and manager of assets with the with less travel.
It is is very gratifying that the culture of the company I think was maintained through that year and we look forward to 2021 as the year of great opportunity for the company.
Extremely well positioned from a balance sheet perspective opportunity is the is prevalent in the market and the.
The tenant demand remains very strong for the for our existing assets. So we're looking for it to a great 2021, and we thank you for joining us on the ride of a great day.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.