Q1 2022 STAG Industrial Inc Earnings Call
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Greetings and welcome to the Stag Industrial Inc. First quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference.
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Steve Zoro. Please go ahead.
Thank you welcome to Stag Industrials conference call covering the first quarter of 2022 results.
Addition to the press release distributed yesterday, we've posted an unaudited quarterly supplemental information presentation on the company's website at Www Dot stag industrial dot 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 forecasted <unk> same store NOI, G&A acquisition, and disposition volumes retention rates and other guidance leasing prospects right collections industry and economic trends and other matters.
We encourage all our listeners to review the more detailed discussion related to these forward looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information 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.
Bill Crooker, our president and Mats, Bernard our Chief Financial Officer.
Also here with US today is Steve Mackey, our Chief operating Officer, and Mike Chase, Our Chief investment Officer, who are available to answer questions specific to operations I will now turn the call over to Ben.
Thank you Steve 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.
To say the least we live in interesting times. The daily headlines are dominated by the ongoing and escalating geopolitical turmoil mounting inflation and firmly entrenched political polarization. The fed has at long last committed to a rising interest rate cycle in a post pandemic new normal continues to evolve.
None of this has dampened the vibrant demand for industrial real estate consumers are consuming supply chains are being reworked and optimized and inventory levels are expected to increase two if not exceed pre pandemic levels.
The recently announced cooling off by Amazon is only a small part of the overall strong demand story.
City of other market participants are aggressively pursuing additional space.
New supply, though elevated continues to struggle to keep up with this continued heightened level of demand. Good news for owners of this asset class.
These dynamics are reflected in the results from our operating portfolio. We continued to experience significant proactive commitment to our spaces from new and current tenants.
This allowed us to achieve greater rental growth and secure a record levels of contractual rental escalations.
Our team is energized and performing at a high level our opportunity set is as large and attractive as at any point in our history. This was a great quarter and portfolio fundamentals support the belief that this strong performance will continue.
The beauty of the Stag investment thesis center underwriting model is there flexibility they give us the ability to react in real time to fluctuating market conditions, such as share price debt rates cap rates rent growth projections et cetera.
Our simple mantra, we will continue to serve us and our shareholders well.
We can buy it for less than its worth we will if somebody will pay us more than we think it's worth will sell with.
That I will turn it over to bill to discuss our operational results.
Thank you Ben good morning, everyone.
I wanted to start off by thanking our team for their hard work. This quarter, we are coming off one of the best years, we've had as a public company and our Q1 performance continues that trend.
As Ben noted the industrial fundamental story is very much intact with demand drivers exceeding expectations and supply in check.
Secular demand drivers, including e-commerce widespread supply chain reconfiguration and unexpected increase in inventory levels continue to be strong tailwind.
Brent remains a small fraction of overall logistics costs.
Space in strategic locations is increasingly the norm for many businesses.
Strategic goal for them and positive demand driver for stag.
The current inflationary environment has caused construction cost to elevate significantly.
This drives up rents on both new supply and uncompetitive existing assets benefiting our portfolio of fungible industrial buildings.
As I mentioned at the outset. This positive backdrop helped our team put together a very strong quarter. Our core <unk> per share was <unk> 53, this quarter and eight 2% increase over the prior year.
Same store NOI was a big contributor of this growth.
We continue to improve our leasing spreads and expect those spreads to be consistent with Q1 as we move through the year.
Rising interest rates have caused a slight slowdown in the longer term lease transaction market. Fortunately for stag, our disciplined process for identifying and closing on industrial acquisitions is focused on relative value.
This allows us to still accretively acquire assets that will deliver long term returns to our shareholders.
Acquisition volume for the first quarter totaled $166 4 million across eight buildings with stabilized cash and straight line cap rates.
<unk>, 5% and five 2% respectively.
There are a few larger transactions I would like to highlight that closed this quarter.
In January Doug required 702000 square foot warehouse distribution facility located in Kansas City were $60 4 million at a four 8% stabilized cash cap rate.
The building is well located within Kansas city's largest industrial submarket near the I 35, <unk> hundred 35 interchange.
Please for five years to a large national retailer. The building serves as tenants So e-commerce facility.
This transaction includes 17 acres of land available for potential expansion or additional parking for the existing or subsequent tenants.
Finding an opportunity to add additional value to the site.
In March we acquired a 156000 square foot warehouse distribution facility located in Greenville, Spartanburg market for $16 $4 million at a four 6% stabilized cash cap rate.
Located in the matrix Industrial park in the I 85 cell sub market building is leased for just under three years to an investment grade tenant.
The tenants occupy the facility for over 13 years and has a large capital investment in the facility.
Rents are well below market, providing an attractive opportunity to create additional value at lease expiration.
Also in March we acquired a 289000 square foot warehouse distribution facility also located in the Greenville, Spartanburg market for $28 3 million.
And a five 7% stabilized cash cap rate.
Well located in each and the exchange logistics Park and the IH five self sub market. The building was 78% leased upon acquisition to three credit tenants.
With the ability to add value through the lease up of the remaining space we've.
We've seen a high level of activity on the vacant suite and are currently negotiating terms with an existing stag tenant for the suite.
As I mentioned in our last call we continue to focus on capital recycling in this environment.
During the quarter, we sold one building for $35 $9 million at a four 4% stabilized cash cap rate with the proceeds accretively redeployed into our acquisition closing schedule.
There are several other capital recycling opportunities in various stages of evaluation and we look forward to updating the market as we move through disposition process.
We continue to expect disposition proceeds in the range of $200 million to $300 million. This year, representing an amount higher than the previous year is to take advantage of the current pricing environment.
With that I will turn it over to Matt who will cover our remaining results for the quarter and provide an update to our 2022 guidance.
Thank you Bill and good morning, everyone core <unk> was 53 for the quarter, an increase of eight 2% as compared to the first quarter of last year cash available for distributions totaled $82 4 million for the quarter, an increase of 13, 8% as compared to the prior period.
<unk> remains near the low end of our range with net debt to run rate adjusted EBITDA equal to five one times during.
During the quarter, we commenced 29 leases totaling $3 1 million square feet, which generate cash and straight line leasing spreads of 15, 2% and 25, 1% respectively.
Pension was 58, 4% for the quarter when accounting for immediate back those adjusted retention equaled 87, 1%.
Cash same store NOI grew four 8% for the quarter the highest level on record for stack included in this quarter's same store as a payment of past due rent as a result of a settlement reached with the prior tenant.
That tenant vacated the building in September and was subject to cash basis accounting. The building was released with zero downtime. This payment contributed 40 basis points to this quarter same store results with the full year benefit the same store I expect to be 10 basis points.
Moving to capital market activity and beginning with equity in January we sold 128000 shares via the ATM at a gross share price of $45 three.
Resulting in gross proceeds of $5 $8 million, we have not issued incremental equity since January 18th on March 29, we fully settled the remaining forward equity proceeds related to our November equity transaction and received $49 7 million in net proceeds which were used to fund the first quarter acquisitions.
Subsequent to quarter end on April 28, we closed a $400 million private placement transaction with a coupon of $4 one 2%.
Year notes are expected to fund in June in.
In terms of guidance, we have made the following updates our <unk> per share guidance is increased to a range of $2 16 to.
$2 20 per share an increase to the midpoint of one penny.
<unk> increased our same store guidance to be between 4% and four 5% for the year, an increase to the midpoint of 75 basis points. This increase was driven by the robust demand we're experiencing for our buildings and leasing results have exceeded our initial expectations.
Finally, we have reduced G&A guidance to a range of $48 million to $50 million a decrease of $1 million at the midpoint. We continue to expect net debt to run rate adjusted EBITDA to be between 475 times and five five times I will now turn it back over to Pat.
Thank you Bill and Matt strong results, indeed, with a bright outlook for the remainder of the year.
As many of you are perhaps aware this will be the final time I participated in a stack earnings call as CEO .
As previously announced I will be moving to the executive chair role in July one bill.
Bill Crooker currently our President will succeed me as CEO I have full confidence in him the rest of the stag team and the direction of the company.
You for your time this morning, I will now turn it back to the operator for questions.
Thank you we will now be conducting a question and answer session.
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Your first question comes from Sheila Mcgrath with Evercore. Please go ahead.
Hi, Yes. Good morning, Dan I was wondering if you could drill down a little bit more on your Amazon comment.
Their commentary really drove the industrial fleets down last week when they said they have too much space. What are you are you hearing from brokers and what is your view on then retreating their impact on demand.
Well I mean, it's obviously was big news and was taken by a lot of people to be I think more meaningful than perhaps it was Amazon has been signaling in their both their activity and in their earnings calls for some time now and generally known in the market that they were slowing the pace of the build out of there.
Apply chain systems.
I think that if you look at the numbers they were a bigger part of the overall absorption in 'twenty than they were in 'twenty, one and indeed, what we've seen from numbers is that they're tracking this year at a rate again in terms of percentage of overall absorption pretty similar to last year, but certainly the signal.
That slowdown now what we're seeing anecdotally across our buildings is very aggressive demand for from other tenants.
Other e-commerce tenants tenants.
Not an e-commerce et cetera, very aggressive and thats reflected in our operating results. So I think it was a little bit of.
A tempest in a teapot.
But but certainly.
Something that people are paying attention to.
Yeah, and Sheila just.
To add onto that our exposure is only three 2% of ABR.
Seven built we have seven buildings leased to Amazon.
Only one was a build to suit for Amazon, which has 12 years of remaining lease term and our near term lease roll. We have two spaces rolling next year leased to Amazon, which are averaging about 25% below market.
Okay, Great and one other quick question just your perspective on cap rate trends in industrial.
With interest rates moving higher and your thoughts there.
Are you seeing any evidence that the high levered buyers, maybe less aggressive on acquisitions.
Yeah. So Sheila obviously, the most important interest rate as the 10 year Treasury for the real estate market and.
I think that the fed's moves are likely to affect the short end of the curve more than a 10 year.
But what's really important for us as well first of all we really haven't seen any impact on cap rates, yet, but it's really important for us is the impact on our competition.
We typically are competing with smaller local buyers of individual assets, who typically use more leverage so our expectation is the cap rates on the individual transactions at some point, we will probably go up as their cost of capital is negatively affected by a rise in interest rates Bill do you want to yes.
That's right I mean, typically as you said bandwidth.
<unk> in terms of the change to cap rates when interest rates rise, we haven't seen anything yet.
But if interest rates stay elevated or there may be a potential rise in cap rates in the back half of the year.
Okay. Thank you.
Your next question comes from Emmanuel Korchman with Citi.
Hey, everyone. Good morning.
Good morning, just given the dislocation in your own stock price you mentioned that you haven't issued any equity since January how do you think about your.
Acquisition pipeline is there a chance that you simply buy less because your cost of funding has changed or.
Or how do you offset that.
Hey, Manny.
We have right now with the.
Private placement, we executed about $800 million of liquidity.
As we see the market today, we are still comfortable with our guidance of acquiring one to $1 2 billion, but it is.
With some elevated dispositions that we expect to transact on.
And at least the first half of the area and some in the back half of the year. So no change to guidance, we have plenty of liquidity.
And comfortable with the guidance we have out there.
And the disposition comment you just made that in.
In excess of what you have guided to or Youre, saying that there there increase models what are your typical levels of this disposition.
An increase versus our typical levels, we're comfortable with our guidance range of $2 million to $300 million.
Okay.
But maybe.
Follow up on the Amazon question and answer.
There's been some discussion about them potentially putting space on the sublease market do you think that's enough to change the rent conversations that we've been having for some time here.
We haven't seen that in our assets.
I'm not familiar with that as a widespread concern in the market.
Certainly if they decided that they wanted to dump a lot of space in the market. It would have an impact, but we certainly haven't seen that or heard much about that.
That's helpful. Thank you.
Your next question comes from Blaine Heck with Wells Fargo.
Great. Thanks, Good morning, just digging into the pricing environment, and then expanding on that a little bit more there was a pretty wide range in terms of Walt on your acquisitions from two nine years at the low end to $9 nine years at the high end can you just walk.
Just talk a little bit about whether there was short deals are pricing differently than those long those with longer walls, and how youre thinking about rent bumps on acquisitions with a lot of lease term remaining are you able to find deals within embedded rent bumps that are sufficient to offset the increasing right in an inflationary environment.
Yeah, Blayne, so I mean, obviously.
Every lease or every transaction that we look at has different parameters somehow shortly so some have long leases bigger rent bumps lower rent bumps higher expected market rent growth lower expiring to make growth mark to markets Theres, all sorts of different parameters that affect the return what doesn't change.
Speaking as the return thresholds that we were that we utilized to make sure that we're getting.
Good long term accretive returns for our shareholders from the acquisition, so where I haven't got the use this word as much as I, usually do we're agnostic as to most of those parameters. We're just not agnostic as to the required returns.
I don't think that or.
Yeah, and as I said, we haven't really seen any pricing changes yet it's a little it's too soon for that.
We've always bought various lease terms, whether it be a vacant asset or a long term lease as I mentioned the $2 nine year lease term asset that we acquired in Q1 is well below market and we'll be able to unlock some value there in three years and the $9 nine year lease term was a very strong credit at a straight line.
Cap rate of five 7%, so very accretive.
Our bottom line.
We are in terms of rent bumps as you allude to we are getting not only in our leasing activity, but our acquisition activity, we are seeing higher contractual rent bumps.
Got it that's really helpful color.
And then retention during the quarter. It was obviously a little lower than the guidance range could you just talk about whether that was expected in the first quarter what drove that lower retention was it just expansions as you've talked about on prior calls or was it kind of a drive on your part to increase the rate that maybe wasn't well received by some tenants.
A little color there would be helpful.
That was expected Blaine and part of the expectation was was driving rates on on those leases. So.
We saw some average occupancy decline in our same store pool that was because of these non retained tenants, but we did backfill a lot of those spaces.
In the second quarter already so.
Expected was in our budgeted numbers are big driver was us roll and those leases up to market, Yeah, and Blaine one of the things that is sort of a hallmark of the of this very very strong industrial market is downtime not only for us but of all market participants is much lower than than sort of long term trends and so retention becomes less of an issue.
As you have lower downtime.
Great. Thanks, guys.
Next question, Michael Carroll with RBC.
Yeah.
Yes. Thanks, I wanted to go back to Bill your comments on cap rates do you kind of implied or said that that cap rates could potentially rise in the back half of the year. I mean can you give some color on that how much do you think that they could rise and just that is just assuming interest rates stay where they are right now.
Historically, the correlation has been about 50% of the rise in the 10 year has impacted the cap rates.
With the demand in industrial I'm not sure cap rates will rise that much just because of the fundamentals we see.
But right now as I said, we haven't seen anything today.
But if these interest rates stay elevated we certainly could see some increases in the back half of the year and if you look at the 10 year, we've seen 100 125 basis point increase.
What bill alluded to in terms of the depth of the capital chasing industrial I think will tend more to slow down how long it takes for that impact to occur, but I think it will it will get itself into the market over time.
The ryzen and cap rates, especially on the individual transactions, where we're most most active.
And then when you are looking at new acquisitions.
Are you adjusting your underwriting for those longer lease duration type properties. I mean are you increasing what youre. The returns that you need on those specific assets.
The answer to that is no because we're looking at returns over a long period of time. So the feature of those of those deals is that they have a fixed.
Rent for longer periods of time that doesn't mean.
But there are less attractive to us it may mean that we can or can't justify paying as much.
In the interest rate environment et cetera, but now we our model is able to analyze those transactions at the same time, we analyze shorter term transactions and produce by analyzing the cash flows over time.
Look at them.
Secondly, a risk neutral basis, yes, we're constantly updating our model with the forward curve. So that's obviously impacting pricing on on longer term leases when the forward curve increases.
Okay, and then just last one from me I mean, how comfortable are you increasing leverage and kind of hitting the top end of that range, maybe with minimal amount of equity and more focused on asset sales I know historically, you like to be towards that lower end. I mean are you willing to kind of creep towards the top end just given some of the dislocation that we're currently seeing.
If it persists.
Yeah, Hi, Mike its Matt So let me walk you through our guidance and the reason why we set it up this way so as we sit here today, we can operate within our current guidance at the low end to acquisitions. The high end of dispositions and not issue an additional dollar of common equity and we would hit that five five times, we're very comfortable with the balance sheet is now we're comfortable with five.
Five times. This is a a promulgated leverage range driven by our investment grade ratings speaking to the either Fisher Moody's they're comfortable leverage higher than that we have a guidance of five and a half. We can operate there we have room to go higher and not engender any ratings issues, but really kind of the takeaway here. Mike is we can run this business probably can run this guidance.
That we have right now without needing common equity this year.
Okay. Thank you.
Yes.
Next question, Jamie Feldman with Bank of America.
Yeah.
Great. Thank you I guess, just going back to your Amazon comments I think you said you had two.
Explorations with them next year do you have any sense of their plans for those spaces.
Now Jamie they are fully utilizing the spaces.
They're fungible spaces, one is a second gen space to Amazon one is the building we developed in Burlington New Jersey.
<unk> fit the markets really well.
We don't have a view on whether Amazon will want to renew or not but as I noted those the average of those two spaces are about 25% below market.
Okay.
Do you have a view on a lot of markets given your portfolio diversification.
As you sit here today or do you think about that news I mean, do you think theres certain markets certain types of buildings that you would be more concerned about or just any any buzz from any of your market leaders about what they may be hearing that you might be able to share.
Yes, I would say if there was.
Our build to suit Amazon building that had.
A year or two left the lease term I would be concerned about that we have one build to suit for Amazon in our portfolio, which has a little over 12 years of lease term.
Really the specialized buildings, Jamie with three four levels of Mezz that would that would cause us some concern as those are probably priced well above market again.
The build to suit that we have in our portfolio that has 12 years lease term was at market. So.
For us our underwriting contemplates specialized buildings that really.
Things that in our underwriting so we don't have many if any of those buildings in our portfolio.
Okay. Thank you.
Then to your comments on potentially cap rates backing up can you just talk to us how youre modeling. Your IRR is now I mean, how do you think about what's changed in your underwriting assumptions, whether it's rent growth or exit cap rate range.
Yes, so Jamie obviously.
We try and update in.
In real time, everything thats going to affect cash flows going forward and that is basically everything you can think of that.
That will affect the future results from the from owning that asset.
We have.
At least in the temporary backup our thresholds a little bit because of the fact, the fluidity in the market, allowing the repricing if you will of assets to occur.
So we've given ourselves a little bit of extra cushion, but.
But given given that and given our experience in the market to date that has not affected at all our expectations as the guidance.
Okay.
That makes sense.
And then as you think about it so youre starting to get kind of a better same store ramps.
With better leasing spreads, which I assume means more cash flow flowing to the bottom line, how should we think about your prospects to grow the distribution going forward.
With better kind of internal growth metrics.
Hey, Jamie this is Matt so our first quarter payout ratio is 80% and we communicated a couple of years ago that we wanted to bring that payout ratio to the 80% level.
We'd like to be there for this year.
We'll continue to evaluate it but we're getting close to the point, where we think that we can begin growing the dividend distribution in line with our CAD per share growth. It may not be this year, but we're getting close to the moderation level that we had communicated.
Okay alright, thank you.
Thanks, Jamie.
Next question, Dave Rodgers with Baird.
Yes. Good morning, everybody wanted to ask about the acquisition pipeline looks like it was just down a little bit and obviously it can't go up every single quarter, but curious if.
Maybe a mix of asset change and they're less coastal assets or migration markets more Midwestern assets. Some additional color on maybe kind of what that pipeline looks like and if you've had to change necessarily the pipeline two to kind of hit those returns that youre discussing.
Hey, Dave the pipeline Hasnt really changed from.
What it's been over the past several years Q1, there is always a dip in the pipeline as transactions Q4 is the largest.
Quarter of industrial transactions, so as transactions close they come off of our pipeline and it takes a little bit a little while to build up that pipeline. So if you go back.
Six years. This is the largest pipeline we've ever had in Q1 at $3 7 billion.
So really its just the seasonal adjustment of the pipeline.
And the pipeline looks the same as it's always looked in terms of makeup same kind of assets.
Okay. That's helpful. And then maybe a follow up on the debt side, maybe for Matt.
The debt that you've talked about having recently issue it sounds like it will fund later in the year is that the debt that you anticipate paying off the <unk> with or do you have more capital plans on the debt side as the year progresses.
Hey, Dave Yes, the $400 million private placement will fund at the end of June .
As we sit here today as Bill mentioned, we have liquidity approaching $800 million in terms of that $46 million of MBS.
We're taking a look at the term loan we also have.
Hundred $50 million term loan that matures in January of next year and as we sit here today, we made we're absolutely going to refinance the <unk> out of the MBS market. It will become unsecured debt. There is a possibility maybe we combine it with the refinance of that term loan, but we have options as we sit here today.
Okay. Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Vince <unk> with Green Street. Please go ahead.
Hi, Good morning, I wanted to follow up on the earlier questions on capital allocation based on your comments. Thus far. It seems you are looking to increase the amount of dispositions as a funding source.
You can sell assets or even a midsized portfolio are at cap rates that are inside.
Implied cap rate and only marginally higher than their current cost of debt.
Can you help me better understand why asset sales shouldn't be a bigger part of the capital plan here, given where your share prices and our current cost of capital overall.
Hey, Vince.
We contemplated greater asset sales when we put our initial guidance in February and that's the two to 300 million. That's still the plan as Matt noted our plan right now our guidance implies no equity issuance this year and operating within our within our our.
Our guidance ranges so.
We have proved over the years to be prudent allocators of capital. It's certainly something we'll look at it as we move through the year.
<unk> stayed the same we may choose to increase our dispositions as we move through the year, but right now we're very comfortable with the guidance and is an increase over prior years.
Okay. Thank you.
Can you discuss which of your markets are experiencing the best trends in market rent growth and releasing spreads today.
Yes, we operate in a number of markets.
One of our newer markets that we really started to penetrate a few years ago with Sacramento, We're seeing some great trends in that market, we're seeing some great trends in our Philadelphia Boston.
Vegas markets.
Overall, the portfolio is operating very well market rent growth is the strongest we've ever seen it and we're making its way, it's making its way through our leasing stats.
Yes, the other thing I would say is that as you know.
We've talked about this before is that our model.
It takes into account the.
The Ah.
Different parameters that are.
Our associated with different markets and we see we're not saying that Ontario, California is a better market than say Dayton, Ohio. They are different and if we take into account all of those parameters you can you're going to evaluate asset purchases.
Those two markets on a relatively equal footing we're.
We're not saying that the results of long term results operationally from the asset Dayton, well matched one or Ontario, but if you buy it for the right price you can have similar returns.
I don't know its really helpful. Thank you.
Thank you.
Thank you I will now turn the floor over to Ben Butcher for closing remark.
Well I'll start out by saying I'm surprised nobody asked me what I was going to be doing in July but I.
I appreciate the fact that focus was on the business and I'm happy to have us focus on the business in this call and for you all to focus on the business because our operational results were reflective of the really good place that stag is in terms of its portfolio and its people.
As I step down in July from CEO as I said in our prepared remarks, I'm highly confident of our ability to move forward under Bill's leadership as CEO .
And with a really strong rest of the team and as I said, great prospects for the future. So thank you.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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Okay.
No.