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spk14: Ladies and gentlemen, good morning and welcome to the Stagg Industrial Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Zaros, Investor Relations. Please go ahead.
spk07: Thank you. Welcome to Stagg Industrial's conference call covering the third quarter 2023 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.staggindustrial.com under the Investor Relations section. On today's call, Companies' 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 forecasts of core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates, and other guidance. leasing prospects, rent collections, industry and economic trends, and other matters. We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. Bank Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear from Bill Crooker, our Chief Executive Officer, and Matt Spenard, our Chief Financial Officer. Also here with us today is Mike Chase, our Chief Investment Officer, and Steve Kimball, EVP of Real Estate Operations. We're available to answer questions specific to the areas of focus. I'll now turn the call over to Bill.
spk08: Thank you, Steve. Good morning, everybody, and welcome to the third quarter earnings call for Stagg Industrial. We're happy to have you with us today as we discuss our results for the quarter. Industrial leasing activity is tracking to be one of the best years on record. DAG's portfolio is benefiting from secular tailwinds, including nearshoring, onshoring, and e-commerce. Market rent growth, however, has generally experienced a degree of normalization given the changing landscape. Construction starts have steadily declined since the end of last year, primarily driven by more expensive debt capital, which in many instances is difficult to obtain at affordable rates. We expect the lack of new construction starts to provide an acceleration of market rent growth as the existing supply is absorbed. The softest part of the industrial market continues to be concentrated in big box spaces between 500,000 and 1 million square feet, particularly first generation space. In light of the potential economic uncertainty, Large tenants are opting to leverage third-party logistics providers as opposed to funding expensive capital projects to move into new space. Sub-leasing has also been concentrated in these larger spaces. It is important to note that Stagg's average suite size is less than 150,000 square feet and does not compete directly with these larger spaces. Deliveries are projected to be approximately 3% of the overall industrial stock this year, with nearly half of these deliveries classified as big box buildings. These deliveries are expected to result in national vacancy rate of 4.4% by year-end, a slight uptick from last quarter's forecast. This level of vacancy is still indicative of strong conditions. We expect market rent growth in our portfolio to be in the high single digits this year, and we expect market rent growth in our portfolio for 2024 to be in the mid-single digits. The portfolio has remained resilient, due in part to our positioning within the markets we operate in. Because of the average suite size, our portfolio is meeting the strongest part of the demand in our markets. There has been a convergence in rent growth between coastal and non-coastal markets, which is largely driven by the secular tailwinds mentioned earlier, as well as an influx of economic investment by both the federal government and private enterprises in non-coastal markets. We are proud to report cash and gap leasing spreads at record highs for STAG. As of October 24th, We've achieved 98% of the leasing we expect to accomplish in 2023 at cash leasing spreads of 30.1%. For 2024, we have addressed 37% of next year's expected leasing, approximately 5 million square feet, achieving 30% cash releasing spreads. Moving to acquisitions, in the middle of this year, the bid-ask spread between sellers and buyers narrowed towards levels where transactions could begin to clear. Our acquisition volume for the third quarter totaled $204.3 million. This consisted of 12 buildings with cash and straight-line cap rates of 6.2% and 6.7% respectively. Subsequent to quarter end, we acquired three buildings for $67.5 million at a 6.7 cash cap rate. Recently, the rapid increase in interest rates has dampened the resurgence of transaction market, and as such, we have adjusted our guidance accordingly. In terms of dispositions this quarter, we sold two non-core buildings for aggregate proceeds of $28.4 million. On the development front, this quarter we achieved substantial shell completion for our Port 290 development. This is located in Greer, South Carolina. Port 290 is well positioned to compete as tenant activity remains healthy in the 75 to 250,000 square foot suite range. We anticipate meeting our first half of 2024 lease commencement assumptions and rents greater than underwriting. In addition, in August, Stagg closed on 31 acres of shovel-ready dirt in the east submarket of Tampa, Florida, for $9.6 million. We will construct two warehouse distribution buildings totaling 298,000 square feet. Anticipated to deliver in the fourth quarter of 2024, the assets will accommodate up to three tenants per building. This was an opportunity for STAG to add to its growing development portfolio and a high barrier to entry, strong rent growth sub-market of Tampa. With that, I will turn it over to Matt, who will cover our remaining results and updates to guidance.
spk10: Thank you, Bill, and good morning, everyone. Core FFO per share was 59 cents for the quarter, an increase of 3.5% as compared to the third quarter of last year. Included in Core FFO is a $900,000 settlement with a former tenant. This settlement resulted in an additional penny of core for the quarter and is excluded from same-store cash NY. Cash available for distribution for the third quarter totaled $96.8 million. We have retained $71.4 million of cash flow after dividends paid this year through September 30th. Leverage is just below the loan of our guidance range with net debt to annualized or unrated adjusted EBITDA equal to 4.9 times. Liquidity today stands at $683 million. During the quarter, we commenced 19 leases totaling 2.3 million square feet, which generated record cash and straight line leasing spreads of 39.3% and 54.2% respectively. We expect cash leasing spreads of approximately 30% for the year. Retention was 74.4% for the quarter and 82.5% when adjusted for immediate backfills. We achieved same-store cash and Y growth of 5.3% for the quarter and 5.3% year-to-date. We've experienced three basis points of credit loss through September 30th this year. In terms of capital market activity, on July 27th, we fully settled all outstanding forward equity contracts and received $61.2 million in proceeds. Moving to guidance, we made the following updates. We increased our cash central guidance to a range of 5.25% and 5.5% for the year, or 25 basis points at the midpoint. Due to the current uncertain macro environment, we have reduced our expectation for acquisitions and disposition volume for the remainder of the year. We have decreased and narrowed the range of expected acquisition volume to a range of $300 to $350 million. Acquisition cap rates for the year are now expected to range between 6.2% and 6.3%. These ranges are driven by the material reduction incremental acquisition volume this year and largely reflective of acquisitions made year-to-date. We decreased our disposition guidance to a range of $100 to $125 million based on our progress through today, a decrease to the midpoint of $37.5 million. 4FFL per share guidance has increased to a range of $2.26 to $2.28 per share, an increase to the midpoint of $0.02. We've updated our retention percentage to 75% for the year. G&A expectations for the year have been decreased to a range of $48 to $49 million. Finally, we expect net debt to annualized run rate adjusted EBITDA to be between 5 and 5.25 times. I will now turn it back over to Bill.
spk08: Thank you, Matt. Our team continues to drive value in the face of continued macroeconomic uncertainty. I'm happy about STAG's relative position within the public REIT sector. Our defensive balance sheet, coupled with the resilience of industrial fundamentals within the industrial space, will allow us to be opportunistic as the landscape evolves going forward. We'll now turn it back to the operator for questions.
spk14: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we request you to restrict to one question and one follow-up question per participant. One moment, please, while we poll for questions. Our first question comes from Craig Millman with Citi. Please go ahead.
spk11: Hey, good morning, guys. Just one clarification. In the SUP, when you guys put the 6-2 cash cap rate and 6-7, are those initial cash cap rates or is that more of a stabilized cash cap rate?
spk08: It's a stabilized cap rate if the lease is expiring within the first year effectively. So we had a couple of those or there's a vacancy in there, Craig. But other than that, it's the in place. So From a market cap rate perspective for the Q3 acquisitions, it's around 6.7, 6.8, if that helps.
spk11: Okay. What would be the difference between the 6.2 and the initial? Would it be pretty tight?
spk08: There's one of our buildings, there's some vacancy in there, so that's obviously going to drag it down. It's probably in the 100 basis points plus a little lower for a short period of time.
spk11: Okay. And then just the follow-up question, Bill, your commentary on market rent growth sounds relatively good versus some of your coastal peers this earnings season. Which markets do you think are really kind of the driver of only seeing kind of a downtick from maybe high single-digit rent growth this year to mid-single-digit next year, you know, given some of the issues that some of the coastal markets are facing?
spk08: Yeah, it's... It's a similar scenario to what we had last quarter where it's more of a size difference than markets for us. So the bigger boxes are slowing and that market rent growth is probably flat to maybe even negative. And the smaller suite sizes, less than 150,000 square feet are still holding up really well. So where we're seeing some weakness in bigger boxes, it's the big box distribution markets, Indianapolis, Columbus, South Dallas, those ones will struggle with that sweet size. But when you get the smaller sweet sizes, those markets are still holding up really well.
spk11: Great. Thank you.
spk02: Thank you, Craig.
spk14: Thank you. Our next question comes from John Kim with BMO Capital Markets. Please go ahead.
spk13: Thank you. Just wanted to follow up on Craig's question on the cap rates on acquisitions. So when you look at the initial cap rate and then compare it to the adjustments to NOI that you have on page six of your supplement, even adjusting for timing, it suggests the initial NOI impact would be something closer to sub-3% initial yield. So I'm wondering what that discrepancy is.
spk08: The discrepancy is primarily related to dispositions. So we had a couple of non-core dispositions. This quarter, one was a fixed option that was a higher cap rate that the tenant had. Another was a non-core, non-CBRE tier one market that we disposed of. So those are higher cap rates. So I think when you look at that run rate adjustment, it's a mix of acquisitions and dispositions.
spk13: So what were the cap rates and dispositions?
spk08: Matt, do you have those?
spk10: Yeah, hi. Good morning, Don. The aggregate disposition cap rate for those two, they were both 100% occupied. It was 8.8%. Okay. And again, to reiterate what Bill said, these are assets that did not have a home in our portfolio, and we opportunistically disposed of these two.
spk02: Got it. Okay. Thank you. Thanks, John.
spk14: Thank you. Our next question comes from Vince T-Bone with Green Street. Please go ahead.
spk06: Hi, good morning. I have a few questions on the Tampa development activity. If you could just maybe provide the expected spend and incremental yield on those buildings and also talk about kind of what profit margins you're targeting on these projects given just the uncertain cap rate environment. Curious how you guys thought about the market cap rate on those once they're done.
spk08: Thanks, Vince. That was a great opportunity for us and something that I think in a different capital market environment, something that we would not have been able to enter into. And when we acquired that, as I said, the dirt was shovel-ready, and so we could begin construction almost immediately. From a profit margin, it's got to be high teens. The reason why it's maybe not higher is because we didn't do any of the entitlement of the lands. so a little bit lower on the risk spectrum. And from a yield basis, it's going to be high sixes, depending on exactly when we lease it, high sixes, maybe even touch a seven.
spk06: And just to clarify, is that a gap or a cash yield, the ones you just referenced? That's cash. Got it. Nope, that's helpful. And then is this more of a one-off deal, as you mentioned, maybe a unique opportunity, or do you expect to kind of look for more of these and start more development projects over the next year or so?
spk08: I mean, we'd love to do more of these, and this is a great opportunity. We have a great partner in the transaction. It's not a JV. We own the whole thing, but just who's constructing it for us. As these opportunities present themselves, if we saw more opportunities like this, we'd absolutely execute on it. It's something that we think is, in the long term, the best interest of our stakeholders and something that, in this environment, it's better use of our capital than acquiring stabilized acquisitions.
spk02: Great, thank you. Thank you.
spk14: Thank you. Our next question comes from the line of Nick Tillman with Baird. Please go ahead.
spk05: Hey, good morning, guys. Maybe on the acquisition activity in the third quarter, you guys kind of acquired an Inland Empire. I know that's a market that's been a little bit too pricey there, so maybe a little bit more details on what you're seeing in that market and what made that a good opportunity here.
spk08: Yeah, I'll pass it over to Mike Chase to answer that one.
spk00: Yeah, thanks, Nick. You know, the asset is located in the southern portion of the Riverside market, which fortunately pulls tenant base from the Inland Empire and from San Diego, which is something that we, you know, attracted us in terms of that, you know, the transaction. In addition, it was two buildings, you know, about 73,000 and 84,000 square feet, They break down to as little as 15,000 square feet. It was 100% occupied, but with seven tenants. But it really meets the kind of the meat of the market in that area. And so that was really what kind of drew us to that transaction.
spk05: That's helpful. And then maybe for Matt, it looks like reimbursement kind of ticked up sequentially. Just wondering if I could get a couple more details on that. Maybe driving forward like changes.
spk10: Yeah, absolutely, Nick. There's really no theme there. This is very similar to what we've seen in previous quarters. To your point, you know, we've seen an increase in expenses, which are 100% reimbursable. So we recommend looking at the aggregate line as opposed to the revenues and expense. Again, it's just kind of a size-based percentage, right? The change on a smaller base versus the change on a bigger base.
spk02: That's helpful. Thanks, guys.
spk14: Thank you. Our next question comes from Jason Belcher with Wells Fargo. Please go ahead.
spk01: Hi, good morning. I guess first just following up on the Riverside, California acquisition, I think that's your first foray or at least one of your first forays into the Southern California market. Is that going to be a new market that you're targeting for additional growth, or is it more of a one-off opportunity at this point?
spk08: Yeah, we own another asset in San Diego, which is close to there. uh we like the market it's just for us it's always been entry price there so this deal uh in particular was a six and a half cap i think um was 10 to 15 below market as well and that's not included in the six and a half percent so uh for us a good opportunity to uh get into that market and as mike said the sweet sizes we really like there and it meets the demand so as those opportunities present themselves in this type of capital market environment, we're going to execute on them if we can.
spk01: Got it. Thanks. And then just thinking about all the noise we're hearing around larger tenants taking longer to make leasing decisions, can you help us think about how this affects your largely single-tenant portfolio and Do you think this dynamic could drive occupancy headwinds if it persists into 24?
spk08: Yeah, so our portfolio is 75% single tenant, 25% multi-tenant. The way we underwrite our assets is if it's a market that is smaller suite size, we make sure that our assets can break down if we need to. With that being said, You know, larger assets, next year we have no assets rolling above 400,000 square feet. We have a few that are rolling above 300,000 square feet, but I think for the majority of those, we've already renewed them. So, for us, our portfolio doesn't really face those big box headwinds next year. And again, as I said in my prepared remarks, our average suite size is less than 150,000 square feet. I think it's 140-ish thousand square feet. That's helpful.
spk02: Thank you. Thank you.
spk14: Thank you. Our next question comes from Sameer Khanal with Evercore ISI. Please go ahead.
spk12: Hey, good morning, everyone. I guess, Bill, on this market rent growth, you know, this sort of high single digits kind of range you're talking about now, maybe expand on the demand that's sort of driving that and just Is that a function of demand you're seeing, like nearshoring or onshoring, given your markets, you know, maybe the low supply in your markets? I'm just trying to get a bit of a better understanding, given that it's different from your peers. Thanks.
spk08: Yeah, it's a good question. This year, the high single digits, it's a little over 8% to get a little more specific on that. The demand is coming from a number of various industries. 3PLs have been a big driver. We've seen... E-commerce tenants continue to be a big driver. With respect to nearshoring, onshoring, we've had some wins this year. I mentioned the last call, the call before, our El Paso assets. We'd had significant demand when we put those assets out to market, and we effectively doubled what we thought our asking rents were going to be on those assets. With respect to onshoring, we haven't seen the direct demand impact our portfolio. But as we mentioned in our investor presentations, it certainly feels like it's coming. It's just hard to measure the exact timing and the significance of the impact to market rent, the positive impact to market rent growth. And then, you know, what's how our market rent growth compares to our peers. And part of it's the demand we just talked about as well as the limited supply. And when you look at the map and where supply is coming online, half of the supply is big box, not competing with our space. And a lot of the other supply is in the top, you know, call it 10, 15 markets. So less supply with continued demand. And I think in the short to medium term, incremental demand from the onshoring.
spk12: Got it. Thanks, Bill, for that. And then I guess just as a follow-up, you know, I'm sorry if I missed this, but I know in the last quarter you talked about these development acquisition opportunities. It sounds like it's pencils down for kind of the overall acquisition guidance, but I guess what's the case with those development acquisitions as well? What are the opportunities you're seeing?
spk08: We're seeing opportunities similar to the one that we're executing in Tampa where the initial price is low. So when you think about our pipeline, the pipeline is – you know, call it $100 to $150 million of these potential development opportunities, but that's just our initial outflow of capital for that. So a, you know, $8 to $15 million land parcel, and then you'll build another $40 million to build a development. So there's a lot of those opportunities we're seeing, just given the state of the capital markets. But we're focused, I think I mentioned this on a prior call as well, Our strategy is being in the tier one CBRE markets. From a development standpoint, it's really the top half of those markets, so probably the top 30 markets. And that's what we're doing with both our Port 290 and our Tampa development. So we expect there to be more opportunities. We're seeing opportunities. It's just they take a little bit longer. And obviously, we wanted to get them for the most effective price for us.
spk12: And the funding for those opportunities would come from sort of free cash flow, or how are you thinking about that?
spk08: Yeah, a combination of free cash flow and Revolver right now.
spk02: Got it. Thank you, guys. Thank you. Thank you.
spk14: Our next question comes from the line of Camille Bonnell with Bank of America. Please go ahead.
spk09: Good morning. This is Andrew Berger on behalf of Camille. Just wondering if we could get some more thoughts around dispositions. I know your dispositions this quarter were non-core, but just wondering about how you're thinking about capital recycling, big picture, you know, whether you'd sell core assets as we, you know, end 23 and head into 24.
spk08: Yeah, I mean, on an aggregate basis this year, we had about half of our dispositions were non-core, half were, call it opportunistic. On aggregate, I think the cap rate was high sixes, low sevens. So opportunistic dispositions were in the mid fives. So very good execution given the capital market environment. You know, when we adjust our acquisition guidance down, we also adjust our disposition guidance down. We really entered, again, a price discovery phase in the market. So when we're not able to efficiently acquire, it's tough to efficiently dispose of assets. Um, it's something that is always in our capital plan each and every year. And we'll, we'll fine tune this as we give our 2024 guidance in February. But right now the market's, um, pretty quiet, just, just given, uh, the volatility interest rates.
spk09: Got it. That makes sense. And then as my followup, could you please talk a little bit about how you're thinking about equity versus debt as a capital source and maybe the current cost spread between the two?
spk10: Absolutely. Hi, this is Max. I think number one, the overarching thing is we need an appropriate use for any capital deployment. You know, as Bill mentioned, the acquisition market, look, we've reverted to price discovery. We do not have anything on our closing schedule. Tons of capacity on the balance sheet. We're lowly levered. We have a significant amount of liquidity. We're going to retain $90 to $100 million of free cash flow this year. So as we deploy capital, that would be the first piece. And then, as Bill mentioned, there would be some incremental revolver dollars to the extent we find appropriate opportunities. But I think really the take-home point here right now is we're not seeing opportunities. Deals aren't trading. Deals are being pulled. Tenure hit five. That kind of reset the market. So, you know, we're not really evaluating many opportunities today. But, you know, if we were to go out and issue long-term debt, it's in the low sevens. If we're going to issue term loans, it'd be in the low fives. And from an equity perspective, we're not really looking at that right now.
spk02: Got it. Thank you very much.
spk14: Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
spk04: Yeah, thanks. Just off of like the last few questions, I know, Bill, that you're taking a step back in the investment market. I mean, how long do you expect to be on the sidelines? And really, what do you have to see before you start re-ramping up activity? Does the capital markets need to stabilize before you feel comfortable doing that?
spk08: I think that's a catalyst for the market to open up generally. If we see good opportunities and sellers willing to sell it, returns that we're requiring in this capital market environment, we'll execute on those. We're still underwriting transactions. And just what happens is we're back into this time where the bid-ask spreads are wider. And that happens when you have a rapid spike in interest rates. And then what happens, usually you get one or two deals closed, and then you start to get market comps, and everybody feels a little bit more confident what market pricing is. So we're still underwriting deals. We're still evaluating deals, but we're just underwriting for higher initial returns.
spk04: Okay, great. And then I'm not sure if you mentioned this yet or not, but last year at this time, you kind of gave us a look through on your 2023 renewal process. I guess, can you give us an update or how you're thinking about 2024? And will cash lease spreads next year be similar to what they are this year or to date? Are they similar to what they are this year?
spk08: Yeah, so we've addressed 37% of our expecting leasing for 2024. It's about 5 million square feet. And the rental spreads on that is about 30%. And then from next year for what we expect for leasing spreads, I mean, we're not giving all of our guidance on this call, but it's 25% to 30% is, I think, where I'm comfortable saying leasing spreads are for next year at this time.
spk02: Okay, great. Thank you. Thanks.
spk14: Thank you. Ladies and gentlemen, a reminder, if you wish to ask questions, please press star and 1. Our next question comes from the line of Mike Mueller with J.P. Morgan. Please go ahead.
spk03: yeah hi um i guess can you talk a little bit about the view of single tenant versus multi-tenant buildings uh right now because it sounds like your initial developments are going to be more multi-tenant skewed and should we think of that as the template for the developments going forward well i think our view is we're trying to achieve the best risk adjusted returns mike and in our developments
spk08: Specifically, we want to make sure that our developments are meeting the demand in the market. And so for that Tampa development, it's smaller users. And so we want to make sure we're building to meet that demand. You said 25% of our portfolio is multi-tenant today. So we went out at our IPO 11, 12 years ago. Yeah, it was a single tenant strategy, but that has morphed over the years. And multi-tenant, I would say over the past couple years, our acquisitions are probably close to 50-50 multi-tenant, single-tenant.
spk02: Got it. Okay.
spk03: And then I guess what's the spot view on a range of acquisition cap rates for a comparable product that you would be looking at today, just given kind of the backup in rates? Is – The 4Q transactions that you penciled, is that, do you think, the right ballpark range for right now?
spk08: The Q4 transactions were sourced in Q3, and so those were about a 6, 7. I'd say now, depending on, you know, where the assets are in relation, where the leases are in relation to market, in place is probably got to be high 6s, low 7s, with probably a mark-to-market opportunity that's not included in that cap rate. Got it. Okay. Thank you. Thank you, Mike.
spk14: Thank you. As there are no further questions, I would now hand the conference over to Bill Crooker, CEO, for closing comments.
spk08: I just want to say thank you all for joining the call and the support of STAG today and through the years. And look forward to seeing you all soon at the upcoming conferences. Take care.
spk14: Thank you. The conference of Stagg Industrial, Inc. has now concluded. Thank you for your participation. You may now disconnect your line.
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