STAG Industrial, Inc. (NYSE:STAG) Q1 2024 Earnings Call Transcript

STAG Industrial, Inc. (NYSE:STAG) Q1 2024 Earnings Call Transcript May 1, 2024

STAG Industrial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the STAG Industrial, Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos. Thank you. Mr. Xiarhos, you may begin.

Steven Kimball: Thank you. Welcome to STAG Industrial’s conference call covering the First Quarter 2024 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.stagindustrial.com, under the Investor Relations section. On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecast of core FFO, same-store NOI, G&A, acquisition disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters.

We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company’s website. As a reminder, forward-looking statements represent management’s estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today’s call, you’ll hear from Bill Crooker, our Chief Executive Officer; and Matt Pinard, our Chief Financial Officer. Also here with us today is Mike Chase, our Chief Investment Officer; and Steve Kimball, EVP of Real Estate Operations were available to answer questions specific to the areas of focus.

I will now turn the call over to Bill.

William Crooker: Thank you, Steve. Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about the first quarter 2024 results. The first quarter reflects the continuation of our strong operating results achieved last year. Our view on the business remains consistent with our fourth quarter call. As anticipated, there are pockets of softness in certain markets, which is driven by increased supply coming online. Additionally, tenants are taking longer to make leasing decisions, which is impacting market occupancy. These dynamics were incorporating our initial view for the year. We continue to expect market rent growth in the mid-single digits for our portfolio, primarily driven by the volatile interest rate environment, forecasted deliveries for 2024 and 2025 are expected to decrease to just 2.1% and 1.6% of stock, respectively.

This is a decrease as compared to the forecast 90 days ago. Interest rate volatility has reemerged today after stability in the first 3 months of the year. This will likely pressure the transaction market, which saw increased activity earlier in the year. In the first quarter, we closed on a 700,000 square foot Class A cross-stocked warehouse for $50.1 million. This building was acquired at cash and straight-line cap rates of 6.1% and 6.8%, respectively. Located in the West Chester submarket of Northern Cincinnati, the building benefits from its multiple access points and proximity to I-75. The building is leased to a tenant with an internal credit rating of BB. The lease has 6.8 years of remaining term and weighted average rental escalators of 4.1%, providing stable NOI growth throughout the term.

These rents were also 13% below market and acquisition. Subsequent to quarter end, we acquired 3 buildings for $85 million at a 6.4% cash cap rate. On the development front, we have over 1.2 million square feet of activity across 3 projects located in the Southeastern U.S. 2 projects are in the Greenville, Spartanburg, South Carolina market. The first is our 2-building, 715,000 square foot development project in Greer, located next to the airport, BMW manufacturing facility, inland port and I-85. Remaining construction, including 4 offices for multi-tenant use was completed in February 2024. Stabilization is projected to occur in Q2 2025. The second project is a 233,000 square foot development in Spartanburg. The building was purchased during construction in Q4 2023 with a Q2 2024 estimated delivery date.

Stabilization is projected to occur in Q2 2025. The third development project is our 2-building, 298,000 square foot project in Tampa, Florida. These buildings are under construction with a Q4 2024 estimated delivery date and stabilization in late 2025. The suite sizes of approximately 50,000 square feet aligned well with demand in this high barrier to entry low vacancy market. With that, I will turn it over to Matt who will cover our remaining results and updates to guidance.

Matts Pinard: Thank you, Bill, and good morning, everyone. Core FFO per share was $0.59 for the quarter, an increase of 7.3% as compared to last year. Cash available for distribution totaled $98.1 million, an increase of 8.9% as compared to the prior period. We retained approximately $29.5 million of cash flow after dividends paid to March 31. These dollars are available for incremental investment opportunities, debt repayment and other general corporate purposes. Leverage remains low with net debt to annualized run rate adjusted EBITDA equal to 4.9x. Liquidity stood at $1.1 billion at quarter end, inclusive of available forward proceeds and committed private placement debt proceeds. During the quarter, we commenced 29 leases totaling 4.3 million square feet, which generated cash and straight-line leasing spreads of 30.5% and 43.6%, respectively.

Retention was 84.2%. Same-store cash NOI growth of 7.1% for the quarter. The 2 primary drivers include the impact of substantial leasing spreads achieved at 2 Burlington, New Jersey assets in the second half of 2023. This contributed to same-store growth in the beginning of 2024 versus the comparison period. We also benefited this quarter from free rent provided in the first quarter of 2023. Moving to capital market activity. Year-to-date, we’ve issued 794,000 shares on a forward basis under ATM program, a gross average share price of $38.94, resulting in gross proceeds of $31 million. As of today, we have approximately $72 million of forward equity proceeds available to fund at our discretion. Equity will be used to pay down the revolver and match under acquisition and development pipeline.

On March 13, the company entered into a note purchase agreement to issue $450 million of fixed rate senior unsecured notes in a private placement offering. The notes consisted of 5, 7 and 10-year tenors with a weighted average fixed interest rate of 6.17%. The notes will be funded on May 28. On March 25, the company refinanced the $200 million term loan F, which was scheduled to mature in January 2025. The term loan now matures March 25, 2027, with 2 1-year extension options. The term loan bears an aggregate fixed interest rate, inclusive of interest rate swaps of 2.94% until January 15, 2025, and will bear an aggregate fixed interest rate inclusive of interest rate swaps of 4.83% from January 15, 2025 through maturity of March 25, 2027. We experienced 9 basis points of credit loss in the first quarter, which is in line with our initial guidance of 50 basis points.

Given the relative health of our portfolio described by Bill and reflect in our quarterly results, we are maintaining guidance at this time. I will now turn it back over to Bill.

William Crooker: Thank you, Matt. I want to thank our team for their continued hard work and achievement towards our 2024 goals. Our team continues to drive value in all macro environments. We are well positioned for sustained growth through our operating and acquisition platform. We’ll now turn it back to the operator for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Craig Mailman from Citi.

Craig Mailman: Bill, I just want to go back to your commentary that you guys maintain guidance. Basically, you had what you thought was more prudent outlook here, pockets of softness from new supply longer decision-making time frame embedded. As you guys saw the first quarter play out, were there any surprises across individual markets or size or precede A versus B in a given market that would maybe have pushed you towards things trending a little bit better? Or is everything kind of just on budget at this point.

William Crooker: In term of our initial guidance, everything is tracking in line with that. In terms of surprises to the upside or downside for this year, none to date. I mean we’re — we’ve maintained all of our guidance. So everything is pretty steady. Just macro trends, the only thing that we’re starting to see across some markets doesn’t really impact us as much. It’s just a little bit more of that big box supply is starting to get leased, which is, I think, a good sign for the overall economy and the industrial market as a whole, but that’s just the early beginnings here.

Craig Mailman: Okay. Then from a rent spread perspective, kind of the spreads on new leases commenced this quarter were a little bit below average versus prior quarters as we look at the incremental 12% of the kind of the target you guys achieved this quarter, it looked like kind of low double-digit spreads versus the closer to 29.5% for the — closer to . Can you just talk a little bit about what you’re seeing on those 2 things?

William Crooker: Yes. A couple of things there. The new leasing activity was pretty light in the first quarter as expected. We’ve signed 5 leases for 700,000 square feet. So when we look at the full year, which is what our guidance is related to those leasing spreads for new leases and renewal leases should be pretty consistent, all in the high 20s. I would think our guidance right now is 25% to 30% cash leasing spreads. We’ll probably be on the high end of that range. With respect to the incremental leasing from our last update to this quarterly report, we had a number of fixed rate renewal options that just hit in this quarter. We fully expected that, that happened. That is incorporated in our leasing spread guidance for the year. So everything is in line with initial expectations and I would say no takeaways from some of the smaller leasing spreads — incremental leasing spreads in the back half of the first quarter.

Craig Mailman: If I could slip the third one in, I know I’m cheating. But your investment pipeline looks pretty robust and kind of picked up sequentially. I know there’s been a little bit of volatility in the macro side of things. Should we expect that, that’s kind of a sustainable pickup here? Or what’s your view on kind of deploying more capital in this kind of higher rate environment?

William Crooker: Yes. I mean the pipeline picked up primarily because of some of the activity in the first quarter. I’ll let Mike Chase talk a little bit more of the pipeline and then I can come back and answer some of our expectations for acquisitions and return reversals.

Michael Chase: Yes. Thanks, Bill. So the pipeline grew immediately out of the gate in the beginning of the first quarter and it accelerated and gained momentum throughout the quarter. Anecdotally, we underwrote 4x the number of deals in Q1 of ’24 than we did in Q1 of ’23. So there was plenty of momentum during the quarter, and that was the indicative of the increase in the pipeline. At the end of the quarter and in April, when the 10-year spiked interest rates rose, volatility crept back into the market. We don’t know if that’s going to be permanent or whether that’s going to be short term. We don’t know what the effect will be on the pipeline going forward. But that’s where the increase in the pipeline came from.

William Crooker: Yes. Typically, when you see a spike like this, either deals sit on the pipeline for longer? Maybe they get retreated, maybe it just takes a little bit longer to close the deal and sometimes deals get pulled off the market. So it’s too early to tell whether this is entering into a new price discovery phase. We’re pretty nimble when it comes to this. We’ve shown that over the past several years. So we’ll continue to be nimble at this point where our underwriting thresholds especially for going in cash cap rates have increased due to the cost of capital increasing. So we’ll continue to evaluate that and see the impacts. With respect to our guidance, the guidance was a wider range than a normal year. We expect to be within that guidance this year.

And if this higher for longer rate environment continues and seller expectations don’t change, then I would expect in that situation that we might be at the lower end of our acquisition guidance. And I just do want to remind everybody that our acquisition guidance is heavily back-end weighted in the year. So there’s not a lot of NOI impact from acquisitions in our 2024 guidance.

Operator: Our next question comes from Vince Tibone from Green Street.

Vince Tibone: Just wanted to follow up again a little bit more on kind of the private transaction market since rates have moved higher. Just to maybe ask directly, like are you seeing and hearing a lot of retrading activity in the market today? And do you get a sense like bids are going to be adjusted lower in real time, just to a higher cost of debt? Or kind of you alluded to is it kind of still a little early to see those signs.

William Crooker: Yes. You just know that it’s a little early. We’ll probably get a little bit more feedback and data on that in the next 4 to 6 weeks. I mean is it like, call it, 20, 30 basis points in the 10-year. So some sellers — some buyers will just absorb that if they really like the transactions and some may look for to retrade price a little bit. So we’ll see how that shakes out.

Vince Tibone: Got it. And then are you seeing any more products come to market that’s like vacant merchant build speculative projects. And I’m just curious, like, is that an area where you will potentially move to on the acquisition side, a little more on the value add, taking on some leasing risk. Just kind of curious how you guys think about the right spread to take on leasing risk versus a somewhat stabilized acquisition like we did in the first quarter, and it sounds like the deals subsequent to quarter end.