Ladies and gentlemen, good morning and welcome to the STAG Industrial, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Investor Relations. Please go ahead.

Thank you. Welcome to STAG 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.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 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. STAG 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 Matts Pinard, our Chief Financial Officer. Also here with us today is Mike Chase [ph], 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.

Thank you, Steve. Good morning, everybody and welcome to the third quarter earnings call for STAG 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. STAG'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 with the potential economic uncertainty, large tenants are opting to leverage third-party logistics providers as opposed to funding expensive capital projects driving the new space. Subleasing has also been concentrated in these larger spaces. It's important to note that STAG'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 boxes. These deliveries are expected to result in a 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. We expect market rent growth in our portfolio for 2024 to be in the mid-single digits.…

Thank you, Bill and good morning, everyone. Core FFO per share was $0.59 for the quarter, an increase of 3.5% as compared to the third quarter of last year. Included in core FFO [ph] was a $900,000 settlement with a former tenant. This settlement resulted in an additional $0.01 of capital for the quarter and is excluded from same-store cash NOI. 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 30. Leverage is just below the low end of our guidance range with net debt to annualized run rate adjusted EBITDA equal to 4.9x. 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 NOI growth of 5.3% for the quarter and 5.3% year-to-date. We've experienced 3 basis points of credit loss through September 30 this year. In terms of capital market activity, on July 27, we fully settled all outstanding forward equity contracts and received $61.2 million in proceeds in the guidance we made the following updates. We increased our cash into 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 range of $300 million to $350 million. Acquisition CapEx for the year are now expected to range between 6.2% and 6.3%. These ranges are driven by the material reduction in incremental acquisition volume this year and largely reflective of acquisitions made year-to-date. We decreased our disposition guidance to remain of $100 million to $125 million based on our progress through today, a decrease to the midpoint of $37.5 million. Core FFO 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 have updated our retention percentage to 75% for the year. G&A expectations for the year have been decreased to a range of $48 million to $49 million. Finally, we expect net debt to annualized run rate adjusted EBITDA to be between 5x and 5.25x. I will now turn it back over to Bill.

Thank you, Matts. 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.

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

Just one clarification on in the sup [ph], 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?

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.

Okay. What would be the difference between the [indiscernible] and the initial? Would it be pretty tight or...

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 lower for a short period of time.

And then just a 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 given some of the issues that some of the coastal markets are facing?

Yes. It's still -- 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 box are slowing and that market rent growth is probably flat to maybe even negative. And the smaller suite size is 100 -- 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 suite size. But when you get the smaller suite sizes, all those markets are still holding up really well.

Our next question comes from John [ph] with BMO Capital Markets.

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 6 of your supplement. Even adjusting for timing, it suggests the initial NOI impact would be something closer to the sub 3% initial yield. So I'm wondering what that discrepancy is in regards [ph].

So the discrepancy is primarily related to dispositions. So we had a couple of noncore dispositions this quarter. I think one was a fixed option that was a higher cap rate that tenant [ph] had and another was a noncore, non-CBR Tier 1 market that we disposed of. So those are higher cap rates. I think when you look at that run rate adjustment, it's a mix of acquisitions and dispositions.

So what were the cap rates in this position?

Matts, do you have those?

The aggregate disposition cap rate for those two, they were both 100% occupied; it was 8.8%. And again, to reiterate what Bill said, these are assets that did not have a home in our portfolio and we opportunistically dispose of these two.

Our next question comes from Vince Tibone with Green Street.

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 then 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.

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, that the dirt was shovel ready and so we could begin construction almost immediately. From a profit margin, it's going to be high teens. The reason why it's maybe not higher is because we didn't do any of the entitlement of the land, so a little bit lower on the risk spectrum. And from a yield basis, it's going to be high 6 [ph] depending on exactly when we lease it high 6 [ph] is maybe even touch 7 [ph].

And is that a GAAP or a cash yield, the ones you just --

That's cash.

Got it. No, that's helpful. And then is this more of a one-off deal you mentioned, maybe you need 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?

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 would 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.

Our next question comes from the line of Nick Thillman with Baird.

Maybe on the acquisition activity in the third quarter, you guys kind of acquired in 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.

Yes. I'll pass it over to Mike Chase to answer that one.

Yes. Thanks, Nick. 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 attracted us in terms of that -- the transaction. In addition, there was 2 buildings, 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 7 tenants but it really meets the kind of the meat of the market in that area. And so that was really what kind of drove us to that transaction.

That's helpful. And then maybe for Matts, it looks like reimbursement kind of ticked up sequentially. Just wondering if I could get a couple of more details on that. Maybe driving forward like changes.

Yes, absolutely, Nick. There's really no theme there. This is very similar to what we've seen in previous quarters. But to your point, 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 change on a bigger base.

Our next question comes from Jason Belcher with Wells Fargo.

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?

Yes. We own another asset in San Diego which is close to there. We like the market. It's just, for us, it's always been entry price there. So this deal, in particular, was a 6.5 cap. And I think was 10% to 15% below market as well and that's not included in the 6.5%. So for us, a good opportunity to get into that market. And as Mike said, the suite 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 if we can.

Got it. And then just thinking about all the noise we're hearing around larger tenants taking longer to make leasing decisions. Just 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?

Yes. So our portfolio is 75% single tenant, 25% multi-tenant, way we underwrite our assets is if it's a market that is smaller suite sizes, we make sure that our assets can break down if we need to. With that being said, 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 square feet.

Our next question comes from Samir Khanal with Evercore ISI.

I guess, Bill, on this market rent growth, the sort of high single digits kind of range you're talking about now. Maybe expand on the demand that's sort of driving that -- is that a function of demand you're seeing like near-shoring or on-shoring given your markets, 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.

Yes, 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 [ph] have been a big driver. We've seen e-commerce tenants continue to be a big driver with respect to nearshoring on-shoring, we've had some wins this year. I mentioned in the last call or the call before, our El Paso assets, we 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 what's -- how our market rent growth compares to our peers and part of it is 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, 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.

Got it. And then I guess just as a follow-up. 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 [ph].

Yes, 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 -- call it, $100 million to $150 million of these potential development opportunities but that's just our initial outflow of capital for that. So $8 million 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've mentioned this on a prior call as well. Our strategy is being in the Tier 1 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 in both our Port 290 and our Tamper development. So we expect there to be more opportunities. We're seeing opportunities is just they take a little bit longer. And obviously, we wanted to get them for the most effective price for us.

And the funding for those opportunities would come from sort of free cash flow? Or how are you thinking about that?

Yes, a combination of free cash flow and revolver right now.

Our next question comes from the line of Kamal [ph] with Bank of America.

This is Andrew Berger [ph] on behalf of Kamal [ph]. Just wondering if we could get some more thoughts around dispositions. I know your dispositions this quarter were noncore. But just wondering about how you're thinking about capital recycling, big picture, whether you sell core assets as we end '23 and head into '24.

Yes. I mean, on an aggregate basis, this year, we had about half of our dispositions were noncore, half for, call it opportunistic. On aggregate, I think the cap rate was high 6s, low 7s. So opportunistic dispositions were in the mid-5s. So very good execution given the capital market environment. When we adjust our acquisition guidance down, we also adjust our disposition guidance down. It's -- 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. So it's something that is always in our capital plan each year [ph] and we'll fine-tune this as we give our 2024 guidance in February. But right now, the markets require just given the volatility of interest rates.

Got it. That makes sense. And then as my follow-up, 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?

Absolutely. This is Matts. I think number one, the overarching thing is we need an appropriate use for any capital deployment. As Bill mentioned, in the acquisition market, look, we reverted to price discovery. We do not have anything on our closing schedule. Tons of capacity on the balance sheet were lowly levered through a significant amount of liquidity. We're going to retain $90 million 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 and hit 5 that kind of reset the market. So we're not really evaluating many opportunities today but if we were to go out and issue long-term debt, it's in the low 7s, if we're going to issue term loans and be in the low 5s. And from an equity perspective, we're not really looking at that right now.

Our next question comes from Michael Carroll with RBC Capital Markets.

Just off of 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 reramping up activity? Does the capital markets need to stabilize before you feel comfortable doing that?

I think that's a catalyst for the market to open up generally. If we see good opportunities and sellers willing to sell it what 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 just -- we're back into this time where the bid-ask spreads are wider. And that's what that happens when you have a rapid spike in interest rates. And then what happens, usually, you get one or 2 deals closed and then you start to get market comps and everybody feels a little bit more confident of what market pricing is. So we're still underwriting deals. We're still evaluating deals but we're just underwriting for higher initial returns.

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 or there [ph] this year?

Yes. 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.

[Operator Instructions] Our next question comes from the line of Mike Mueller with JPMorgan.

I guess -- can you talk a little bit about the view of single tenant versus multi-tenant buildings 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, 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, yes, it was a single tenant strategy but that has morphed over the years. In multi-tenant, I would say, over the past couple of years, our acquisitions are probably close to 50-50 multi-tenant single tenant.

Got it. Okay. And then, I guess, what's the spot view on a range of acquisition cap rates for comparable product that you would be looking at today, just given the backup in rates. Is the 4Q transactions that you penciled, is that -- do you think the right ballpark range for right now?

The Q4 transactions were sourced in Q3. And so those were about 6.7%. I would say now, depending on 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.

As there are no further questions, I would now hand the conference over to Bill Crooker, CEO, for closing comments.

I just want to say thank you all for joining the call and support of STAG today and through the years. And we look forward to seeing you all soon at the upcoming conferences. Take care.

The conference of STAG Industrial, Inc. has concluded. Thank you for your participation. You may now disconnect your lines.