Matts Pinard - VP, IR Benjamin Butcher - Chairman, President & CEO William Crooker - CFO, EVP & Treasurer Stephen Mecke - COO & EVP.

Sheila McGrath - Evercore ISI David Rodgers - Robert W. Baird Gaurav Mehta - Cantor Fitzgerald Blaine Heck - Wells Fargo Jamie Feldman - Bank of America Merrill Lynch Neil Malkin - RBC Capital Markets Michael Mueller - JP Morgan Paul Puryear - Raymond James.

Greetings and welcome to the STAG Industrial Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Matts Pinard, Vice President, Investor Relations. Thank you, you may begin..

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2017 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental information presentation on the company's website at 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 statements related to earnings trends, G&A amounts, acquisition and disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends, and other matters.

We encourage all of 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 informational 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 Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer. I will now turn the call over to Ben..

Thank you, Matt. Good morning everybody and welcome to the third quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our third quarter results.

Presenting today in addition to myself will be Bill Crooker, our Chief Financial Officer who will discuss the bulk of the financial and operational data. Also with me today are Steve Macke, our Chief Operating Officer; and Dave King, our Director of Real Estate Operations. They'll be available to answer questions specific to their areas of focus.

The third quarter of 2017 was business as usual for STAG as we continue to execute on the business plan. This was a successful quarter, both from an operations and acquisitions standpoint. The team continue to identify accretive opportunities closing a $120 million of acquisitions in the third quarter at 7.5% stabilized cash cap rate.

The team was equally busy on the leasing front this quarter with over 2 million square feet leased generating a robust leasing spreads. This was our second consecutive quarter demonstrating the powerful combination of growing per share earnings while reducing leverage.

Year-over-year for the third quarter, the platform produced 7.5% core FFO per share accretion while reducing leverage from 5.3 times to 5.0 times today. As we look out for the remainder of the year, we continue to see ample acquisition opportunities.

Our pipeline sits at $2.2 billion, our year-to-date acquisitions crossed the $500 million mark making 2017 our largest acquisition year ever with two months left to go. With this we are updating our acquisition guidance for 2017 to between $625 million from $675 million with an expected stabilized cash cap rate of 7.5%.

The industrial sector is very healthy, both nationwide and in the markets in which we operate. During the quarter we leased 2 million square feet and produced cash rent change and GAAP rent change of 10.5% and 18.7% respectively. These positive rent changes represent the largest quarterly rent increases in the company's history.

Our tenant retention of the quarter was 71%, in line with our historical average with the retention predicted to be in the 60% to 65% range for the year. Our balance sheet is in great shape, we raised $65 million of equity at attractive prices in the quarter through the efficient use of our ATM.

The third quarter was another productive one for the STAG platform; accretive acquisitions, healthy leasing results, and efficient and conservative capitalization. This combination resulted in another quarter of per share earnings growth.

The attractive opportunities continue to persist, industrial fundamental picture remains strong and the STAG team continues its robust execution at all phases of our business. With that, I'll turn it over to Bill to provide more detail on our third quarter results..

Thanks, Ben and good morning everyone. During the third quarter we acquired 10 buildings for $120 million with a 7.5% stabilized cap rate, and we also sold five buildings for $35 million. We expect to have non-core and opportunistic dispositions between $60 million and $80 million in 2017.

There were four opportunistic dispositions this quarter generating proceeds of $34 million and resulting in unlevered IRRs of approximately 15%. At quarter end, we owned 347 buildings with a total of approximately 69 million square feet. Occupancy for the operating portfolio stands at 95.4% with a weighted average lease term of 4.7 years.

Cash NOI for the quarter grew by 19% from the prior year. Same-store cash NOI decreased by 60 basis points over the prior year third quarter which was driven by an average occupancy reduction of 60 basis points. Same-store cash NOI was down 30 basis points on a year-to-date basis.

It's important to note that our year-to-date same-store pool represents less than 70% of our total portfolio. The 30% of our operating portfolio excluding from our same store pool is 96% occupied and has annual fixed rental bumps of approximately 2%. As we've said in the past, our primary focus is on the bottom line core FFO.

During Q3 we grew core FFO by 39% compared to the third quarter of 2016. On a diluted per share basis, core FFO was $0.43, an increase of 7.5% compared to $0.40 per share last year.

The growth on our per share metrics coupled with growth in long-term cash flow remains the primary focus for our company and is a central consideration in our acquisition and operating decision making. G&A for the quarter was $8.4 million. We continue to expect full year 2017 G&A to be between $33.5 million and $34.5 million.

The balance sheet is in the strongest position as it's been during our life as a public company. As Ben noted, we raised equity of $65 million through our ATM in Q3 and delevered down to 5.0 times on a net debt to run rate EBITDA basis, when compared to the 5.3 times for the same period last year.

Our fixed charge coverage ratio is at 4.3 times and our liquidity is $360 million. During the quarter we executed $150 million, 5.5 year term loan which was fully swapped out for an all-in fixed rate of 3.15%. We also paid-off three traunches of our secured debt with a principal balance of $88 million and an interest rate of 6.1%.

Since year end 2015, we have reduced our secured debt outstanding by 74% reducing the overall cost of debt while also increasing the balance sheet flexibility. Secured debt now accounts for only 5% of our debt outstanding.

At quarter end we had approximately $1.2 billion of debt outstanding with a weighted average maturity of 4.8 years and a weighted average interest rate of 3.4%. All of our debt is either fixed rate or has been slogged to a fixed rate except for our revolver. Additionally, we have no debt maturing until December of 2019.

With that, I will now turn it back over to Ben..

Thanks, Bill. Our focus remains on delivering bottom line performance for our investors. As previously noted our core FFO per share grew by 7.5% over the third quarter of 2016. We have consistently demonstrated a commitment to providing our shareholders with not only growth but also income.

On November 2 our Board of Directors approved a dividend increase to $1.42 per share annually. We've increased our dividend every year that we've been a public company. This continued focus and demonstrated capital discipline combined with the abundance of accretive acquisition opportunities makes for very bright future for our company.

We thank you for your time this morning and for your continued support of our company..

[Operator Instructions]. Our first question is from Sheila McGrath with Evercore. Please proceed with your question..

Good morning. Ben, I was wondering if you could give us some updated insight on same-store NOI guidance. I think for the quarter it was tracking 60 basis points better than your guidance for the year of down 1% to 1.5%.

So any insight on what that might be for the year?.

Good morning, Sheila. I think I'll let Bill handle that..

Okay, great..

Actually that was my second question. On the leasing spreads, that was your strongest quarter.

Is there like one lease in there that's skewing things or were roll overs in very strong markets, if you could just give us a little more detail there?.

That number is reflective of 12 leases there, couple of downs and mostly ups, some sizeable ups but not driven by any one lease in particular..

Okay, great. Thank you..

Our next question comes from Dave Rodgers of Baird. Please proceed with your question..

Good morning. Maybe just following up on the spreads and maybe just ask a question and maybe just put some caution in there.

Do you expect these kind of spreads to continue in the near-term or these kind of below market acquisitions, I guess that they were spread out etcetera but given the pretty big jump that you had, obviously, I want to set expectations for release rollovers here over the next couple of quarters?.

Okay, thanks for that.

And then on the growth in the pipeline in your increased acquisition guidance for the year, obviously you've got in a long way there so far; can you talk about maybe what your comparable markets look like in terms of volume changes? Obviously you've added staff to bulk up and that's added to the pipeline which has been great to see but if you looked at stable markets where you've been active for quite some time, what's the comparable year-over-year volume in those markets that you're winning or that you're looking at?.

On the new leasing front Ben, obviously didn't sign on the quarter; you know, obviously we don't want to read too much into that but was it a tougher period in terms of lease signings or just more focused on the renewals? Maybe give us a little color on the new lease activity that you see, especially coming at kind into the fourth quarter?.

Yes, I think that was in the first zero that we've posted and it's really a timing anomaly. The quarter to-date and the fourth quarter we signed more leases than we -- more square footage in new leases than we generally signed in an entire quarter, so the fourth quarter should be very healthy..

Okay, great. Thank you..

Our next question comes from Gaurav Mehta of Cantor Fitzgerald. Please proceed with your question..

Thanks, good morning. I was wondering if you could comment on what you're seeing in the supply. I think on the last call you mentioned that you're expecting demand will help in the supply to at least [indiscernible] for the year.

I was wondering if you still hold that view and you expect that to continue into 2018?.

I think generally we do. Obviously we moved into a period here where demand and supply are little bit closer together than they were say a few years ago and obviously it depends market to market.

A lot of the new supply on a national aggregated basis is in a number of markets and we are less -- we tend to be less active in those markets so we feel pretty good about -- say, if we're looking at 60 markets and 5 or 6 of them have a lot of the excess supply, the other 55 or so obviously have better supply-demand dynamics.

Having said that, there is a price for everything in the market given the supply and other characteristics of the market and resulting in potential red growth and potential downtime, and we believe we are rational underwriters of those risks and if we can buy an asset for less than we think it's worth, based on those parameters, we'll go ahead and buy it..

Okay. And I guess as a follow up on acquisitions, you have been consistently growing at 25% per year.

Do you think that pace is sustainable in 2018 as well?.

Yes. It's interesting. I think when we started our life as a public company, we knew we were going to grow. I think the 25% a year which has gotten to be a little bit of a legacy statement, I'm not quite sure where to go back and figure out where did that came from.

Our stance has always been we'll buy - as I mentioned just previously, when we believe we could buy them and they have sufficient returns for our shareholders, i.e. we can buy them for less and we think they're actually worth based on their cash flow going forward. The 25% which has been probably the low is 20%, the high is 35% or 40%.

In one year, I think we are well above that in the early years. I think the denominator has grown, the stability, if you will, of the growth rate has become more stable. The limiting factors on us at this point probably are just our ability to identify and process.

We still see abundant opportunity out there and as our staff gets more experienced as I alluded to earlier, our senses in processes get better, that number increases. Whether in the future it will increase to provide 25% growth. Obviously there are some large numbers out there. You would expect that over time to perhaps a lot of number lower than that.

But we're still seeing lots of opportunity and we're still seeing opportunity to continue to increase our acquisitions as we move forward..

Okay, thank you..

Our next question comes from Blaine Heck of Wells Fargo. Please proceed with your question..

Hey, guys. Good morning. Bill, looks like expenses were up pretty substantially, almost $2 million quarter-over-quarter and then 20% on the same-store basis.

What drove that increase and was there anything one-time in nature there?.

On the same-store expenses, Blaine, sometimes what happens there is you have tenants that take real estate taxes directly, but then for whatever reason, we pay those real estate taxes. So what happens is when we pay those taxes, they come on our books, but they're offset for one-for-one basis on the revenue line item.

So on the percentage basis, it looks like expenses increased at a higher percentage -- which they did, but from a dollar standpoint, cash-wise, it's the same..

Okay, that's helpful. And then Ben, looking at the acquisitions during the quarter, there are a couple in Pennsylvania that you did that were larger buildings, that they had lower remaining term on the leases.

Can you talk about whether you're able to get a better price for a building with lower term and is that anything you guys are actively looking for in Tier 1 markets?.

Yes. We're looking obviously for places - I sound like a broken record here - we can buy assets that we think is good relative value, i.e. less than we think they're actually worth based when the cash flow is going forward.

That might be an example of a market anomaly where we believe the retention possibility or potential of that asset is greater than the market does and we've seen more cash flow. If not a particular, we're going to go out and buy our short term leases in top distribution markets.

We're looking broadly across the market to identify those cash flows that will be attractive for our shareholders to own. The fact that we bought a couple of larger buildings on shorter term leases in those markets are we believe that the cash flows on those assets will provide sufficient returns for what we're looking to do for our shareholders.

But it's not a conscious decision that it went to the [indiscernible] valley and buy short term leases..

Fair enough. And then you guys have about $3 million square feet expiring in the first quarter of 2018. It's pretty big chunk relative to most quarters.

Do you guys have any visibility into those leases and are there any known move-outs that we should be aware of there?.

We look across 2018, we're pretty confident of our ability to maintain that 70% retention that we've had across most years. I don't think there's anything sticking out to us, really as an anomaly away from that so again, our expectations are around 70% for the year..

Got it. Thanks, guys..

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please proceed with your question..

Great. Thank you. If you look at your CapEx schedule on Page 12 of the supplemental, it looks like your third quarter CapEx was past the year-to-date amount.

Can you just talk us through some of these buckets and is this kind of a run rate we should expect to see or are there kind of one-time projects in here? Just how should we think about CapEx and whether it's a driving of leasing spreads or if it's just a way how you're running your business?.

Hey, Jamie. CapEx, we've communicated before, it's roughly around this $0.25 to $0.30 on the portfolio. This was a higher quarter and some of the projects that we did this year where we're related to assets that you can't perform those projects in the winter, so they get down in the second and third quarter.

Certainly not a run rate number from our own purpose, I'd use the $0.25 to $0.30 as per square foot basis across the portfolio..

Okay..

Jamie, the leasing spreads on the quarter were not a result of spending money in the quarter to get the leasing spread. These are CapEx products that are unrelated to. They're just building maintenance, et cetera..

Okay.

And then how much of this gets passed through the tenant?.

It really is dependent, Jamie. Some of it is passed through the tenants and some doesn't. For this $8 million -- I don't have the exact details of how much of that gets passed through tenants - most of those expenses are roofs, so those roofs would not be passed through to tenants..

Okay. All right, that's helpful.

And then do you have an estimate of what you think your current portfolio mark to market is?.

We've been saying for some time now, we believe our portfolio is marked at or around market, maybe slightly below. There is a question as to we internalize. We discuss it. The market we're talking about -- vacant asset in that market or the existing tenants belief off what the rent is on that market.

But generally believe our portfolio is at or around market, maybe slightly below..

Okay..

And you get, obviously as we've talked about before, year-to-year, quarter-to-quarter anomalies and what leasing spreads and mark to markets on the assets roll in that quarter look like..

Okay. All right, great. That's helpful. Thank you..

Thanks, Jamie..

Our next question comes from Neil Malkin of RBC Capital Markets. Please proceed with your question..

Hey, everyone. Good morning. Just related to the strong spread you saw this quarter. We don't really talk about the type of tenant you have like we do for the traditional [indiscernible] of the world.

But I'm just wondering, in the quarter, did you have for example ecommerce, tenants who were rolling over, that maybe provided you that juice and if so, can you maybe articulate what type of exposure you have to the ecommerce sector?.

We have something on the order of 25% or 30% of our buildings have some kind of ecommerce activity going on inside them. It's a little difficult to assess. Ecommerce is a big blanket that gets thrown over the world.

If you have a truck leaving a traditional warehouse that goes to an Amazon fulfillment center, does that mean the building, the trucks leaving from is involved in ecommerce, but maybe not as demonstrably so as that Amazon fulfillment center. I don't think that there's any particular industry thread in our leasing spreads this quarter.

It's spread across a bunch of industries. Obviously the industrial market is doing quite well and across a lot of areas including obviously ecommerce..

Yes and in addition to that, in addition to the 25% to 30% of our tenants show some type of ecommerce going on in the buildings, 5% to 10% of our tenants have 100% of the building as dedicated to ecommerce..

Okay, that's helpful.

And in terms of the acquisition market, are you finding yourself having to go maybe up the quality curve? Do you think that maybe over the next 12 to 18 months, you're going to see more competition or even stronger pricing in some of the markets you plan? What do you force the characteristics of either markets or assets you buy look like?.

I'll let Steve answer that, but I'll say first of all, can we borrow your interest rate crystal ball before we answer it?.

Yes, no problem..

Steve?.

Yes, it's interesting. In general, we're seeing most markets broadly across the ones we look at, the cap rates are fairly stable.

In terms of the quality spectrum, we're basically buying the same type of assets we've been buying for years, but there definitely has been -- we bought a few in the last few quarters few built-to-suite which clearly are brand new buildings, et cetera. In general we're seeing stable to some markets. There is some decline in cap rates.

The markets are all active. Industrial is a hot sector right now so we're definitely seeing it. But as Bill mentioned, it's all going to depend on what the interest rate crystal ball looks like in the coming quarters..

And we believe Steve alluded to the strength of industrial sector -- we think that has a lot of legs. There could be recession some time in not too distant future, but industrial is going to continue to be very strong.

The ecommerce impact to the extent that there's on-showing of activity, all these things are good for the industrial market and will continue to be good for the foreseeable future. We're fortunate to be involved in this asset class..

Thanks, guys..

Our next question comes from Michael Mueller of JP Morgan. Please proceed with your question..

Thanks. Hi. Just a quick one.

What are disposition cap rates been this year?.

We don't disclose disposition cap rates. Our focus on that is really what was the unlevered IRRs we achieved, which we think is a better-indicator of the returns we receive from that asset and that investment.

This quarter as I mentioned in the prepared remarks, four of our dispositions were opportunistic which resulted in an average on levered IRR of 15%..

And the other disposition of the five dispositions would be part of our - if you will, calling of the herd. As we continue to sell down our office flex portfolio which again is a couple of percent of our portfolio..

Okay. Thank you..

Thanks, Mike..

Our final question comes from Paul Puryear of Raymond James. Please proceed with your question..

Thanks. Good morning.

You pretty well just answered it, but as far as calling a portfolio, I'm just curious, are you at all incentivized here to step that up given the market and to what kind of returns do you think you're getting on some of those assets just to soon get rid of?.

Paul, we obviously - about a year ago - demonstrated the accretive nature of dispositions in the portfolio sale that we accomplished last fall. But we still believe that there is ample opportunity to grow a portfolio accretively and that is a better long term sourcing growth for using new equity.

It's a better long-term source of growth for our shareholders in large part due to the operating leverage that we've discussed before. But we certainly could sell assets, derive gains from doing that for that money accretively. We are cognizant [ph] of the portfolio effect.

These individual assets are worth more inside the portfolio than they are outside. Looking at portfolio sales was again, of operating leverage issues, I think we're going to continue to focus on identifying and acquiring good accretive assets going forward..

Okay, thank you. And as far as the fourth quarter leasing, any color there? Any industry stand out? It sounds like you're pretty enthused about what you're seeing..

The demand has been pretty broad-based as Ben alluded to earlier. It's not confined at any particular sector..

We're enjoying like the rest of the industrial operating companies. Very healthy operating environment. Not just ecommerce, certainly not just last mile. It's the entire industrial infrastructure is in a great demand for the reasons we've alluded to earlier..

Okay, thank you..

Thanks, Paul..

Your next question is a follow-up from Jamie Feldman of Bank of America Merrill Lynch. Please proceed with your question..

Thank you.

I'm just wondering, what do you guys typically forecast or expect for down time when you have a tenant move out before you can get it back filled and what's the historic average been?.

Obviously that's very building and market-dependent. The fundable [ph] building in a market that's exactly the right size was market obviously least in size or not one maybe too big or too small, or whatever it might be. There are markets where 22-foot clear high building lease is very quick, and some markets almost never lease.

So looking broadly across the different types of buildings, the different markets we have, we're something around 12 months in sort of our expectation experience. So we have some markets where we underwrite six months and our acquisition guys are telling us what the brokers are telling them now with three months.

But generally speaking, something around 12 months is our expectation. But again, lots of variability depending on market..

Okay. All right, thank you. That's helpful..

It's important, Jamie, obviously one of the things that we try and avoid in our analysis is decision roles so that's important for us to bespoke, if you will, assumptions by market and building for what you can expect in that particular sub market that it operates in..

Right. That makes sense. Okay, appreciate it..

Thanks, Jamie..

Ladies and gentlemen, we have reached the end of our Question-and-Answer Session. I would like to turn the call back to Mr. Ben Butcher for closing comments..

Thank you very much and thank you, all, for joining us this morning and providing these interesting questions for us to respond to. We continue to pursue our investment thesis. There continues to be great opportunity. Our operating staff is enjoying the strong fundamentals and our portfolio is operating very well.

We continue to use the word continue and we look forward to continuing to provide both income and growth for our shareholders going forward. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..