Matts Pinard - Vice President of Investor Relations Ben Butcher - Chief Executive Officer, President, Chairman of the Board Bill Crooker - Chief Financial Officer, Executive Vice President, Treasurer Steve Mecke - Chief Operating Officer, Executive Vice President Dave King - Executive Vice President, Director of Real Estate Operations.

Sheila McGrath - Evercore Michael Carroll - RBC Capital Markets Dave Rodgers - Robert W. Baird Joshua Dennerlein - Bank of America Merrill Lynch Mitch Germain - JMP Securities Brendan Finn - Wells Fargo John Massocca - Ladenburg Thalmann Chris Lucas - Capital One Security.

Greetings and welcome to STAG Industrial second quarter 2018 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.

It is now my pleasure to turn the conference over to your host, Matts Pinard, Vice President of Investor Relations. Thank you. You may begin..

Thank you. Welcome to the STAG Industrial's conference call covering the second quarter 2018 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 relating 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 discussions 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 Matts. Good morning everybody and welcome to the second quarter earnings call for STAG Industrial. We are pleased to having you joining us and look forward to telling you about our second 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 Mecke, our Chief Operating Officer and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.

The second quarter built upon our already strong start to the year. Bottom line growth continues to be a focus of the organization and I am pleased to report a 10% increase in our core FFO per share for the quarter over the prior year period.

This should not come as a surprise given the momentum of the platform, accelerating acquisitions volume, same-store NOI growth, impressive, retention and re-leasing spreads and all the while we further executed a further reduction in leverage.

Acquisitions volume for the year more than doubled with over $190 million closed in Q2 through July 31 with an average stabilized cap rate of 7.1%.

The acquisition team was successful across a broad array of markets in which STAG operates marketplace, markets like Houston with a well-established institutional capital presence and markets like Charlotte which benefits from attractive demographic trends including significant population growth but has not yet drown the same attention from organized institutional capital.

STAG's relative value approach to acquisitions enables us to find attractive risk adjusted returns across many markets including the two just mentioned resulting in a larger opportunity set for our acquisition activity.

With over $270 million acquired through July and the historical trend of relatively larger third and fourth quarter acquisition activity, we are raising our acquisition guidance for the year to a range of $600 million to $700 million.

The leasing team continues to produce results that reflect the strength of the team and the strength of our own portfolio. Retention for the quarter was 88% with cash re-leasing spreads of 8%. These results contributed to our trend of improving same-store NOI growth.

It should be noted that the vast majority of the assets excluded from our same store portfolio, 24% of owned asset to quarter-end, are stabilized and have embedded contractual lease escalations. This broad lease growth is supported by defensive balance sheet that benefited from multiple positive transactions this quarter.

Bill will discuss these in detail in a moment. With debt to EBITDA below five times at quarter-end, the balance sheet is well positioned to capture the attractive opportunities available to the STAG platform. The industrial sector is healthy, with most participants pointing to approaching an equilibrium at historically low vacancy levels.

This is true from an aggregate point of view but even more so once when specific markets are examined, many of the markets in which STAG has a large presence post fundamentals that exceed the nationwide averages. E-commerce continues to be an incremental demand driver across all markets.

Greenville-Spartanburg, STAG's third-largest market by ABR, has exhibited population growth exceeding the national average and offers one-day truck access to reach the large affluent populations along the East Coast.

This market benefits from an inland in Greer, a diversified distribution and manufacturing demand base and a favorable demand to supply dynamic. Another example of a Top10 market for STAG with limited institutional competition and attractive characteristics is Detroit, STAG's sixth-largest market.

With labor increasingly a gating item in respect to tenant operations and potential for business expansion, the trade-off is its strong infrastructure, a deep and skilled labor force and a business friendly climate.

With limited speculative supplies and additions and a strong demand base, this market offers STAG attractive risk adjusted opportunities for the long-term.

There are many other examples of industrial markets that exhibit demographic dynamics and industrial profiles that track above the national averages that are undepreciated generally by institutional capital.

STAG's inherence to a thoughtful and quantitative approach to real estate and avoidance of arbitrary decision rules, provides STAG with a persisting opportunity to create lasting value to the shareholder. With that, I will turn it over to Bill to provide more details on our second quarter results..

Thank you Ben and good morning everyone. This quarter demonstrated the strength of the STAG platform with all areas of the business contributing to another great quarter.

Yesterday's earnings release reporting a double-digit core per share accretion, simultaneous deleveraging the balance sheet, impressive portfolio operating metrics and multiple capital markets transactions that resulted in a stronger company today. Core FFO was $0.45 for the quarter, an increase of 10% as compared to the second quarter of 2017.

G&A for the second quarter was $8 million and $16.7 million year-to-date. The company has been focused on processes and efficiencies over the past several years with an emphasis on data and how the company uses it.

Given the organizational gains in efficiencies, rationalization of third-party contracts and a share performance to-date, we are lowering our full-year G&A guidance to a range of $34 million to $35 million. The strength of the portfolio and health of the markets in which STAG operates was again reflected in the operating metrics this quarter.

Retention was 88% on 1.7 million square feet expiring in the period and 84% year-to-date. Cash and GAAP re-leasing spreads were 8% and 15%, respectively on total leasing for the quarter and 8% and 16% year-to-date, respectively. The combination of these metrics produced positive same-store cash NOI growth this quarter.

This continues to track our same-store guidance for the year of between 25 and 75 basis points of growth. The annual cash same-store pool represents 76% of our total portfolio at quarter-end. The 24% of the portfolio excluded from this metric are predominantly stabilized assets with leases in place.

These assets benefit from the annual contractual rental increases of 2% on average, which further increases the cash same-store NOI metric, if included. Along with the great operating quarter, the balance sheet continued to strengthen after an active few months in the capital markets.

Common equity was issued, preferred equity was called and redeemed after the quarter, private placement debt was closed and funded, our revolver was upsized and refinance and a new delayed draw term loan was originated. Taking this in pieces, beginning with equity.

During the quarter, we raised $177 million in gross proceeds through our ATM program at an average share price of $25.92. This resulted in leverage of 4.7 times and a fixed charge coverage ratio of 4.4 times at quarter-end. In June, we called our Series B preferred equity and fully redeemed the security on July 11.

As a reminder, our Series B had a notional of $70 million with a rate of 6.625%. After this redemption, we only have one series of preferred equity outstanding, a $75 million, 6.875% Series C, which is callable in March, 2021. Moving to debt activity and starting with debt that was previously committed or communicated.

The $175 million private placement notes closed in April were funded in June with the proceeds applied to the balance on the revolving credit facility. The transaction consists of two tranches, $75 million of seven-year notes and $100 million of ten-year notes with a weighted average interest rate of 4.2%.

On July 27, we drew the remaining $75 million associated with Term Loan D. This facility is now fully outstanding with an all-in swap interest rate of 3.15%. The proceeds were also applied to the outstanding revolver balance. In terms of new debt activity, on July 26, we refinanced our revolving credit facility. The facility now matures in 2023.

The notional was increased from $450 million to $500 million with a reduction in the pricing grid of 10 basis points. Finally, we originated a new $175 million term loan that matures in 2024. The term loan is fully swapped with a delay draw feature for up to one year with an all-in rate of 4.12%.

Including these debt transactions, our available liquidity is $739 million. Including the impact of subsequent acquisitions, dispositions and capital markets activity, pro forma leverage is 4.9 times.

These capital market transactions enhance an already strong balance sheet, which continues to be well-positioned to support the company's attractive opportunity set and impressive growth trajectory..

Thank you Bill. We will now open it up to questions..

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

Yes. Good morning. Ben, the almost 10% FFO growth per share is significant.

I just wanted to know, were there any one-time items driving that? And given that growth, how should we view dividend growth outlook?.

Okay. Sheila, I am going to turn it over to Bill to answer that question but we always appreciate your calls and I will say hello to you before I turn you over..

Thanks Sheila. No one-time items in the 10% growth. It was due in large part of a combination of our acquisitions that we achieved from the last 12 months as well as our internal growth metrics that you see in our operating steps. From a dividend perspective, we continue to moderate our dividend payout ratio.

As we mentioned in our prior calls, we want to drive that dividend payout ratio to 80% of AFFO less nonrecurring CapEx over the long-term..

Okay. Great. And then occupancy moved up sequentially and also year-over-year.

Can you give us some detail on some of the lease-up during the quarter that was contributing to that?.

Sheila, we would more describe it as normal course of business. Obviously, we had great retention, which contributed to that. But it wasn't any particular lease or series of leases, just normal course of business and good retention..

Okay. Great. And one last quick one on G&A. That was a positive that moved lower in the quarter.

Just longer-term, how should we think about that? Or what do you look at G&A as a percent of revenues? And over time, do you continue to expect some operating leverage to move that ratio lower?.

As we have talked about in prior calls, we have a very scalable model and so we add 1.5% to 2% of new NOI to G&A moving forward because we only have to add accounts and asset managers. The fixed cost part of the system doesn't need to expand.

And so we expect, over time, our G&A to move to around 10% of NOI from its current levels of 14% to 15%, again, as the scalability impacts the level of G&A..

Okay. Great. Thank you..

Thank you Sheila..

Our next question is from Michael Carroll with RBC Capital Markets. Please proceed with your question..

Yes. Thanks. Ben, I just wanted to get a quick comment from you regarding the tariff. I guess I understand it's not really impacting the space today.

But does this change your investment strategy and what type of assets that are looking at in the marketplace?.

Well, I think you are right is that we have not seen anything appreciable from our tenants or from the commentary from our tenant to-date relative to the impact of tariffs. Certainly, trade wars result in diminished GDP and GDP is highly correlated with industrial demand. So you might see an impact on demand as these trade wars heat up.

I think one of the things that most people would say is that nobody wins straight wars. And once they start, they are hard to stop. Having said that, we are in such a good position overall in the industrial markets across the U.S.

and the ones that we participate in, from a supply-demand and current vacancy levels standpoint that we are expecting to have really good continued results even if there is some dampening impact from the tariffs..

Okay. And then I know that your second largest industry exposure is automotive.

Can you describe what that space is used for? And would the tariffs impact that segment specifically?.

Well, certainly automotive is a focus of tariffs both ways, European tariffs and U.S. tariffs and Chinese tariffs, et cetera. So automotive surely is an industry that could be affected by tariffs going forward. We have a really, really broad-based exposure to auto. We have both domestic and foreign manufacturers.

We have Tier 1 and Tier 2 suppliers, aftermarket suppliers, et cetera. So very, very broad-based with very good credit profile and lease profile within that.

Bill, do you have anything to add there?.

No. I think that's right. And in addition, to get a little more granular, about 60% of auto exposure is aftermarket parts. So we are likely less impacted from the tariffs..

So nobody in the business community is looking forward to the impact of tariffs on our economy, but we are pretty well-positioned and have not seen any effective to-date..

Okay. And then just one last question for me. I wanted to touch on about your tenant credit watch list. If there is anybody on there? And I know coming through your top tenant diversification, American Tire Distributors was on there a few quarters back.

What's your exposure to that tenant? And how you are thinking about that right now?.

Well, you are correct. They are no longer in our Top 10. Our growth has diminished our exposure to American Tire Distributors. American Tire Distributors had some negative news with regard to some suppliers that are distributing directly instead of through ATD.

However ATD is still a viable going concern and they occupy a number of buildings within our portfolio. But those buildings are very fungible. We are very happy with the real estate and not overly concerned about ATD or the prospects for those buildings should ATD depart them at some point in the future..

Okay. Great. Thank you..

Our next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question..

Yes. Good morning. Ben, maybe just to follow-up a little bit on Mike's last question or the earlier question about foreign tenants, et cetera coming into the U.S. if tariffs continue, more and more production and assembly maybe happens in the U.S.

Do you have a risk profile assessment for foreign tenants? Or is that just all done at the industry and tenant level?.

One of the things about and particularly the auto industry is, it's not simple. That light-duty truck coming out of a plant in Alabama may be 40% of product coming out Mexico but 20% of that 40% came out of the U.S. in the first place. So it's naïve to make sort of blanket statements about the impact.

There certainly is, if the trade war and protectionism, et cetera continues, there certainly will be a trend for more in country manufacturing. But you have people like BMWs whose plant in the South is, I think, majority designated towards export. So it's pretty hard to make blanket statements.

But you certainly would see a trend towards more manufacture for domestic consumption if the trade wars keyed up and looked like they are going to be sustained. The interesting thing though is, people who are making decisions about production like an auto plant, aren't making that on a six-month basis.

These are major capital investments that are being done for the long-term..

Got it. And with regard to your acquisitions in the quarter, cap rate, I think, was 7.1% you quoted.

Can you talk about, one, what got you there? And two, your expectations for the pipeline for the rest of the year?.

Well, our guidance for cap rates is still 6.75% to 7% in a quarter. Obviously that 7.1% falls into that range. We mentioned before, cap rates is a point in time measure that falls out and there are a variety of factors that can impact it up or down. We are really focused on long-term cash flow for the benefit of our shareholders.

Maybe for buying assets with longer lease that have more embedded bumps you might see, you will expect to see cap rates go lower. I think given the opportunities we see out there, that could happen as we move through the year. But our pipeline is still very large and robust and we also believe that our guidance is accurate for the year..

Got it. Last one for me. Bill, you talked about leverage down to 4.7 times as at the end of the quarter. How should we think about ATM issuance versus leveraging up during the second half of the year and into 2019? Obviously you are below your band and it would be more accretive to get back into that band.

So how should we think about that now and on a go forward?.

Yes. Thanks Dave. See, the 4.7 times was a little lower than we have typically run the balance sheet and that was in large part due to the preferred equity that we redeemed in July. We called that in June and redeemed it in July.

So as I mentioned in the prepared remarks, when you pro forma that in, our leverage is 4.9 times, which is at the low-end of our previously guided leverage range of five to six times debt to EBITDA. So, so long as we have sources for the capital, we will continue to use our ATM and be diligent in that and maintain low leverage..

Yes. I would add to that.

I think you have seen over the last couple of quarters is although our promulgated range of five to six times is still there and certainly is a lever that we can use as we move through different situations with regard to equity issuance, et cetera, with our attractive equity pricing, relatively attractive equity pricing, we have been staying at or around five times and that's intentional.

Maintaining some degree of leverage neutrality, I think, is a benefit to us in terms of being able to take advantage of opportunities going forward, but also for the investors, et cetera not having to deal with changing leverage as we report our results.

We have the ability to stay at five times, given the fact the ATM has a granular issuance, et cetera and I think that's something you will probably see us do give our equity pricing..

All right. Thank you..

Our next question is from Joshua Dennerlein with Bank of America Merrill Lynch. Please proceed with your question..

Hi guys..

Good morning..

Just curious about your debt swap.

When do these burn off? And then like what will be the FFO impact? And are you contemplating fixing your debt given that interest rates are only likely to go higher from here?.

Hi Josh. It's Bill. We fix all of our floating rate debt that's outside of our revolver. So the new Term Loan we originated, even with the forward option, the forward drawer option there, that is fully swapped to maturity. So all of our loans are fully swapped to maturity..

Okay..

And Josh, I would mention that we have a long and laddered debt maturity schedule that is reflective of our looking to protect our balance sheet and our shareholders from interest rate movements, whether they be up or down. We are not looking to have our business dependent on bets on interest rates. We stay fully hedged.

And again, have a long and laddered debt maturity schedule to extend that protection..

Our next debt maturity in September 2020..

Okay. All right. That's it for me. Thank you..

Thank you..

Thanks..

Our next question is from Mitch Germain with JMP Securities. Please proceed with your question..

Good morning.

So has some of the M&A in the space, has that changed the competitive dynamics within the acquisition environment?.

I will turn it over to Steve. Obviously, it's still a very much sought-after sector but the Gramercy move has certainly changed.

So Steve?.

Yes. The Gramercy, well, we competed with them on certain deals. It wasn't really across the board. Most of our competition still is the local, the regional, fund managers and some of the larger fund managers. So the M&A activity that we have seen so far really hasn't had a dramatic impact on lessening competition for most of the deals we look at..

Certainly, Gramercy, we are not saying they haven't disappeared, but we don't to see them at the same granular level now that they would be part of the Blackstone engine..

Great. Last one for me. If looking historically versus this year, it seems like the average transaction value per asset is growing. Obviously, industrial cap rates of compressed.

But is it just simply market dynamics? Or is it maybe you guys looking in different markets and better quality assets as well?.

Mitch, we adhere to our long-run cash flow thresholds and we look broadly across a lot of market. As we deploy resources or more resources in some larger markets, you will see us and you have seen us with our activity in California in the West, you will see us buying more in those markets.

So we are not giving up on our need or our desire for return over the long run for the benefit of our shareholders. But if you buy at a mark with better rent growth and better leases, you may be able to withstand a lower initial cap rate and still get the overall same long-term returns..

Yes. And there is a still a wide range of acquisitions. And you see that with the second quarter. And we have acquired assets as small as $4.3 million and up to $27 million. So it's still a wide range..

Thank you..

Thanks Mitch..

Our next question is from Brendan Finn with Wells Fargo. Please proceed with your question..

Hi guys. Good morning. I wanted to follow-up with you guys on the potential portfolio sale that you guys had talked about last quarter.

Have you guys identified portfolios to sell? And then maybe could you speak to the size of the portfolio and maybe geographic exposure?.

Go ahead Dave..

We are working through that process now. We are likely to sell something in the order of $100 million to $150 million worth of assets by year-end. And we can update you on that processes as we go..

Got you. Okay. Cool. And then just real quick on retention. It looks like year-to-date retention is over 84%, full-year guidance is 75% to 80%.

So do you guys have some move-outs in the back half of the year that you are expecting? Or is it just a matter of you don't know what's going to happen with some expirations?.

We have very good visibility for the remainder of the year. 88% is a very high level. So again, we don't expect on a normal course to maintain that kind of level. The 75% to 80% is still a good number for the full-year..

Cool. All right. Thanks guys..

Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed with your question..

Good morning.

So just kind of touching on both retention and tariff and even interest rate concerns with a different angle, is it potentially helping your retention as maybe tenants are a little more reluctant to move out and expand to larger properties? Is that some color you are kind of hearing from tenants? They want more of a macro certainty before expanding operations?.

No. I think that with what we are hearing our tenants is a large degree of confidence in their business and in the future. Probably, perhaps even more than the general economic environment, the tenants are exhibiting very strong and you see it through longer leases, better rent bumps, et cetera in those leases.

So I think the tenant attitude is very strong. They generally move, tenants move because they have a valid business reason to move, the building is not big enough which is the primary reason we tenants move or M&A activity or something like that. But we are seeing very strong tenant confidence..

Is there maybe any concern that as you get economic expansion and you see people therefore need more space that retention could get hurt, call it in 2018?.

You saw that back in 2012 and 2013, when coming out of the global financial crisis, tenants hadn't done anything for a number of years and so you saw retention go down and people started doing that kind of activity. I think we are in really a more normalized time right now. So we are not seeing anything unusual in terms of retention at this point..

Okay. That makes sense. And then switching gears a little bit, details on a modeling question. Other income spiked a little bit in the quarter? It's only about $500,000, but it still is %500,000 higher than historical run rate.

Was there something driving that?.

Let me get back to you on that one, John. Nothing comes to mind, but I can get back to you offline on that..

That's it for me. Thank you guys very much..

Thank you..

[Operator Instructions]. Our next question is from Chris Lucas with Capital One Security. Please proceed with your question..

Hi. Good morning everybody. Just a quick question, sort of a follow-up related to the auto conversation earlier. I guess Yanfeng shows up as a Top 10 tenant this quarter.

Curious about their business, what role they play within automotive? Who some of the customers are? And then lastly, sort of how you got comfortable underwriting the Chinese credit and how much of their real estate did you end up buying?.

We don't own a significant amount of Yanfeng's operational real estate. We are comfortable with their operations. They support generally manufacturing plants and they operate on long-term contracts..

It's mainly a manufacturing supporting domestic consumption..

So the current noise around tariffs is unlikely have any impact on them for years to come due to those contracts..

Great. Thanks. That's all I had this morning. Thanks..

Thanks Chris..

Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I would like to turn the call back to Ben Butcher for closing comments..

Thank you. The company's continued impressive bottom line growth and further delevering puts STAG in an enviable position. The momentum behind the STAG platform continues to be driven by our team of employees who are committed to execution with a focus on our attractive opportunity set.

The underlying health of the industrial sector further awards the thoughtful construction of our portfolio of industrial assets and we look forward to a successful second half of the year. We thank you for your time this morning and for your continued support of our company. Have a good day..

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation..