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STAG Industrial, Inc. (NYSE:STAG)

Q4 2012 Earnings Conference Call

February 21, 2013; 11:00 a.m. ET

Executives

Ben Butcher - Chief Executive Officer

Greg Sullivan - Chief Financial Officer

Steve Mecke - Chief Operating Officer

Dave King - Director of Real Estate Operations

Andy LeStage - Director of Leasing

Bill Crooker - Chief Accounting Officer

Brad Shepherd - VP of Investor Relations

Analysts

Sheila McGrath - Evercore

Evan Smith - Cantor Fitzgerald

Jamie Feldman - Bank of America Merrill Lynch

Dave Rodgers - Robert W. Baird

Brendan Maiorana - Wells Fargo

Mitch Dauerman - JMP Securities

Michael Salinsky - RBC Capital Markets

Michael Muller - JPMorgan Chase

Gabriel Melamed - UBS

Operator

Greetings and welcome to the STAG Industrial Incorporated, fourth quarter and year end earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Brad Shepherd, VP of Investor Relations. Thank you Mr. Shepherd. You may begin.

Brad Shepherd

Thank you. Welcome to STAG Industrial’s conference call, covering the fourth quarter 2012 results. In addition to the press release distributed yesterday, we have posted an un-audited 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 actually results to differ from those discussed today.

Examples of forward-looking statements include those related to STAG Industrial’s revenues and operating income, financial guidance, as well as non-GAAP financial measures such as trends from operations, Core FFO and EBITDA.

We encourage all of our listeners to review the more detailed discussion related to these forward-looking statements contained in the company’s filing 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 of as today, Thursday, February 21, 2013. STAG Industrial will strive to keep its stockholders as current as possible on company matters and assumes no obligations to update any forward-looking statements in the future.

On today’s call we’ll hear from Ben Butcher, our Chief Executive Officer; and Greg Sullivan, our Chief Financial Officer.

I’ll now turn this call over to Ben.

Ben Butcher

Thank you Brad. Good morning everybody and welcome to the fourth quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our fourth quarter results and some significant subsequent events. We are proud of the progress made by our company over the last year.

Presenting today in addition to myself will be Greg Sullivan our CFO, who will review our fourth quarter financial and operating results. Also with me today are Steve Mecke, our COO; Dave King, our Director of Real Estate Operations; and Bill Crooker, our Chief Accounting Officer. They will be available to answer questions specific to the areas of focus.

At the end of the fourth quarter of 2012 the company owned a 172 industrial properties, totaling 29.4 million square feet. The 40 properties acquired by the company during the fourth quarter represents an approximately 28% increase in the square footage of the company’s real estate assets over the previous quarter and a 78% increase for the full year.

As you undoubtedly know, our primary investment strategy focuses on what we perceive to be marketing efficiencies and the pricing of our target properties. This opportunity remains as we continue to be able to source accretive acquisitions and significant volume. Our fourth quarter operational results provide continued validation of our investment thesis, with significant leasing and acquisition activity by the company.

Let me first mention the highlights from the company’s recent activities during the fourth quarter of 2012. The tenant retention for leases that’s scheduled to expire in the fourth quarter of 2012 was 72%, slightly below our long-term expectations due in part to the small sample size. Tenant retention for the year was 84%, in line with our long-term expectations of 80% to 85%.

In the fourth quarter the company-renewed leases for 671,353 square feet. In the quarter we also leased 184,814 square feet of existing vacant space. The rental rates on renewed lease that expire in the fourth quarter decreased 1.2% on a cash basis and increased 2.5% on a GAAP basis, essentially in accordance with our third quarter results and in keeping with our relatively flat expectations.

As a result of these fourth quarter leasing efforts and our acquisition activity, which included in acquiring some vacancy in the large portfolio transaction, overall quarter end occupancy decreased to a still healthy 95.1%.

These results are a continuation of our experience with the prior quarters. We continue to experience strong leasing results without having to offer significant rental concessions, by incurring large capital expenditures. That is simply a feature of our investment focus on large single tenant industrial buildings.

Leasing continues to be positively impacted by the strong trends in U.S. manufacturing. The continuation of these trends will further contribute to the company’s growth and stability in the coming quarters.

Our acquisition activity was as expected, very strong in the fourth quarter. We completed the acquisition of 40 properties for a combined all-in purchase price of approximately $212.8 million. This included our previously announced portfolio acquisition of 31 properties for $128.7 million. These acquisitions added approximately 6.5 million square feet to our portfolio, increasing our portfolio size by 28% over the prior quarter.

Those 30 properties are acquired and located in 15 different states and their tenants reflect diverse industries, including air-freight and logistics, food and beverage and automotive. These acquisitions have been accomplished in an average cap rate of 9% plus, continuing in-line with our targets.

In addition, our pipeline of deals that meet our investment criteria is robust. There are approximately 600 million of potential acquisitions being reviewed and considered by our acquisition teams. This level of pipeline, level of activity is unusually high for the first quarter, typically the slowest quarter of the year for acquisition activity. As these acquisitions in our pipeline indicate, we remain very confident of our ability to maintain a vibrant acquisition place through 2013 and beyond.

Following the end of the fourth quarter, in January we completed a very successful third follow-on comp offering of common stock. The proceeds of this $150 million offering were used primarily to repay indebtedness under our revolving credit agreement, which have been used to file a portion of our fourth quarter acquisition activity. This positions us from the standpoint of leverage levels and balance sheet flexibility, to continue to be an active acquirer going forward.

I will now turn it over to Greg to review our fourth quarter financial results and provide some further detail on our balance sheet and liquidity.

Greg Sullivan

As Ben mentioned we had another solid quarter from an acquisition and a leasing standpoint. Our cash NOI was up 72% over the fourth quarter of 2011. This growth was driven primarily by our strong acquisition activity. Our core FFO increased by 163% over Q4, 2011 and 44% on a per share basis.

Our AFFO for the quarter increased 135% over the fourth quarter of 2011 and 20% over last quarter. We viewed this as one of our key metrics and as a reflection of the nature of our portfolio. Because of the single tenant focus of our business, our leasing and CapEx costs continue to be quite modest. Once again we had a number of acquisitions closed towards the end of the quarter. As a result, the run rate growth rates are even better than the ones that I have mentioned.

Our G&A increased over the third quarter as we continue to build our organization to handle our growing portfolio. Having said that, the business continues to have great potential of scale, with only modest increases in our cost structure.

On a year-over-year basis our portfolio occupancy increased 190 basis points, from 93.2% to 95.1%, despite the 400,000 square feet of vacancy that was acquired in our fourth quarter portfolio acquisition. This purchased vacancy also explains the occupancy drop from Q3 to Q4.

Our same store occupancy and cash NOI was basically flat from Q4 last year when measured to quarter ends. The drop in same store occupancy from last quarter was due to a few tenant non-renewals, but our overall retention rate for the year was 84%.

Our interest coverage for the quarter was 4.8 times and our total debt to total assets was 48%. Our net debt to annualized adjusted EBITDA was 5.8 times at quarter end, but that figure is somewhat over stated, since once again the sizable portion of the acquisition activity occurred late in the quarter. As a result there may have only been a few weeks of income in the quarter for certain acquisitions, and we counted the full debt balance on those acquisitions.

We also put in place a 10-year debt facility this quarter as part of our goal of continuing to latter out our debt maturities. As of quarter end we had approximately $19 million of cash and total liquidity of $144 million, including current and in-process availability under our unsecured facility.

As Ben mentioned, we did another follow-on equity offering in January and raised $115 million of gross proceeds, which fully paid off the $99 million revolver balance that’s been outstanding. We also put in place an ATM program during the last few weeks of December and raised around $5 million of gross proceeds. We expect to continue to utilize the ATM going forward.

Given these extremely strong credit statistics and the now achieved unsecured borrowing status, we intend to maintain a very conservative balance sheet. Our financing strategy is to emphasize unsecured financings, extend term generally given the attractive rate environment and maintain credit metrics consistent with an investment grade rating and the financial flexibility that comes with that as we continue to grow.

Consistent with those goals we just closed $150 million seven year unsecured facility in February, with pricing currently at LIBOR plus 215 basis points and drew down $25 million at closing. Both the equity offering and the most recent unsecured financing demonstrated our continued ability to drive down our cost of capital, which becomes accretiably attractive relative to our acquisition cap rates of 9% plus. We also got included in the Morgan Stanley read index in November, which further broadened our institutional investor base.

In general, the financing markets continue to be attracted to our property’s ability to generate high cash yields with limited leasing costs. We also continue to see the high positive spreads between our growing and cap rates and our financing rates.

As a result we once again are able to pay an attractive dividend to our shareholders, which was an annualized rate of 6% and our year ending share price represented approximately 87% of our AFFO. I should add that 43% of our dividend in 2012 was a return of capital and therefore not currently taxable in most cases.

So in summary, we continue to exploit the attractive acquisition opportunities available to us. We continue to experience the high tenant retention and minimal CapEx’s inherent in our business and we have a sound balance sheet to execute our strategy of generating income plus growth for our investors.

I’ll now turn it back over to Ben.

Ben Butcher

Thank you Greg. A very busy and successful fourth quarter topped off a great first full year for STAG as a public company. In 2012 we continue to move forward with our low-levered strategy for the execution of our differentiated investment thesis. I am very proud of our team and on the solid floating shareholder return of 68% we delivered to our shareholders over 2012.

Looking to the future, STAG continues to benefit from the combination of factors that provide a significant volume of quality and accretive opportunities for acquisition, both on a relative value and a steady investing basis.

We believe that the ongoing improvement in the general economy, combined with the continued strength in the manufacturing sector, will positively impact our own portfolio in terms of occupancy levels and rental rates. The continued relative lack of speculative development generally across the country and specifically in our markets will enhance the performance of these important metrics.

Thus we continue to be optimistic about the future for our company, for our owned assets and for our investment thesis. We believe that our business plan to aggregate and operate a large portfolio of granular and diversified industrial assets will produce strong and predictable returns for our shareholders.

Our fourth quarter operational results provide continued validation for this contention. We’ve be lauded by some of the exhibiters for our disciplined adherence to our strategy and for our focus on shareholder returns. We will continue to do just that and thank you for your continued support.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Sheila McGrath with Evercore. Please proceed with your question.

Sheila McGrath - Evercore

Yes, good morning. I have a couple of questions. Ben, you closed on over 400 million of acquisitions last year. Can you help us think about the potential magnitude this year? Was it 400 because you had that portfolio opportunity in that kind of a high water mark?

Ben Butcher

Obviously the question deserves a nuance answer. What we said is our expectation is to grow 25% a year for the foreseeable future, which offer approximately a billion base, so at the end of the year it would indicate 450 million.

Having said that, we have the capacity within our acquisition teams and the rest of the organization here to acquire at the level that we acquired at last year. I think it has been noted in some of the – our acquisition total in the first quarter last year was 38 million by virtue of what we have under contract, although we are not necessarily going to close that. It looks like we’ll be somewhere around double that in the first quarter this year. So we are pretty confident of our ability to at least meet that 25% per year growth rate.

Sheila McGrath - Evercore

Okay, thanks. And then Greg or Ben, just could you give us your thoughts on the dividend. You did bump it last May. Are you targeting a certain payout ratio or just give us your thoughts on it?

Ben Butcher

You know its something we obviously continue to think about, but what we said before and it is still our policy that we are targeting around 90% of AFFO as a payout. Because of our growth in our AFFO community here at the end of the year it’s treated quite a bit different. So that 90% is a target for some point in the year as we have perhaps on default. So we are certainly looking at it and continue to follow it, continue to attempt adhere to that policy.

Sheila McGrath - Evercore

Okay, last question. Ben there was some confusion towards the end of the year surrounding some Form 4 filings and your disposing of shares. I was just wondering if you could walk us through your ownership stake in the company and any recent selling activity.

Ben Butcher

Well, as you know the devil’s in the details. The footnotes on some of those Form 4 filings which I’ve had numerous friends come up and congratulate me on the large sale of stock, and as to why I actually didn’t sell any stock.

As the managing general partner of some of the private funds are a part of the formation transactions. When those funds convert, they are all paying at the share and/or other activities. I get recognized in the Form 4 filings just having been the seller. Unfortunately or fortunately that sale that was announced was related to one of our private funds. I think it was about $4 million of shares.

Now I had a diminimus part of that. My ownership with the company, in the company, both invested and non-invested I think is around 300,000 shares or something, roughly 300,000 shares at this point and that has not been decreased by any actions of sales or otherwise and has increased through some purchases and also through some performance awards.

Sheila McGrath - Evercore

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Evan Smith with Cantor Fitzgerald. Please proceed with your question.

Evan Smith - Cantor Fitzgerald

Hi guys. It looks like there were a couple of leases that were set to expire on Dec 31. Can you mention if these were renewed and also if there’s any other notable move outs that you’re expecting in 2013.

Ben Butcher

I’m going to turn it over to Dave King our Director of Operations. I will say in process that is a large portfolio, but each of the tenants obviously act independently. So we are pretty confident of our long-term trends around the 80% to 85% kind of retention over a short term and small samples you may get slightly different results. Having said that, I’ll give it to Dave.

David King

Its quite a lead in. We did have one sizable tenant that expired at the end of the year and its Electronic Data Systems in Baten, Ohio. They did not renew the lease and we have had the building in the market for lease for quite a while, since about midyear. So we are up and running on a very nice space in a marketable condition and have seen some activity on it so far.

As I’ve mentioned in prior calls, we do have one sizable expiration about mid-year this year, the Famous Footwear of Madison, Wisconsin. They have elected not to renew the lease. Its about 427,000 feet. They’ve been very cooperative in returning the space to a marketable position and allowing us access to market it. So as a result of that we’ve had some good activity. We’ve got some full building and partial building uses for this space. So we are optimistic on the prospects for that space.

Other than that, there aren’t any 2013 explorations over 100,000 feet. So we are pretty optimistic on managing that expiration schedule and we’ve also had some pretty positive interactions with our ‘14 expirations, so…

Greg Sullivan

Hey Evan, it’s Greg. I might add a couple of points. Its sort of interesting when we are reading the research reports, the quick notes that came out last night, there were sort of a verity of reactions. Some people said great leasing quarter; other people said leasing was soft.

I think probably the best way to look at our leasing activity is probably not quarter to quarter but more maybe over the last two quarters or four quarters. If you look at some stats like we did 185,000 square feet of new leasing in the quarter, that was 23% of our availability, which I think is probably the highest percentage that we’ve done. Our leasing cost again were well below the average that we had in other quarters which is well below the pier group.

Again, we had rents rolling at market, no big roll downs. And again, the same store portfolio with a lot of people to focus on for a good reason is only about 50% of the portfolio.

So again, we look at it as a very stable, bearable income base and then for what its worth, our Core FFO per share was up about 43%. So in any give quarter you might see a little bit of noise if you will. For example in the first quarter we had a 100% retention rate, in the fourth quarter it was about 74%, but again on average, it runs between 80% and 85%.

Evan Smith - Cantor Fitzgerald

Okay, and then just going back to the same store specifics a little bit then. In terms of the roll downs or the decline in operating revenue, how much of that was relative to the occupancy loss versus the cash leasing spreads rolling down. And then also is there anything notable behind the 9% decline in expenses?

Greg Sullivan

It’s Greg. So a couple of things. One, the vast majority of the decrease in revenue was from the occupancy drop. On the expense side as you know, since about 95% of our leases are triple net, when you have a vacancy you are obviously are also picking up the expenses. So there’s a little bit of seasonality. So in the forth quarter for example, expenses tend to be a little higher than they might be in the second quarter. But for the most part that expense drop was largely a result of the drop in occupancy.

Evan Smith - Cantor Fitzgerald

Great, thank you very much.

Greg Sullivan

Sure.

Operator

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

Jamie Feldman - Bank of America Merrill Lynch

Thanks. So I guess sticking with same store, do you guys have sense of what you think your same store NOI could be for 2013.

Greg Sullivan

I think sort of steeping back; I think we would probably expect our same store occupancy to be about the same as it was at year end 2012. And so the NOI might be a little higher because of rental bumps, but I would expect it to be quite stable.

Jamie Feldman - Bank of America Merrill Lynch

Okay and then as you said before, the expense side, as long as you don’t loose occupancy it stays kind of flat.

Greg Sullivan

That’s right.

Jamie Feldman - Bank of America Merrill Lynch

Okay and then thinking more about the acquisition pipeline, can you give a little more color on where assets are and you had said that this a healthier pipeline and typically for this time of the year, is there anything in particular driving that. There are certain reasons maybe that you are looking more than you’ve looked in the past.

Ben Butcher

We remain agnostic as to, generally agnostic as to location and region. So we are just seeing the opportunity. I think frankly people are feeling better about the world and our assets that have been held off the market or come into market. I think people are just sort of moving on, so typically at the end of the year when thinks run down, deals get done and you have to restart at the beginning of the year.

So our pipeline is in the first quarter, and our executions in the first quarter are generally very muted relative to the other quarters. So we are seeing, as I mentioned earlier, the pipeline activity is probably high as we’ve ever seen and that reflects the fact that its just maybe also reduces competition. There were just not a lot of other people competing for these assets.

Jamie Feldman - Bank of America Merrill Lynch

Are you not seeing any downward pressure on yields either?

Ben Butcher

No.

Jamie Feldman - Bank of America Merrill Lynch

Okay, all right, thank you.

Ben Butcher

We are still, the assets that we have under agreement for the – at this point in the asset we closed in the quarter, still that 9-plus cap rate.

Jamie Feldman - Bank of America Merrill Lynch

Great thanks.

Operator

Thank you. Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Dave Rodgers - Robert W. Baird

Hey, good morning. Hey Ben maybe along the same lines on the acquisition, it’s been great to see the acquisition yields continuing to be in that 9%-plus range. But maybe to challenge a little bit on that front with regard to the risk side of that equation.

Do you feel like either on the average length of lease term, which seems that maybe you’ve gotten shorter in terms of the acquisitions that you’ve done since earlier after the IOP, that you’ve taken more risk with sort of lease term, more of the credit side taking more risk and is that an accurate perception and would you feel comfortable doing more of that given where the economy is today.

Ben Butcher

I’m not sure the lease term is a risk, but I would feel more comfortable with the economy, I’d say flatter might be a risk and it could be more comfortable in the economy. But I will also say I don’t think we’ve changed our risk profile in any great degree and to the extent we’ve changed it, we may have upgraded or lowered the risk of the assets we are buying.

I think the story and the lease term is it reflection of that portfolio purchase, which said if our typical deal is six or seven years, then the outset of this was four years. So we put a big slug of shorter lease term in that portfolio purchase. These are assets that we are pretty familiar with and pretty confident about their potential for them. But that portfolio did have a slug of shorter lease term.

I think that the granular assets that we are purchasing, again on a risk basis look pretty much the same as we’ve always purchased and deemed may be slightly better.

Greg Sullivan

Yes I might add to that, it is interesting as your seeing the cap rates compress in the primary markets and people have expected to see the same in our business. We really haven’t comprised our risk-adjusted returns at all. We haven’t changed our credit profile; we haven’t changed our term as a way of sort of managing lower yields over all. All those return metrics have remained consistent.

Dave Rodgers - Robert W. Baird

Okay and there have been some discussion out in the market that maybe about a potential CMBS transaction. It sounds like maybe you’ve forgone that. I don’t know if you can comment on that or not, but it sounds like if you are going to go fully the unsecured ramp, that that maybe something that you’ve decided not to do, but in fact you are pursuing it. Can you comment on that at all Greg?

Greg Sullivan

Yes sure. We actually did do a CMBS deal in October. It was about $68 million. One of the reason we did it was that we really wanted to continue to later out the maturities of our debt schedule. So it gave us the opportunities to do 10 year financing.

We have subsequent to that been able to do a seven year unsecured deal which we closed about a week ago and its not likely that we will be pursuing CMBS financing in the future, but at that time we felt that there was a relatively sizable chunk of money in the five year slot and we really wanted to push our maturities out and that’s why we too advantage of it.

Ben Butcher

And not only CMBS transactions, but any type of secured transactions would be unlikely going forward.

Dave Rodgers - Robert W. Baird

Okay. Thanks guys.

Operator

Thank you. Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Brendan Maiorana - Wells Fargo

Thanks. Good morning. Greg, I heard your comments on G&A. I just wanted to make sure I understood them. So I guess were you suggesting that the G&A increase in the fourth quarter is sort of a natural expansion of G&A, given the higher asset base or is there some seasonality in Q4 that drove that number up sequentially, such that Q4 is not great run-rate as we think about what G&A is likely to be in ’13.

Greg Sullivan

I think the run-rate, the fourth quarter is probably is a good starting place. I think going way back at the end of 2011, we talked about sort of informal guidance of G&A of X and acquisition pace of Y. We obviously greatly outpace, that acquisition expectation and as a result we had incremental additions to the staff. But again having said that, we fell it’s a very scalable business and that we can continue to grow the portfolio very significantly without dramatic increases in our G&A.

Brendan Maiorana - Wells Fargo

So if you guys complete the 25% growth in ’13 is the G&A supportive of that sized portfolio or will there be some, maybe not 25% increase in G&A, but some modest increase in G&A as we go though ‘13 as well.

Ben Butcher

Yes, I mean -- this is Ben. The headcount for an additional $250 million in assets is probably one or two people; one is asset management, one in accounting basically is what we would need to do to take on that. We don’t need, but we bring it on to comfortably handle that.

So I don’t think that the headcount portion of G&A is likely to be – obviously, these are not senior people, these are mid-level people. So you are talking about few $100,000 and I don’t think that force of G&A will be anywhere near obviously that 25% of the asset growth out there.

Brendan Maiorana - Wells Fargo

Sure, okay that’s helpful. The bad outlook or the CapEx outlook, your CapEx levels have continued to be very low relative to the amount of NOI that you’ve got. As I look at ’13, there is really not a lot of lease roll over and so you probably keep CapEx levels pretty low again in ’13, but they start to move up more significantly in ’14 and then it seems like it’s a little bit more of a normalized run rate. Is there a risk that the level of CapEx that you’ve been spending in the business goes up as we get pass ’13, as there more lease role in the portfolio.

Greg Sullivan

Well again, our expectations are for 85% tenant retention, and that’s been worn out overtime, so that the amount of lease that’s actually rolling to new tenants that will requite any type of significant CapEx is going to be small and further more the type of buildings that we own are at very minimal office space.

They are basically big simple boxes and so the CapEx to roll over one of these tenants is not going to be large, even with a new tenant. So the answer is although we have more potential tenants rolling as we move forward, we still expect CapEx to be a fairly minor portion of NOI.

Dave if you want to throw anything on top of that.

Dave King

I think that’s accurate. I don’t anticipate anything should vary from the normal we’re seeing today.

Brendan Maiorana - Wells Fargo

Okay, that’s helpful. And then Greg, I know you talked about sort of your overall liquidity. But as you think about running the balance sheet, you run it for conservative debt metrics and debt ratings following the rate last month. Where do you think the kind of overall capacity is for new investments as you look out after the January rates?

Greg Sullivan

Yes, I mean if you look at the snapshot as of the end of the calendar, we had $19 million of cash and $144 million of availability in the line. So well, $160 million odd, which would be the equity, which would be supplemented with third party debt for our purchasing power.

If you looked at it today, we’ve got about $40 million of cash and about $230 million of availability, for a total of about $270 million. So if we had an acquisition activity of $300 million or even $400 million, we have the availability to accomplish that.

Having said that, we are focused on running a more conservative balance sheet. We got a great business model and we don’t need to push the leverage to generate the kind of compelling returns that we have been able to accomplish. So I think the short answer is we are going to continue to manage a very conservative balance sheet, but we have a sizable amount of dry-powder in our balance sheet to take advantage of the acquisition opportunities.

Brendan Maiorana - Wells Fargo

Yes, but as you sort of think about running that balance sheet inline with those metrics, maybe $400 million in sort of a technical capacity, where do you think your metrics from a balance sheet perspective start to get to the point where not that it becomes problematic, but where do you think that maybe you don’t have a whole lot more longer term capacity on that balance sheet.

Greg Sullivan

I think we probably want to keep our debt to total assets in the 40% range, plus or minus, and that will drive how much dry-powder we have to invest, off our balance sheet as opposed to through additional equity.

Brendan Maiorana - Wells Fargo

Does that put debt to EBITDA for like mid-fives?

Greg Sullivan

Low fives.

Brendan Maiorana - Wells Fargo

Okay, great. Thanks.

Greg Sullivan

Sure.

Operator

Thank you. Our next question comes from the line of Mitch Dauerman with JMP Securities. Please proceed with your question.

Mitch Dauerman - JMP Securities

Good morning. Ben, with your commentary on the acquisition pipeline, is that mostly one off deals or are there any portfolios in there?

Ben Butcher

I believe that total is all granular assets. We are looking at a number of smaller portfolios, but pretty sure that’s -- I’ll let Steve answer that more directly.

Steve Mecke

Good morning. Yes, the predominance of the portfolio is a greater asset, but we do have a three dimensioned, basically three small portfolios in that pipeline, which probably totaled about $120 million. So they are roughly $40 million, probably five or six assets deals.

Ben Butcher

So a $120 million of the $600 million total is made up of the three portfolios.

Mitch Dauerman - JMP Securities

And just remind me Ben, are there any other properties held in some of the partnerships that you guys are afflicted with, that you guys could purchase on the road or is that avenue being closed at this point.

Ben Butcher

Well, it hasn’t been closed. We did that acquisition in the fourth quarter from that one remaining private partnership. That partnership still holds assets. The difficulty of transacting between he public company and the private enterprise is significant. There is conflict, fairness, etcetera, and in addition to which is a fiduciary for that fund, we certainly don’t want the market to think that we are the only buyers.

So we are very actively looking to -- that portfolio is in liquidation, it’s coming down over the next dew years to the end of its life. Those assets are going to be actively marketed to third parties, with the focus in that liquidation of third party sales.

Mitch Dauerman - JMP Securities

Great, thanks.

Operator

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Good morning guys. Just in the quarter mentioned, you mentioned you had a lease termination of about 225,000 square feet. Was there any term fee related to that in the fourth quarter?

Greg Sullivan

There was about $30,000 of a lease termination fee and we obviously backed that out for our Core FFO purposes.

Michael Salinsky - RBC Capital Markets

Okay, that’s helpful. Second of all, as you think about lease timing, the leases that were signed in 2012 to units that are in ’13, anything big on the horizon there, anything to do with the new occupancy in the first half there.

Greg Sullivan

I don’t think there is anything big. There is one tenant that’s phasing in over time, but I don’t think it’s a move the needle kind of FX.

Michael Salinsky - RBC Capital Markets

Then as you think about diversifying the portfolio a little bit, pretty high concentrations on a couple of states right now. I mean is there any that are looking at certain transactions, certain markets or is it still kind of first come first served.

Greg Sullivan

Yes, no we look at it from a different perspective rather than looking from markets to move into. We are conscious off in an attempt to maintain, not going over certain levels of concentration. We’re on a state basis, we are uncomfortable going above 15% on any particular state, and I think North Carolina is just under that at this point. So that’s more of our focus; it’s maintaining the metrics that keep correlation low across the portfolio.

Michael Salinsky - RBC Capital Markets

The final question, just going back to I think the previous questioner. As you look at small portfolio opportunity versus one off transactions, any noticeable difference in pricing the portfolio versus one of transactions.

Greg Sullivan

There certainly can be, with the kind of portfolios that we are talking about, under $100 million you might see 25 to 50 basis point difference in cap rates. I wouldn’t say it’s more than that though.

Michael Salinsky - RBC Capital Markets

Okay. I appreciate it. Thanks guys.

Ben Butcher

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Muller with JPMorgan Chase. Please proceed with out question.

Michael Muller - JPMorgan Chase

Yes, hi. A couple of things. First of all, I think you said the occupancy you saw in the year was flattish with where it is now. If we are thinking about the trajectory, do you think its flat throughout the year; does it dip a little bit in the first half of the year?

Ben Butcher

And again, that was on the same store portfolio. I think its probably going to dip in the first half of the year. We’ve got a couple, and I think we mentioned it, Brown Shoe and a couple of other tenants that are know move outs. And so I think its probably front half loaded in terms of a bit of incremental vacancy and then sort of flattish towards the end of the year.

Michael Muller - JPMorgan Chase

Got it and then going back to the G&A a little bit, can you repeat what you said in terms of the comment about fourth quarter? Did you say that was a good starting point if we are thinking about it? So annualizing that and coming up with like an $18 million number; is that what you are implying?

Ben Butcher

Yes, I think obviously there’s a little more compensation built into the fourth quarter. We for example at the beginning of the year we have a budget, and we are looking at expected bonuses, and as we continue to out perform and out perform by an even greater margin, some of those bonuses grew and the accrual for that took place more in the third and particularly in the forth quarter. We are cautiously optimistic that we are going to have another very good year in 2013. So I think that’s probably a good starting place for a run rate.

Michael Muller - JPMorgan Chase

Okay. Thanks

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Gabriel Melamed with UBS. Please proceed with your question.

Gabriel Melamed - UBS

Hi guys. Just on the move on Madison, I think you said it was roughly 400,000 square fee. Can you just give what expectations would be for -- what the market rent would be in that market relative to what’s just going to roll off.

Ben Butcher

Andy LeStage, our Director of Leasing is here and he’ll take that question.

Andy LeStage

Sure. For that property we are not expecting a material roll down in rents and in fact we had some positive activity on full building user to replace that tenant in 2013. So we are expecting approximately a $2.50 rent, base rent for that property.

Gabriel Melamed - UBS

Okay thanks. And then just on the ATM, has there been anything done in the first quarter in addition to the secondary.

Greg Sullivan

I think there was maybe a little tiny bit done in the first couple of days of January, but as you probably know, you have to sort of turn the switch off before you do an overnight, and subsequent to the overnight we’ve been in sort of a blackout period. So we’ve not been selling any additional stocks at the ATM.

Gabriel Melamed - UBS

Okay, thank you.

Operator

Thank you. Mr. Butcher there are no further questions at this time. I would like to the turn the floor back over to you for closing comments.

Ben Butcher

Thank you and thank you for your help this morning. As I listen to the questions and comments in the call and I sometimes feel guilty, because we say the same thing almost every quarter.

We’ve had another good quarter; the results are good. It’s a function of an investment thesis that is as we mentioned many times is differentiated and we feel very confident of our ability to continue to perform as the months and quarters go ahead. We thank you for your support and look forward to having you as shareholders for a long time.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

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