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Stag Industrial, Inc. (NYSE:STAG)

Q1 2013 Earnings Call

May 7, 2013 11:00 AM ET

Executives

Brad Shepherd – VP, IR

Ben Butcher – Chairman, CEO and President

Greg Sullivan – CFO, EVP and Treasurer

Dave King – EVP and Director, Real Estate Operations

Steve Mecke – COO and EVP

Analysts

Blaine Heck – Wells Fargo

Mitch Dauerman – JMP Securities

Sheila McGrath – Evercore

Dave Rodgers – Robert W. Baird

Nathan Isikoff – Transwestern

Michael Muller – JPMorgan

Michael Salinsky – RBC Capital Markets

Operator

Greetings and welcome to the STAG Industrial Inc., First Quarter 2013 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) As a remainder, this conference is being recorded.

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 first quarter 2013 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company’s website at www.stagindustrial.com under the Investor Relations section.

On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include 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, Tuesday, May 7, 2013. STAG Industrial will strive to keep its stockholders as current as possible on company matters but assumes no obligations to update any forward-looking statements in the future.

On today’s call, we will 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 first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our first quarter results and some significant subsequent events. We are off to a great start to 2013

Presenting today in addition to myself will be Greg Sullivan, our CFO, who will review our first 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 first quarter of 2013, the company owned 179 industrial properties, totaling 31.2 million square feet. The seven properties acquired by the company during the first quarter represents an approximately 6% increase in the square footage of the company’s real estate assets over the previous quarter. On a year-over-year basis, the square footage of our own properties increased by 71%.

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 first quarter operational results provide continuing validation of our investment thesis, with significant leasing and acquisition activity by the company. We’ve also been active in the capital markets as we continue to improve our balance sheet and capacity for growth.

Let me first mention the highlights from the company’s recent activities during the first quarter of 2013. Tenant retention for leases scheduled to expire in the first quarter of 2013 was 100%. This is somewhat above our long-term expectations due in part to the small sample size that results from our very manageable lease expiration scheduled.

In the first quarter the company-renewed leases totaling 510,750 square feet. In the quarter we also leased 238,370 square feet of existing vacant space. The rental rates on signed leases expired in the first quarter increased 6% on a cash basis and increased 8.6% on a GAAP basis. A significant improvement of our previous quarters that was not changed our relatively flat expectations going forward. As a result of these first quarter leasing efforts and our acquisition activity, overall quarter end occupancy increased to 95.4%.

These results are a continuation of our experience to the prior quarters. We continue to experience strong leasing results without having to offer significant rent concessions, or 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 the 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 very strong in the first quarter. We completed the acquisition of seven properties for a combined all-in purchase price of approximately $61 million. This compares favorably to the $38 million of acquisition we did in the Q1 of 2012 as reflected on the strong acquisition environment we alluded to in our last call. These acquisitions added approximately 1.8 million square feet to our portfolio, increasing our portfolio size by 6% over the prior quarter.

The seven properties are located in six different states bringing the total states represented by STAG to 33. Their tenants reflect diverse industries, including household durables, air-freight and logistics, containers, packaging and automotive. These acquisitions have been accomplished in an average cap rate of 9% plus, continuing in-line with our targets.

In addition to our pipeline of deals that meet our investment criteria continues to be robust with approximately 600 plus million of potential acquisitions being reviewed and considered by our acquisition teams. This level of pipeline activity is unusually high early in the calendar year. As these acquisitions in our pipeline indicate, we remain very confident of our ability to maintain a vibrant acquisition pace through 2013 and beyond.

On the capital markets front, we continued to expect to improve our balance sheet. In January we completed a very successful third follow-on offering of common stock. The proceeds of a $115 million offering were used primarily to repay indebtedness under our outstanding revolving credit agreement, which have been used to fund a portion of our fourth quarter acquisition activity.

During the quarter, we also entered into a seven-year unsecured debt facility. Following the end of the quarter, we completed a $70 million offering of preferred stock STAG preferred B. Greg will describe these in greater details shortly. This capital market activity further positions us with both, leverage and a flexible balance sheet, to continue to be an active acquirer going forward.

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

Greg Sullivan

Thanks, Ben. As Ben mentioned, we had another solid quarter from an acquisition and operation standpoint. Our cash NOI was up 69% over the first quarter of 2012. This growth was driven primarily by our strong acquisition activity. Our Core FFO increased by 118% over first quarter of 2012.

We think it is important to observe these non per share metrics because they convey our ability to grow the business, while the per share metrics are heavily influenced by our financing and liquidity positions. To that point, we are adopting a more conservative capital structure overtime, because the profit margins in our business enable us to do so.

As a point of reference, we de-levered our balance sheet from 51% debt to total assets in Q1 of ‘12 to 40% over the same period in 2013. As a result, this de-levering with additional equity generated a $115 million of additional debt capacity or liquidity or reduced our Core FFO per share. While it was up 10% on a per share basis, it would have been up considerably more on a leveraged neutral basis.

We also laddered out the average maturity of our debt from 4 to 5.5 years which given the upward slope in yield curve also dilutes per share FFO everything else being equal. So while the 10% per share growth rate is respectable, it is important to look at the whole picture when evaluating it. Our AFFO for the quarter increased a 113% over the first quarter of 2012. We view this as one of our key valuation benchmarks as it is a cash metric which reflects the low CapEx nature of our portfolio.

Because of the single tenant focus of our business, our leasing in CapEx cost continue to be quite modest, once again below 2% of cash NOI this quarter. As in the past, we had a number of acquisition closed towards the end of the quarter. On the $61 million that closed in Q1, $38 million closed in the last two weeks of the quarter. As a result, the growth rates I mentioned while impressive are somewhat understated compared to the actual run rate.

Our occupancy was 95.4% at the end of the quarter, compared to 95.1% at the end of the fourth quarter of 2012. The tenant retention rate for the leases expiring in the first quarter of ‘13 was a 100%. The rental rates on these renewed leases increased, as Ben mentioned, 6% on a cash basis and increased 8.6% on a GAAP basis. Year-over-year same-store occupancy decreased marginally from 94.5% to 94.2% although cash NOI increased by 2.3% in 2012 and all this information is fully detailed in our supplemental.

Our interest coverage for the first quarter was 4.9 times. Our total debt to total assets was 40% and our debt to enterprise value was 28%. Our net debt to annualized adjusted EBITDA was 4.7 times at quarter end, but that figure is somewhat overstated since once again a sizable portion of the acquisition activity occurred late in the quarter. I mentioned that there were only a few weeks of income in the quarter for several acquisitions, yet we countered full debt balance on those acquisitions.

In general, the financing markets continue to be attractive to our properties ability to generate high cash yields with limited leasing costs. This quarter, we put in place a new $150 million unsecured seven-year term loan with pricing currently in LIBOR plus 215 basis points and drew down $25 million at closing which we swapped all-in at 3.5%.

As of quarter end, we had approximately $12 million of cash and total liquidity of $218 million. As Ben mentioned, we did another follow-on equity offering, in January we raised a $115 million of gross proceeds. Subsequent to quarter end, we sold $70 million of 6.625 perpetual preferred. The company used the net proceeds of these offerings to fully repay the outstanding balance on the revolving credit facility and to fund acquisitions.

With the January common offering and our quarter end earnings black out, the ATM was not heavily utilized this quarter. We did used the ATM program during the first few days of the quarter and raised around $2.5 million of gross proceeds. We expect to continue to utilize the ATM going forward as the need arises.

Given our extremely strong credit certificates, our financing strategies to continue to emphasize unsecured financings, expand term generally given the attractive rate environment and maintain credit metrics consistent with an investment grade rating and a financial flexibility that comes with that as we continue to grow.

Both the recent common and preferred equity offerings and our most recent unsecured financing demonstrate our continued ability to drive down our cost to capital which becomes increasingly attractive relative to our acquisition cap rates of 9% plus. Because of the size of our investment spread, we can afford to run the company at lower leverage and still produce outsized returns.

I should add that we increased the dividend by 11% in our first quarter and will continue to monitor it during the year with the dividend strategy of paying out roughly 90% of AFFO. Because of the ongoing high positive spreads between our growing cap rates and our financing rates, our existing portfolio was able to generate a dividend yield that is roughly twice the average REIT dividend even if we didn’t buy another asset. Yet as Ben mentioned, our pipeline is larger than we have ever seen, so we expect to continue to deliver attractive income plus growth for our investors.

I’ll now turn it back over Ben.

Ben Butcher

Thank you, Greg. A busy and successful first quarter has set the tone for what we expect will be a great 2013 for STAG. We will continue to move forward with our low-levered strategy for the execution of our differentiated investment thesis. I continue to be proud of our team and the solid performance in executing our strategy in the public markets.

STAG continues to benefit from the combination of factors that provide a significant volume of quality and accretive opportunities for acquisitions, both on a relative value and a spread investment 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 our performance of these important metrics.

Thus, we continue to be optimistic about the future of 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 first quarter operational results provide continued validation for this contention. We will continue our disciplined focus and shareholder returns. We 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) One moment please, while we poll for questions. Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question. Your line is live.

Blaine Heck – Wells Fargo

Thanks. Good morning guys. Ben, on the acquisition side, are you guys looking at any large portfolios or is it still a more one-off transactions?

Ben Butcher

Good morning, Blaine. Thanks for the question. We continue to focus on granular acquisitions because we think that the relative value opportunity is greater there than it is on portfolios. Having said that, we are looking at a number of smaller portfolios say in the order of $50 million – $20 million to $50 million, where we think we can still garner the type or returns that would deliver the returns to the shareholders that we’re speaking. So primarily continuing granular one-off acquisitions with a couple of smaller portfolios to join in.

Blaine Heck – Wells Fargo

And are you seeing that there is any sort of a price premium on even though they are smaller portfolios, but they are portfolio?

Ben Butcher

(Inaudible) if they are looking for a great premium, that’s what we’re trying to garner by doing our granular activity. So we would pass on something where that was significant premium.

Blaine Heck – Wells Fargo

Sure, it’s helpful. And then same-store looked good on a cash basis, but it looked like the operating expense was up pretty significantly. Was there anything specific to the quarter that drove that increase?

Ben Butcher

There was a little bit of seasonality in the first quarter. Some of the utility costs were up in the vacant properties, but other than that it was pretty much ordinary course.

Blaine Heck – Wells Fargo

Okay. And then, Greg, one for you, after including the effect of the potential – well, I guess executed and potential $108 million of additional acquisitions plan for the second quarter, it looks like you are getting close to the up around of debt to EBITDA target. Do you think now is a good time to tap the capital market to fund future growth?

Greg Sullivan

Actually, we’ve got quite a bit of room on our leverage stats. If you look at our debt to enterprise value, we’re running at about 28%. So we got a quite a bit of room. In terms of the liquidity, at the end of the quarter we have about $13 million of cash, about $225 million of debt capacity under our revolving credit facility, so that will give us about $400 million of purchasing power running at about 40% leverage. So we actually have quite a bit of run way.

Blaine Heck – Wells Fargo

Okay, great. Thanks guys.

Ben Butcher

Thank you.

Operator

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

Mitch Dauerman – JMP Securities

Good morning guys. Maybe just a follow-up to Blaine’s question. If you guys – Greg, maybe if you can offer some details on how you view your leverage targets over the long-term?

Greg Sullivan

Sure. When we went public, we talked about having a debt to EBITDA ratio between five and seven times. We’ve been fortunate, there is enough inherent profitability in this business that we’re able to run the business at lower leverage and continue to produce very attractive returns. So I would think we’d be at the low end of that range, sort of between 35% and 40% debt to sort of book value and probably 4.5 to 5 times debt to EBITDA.

It may move around a little bit depending upon pacing of acquisitions, but I think we probably looked it have to be the long-term debt financing strategy. And once again, I think one of the advantages of this collateral pause because it is so granular, so highly diversified with a large positive investment spread and so little CapEx. With the margin they can afford to have more leverage in other types of asset classes like CBD office. But having said, we can run this business very profitably without the leverage that some of the other people need to have.

Mitch Dauerman – JMP Securities

And Ben, maybe on acquisitions, you haven’t changed your underwriting at all, maybe except lower credit quality or some part of location or lease term, just to hit that 9% threshold or is this pretty much the same thing that you’ve been seeing over the last couple of years in terms of the types of properties that you are underwriting [ph]?

Ben Butcher

Yes, I guess I would say that the environment has gotten marginally more competitively largely I think due to advances in the CMBS lending market and the continuing low yield environment generally across the investment world. We have not changed our underwriting nor have we changed our targeted investment returns. I think that what you’ll see is we have to put more grift through the mill if you will to get the same number of acquisitions but we’re holding to tight in discipline in our return targets. So we’re not diminishing the parameters on credit quality, building quality, location quality.

Again we may have to look at a few more assets to make our acquisitions but we’re holding to our standards.

Mitch Dauerman – JMP Securities

Great. And have you seen any new types of competitors that are searching for yield, or is it just the same sort of competition that you’ve been betting against historically?

Ben Butcher

Well I think as we mentioned continuously, our principal competitors is a sort of anonymous collection of small investors. That’s what we usually run up again. We do see at the margin, people like Industrial Income Trust, the publicly non-traded REIT. Sometimes we’ll see Primaris REIT [ph] whose is kind of a newly reenergized participant but not sort of down the failing, we don’t see them on every deal, we see them on an occasional deal, maybe in the case of those two, one of every 10 deals or something like that, we’ll see them but that is a bit of a change from sort of doing the out take if you will from the global financial crisis, so we didn’t see anybody repeatedly and we are still the only bigger fish in the pond.

We are seeing some names not in every deal we’re seeing repeatedly some other names. But again most of our – most of times, we’re competing against people that we have significant capital advantages over.

Mitch Dauerman – JMP Securities

Great, thanks for the color. Great quarter.

Ben Butcher

Thank you.

Operator

Thank you. Our next question comes from the line of Sheila McGrath with Evercore. Please proceed with your question. Your line is live.

Sheila McGrath – Evercore

Yes, good morning. Greg or Ben, your leverage level was significantly lower this quarter than a year ago. I just wondering if you haven’t have the growth rate on a leverage neutral basis, what FFO growth rate would it have been?

Ben Butcher

Yes, it’s a good question. In my sort of opening commentary, I talked about the fact that a lot of people look at Core FFO growth rates sort of without pealing back the curtains. And I think in our situation there were a lot of things that would have made that growth rate much higher. If you for example took the cash that we raised was equity and used that as debt instead. Our Core FFO growth rate instead of being 10% per share would have been over three times higher than that.

So again we’re able to – because of the profitability of this business, operating at lower leverage level, but the fact that we move so dramatically from 51% than the 40% and we laddered out our debt maturities which again in an upward slopping yield environment, everything else being equal dilutes Core FFO. We’ve had a pretty solid quarter although the numbers you have to look a little deeper to understand them.

Sheila McGrath – Evercore

Thanks. And Greg or Ben, is there a range of debt to EBITDA numbers that we should expect that you’re going to be targeting to operate at, like is this a typical low for the quarter?

Greg Sullivan

Yes, I think that today looking at sort of debt to enterprise value of 28%, that is clearly on the lower end of the range, so what we would be operating. But having said that, we are sensuous to want and run the balance sheet consistent with investment grade metrics. So that’s probably be on a debt to EBITDA basis 4.5 to 5 times sort of on a normalized basis recognizing it might move around a little bit within a given quarter, but again lots of companies go off of the North American platform to find yield, they do joint ventures. This business is sufficiently inherently profitable but we really don’t need to do that and we can continue to run the business at lower leverage and still make very large returns.

Ben Butcher

And I might add with very, very high leverage ratios, (inaudible) interest coverage and things like that are extraordinary strong relative to our peers and other REITs.

Sheila McGrath – Evercore

Okay, thank you.

Greg Sullivan

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question. Your line is live.

Dave Rodgers – Robert W. Baird

Good morning guys. Ben, maybe you could give us a little color on leasing, you had another good leasing quarter both on the renewal side and new leasing. Clearly occupancy is pretty high, so there is not too much left to go, but maybe some color on the negotiations in the discussions you’re having with your tenants as they sit today and new tenants that are looking for space your ability to maybe opportunistically grow with existing customers. Are we getting to that kind of part of the cycle where you’re feeling better and better about the ability to go out maybe to either acquire vacancy or take tenants to new facilities?

Ben Butcher

I’m going to refer it very shortly to Dave King, our Head of Asset Management to talk a little bit about that. But I think generally the sign of a healthy leasing market is when you have multiple tenants competing for space. I’m not sure we’re seeing that broadly across the markets, but we’re seeing evidence of that to a greater degree than we have any time since 2008. So it’s a healthier market generally. We are fortunate that we high occupancy relatively limited roles in the next few years. So our exposure is not great, but having probably talking about that, I’ll sure will turn it over to Dave.

Dave King

This is Dave King. Yes, the leasing momentum has certainly improved and continues to be pretty strong. New lease activities is very strong at many of our assets. Our existing tenants appear to be a little more certain in their ability to make renewal decisions and we’re in discussions with several of them about expanding facilities. But I’d say the confidence level is up and continues to improve.

Dave Rodgers – Robert W. Baird

Okay. Then maybe back just to the acquisition side of the story, but from the seller side, are you seeing a seller profile change at all in terms of where the assets that you’re looking at are coming from – more from, I don’t know CMBS, more from institutions, more one-off sales from individuals just any more color would be grateful there? Thanks.

Ben Butcher

Yes, I’ll let Steve Mecke, our COO answer that question. I’ll let him answer that – I’ll resist the areas to talking about.

Steve Mecke

Good morning. The actual selling profile really hasn’t changed for the assets we’re targeting. It’s really coming from smaller owners. They might have small conglomeration of assets or local sellers. We haven’t really pinged into a lot of the debt, CMBS portfolios or anything like that so that really hasn’t – we haven’t seen anything coming out of that yet. There is a clearly some sellers are selling as a result of trying to get in front of a debt maturity, but our selling pole really hasn’t been morphing into anything but what we’ve seen in the past couple of years.

Dave Rodgers – Robert W. Baird

Okay, great. Thank you for the comments.

Operator

Thank you. Our next question comes from the line of Nathan Isikoff with Transwestern. Please proceed with your question. Your line is live.

Nathan Isikoff – Transwestern

Good morning, gentlemen. Congratulations on great results. I’ve been puzzled by a quandary for a number of months. I have followed the stock through Fidelity, and the reports have been somewhat perplexing and that there is some sell recommendations, some underperformance, some neutral and the total is very bearish. As a guy who has been in this business for 50 years and think you have a great strategy and are executing it to perfection, one of these people missing as...

Ben Butcher

Yes.

Nathan Isikoff – Transwestern

It’s continuing to reward you.

Ben Butcher

Nathan, I think that we’re puzzled sometimes by some of the things we see. I’ll let, Greg, talk for a second but I think my immediate reaction is we have a lot of sort of quantitative guys who don’t understand the REIT world and who are really in earnings per share evaluators and don’t understand that the concept of FFO and AFFO and how REITs really work. But Greg if...

Greg Sullivan

Yes, that’s exactly right. In fact I’m a Fidelity customer. I’m always hounding them because if you go onto the Fidelity website and you look up STAG, it has – many of the analysts that they cover in particular have sell recommendations on the stock. And again if you looked at those research reports, they are basically just data gathering programs that pull a bunch of data out of the various financial reports and just grind to the numbers. And they focus exclusively on net income.

And so whenever a company is running at a loss, which of course REITs have losses because of the significant depreciation of their income statements then it waves a red flag and if you go further down in that Fidelity website for example, at the very bottom, it does list the fact that we’re covered by 10 real analysts. And most of those companies have buys and couple of holds, but it is one of these inconsistencies that Fidelity for some reason has not been able to address.

Nathan Isikoff – Transwestern

Well they should. Thank you.

Ben Butcher

Thank you, Nathan.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Michael Muller with JPMorgan. Please proceed with your question. Your line is live.

Michael Muller – JPMorgan

Thanks, good morning. I mean you’ve had a lot of success buying at 9% cap rates, 9% plus cap rates. Have you thought about the trade-off of moving down a little bit lower and is there a threshold that you think of internally where if something say south of 8.5% you don’t think of it or you tend to pass on it or is there something that would be a positive trade-off for looking at a portfolio that has say 8%, 8.5% cap going in yield?

Ben Butcher

Yes, I think first and foremost we’re talking about average cap rates. And cap rate is only one of the metrics we look at. We look at IRR [ph] through the first role, so we could take into account the effects of the volatile [ph] low market rents. We look at average cash and cash returns over the first 10 years. If you look at number of metrics, the cap rate obviously has the advantage or disadvantage of being a play in time measure. So it can be illuminative of – obviously it is illuminative of what you have day one but maybe not bad illuminative of what is – the access can provide for you over the next number of years as through the whole period which (inaudible) permanent capital, sourcing a long-term holder is something longer term metrics are more important to us.

Having said that, we think – we mentioned in the call that our pipeline of deals that meet our investment return requirements at least on a per share preliminary basis is as large as its ever been, so that our ability to continue to do sort of the 25% growth that we’ve indicated as our long-term growth for the company is not been diminished now by the some tightening that had occurred in the market on cap rates with again I think largely due to the effects of financing both I earlier mentioned CMBS, but also bank financing perhaps has gotten a little bit more aggressive and/or lenient.

So I think the little bit of tightening that we’ve seen on cap rates and on expansion on prices has not diminished our confidence in our ability continue to do very good return deals for our shareholder maintaining the pricing disciplined that we’ve used since our IPO.

Michael Muller – JPMorgan

Okay. And then switching gears for a second. The leasing spreads, the 6% spread, I think that’s a renewal number that you were talking about. When you talk about flattish for the full year or trending back to there, was that looking at renewals as well or is that total leasing?

Ben Butcher

I’ll turn it back over to Dave but it’s – the flattish is a long-term trend comment that is sort of more reflective effect that long-term rent growth is relatively flat, but Dave any further color?

Dave King

I think that’s accurate. The 6% is being currently on the renewals.

Greg Sullivan

And I think – Mike, it’s Greg. At the beginning of the year, I think I estimated that we’ve probably rolled down 1% to 2%, it’s a little hard to tell early in the year. And I remember back in 2012, I estimated we’re going to roll down 1% to 2%. We rolled up about 1% to 2%. So as Dave mentioned, the leasing environment seems to be a little more positive as it might have been three months ago. I wouldn’t expect huge uplifts but I think this quarter was a little higher than we might have expected. But sort of 1% to 2% plus or minus is probably a regional place to have an expectation.

Ben Butcher

The continuing cost scenario, know it about small sample size. We just have a very limited rollover schedule, so that the amount of assets on a square foot and dollar basis are small and then the absolute number is small. So the numbers can move around just because of small sample size.

Michael Muller – JPMorgan

Got it. And last question to that, if you’re looking at the new leases, the new leasing spreads if you’d disclose those, would those be comparable to the renewal ones on average. So if you’re talking plus or minus zero give or take or the new ones in that bandwidth as well?

Ben Butcher

New leases relative to the prior tenant lease?

Michael Muller – JPMorgan

Yes, exactly.

Ben Butcher

Those would tend more towards zero, I mean the ability to roll a renewing tenant up is probably stronger than a new tenant coming into a vacant building.

Michael Muller – JPMorgan

Okay.

Ben Butcher

One of things, that helps the rental uplift with renewals obviously is that our average tenant size is relatively large about 175,000 square feet, so they tend to be a little sticky. So if the tenant is rolling at $4 and the market $3.75 and we tell them the market is $4 for their new renewal, it’s difficult for them to leave. For a new tenant you probably don’t have that sort of stickiness factor adding to the dynamics.

Michael Muller – JPMorgan

Okay, great. Thank you.

Ben Butcher

Thank you.

Greg Sullivan

Thank you.

Operator

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

Michael Salinsky – RBC Capital Markets

Good morning guys. Ben, just following up on a couple of leasing questions. Any large lease expirations we should expect over the back of the year or those that pretty much back at this point?

Ben Butcher

Well we have – I’ll turn this over to Dave. We have some known move outs in the year. They’ve been known for a period of time, but Dave, perhaps some more color.

Dave King

Yes, one thing I mentioned on previous calls. There is a large tenant out in Wisconsin which makes up about third of our remaining role (inaudible) they are going to lease quite some time within marketing space they actually have several interested parties, but that will be a non-retention story. And we’ve got one other known vacant that’s fairly sizable but the rest of them are basically uncertain at this point.

Ben Butcher

And our expectations long-term remain the tenant retention over a large sample size over a longer period of time will be in mid 80% for this kind of asset.

Michael Salinsky – RBC Capital Markets

Okay, fair enough. Second question, Greg, Cosentini [ph] made very strong progress in keeping the balance sheet well positioned, your leverage metrics and fixed charged capability conducive to a investment grade rating. What are you hearing from the rating agencies and what size do you need to get to get on that investment grade rating?

Greg Sullivan

We’ve had some preliminary discussions with one of the agencies. They seem pretty positive in terms of our various credit statistics. The size often can be an issue, I know that typically Moody’s and S&P size of a couple of billion dollars in book value of assets is pretty important as well your tenure as a public company. Fitch, I think is probably a little more focused on the quality and strength of your credit metrics.

So I think it varies a bit agency to agency. But if you sort of look at our credit stats in the vacuum, it would certainly look like they were reasonably consistent with the lower end of an investment grade rating, although they are other factor that the agencies review as well.

Michael Salinsky – RBC Capital Markets

So when you talk about attainment of investment grade rating, is there something that you expect in the next 18 months, or is this kind of a more of a longer term goal?

Greg Sullivan

I think it would probably be a reasonable expectation if we continue to derive the large positive investment spreads over the next 12 months or maybe some…

Ben Butcher

One of the things obviously is because we’ve been selective in the – in our language in the equity markets, but also Greg, put into place our seven-year unsecured, as we have quite a lot of capital in place, so our needs to access additional capital sources towards the investment grade rating. If we had it, it would be useful in garnering that’s out of few month as well. So we’ve got a lot of pressure on us currently to have an investment grade rating, we have any rating for that matter. But it’s something we certainly are looking at and are working on. And as we go through the coming months, we will definitely focus on.

Michael Salinsky – RBC Capital Markets

Okay. Final question, just given your comments about the size of the pipeline at this point as well as a couple of small portfolio opportunities. Any thoughts on increasing your acquisition target from 25% this year or that’s still a pretty good target?

Ben Butcher

It’s a great target. I will refer back to last year where our target was $160 million. We’ve announced activity thus far for the year between under contract and closed I think is $160 million, so that’s stuff it will happen in the first half of the year. One could infer from that that the $250 million is reachable.

Michael Salinsky – RBC Capital Markets

Very nice. Thanks guys.

Ben Butcher

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments you may have.

Ben Butcher

Thank you very much and thank you for those questions. That was a good series of questions. I think it’s the most questions we’ve had on a call today and they were good and helped us get some of the messages across but we were helpful to get across.

We are in a period of a very good time for the company and for a real estate in general. We continue to take advantage of the abundance of accretive acquisition opportunities and we’re really looking forward to a good and successful 2013, and we thank you for your support and look forward to delivering some – continue to deliver some good results for you. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time. And we thank you all for your participation. Good day.

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