STAG Industrial's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: STAG Industrial, Inc. (STAG)
by: SA Transcripts

Operator

Greetings and welcome to the STAG Industrial Inc., Second 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 - Vice President, Investor Relations

Thank you. Welcome to STAG Industrial’s conference call covering the second 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 statement 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, August 6, 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’ll hear from Ben Butcher, our Chief Executive Officer; and Greg Sullivan, our Chief Financial Officer.

I will now turn the call over to Ben.

Ben Butcher - Chief Executive Officer

Thank you, Brad. Good morning everybody, and welcome to the second quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our second quarter results and some significant subsequent events. We are happy to report that 2013 continues to be a good year for STAG and its properties.

Presenting today in addition to myself will be Greg Sullivan, our CFO, who will review our second 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.

Our second quarter operational results provide continued validation of our investment thesis with significant acquisition and leasing activity by the company. During the second quarter the company acquired 16 buildings approximately 7% 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 63%, at the end of the second quarter of 2013 the company owned a 194 industrial buildings totaling a 33.3 million square feet, a significant increase from a 121 buildings owned at the end of the second quarter of 2012.

Some details of our strong acquisition activity in the second quarter are, the 16 buildings were acquired for combined all-in purchase price of approximately $109 million. This compares favorably to the $75 million of acquisitions we did in the second quarter of 2012 as reflective of the strong acquisition environment.

Total acquisitions for the first and second quarters were 170 million versus a 113 million over the same period in 2012. These acquisitions added approximately 2.2 million square feet to our portfolio. The 16 buildings are located in six different states; the tenant reflects diverse in industries including technology, automotive, office supplies, aerospace and defense. In addition our pipeline of deals we meet our investment criteria continues to be robust, with approximately 600 plus million of potential acquisitions being reviewed and considered by our acquisition teams. As these acquisitions and our pipeline indicate, we remain very confident of our ability to maintain a vibrant acquisition pace to 2013 and beyond.

The company has experienced strong leasing activities in the second quarter as well, some highlights are, tenant retention for leasing and schedule expire through the second quarter of 2013 was 72%. This is slightly below long-term expectations due in part for the small sample size and one large known move out by Wisconsin tenant.

In the second quarter, the company renewed lease is totally slightly more than a 750,000 square feet. In the quarter we also leased approximately 412,000 square feet on existing vacant space. The rental rates on renewed leases in the second quarter increased 1.4% on a cash basis and increased 5.9% on a GAAP basis. This is slightly muted continuation of the first quarter up tick on these metrics. Occupancy decline for the quarter was 95.4% to 93.9%. This decline is principally the result of the previously disclosed move out in Sun Prairie, Wisconsin on May 31, 2013. There has been significant tenant interest in this building that we are in preliminary negotiations for a lease of the entire space.

We continue to experience strong leasing results without having to offer significant rent concessions or by incurring large capital expenditures that has simply featured our investment focus on large single-tenant industrial buildings. One the Board of Directors matter to mention, one of our founding directors Alexander Fraser has resigned from our Board, so that he can focus on his partner responsibility at GI Partners. That includes fund raising and investing on behalf of both their new general fund and manager of their infrastructure fund. On behalf of the Board, the other officers and myself, I’d like to thank him for his contribution to the company during the period prior to our IPO and over the past few years. We wish Alexander all the best in his future endeavors. The Board is actively considering how best to fill the sake of the, with a director who can future broad the Board’s composition.

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

Greg Sullivan - Chief Financial Officer

Thanks Ben. As Ben mentioned we had another solid quarter from an acquisition and operational standpoint. Our cash NOI was up 59% over the second quarter of 2012. This growth was driven primarily by our strong acquisition activity. Our core FFO increased by 83% over the second quarter of 2012.

We think that these non per share metrics are important, because they convey our ability to grow the business, while the per share metrics are heavily influenced by our financing and liquidity positions. As I mentioned on our last call, we are adopting a more conserved capital structure over time, because the profit margins in our business enable us to do so. As a point of reference we de-levered our business from 35% debt to enterprise at June 30, 2012 to 29% at June 30, 2013. As a result this de-leveraging with additional equity generate an additional debt capacity and liquidity well reduced our growth in core FFO per share. One of the other results of this de-leveraging was that despite our relative newness as a public company and are relatively small size we secured an investment grade rating from Fitch Ratings due to the strength of our credit metrics.

This milestone should enable us to gain better access and enhance pricing as well as terms on future debt financings. Our AFFO for the quarter increased 76% over the second quarter of 2012. We view this as one of our key valuation benchmarks as it is the cash metric which reflects the low CapEx nature of our portfolio. Because of the single tenant focus of our business, our leasing and CapEx cost continue to be quite modest.

As in the pas,t we had a number of acquisitions closed towards the end of the quarter, of the $109 million that closed in the second quarter $58 million closed in the last two weeks of the quarter. As a result the growth rates that I’ve mentioned while impressive somewhat understated compared to the actual run rates. Our occupancy was 93.9% at end of this quarter compared to 95.4% at the end of the first quarter of 2013 largely due to the 427,000 square foot move out (indiscernible) and Sun Prairie, Wisconsin. For the same reason same-store occupancy also decreased from 95% to 91.7%, a larger difference of 3.3% since the same-store pool is only around 50% of our portfolio.

Same-store occupancy dropped by only 1.5% of day weighted basis which we believe as a more occupancy metric. As Ben mentioned we are in preliminary negotiations for lease of the entire space. Our debt metrics continue to be quite strong, our interest coverage for the first quarter was 5.1 times, our total debt to total assets was 39% and our debt to enterprise value was 29%. Our net debt to annualized adjusted EBITDA was 4.6 times at quarter end. That figure is somewhat overstated since once again the sizable portion of the acquisition income occurred late in the quarter, we accounted the full debt balance on those acquisitions.

These acquisitions were acquired on the first day of the quarter, our annualized adjusted EBITDA would have increased by $6.1 million on an annualized basis. In general the capital markets continue to be attracted through our properties ability that generate high cash yields with limited leasing cost. We sold $70 million of perpetual preferred at key point of section 5-As, a significant reduction from our previous preferred stock issue priced at 9%.

As of quarter end, we had approximately $20 million of cash, of cash, zero drawn, undrawn revolver and total liquidity of $250 million. We did use the ATM program a bit this quarter and expect to continue to utilize the ATM going forward.

Given our extremely strong credit statistics, 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 the financial flexibility that comes with that as we continue to grow. Because of the ongoing high positive spreads between our growing cap rates and our financing rates, our existing portfolio has been able to generate a dividend yield that is roughly twice the average REIT dividend, which I would expect would continue even if we didn’t buy another asset. Yet as Ben mentioned, our pipeline is larger, so we expect to continue to deliver attractive income plus growth for our investors.

I’ll now turn it back over Ben.

Ben Butcher - Chief Executive Officer

Thank you, Greg. A busy and successful second quarter has continued 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. 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.

General market conditions remain favorable, the market forecasters such as (indiscernible) projected industrial space absorption for the U.S. be well in excess for the development for the next couple of years, which would positively impact our own portfolio in terms of occupancy levels and rental rates. Thus we continue to be optimistic about the future for our company for our owned assets and for our investments 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 second quarter operational results provide continued validation for this contention. Going forward, we will maintain our pricing discipline and focus on 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). Thank you. Our first 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

Great, thanks and good morning guys.

Greg Sullivan

Good morning.

Jamie Feldman - Bank of America Merrill Lynch

I’m just wondering, can you guys talk a little bit about what you are seeing on the acquisition yield and both in the pipeline and what you’ve done since the end of the first quarter?

Ben Butcher

In the pipeline remains pretty much sort of where its been sort of over the last six months we saw some variability down probably towards the end of the last year, but as interest rates start to kick up in the first quarter and beyond. I think we saw leveling that maybe even slight rises in cap rates. So, I think headline is not much, we continue to see about, we continue to maintain our pricing discipline and see about the same environment out there. We have noted and I have mentioned in previous calls the increase and availability of assets for us to underwrite and consider for acquisition. We believe this maybe a and generally in part by the rising interest rates perhaps leading to a diminishment of peoples expectations of continuing reduction of cap rate, but maybe that the small term decline in cap rates will bottom out some people are perhaps looking to sell in advance of rising cap rate. But that just the opposition on our part – the headline again is not much as changed.

Greg Sullivan

Again for the acquisitions in this quarter, the average cash cap rate was still 9% plus.

Ben Butcher

You split and let them ask that question Greg.

Jamie Feldman - Bank of America Merrill Lynch

And then you think in the pipeline is in-line 9% plus?

Ben Butcher

Yes.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then how are you guys thinking about your investment spread right now, what’s changed in your mind since the 10 year is moved?

Ben Butcher

Well obviously now with the type of an essence spreads we’re talking about between acquisition cap rates and cost of debt as a portion of our cost and capital that remains extremely wide. So, if our average cost of debt is say circum 4% or little above we’re still talking about 500 basis points, if our average cost is down and again we’re not refinancing that and so our average that’s not moving as much as the 10 year has moved. But the marginal cost of debt that’s moved 50 basis points 75 basis points our spread could have – our marginal spread could have gone down 50 or 75 basis points, but that’s from and our marginal cost has been lower than what we’d say was 4, so we’ve gone from a 500 basis points spread to 425, still very healthy, still very accretive.

Greg Sullivan

For example, on our recent seven-year unsecured term loan that we put in place, we drew down a bit under that at high trains, that’s up fully swapped out.

Jamie Feldman - Bank of America Merrill Lynch

Okay, and then what you guys thinking about dividend growth from the year?

Ben Butcher

We believe that’s a good thing. We’re going to continue with our policy of paying out 90% of AFFO, obviously as we’ve discussed in the past we have a lot of confidence about where AFFO per share is going. So, we have lot of confidence about our ability to continue to pay strong dividends.

Jamie Feldman - Bank of America Merrill Lynch

Okay, alright. Thank you.

Operator

Our next question comes from the line of David Toti with Cantor Fitzgerald. Please proceed with your question.

David Toti - Cantor Fitzgerald

Hey guys, good morning.

Greg Sullivan

Good morning.

Ben Butcher

Good morning.

David Toti - Cantor Fitzgerald

With regard to the prep Greg, why I guess you touched on little bit, but why now is just because of the rate was attractive, is it somewhat of a call on attractional movement on overall cost of capital, do you feel this is those sort of right time to hit that yield?

Greg Sullivan

Well I think that in just to context before, he is saying about the recent preferred offering that we did, but I think that it was part of our overall capital strategy to continue to extend out our debt maturities. The preferred transaction was a perpetual preferred. So obviously that’s very desirable from that standpoint. Typically issuers don’t want to have more than 10% or 15% in preferred and right now, I think we have the advantage of having a relatively profitable platform. You may find that several companies actually won’t choose the preferred root, because its relatively expensive compared to say seven year financing. But in our case we have enough profitability that we can afford to do that, and we think that, creating the most stable balance sheet is in everyone’s best interest.

Ben Butcher

And we view it also as leverage to the equity, although it maybe expensive relative to the seven year financing, we think it’s relatively cheap in the long run to our equity.

David Toti - Cantor Fitzgerald

I would agree, how is the demand on the offer?

Ben Butcher

Very strong.

David Toti - Cantor Fitzgerald

Okay. And then I just had a couple of general questions about the portfolio, when we look at your – look at sort of geographic map and there seems to be kind of a Eastern U.S. concentration is there strategy around geographies and actual physical concentration relative to operational synergies or is it really just driven by the yield and the opportunities there?

Ben Butcher

We are agnostic as the market. So we are not, we don’t follow some, macro prognosticators there is an emphasis the best market to be in and then that we rushed down the emphasize and trying by asset. We’re really looking for the best deals on a fully considered and underwritten basis for our shareholders. So we’re spread out across the map based on where we find the opportunities.

We don’t believe that there is significant operational efficiencies choose by concentration, we have consciously vertically integrated only through asset management. We hire the best-in-class leasing brokers and property managers while we need their services and feel confident that we get better service that way.

The other thing I would point out is that, although we are concentrated east of the Mississippi, so with the U.S. population are assets are tend to be near population center. So, the fact that approximately 73% I think of U.S. population in the eastern Mississippi is not surprising therefore that the preponderance of our assets would be to the Mississippi. The big population now it’s western Mississippi and in particular California and probably to a lesser extent Texas having a very difficult plants just for us to find adequate returns on the people who are bidding on those assets or bidding against on assets on those locations are bidding to lower return and using more aggressive assumption in their underwriting. We pride ourselves on maintaining pricing discipline and sort of doing our best to understand the cash altogether we derived from one of our asset in any particular location.

David Toti - Cantor Fitzgerald

Okay, that’s helpful and my final question is just sort of a tough topic to that. Last question and when you’re looking at acquisitions opportunities how important is the industry concentration given that today especially Europe sort of mostly exposed automotive and packaging some are limited do you think about how that tenant in the less lease sort of fit in to the overall portfolio sort of longer-term?

Ben Butcher

Very much and I apologize I should have been included in the answer to the first question. Yeah although we are agnostic as the market and agnostic as to industries we are very conscious of minimizing correlated risk in our portfolio. So, we’re not out seeking for instances fracing companies as tenants or cloud-computing companies as tenants or anything in particular, but we’re very conscious of not overcommitting to any particular industry. So at this point I believe have two industries that are about over 10% concentration on our portfolio obviously there are lot of individual companies underneath that so the concentration on the individual had a credit basis is more diverse. But we’re very conscious on every important metric that would introduce correlated risk we have internal cap that we won’t violate, geography, lease exploration, industry, individual tenant credit et cetera.

David Toti - Cantor Fitzgerald

Okay, very helpful. Thank you.

Operator

Our next question comes from the line of Gabe Hilmoe with UBS. Please proceed with your question.

Gabe Hilmoe - UBS

Hi, thanks. I guess then to Greg just looking at in the quarter obviously those influenced by the move almost constant but just trying to get a sense for the back half of this year kind of how you see those that same-store pool trending I think you mentioned it was just roughly 50% of your asset base I think in the past you’ve mentioned can see some other larger move outs this year?

Greg Sullivan

Yeah I mean I think one of the stats our asset management folks came up with year-to-date through the second quarter there has been 2.2 million square feet of lease explorations at this point either through lease renewals, new leases negotiated or preliminary agreements underway are in place 98% of that 2.2 million has been spoken for. So, this is consistent with our sort of long-term we expect that kind of attention normally to run higher than it has, but the, this is consistent with our long-term attention that we buy and manage fundable assets. So the assets may not always have the benefit of that 85% renewal but they are reusable by other people. So this 98% of the 2.2 million so far has been spoken for at least on a preliminary basis. I’ll let Dave answer the Dave King our Head of Real Estate Operations to answer the second half of the year question?

Dave King

And through the end of the year we got relatively small subset of assets that are kind of released it rolling 400,000 feet with eight tenants. And some of them was our known goals, some of them was our still expecting a little bit and some we have renewed everything that is not yet renewed is on the market for lease and we have strong interest on those assets.

Ben Butcher

So the headline would be we’re happy with the so the revitalization of tenant interest and industrial asset across the U.S.

Greg Sullivan

I guess the other point I might add is on the new leasing front we’d leased about 412,000 square feet of new leases in this quarter have represent about 29% of the available space we had in the portfolio which I think is the highest ratio we’ve had since we’ve gone public. So again to reinforce the leasing activity of the company is quite good.

Gabe Hilmoe - UBS

Yeah. And then just one more, looking at the I think you said roughly $600 million in kind of potential acquisition pipeline, I guess just trying to get a sense as what’s the governor on that in terms of doing more as tuners that pricing as a manpower?

Ben Butcher

We constantly well I guess did cover upon us as there is managers as to look at the constraints and that if you will the machine and trying to figure out ways to make the machine more productive or increase the capacity of the machine and we’ve done some of that you may get at some point or you may at some point get some questions about our G&A loan we’ve been adding sort of the fixed costs of the machine than adding analysts and other people on our acquisitions area and I think we’ve moved sort of the capacity to close on a granular basis up significantly I kind of probably came into the years thinking the pricable capacity with somewhere in the 400 that I think now probably closer to again not that we’re going to do this much but the capacity to close on a granular basis is significantly larger than that today.

Gabe Hilmoe - UBS

Okay. Thank you.

Operator

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 Ben I know you benefited from kind of a lack of competition in the acquisition market but I think portfolio transactions have been more difficult due to some of the big buyers with the movement in rates have you seen or do you expect to see may be less competition for some of those assets and are you able to underwrite larger portfolios to built on at a faster pace?

Ben Butcher

Well we absolutely have seen some and expect to see more of this financial buyers being chilled by rising interest rates or even more importantly chilled by the expectation of rising interest rates. A lot of – we know that there are number of our competitor large competitors have used floating rate financing to the cool aid if you will to crap very large cash flows out of industrial portfolios, obviously those short-term interest rates are may lower those structures continuing to turn out the large cash flow. But I think people are beginning to worry about how long that game can be played now we’ve seen we think on a little bit of diminished demand for the portfolios. Having said that, we still believe that the for the most part pursuing individual granular transactions will continue to produce extraordinary returns for our shareholders relative to the portfolio participants. Having said that, further we’re also are looking at the number of say $30 million to $60 million portfolios where the pricing is not the similar to the granular asset participants. But if you get up into the couple of $100 million, $250 million of our portfolios there is still some clients walking around that we choose not to compete with.

Dave Rodgers - Robert W. Baird

Okay. that’s fair and then and Greg may be on the balance sheet side, do you anticipate taking leverage even lower to again given in your preference there that in light that you have for preferred just trying to get preferred rating out even further, is that a goal or are you happy where you’re today?

Greg Sullivan

And I think we’re pretty happy where we are today. We’ve got a pretty good balance of debt and preferred and obviously we’ve got the investment grade rating I think we’re in a place because that we’re pretty comfortable for the foreseeable future.

Ben Butcher

And there also Greg didn’t mention one is that achievement in getting the investment grade rating out of Fitch that not only investment grade rating but through investment grade rating with positive outlook and I think that’s reflect the fact that our metrics are the absolute credit metrics are very strong and perhaps are tampered a little bit by our newness to market and our small size, but that the absolute metrics themselves remain very strong for the type of rating that we have.

Dave Rodgers - Robert W. Baird

Okay, and may be for David or Ben you can chime in here it sounds like you’re in negotiation on the Sun Prairie asset that may be you don’t want to talk economics, but do you have at least a vision on kind of when that lease would start?

David King

At this point we are in negotiations and we are optimistic that we’ll release the favorable conclusion over to lot of these (indiscernible) there is no time – set timeline that was followed. I would expect it to happen in the next quarter I guess good for us.

Ben Butcher

And I will note that our investment strategy our investment thesis is not one of we’ll never have vacancy, we’ll have a tenant lease we’re underwriting to sort of perfection, we expect in the execution of right thesis to have tenant move out and in a case with that kind of defaults we don’t have any tenants on our credit watch list today, but if you’re taking sort of judicious risk you’re occasionally the probability going to hit you when you’re going to have those things move out. I will note on the Sun Prairie deal in our underwriting of that transaction we underwrote a downtime I believe of 18 months and we’re satisfied with the economics of the deal if it’s even though it, we and in our expectations it would take up 18 months to lease that deal. Our expectation is all that’s going to take considerably less than for that transaction is simple that provide economics in excess of what sort of our original expectations for.

Dave Rodgers - Robert W. Baird

Alright. Great, thank you.

Operator

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. So Ben I was trying to follow the 98% of leases signed tenants taking the vacancy and then I think you said may be under negotiation so if I look at that 98% of $2.2 million that’s I think it’s like 45,000 square feet if I'm doing that math right?

Ben Butcher

Yeah.

Brendan Maiorana - Wells Fargo

Yeah and you guys have had this today net absorption is negative 5.30 so does that sort of suggest that you got kind of 500,000 square feet positive net absorption of the back half of the year?

Ben Butcher

You certainly could make that case. Obviously preliminary note, negotiations are LOI or something close to LOI is certainly none of those are guaranteed to result in a specifically in a transaction we have high expectations or good expectations but the certainly obviously the other party the counter party has to sign the lease as well as us.

Brendan Maiorana - Wells Fargo

Yeah okay, okay fair enough. Probably for Greg the operating expenses were up that in the quarter that kind of cause your same store to turn negative is there, is that expected to continue as we go forward in the remainder of 2013 and into 2014 and if can you recover some of that so it could benefit your NOI going forward?

Greg Sullivan

Yeah so what happened was this we had one fairly sizable kind of that was paying on a triple net basis and when that tenant left it was replaced by three different tenants who paid on in gross basis. So what happened was is that was basically a flip between the tenant paying the expenses and that was in the amount of about $400,000 and it flipped to us paying expenses obviously we are reimbursed for those expenses we chose up in the revenue line but it was really just a shift in the mix of (indiscernible) would not be expected to be continuing going forward.

Brendan Maiorana - Wells Fargo

Well wait to – but it sounds like those leases are full service and that’s in place so I mean the economics that were in the second quarter continue forward right the increase wouldn’t….

Greg Sullivan

That’s right.

Brendan Maiorana - Wells Fargo

But that, yeah okay, okay.

Ben Butcher

Brendan, what happened was there was a prime tenant as the part of it had something that’s underneath that didn’t depart and so the building made the same sort of physical occupancy which is the nature of the lease has changed.

Brendan Maiorana - Wells Fargo

Yes, yeah got it okay. CapEx you guys have had its been really low for a long time it looks like the maintenance CapEx picked up a little bit in the quarter and you were at about 4.5% of NOI this quarter which is very low relative to every other industrial company but its high relative to historical performance for you guys. Is that a level that we should expect going forward or is there something that maybe drove that maintenance CapEx up a little bit more in this quarter versus the recent past?

Greg Sullivan

Yeah there were a couple of things that happened in this quarter there was one lease that was actually for a call center. We have some legacy office assets from our prior days as a private fund which rolled into the REIT so that was a case for one of the office TIs was in the order of about $8 a square foot that pushed up the new TIs if you look in the supplemental. And then the other thing is we spend about $400,000 in one particular situation to do a series of sort of make ready work to make it more appealing to potential tenants. So that number bumped up our recurring CapEx I would probably characterize both of those as a bit unusual.

Brendan Maiorana - Wells Fargo

Okay, okay. Great thank you.

Ben Butcher

Thank you

Operator

Our next question comes from the line of Michael Muller with JP Morgan. Please proceed with your question.

Michael Muller - JPMorgan

Yeah hi going back to occupancy. I mean do you have a year end target where you expect to be just looking at this 939 basis assuming you don’t buy anything else I think you’ve had the same-store metric?

Ben Butcher

I mean I think we’ve said in prior calls that our expectation is that the year will be relatively flat overall in terms of occupancy and I don’t think we really have deviated form that expectation.

Michael Muller - JPMorgan

Okay – you mean it’s like flat on the same store basis year-over-year?

Ben Butcher

I only think in totals. But I think probably reasonably flat same store also by the end of the year.

Michael Muller - JPMorgan

Okay and you’re starting off down 300 is that right, right now?

Ben Butcher

From that one move out principally yes.

Michael Muller - JPMorgan

Yeah so you expect to make it back by year end it sounds like.

Ben Butcher

Yes we’ve said we have that preliminary negotiation statement we have reasonable expectations of that being completed.

Michael Muller - JPMorgan

Got it okay. And then I may have missed this did you say what leasing spreads were in the quarter?

Greg Sullivan

They’re on the press release.

Ben Butcher

Yeah it’s up 1.4 and up 5.6 cash on GAAP I think.

Michael Muller - JPMorgan

That’s right got it. Okay that was it thanks.

Ben Butcher

Hey Mike good morning. You didn’t start out good morning I felt very left out so I thought I’d say good morning.

Michael Muller - JPMorgan

It’s almost good afternoon so.

Ben Butcher

Thank you

Operator

(Operator Instructions) Our next question comes from the line of Michael Salinsky with RBC. Please proceed with your question.

Michael Salinsky - RBC

Good morning want to make sure I get that in there.

Ben Butcher

Well post the question Mike.

Michael Salinsky - RBC

First question can you talk a little bit I mean I know you’re upon negotiations but how does the rents you’re discussing on the same as for worse-based compared to the vacate there and where is kind of market-to-market?

Greg Sullivan

The economics are basically on par with the current tenants.

Michael Salinsky - RBC

Okay. That’s helpful. Second of all, can you – at the beginning of the year you talked about pricing being flat down on renewals that you’re tracking ahead as you look at the releasing for the back half of the year as do you expect that to continue as it more of a mix leasing a little bit more market growth than you anticipated?

Greg Sullivan

I think we’re seeing a continued up-tick in kind of demand and in terms of short lease or proposal issued in letters of intent. But I think obviously the trend cannot continue up and definitely but we’re optimistic about the continued leasing of the portfolio.

Michael Salinsky - RBC

Okay. Third question I just look at the back of the year are pretty much known at this point as you look at the 14, any large vacates some out of state tenants where we should be aware of at this point?

Greg Sullivan

Yeah we’ve been in contact with all of our tenants really next year and some into 2015 and today we haven’t thought of anything that is sizable as sizable as brought to obviously there is significant amount of uncertainty surrounding that was situations both from the tenant side and from our marketing side.

Michael Salinsky - RBC

Okay. Then as you think about the legacy office reflects recycling in the back half of the year what’s kind of the plan at this point?

Greg Sullivan

Where we sold one small office building this quarter and we’re on a contract to sell another one on next quarter or this current quarter very -- small dollars involving those. But we will continue to take opportunistic and sell opportunities to once we have terms or lease terms as we’ll sell or we find a user that building us for very well we will seek to sell those office assets.

Michael Salinsky - RBC

Thanks very much.

Greg Sullivan

Thanks Mike.

Operator

(Operator Instructions) One moment while we repost for any additional questions. Mr. Butcher, it appears we have no further questions at this time, I would now like to turn the floor back over to you for closing comments.

Ben Butcher - Chief Executive Officer

Thank you very much and thank you everybody for joining us this morning. I think I was just remarking to some of the folks here at the run that we used the word continued too often in our press releases but the fact that matter is we are continuing to deliver on the promises and hopefully on the expectations that you all have I think 2013 is going to be a very important year for the company in terms of its demonstration of visibility to manage and lease assets through the year and as the revitalization of the tenant demand continue. So, we’re looking forward to a very successful back half of 2013 and we thank you for your support.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

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