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Stag Industrial Inc (NYSE:STAG)

Q2 2014 Earnings Conference Call

July 31, 2014 11:00AM ET

Executives

Brad Shepherd – Investor Relations

Benjamin S. Butcher – Chief Executive Officer, President and Chairman of the Board

Geoffrey G. Jervis – Chief Financial Officer, Executive Vice President, Treasurer

William Crooker – Chief Accounting Officer

David G. King – Executive Vice President and Director of Real Estate Operations

Analysts

Mitchell B. Germain – JMP Securities LLC

Sheila K. McGrath – Evercore Partners Inc.

Brendan Maiorana – Wells Fargo

Jamie Feldman – Bank of America Merrill Lynch

David Rodgers – Robert W. Baird & Co.

Andrew Schaffer – Sandler O'Neill & Partners

Michael Salinsky – RBC Capital Markets

Operator

Greetings and welcome to the STAG Industrial Incorporated Second Quarter 2014 Earnings Conference 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 reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brad Shepherd, Vice President of Investor Relations. Thank you, Mr. Shepherd, you may begin.

Brad Shepherd

Thank you. Welcome to STAG Industrial’s conference call covering the second quarter of 2014 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 filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information of package available on the Company’s website.

As a reminder, forward-looking statements represent management’s estimates as of today, Thursday July 31, 2014. 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 Jeff Jervis, our Chief Financial Officer.

I will now turn the call to Ben

Benjamin S. Butcher

Thank you, Brad. Good morning everybody and welcome to the second quarter earnings call for STAG Industrial. We are pleased to have you joining us and look forward to telling you about our second quarter results and some significant subsequent events. Presenting today in addition to myself will be Jeff Jervis, our Chief Financial Officer, who’ll review our second quarter financial and operating results.

As you may remember from our call last quarter we are deep into the process to the circumstance end by the right candidate to fill the CFO position here it STAG. But we are fortunate to have the chance to meet many qualified candidates in the process Jeff was the clear choice for the roll.

Also with me today are Steve Mecke our Chief Operating Officer, Dave King our Director of Real Estate Operations and Bill Crooker our Chief Accountant Officer. They’ll be available to answer questions specifics to their areas of focus. We are happy to report that 2014 continues to be the positive businesses as usual for STAG and its properties.

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 nine buildings for a combined all in purchase price of approximately $82 million, the 2.1 million square feet acquired in the quarter increased the company’s portfolio square footage to 41.2 million square feet, a 24% increase in square footage from the end of the second quarter last year.

The nine buildings acquired in the quarter are located in six different states of a weighted average lease term remaining in the five years and represent diverse industries including industrial equipment, household durables and air freight and logistics. With these second quarter acquisitions, the company has purchased a total of 13 buildings for a combined all in purchase price of a $119 million year-to-date. Subsequent to the end of the quarter the company closed on a property for approximately $9.8 million.

In addition the company has entered into contracts to acquire 11 industrial buildings for a combined purchase price of approximately $118 million. Our pipeline of deals that meet our investment criteria continues to be robust with approximately $1 billion of potential acquisitions including small portfolio deals being reviewed and considered by our acquisition teams.

We remain on-track to reach our significant 25% for year growth for 2014 and beyond. The company produced strong leasing activity in the first quarter as well and the quarter the company signed seven lease renewals totaling approximately 1.1 million square feet. Five of the renewal leases were set to expire in 2014 while two were expiring in 2015. In the quarter, we also executed new leases on approximately 200,000 square feet of existing vacant space. Occupancy declined during the quarter from 95.3% and 94.5% primarily as the result of one 300,000 square foot non-renewal.

Our [tenant] retention was below our long-term norms at 35%. We expect tenant retention for reminder of the year to come in at approximately 80%. With this retention expectation we reject our total occupancy to remain in this range mid 94% throughout the reminder of the year. For the expiring leases that did renew in the quarter we continue to see cyclically larger increases in rental rates. Cash rollover rent change was a positive 13.5% for the three retained leases and over 13.7% on a GAAP basis. The general outlook for industrial real estate continues to leasing continues to be very positive perhaps the most important factor is the continuing general economic improvement evidenced by yesterday’s GDP announcement up 4% in the second quarter after the first quarter disappointment.

In addition, the other positive factors were evident in 2013 growth in e-commerce shortening and fattening of supply chains and the onshoring of the manufacturing will continue to drive demand for industrial space over the coming years.

Over the quarter, the media focus on the potential for oversupply and industrial properties has seemed to wane a bit and all but a few specific markets notably Dallas and Southern California. The broad range of markets that we’re active in continues to generally have positive net absorption well in excessive of supply. This will lead to further reductions and availability and improving conditions for landlords to achieve rent growth and backfill vacancy more properly when it occurs.

We continue to expect to see cyclical rent growth above long-term norms for the next three to four years. This was evidenced in this quarter’s rollover rent increases. During the quarter we announced the Board Of Directors approved a 5% increase in the company’s annual common stock dividend from the current annual rate of $1.26 per share to $1.32 per share commencing with the July 2014 dividend, the increase equates to a dividend of $0.11 per share common share per month and represents annual distribution rate of 5.5% based on a quarter ending share price of $24.01. This is the second $0.06 per share increase since year end 2013 evidence of our stated policy to review our dividend and payout ratio more than just annually.

In an effort to continue its policy, we are sharing our growth in per share financial metrics with the company’s stockholders the board anticipate its evaluating its dividend policy periodically throughout the year.

I’ll now turn it over to Jeff to review our second quarter financial results and provide some further detail on our balance sheet and liquidity.

Geoffrey G. Jervis

Thank you Ben. And good morning everyone. As Ben, mentioned the second quarter continued our trend and progress on both the operational and acquisition fronts. From an operational standpoint starting with property level cash flow our portfolio wide cash net operating income or cash NOI was $33.7 million for the quarter, representing growth of 6% from the first quarter and 24% were compared to the second quarter of last year.

Compared to Q1 cash NOI was impacted by portfolio acquisitions as the $37 million of acquisitions from Q1 were relevant for the full period and the $82 million of Q2 acquisitions contributed for a partial period. The impact of acquisitions equated to a $1.5 million increase to cash NOI with the balance of the increase coming from $700,000 of new leasing activity, partially offset by $400,000 of lost revenue and increased expenses from new vacancy. On a corporate level Adjusted Funds From Operation or AFFO was $20.6 million for the quarter an increase of 6% and 36% compared to the first quarter of 2014 and the year ago period.

Adjustments from Cash NOI to AFFO our corporate level cash G&A and interest expense, recurring capital expenditures and renewal of TI and LCs. We believe that AFFO was a proxy for recurring free cash flow and the best metric for setting our dividend. Looking forward we expect corporate level G&A to be in the $5.7 million range per quarter as we continue to grow our platform to address the market opportunity.

On the dividend front, we paid monthly dividends of $10.5 per share during the quarter and raised the dividend to $0.11 per share commencing with the July dividend. From a coverage standpoint our dividends represented 88% of our AFFO a level with which we’re comfortable and a level in line with our past experience.

Looking at the balance sheet immediately available liquidity was $276 million at quarter end comprised of $6 million of cash and $270 million of immediate availability on our unsecured credit facility and unsecured term loans. In addition, we had $44 million of additional capacity on our unsecured facilities for future acquisitions.

In addition to cash and credit availability we have $46 million of capacity under our ATM program at quarter end, and expect that the program will satisfy our third quarter equity needs that said we plan on refreshing the program in the near future, leverage continued to be low with net debt to total real estate cost basis of 37% and total debt to total enterprise value of 27%.

Net debt to annualize adjusted EBITDA was 4.8 times at quarter end and our interest coverage for the quarter was 5.3 times. We continue to strive for a defensive balance sheet and believe that we have achieved our goal today. As evidenced by Fitch’s June aforementioned of our investment grade rating and positive outlook assessment.

Looking at our outstanding debt at quarter end we had approximately $559 million of debt outstanding with a weighted average remaining term of 4.5 years and a weighted average interest rate of 3.76%. During the quarter we executed a $100 million private placement of senior unsecured notes consisting of $50 million tenure notes and $50 million of 12 year notes.

Borrowings under both tranches of notes bear interest at a fixed rate of 4.98%. The 12 year notes were funded on July 1 and the 10-yaer notes are expected to fund in October.

As we look to manage our liabilities, we strive to have multiple credit relationships to minimize calendar year maturity concentrations and to match the long duration of our assets. The private placement markets and accomplishment on all fronts, in particular addition of the private placement or the increase the weighted average duration of our liabilities by nearly 12-months or by 22%.

On the equity front, the ATM program was again effective in the second quarter as we issued 1.8 million shares of common stock at an average price of $23.79 per share, receiving net proceeds of approximately $41 million. The ATM allows us to raise just in time equity capital for our granular acquisition strategy and extremely low all-in cost of approximately 1.5%. As such we expect to continue to utilize the ATM going forward and match fund our acquisitions with roughly 60% equity.

Before I turn it back to Ben, I want to given an assessment of STAG after my first 30-days on the job. I took this job because of my belief in the business model, the dynamic stage in the lifecycle of the corporation and the quality of the people. After, 30-days I am even more convinced that this was the right decision, the more I learned about the model, the company and its people the more I am impressed with STAG.

With that, I’ll turn it back over to Ben.

Benjamin S. Butcher

Thank you, Geoff. It was another successful quarter for the company with good leasing results and acquisition progress. In particular, our acquisition totals for the year closed and under contract was $247 million, so it’s served to dispel any concerns it will recent annual goal of 25% growth.

We will continue to move forward with a lower strategy for the execution of our differentiated investment thesis. STAG continues to benefit from a combination of factors to provide a significant volume of quality and accretive opportunities for acquisitions both on a relative value and a spread of investment basis.

General market conditions remain favorable with relatively low and stable interest rates continued strengthen and then leasing market and a relatively stable cap rate environment. 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 second quarter operational results provide continued validation for this contention. Going forward we’ll maintain our investment discipline and focus on shareholder returns.

We thank you for your continued support.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Mitch Germain with JMP Securities. Please proceed with your question.

Mitchell B. Germain – JMP Securities LLC

Good morning guys.

Geoffrey G. Jervis

Good morning

Mitchell B. Germain – JMP Securities LLC

Geoff, curious I appreciate the thoughts I think you laid out a bit in terms of the balance sheet I am just curious looking at the balance sheet today and maybe reconciling that with your strategy going forward?

Geoffrey G. Jervis

With respect to the capital structure…

Mitchell B. Germain – JMP Securities LLC

Capital…

Geoffrey G. Jervis

I think that when you look at the maturity profile of the debt I think that we are going to continue to lengthen out the maturity profile and when you look it our resource of the capital that we look to tap I think you probably like to see us continue to tap the private placement market until we reach the scale to where we can cap the public market and reduce our reliance on the bank market.

Mitchell B. Germain – JMP Securities LLC

Great, I know that we have seen over reading about increased competition in secondary markets and I’m curious spends your commentary I know you get this question every quarter but are you seeing the institutional capital more and more when you are biding for properties or is it still really more private landlords?

Geoffrey G. Jervis

I don’t think that the headline as it continues to be small or competing primarily the small buyers obviously who don’t have the access to capital or the cost of capital that we do. Certainly, we hear about and there continues to be verbiage about additional competition coming in its not evident that’s occurring, our pipeline remains very robust we continue to grow our machine to better attack into our approach those markets that we find opportunities in so I don’t think that there is any meaningful in terms of increased competition and where are continue to increase our capacity to compete in those markets.

Mitchell B. Germain – JMP Securities LLC

Great and then last question for me, I think Ben you mentioned some of the market trends, should we see a similar lift in RANS in the back half of this year or next year or was there something specific that that cause the RANS to increase to the extent that sort of?

Benjamin S. Butcher

Yes, I think the backdrop is cyclical above normal, cyclical rent growth going on across virtually all markets excluding some tertiary markets et cetera but in the second and primary markets you have this underlying rent growth. So to the extent that you have static – rents are lower than that underlying rent growth. We’ve seen rent growth in every quarter for sometime now and larger rent growth in most recent quarter. So, I’m sure, if you ask our asset management that tell me that it would be too optimistic, but yes we continue to expect to see rent growth across all markets.

Mitchell B. Germain – JMP Securities LLC

Thank you, great quarter.

Benjamin S. Butcher

Thank you.

Operator

Our next question comes from Sheila McGrath with Evercore Partners. Please proceed with your question.

Sheila K. McGrath – Evercore Partners Inc.

Hi, yes, good morning. Ben or Jeff in the first half of 2014 you raised almost as much equity on the ATM as acquisitions closed. I’m just wondering, we typically model in about 60% of volumes funded with equity should we moderate our assumption, because some of the equity was frontloaded this year or should we moderate our back half?

Benjamin S. Butcher

Yes, I think that we will be – our stated intention is to raise around $40 million a quarter, we obviously get well ahead of that we raised about twice that in the first quarter that was a little bit opportunistic and that we had some big reverse enquires that we decided to take advantage of. And so we did frontload a little bit, I think that you’re thoughts generally at the margin funding deals was about 60% equity are accurate.

If you look at our pipeline I have announced deals under contract in excess of $100 million or $40 million of equity it doesn’t get that done. So, to the extent we frontloaded will be cashing up and obviously we will – as we get through the third quarter into the fourth quarter our ATM issuance may need to increase to max that increase the acquisition volume. As you know our fourth quarter is typically our largest quarter for acquisition on a cyclical basis, typically being as much as 40% of the year.

So, I’m not promising acquisition total of 40% of the year, our acquisition people are getting ready to stall me now. If we would expect that quarter to be the biggest quarter and obviously the third quarter is going to be pretty big quarter. So, our equity needs will match, our equity rates will likely match our acquisition totals at or around that 60% rate you’re talking about.

Sheila K. McGrath – Evercore Partners Inc.

Okay. And then just on the same-store NOI, it was modestly negative in the quarter. I’m just wondering as Sun Prairie lease turn cash in the back half of the year? Do you think that metrics is poised the term positive again or will that other tenant rollout in Illinois come and drag that impact?

Benjamin S. Butcher

Yes, there is obviously you know a number of factors going on, at the margin, I think that the same stores is a little bit indicative of some things with obviously the full portfolio is what, as important to us in terms of delivering return. Bill Crooker was here may be able to provide a little more granular color.

William Crooker

Yes. Actually I think going forward from Q2 to Q3 our same-store numbers rolled, same store NOI will probably remain flat, the temporary increase offset by the Illinois, and some other smaller occupancy changes.

Sheila K. McGrath – Evercore Partners Inc.

Okay. Thank you.

Benjamin S. Butcher

Thank you, Sheila.

Operator

Our next question comes from Brendan Maiorano with Wells Fargo. Please proceed with your question.

Brendan Maiorana – Wells Fargo

Thanks, good morning. So what was the drop in the office reflects portfolio that happen this quarter just seem like it is a little bit more outsize the normal.

Benjamin S. Butcher

So, we first of all that portfolio is very small so, things that happen in that portfolio are magnified by the small size of the portfolio, Dave can give any color for…

David G. King

Yes, that was the result of one lease that rolled actually was it downsizing or retain the tenant from the smaller store footage. So as Ben said a small sample set that large ripples are caused by small moves.

Benjamin S. Butcher

And Brendan just over time, if you know we’re we will eliminate that asset class from our portfolio, but it is a gradual process that we harvest as appropriate.

Brendan Maiorana – Wells Fargo

Yes, just Ben I think you mentioned that your expected occupancy for the reminder of the year to remain, about flat just given that rents are in the – on the flex/office side or about almost 3 times so they are for the warehouse or manufacturing. Is there any mix issue or is that just kind of flat across, even the three types of your product type.

Benjamin S. Butcher

I don’t think for the reminder of the year that we expect any mix issue, that certainly not a anything known on the office/flex side that’s going to cause a an unusual drop I think the mix will remain about the same, actually the mix might change and that the, there could be some change in the mix and then leasing performance is more likely to occur and are more generic areas of the manufacturing warehouse areas reducing the office area. So it could be mix change but it will be to the positive. It would be an [inflection] that a possible mix might not be possible but the increments would be net positive.

Brendan Maiorana – Wells Fargo

Okay. And just on capital deployment acquisitions that are out there, I apologize if I missed this, but did you guys provide what the average cap rate was on the deals that you did in the quarter and as we’ve talked about in the past I think you guys had looked at maybe some potentially thinking about some larger portfolio deals. Is that still a possibility and if so would we expect to see compression if you did any of those larger deals that may happen?

Benjamin S. Butcher

I time-to-time and talk about the fact that cap rates are point in time, measure not really indicative of the quality of the investment for in terms of stability to produce long-term cash flows or more interested in IRR or an average cash flow derived over a 10 year period something like that. But having said that, our cash flow, I mean our cap rates remain in or around nine ranges for the year. We have a portfolio that we’re going to close in this quarter.

So a little bit somewhat – little bit over $50 million. There’s a little bit of a hit there in cap rate but its 25 basis points or something like that versus buying those assets individually. No more than that, versus buying the asset individually. So I don’t think that we’re not focused on cap rate as a measure of the quality of the acquisitions, we’re more focused on these longer-term measures, because we intend to deliver returns of our shareholders for a long period of time.

Brendan Maiorana – Wells Fargo

Okay, and then just last one Geoff, I think you mentioned G&A guidance $5.7 million quarterly, EBITDA is kind of grow the portfolio was that still a pretty good guidance level as we think about G&A forecasting out for even for several quarters out.

Gregory W. Sullivan

I think that, it’s probably a pretty good estimate for the next two quarters and we will get some further guidance going forward. I mean obviously, we’re continuing to grow the platform in order to address the opportunity certainly trying to look at the acquisition capabilities here another parts of the platform, but I think five sounds pretty good for the next two quarters.

Benjamin S. Butcher

Yes, I would say also that the growth in G&A that is not – is more related to growing the platform that reduced to scaling to the size of the portfolio. Is very minimal dollars of required to scale for the size of the portfolio it’s more conscious decisions as Geoff just mentioned to increase the size of the machine if you’ll to address the opportunity.

Brendan Maiorana – Wells Fargo

Okay, alright. That’s helpful. Thanks guys.

Operator

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

Jamie Feldman – Bank of America Merrill Lynch

Thank you. So I talking about – thinking about the $1 billion of potential acquisitions and even the ones you have in our contract. Can you talk a little bit more about how does compared to your current footprints, tax of market and tax of quality, where you maybe growing.

Gregory W. Sullivan

I think that the easiest thing to say as the stuff that is on the pipeline looks a lot like we own already. We remain very vigilant in terms of our portfolio composition in trying to minimize the introduction of correlated risk. So our internal metric caps on geography industry lease your expiration, you were paying attention to that on a dynamic basis as we go forward, I think that the asset quality has remained fairly constant throughout, we are certainly confidence of -- I think I have said in the past but we didn’t spring fully formed for the law and they were 10-years ago our model and our understanding of capital cost on certain types of assets et cetera has improved over time so I think nothing is really changing and frankly we are pretty good at buying what kind of stuff we buy.

Jamie Feldman – Bank of America Merrill Lynch

So are you saying no new markets, just kind of spreading it out across?

Benjamin S. Butcher

Then we remain agnostic as the market, so if we can find a great transaction for us in terms of cash flow arrived and sit in the middle of the inland that buyer will buy which is not that likely that we’ll find a deal in the end of that part given all these the buying pressure on market like that that we are going to find an asset there, but we will continue to look in places, I mean we will look (inaudible) 34, 35 states now I mean I would not be surprised if that extended out 40 states overtime.

We are not anxiously looking to expand the market, we are evaluation assets in all markets that as we build our machine, we are potentially adding two new acquisition people who will have targeted to some of the – some of them will be target to add market that we have not been terribly active in. We are the Southwest through Southern California may not be the most hurdle ground for us, but there are deals we can do there, we just having to apply whole lot of manpower to those markets overtime.

In places where we are more active we spend more time on the ground looking for deals, we have been more reactive in the South west two deals that have brought the west. So as we increase our on the ground activity in those market, we expect to be able to develop more transactions that make sense to us on the basis of cash flow that arrive going forward.

Jamie Feldman – Bank of America Merrill Lynch

So how many people are you adding and where are they going to be located?

Benjamin S. Butcher

That is still in process, we currently have five outward facing people, I think we will probably hire two more.

Jamie Feldman – Bank of America Merrill Lynch

And do you have them in region, or you have them in home office?

Benjamin S. Butcher

I mean everybody – our acquisition focus is now based on regions and we will redivide the regions as we add people. Basically everything is covered today it’s just a question of intensity of coverage.

Jamie Feldman – Bank of America Merrill Lynch

Got it. Okay can you talk through some of the largest vacancies in the portfolio like the value in the second quarter and then just some of others that are out there, what the prospects are to backfill?

Benjamin S. Butcher

Well, I’ll start off by saying as an overview we can see not surprisingly continue to improvement in leasing market. On a national basis there’s a lot more of square foot, is getting absorbed then it’s getting supplied. So vacancy rates are declining, rents are increasing it’s becoming there is a general shift in the favor of the landlord. So I will turn it over to Dave to talk more specifically.

David G. King

Jamie, as far as the second quarter vacancies, the 500,000 square feet that became vacant was attributed to two leases and three buildings one in Chicago, metro area one in which STAG Kansas or two in which STAG Kansas, [indiscernible] we go adjacent tenant who is likely to take some from all other states and the market reception has been very positive. In which had a decent quarter of negative absorption but in general that’s a strong market in a mid to single-digit vacancy rates. So we are also hopeful on leasing that asset in pretty short order. And in regards to our larger vacancies, we don’t really have anything that’s persistent and troubling. We have some big buildings that are marketed for lease or sale and we expect to transact in one direction or the other on all of them.

Jamie Feldman – Bank of America Merrill Lynch

Okay, thanks Dave. And as you look forward to 2015 what is your rollover schedule look like, in terms of known move out, or is it too early to tell.

David G. King

For 2015, we had one known move out about 300,000 feet we – as Ben said through the reminder of the year we expect to renew to about 80% of our tenants from next year. We are expecting to be 75% range. So that 300,000 feet would be a large [indiscernible] 25%, vacating.

Jamie Feldman – Bank of America Merrill Lynch

All right, and then just you’re comment on rent growth, can you talk a little bit more about I know maybe in he second quarter it sounded like things have really ticked up. So what types of tenants and in what location maybe what industries that you starting to see the most life.

David G. King

It’s across the spectrum, we’ve done few logistics deals, manufactures continue to demand more space in our existing portfolio, we now have two building expansions currently underway and we’re discussing and in some point of negotiation on another six, that’s part of the (inaudible) the portfolio is lot of our building had access plans. So we can build, what is essentially free land and satisfy the growth needs of our tenants. As far as demand it’s across the spectrum.

Jamie Feldman – Bank of America Merrill Lynch

And same with across all markets too.

David G. King

Yes.

Jamie Feldman – Bank of America Merrill Lynch

All right, great thank you guys.

Benjamin S. Butcher

Thanks Jamie.

Operator

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

Unidentified Analyst

Hi this is Matt here with for Dave. Just a question on the pipeline can you maybe quantify for us of the $1 billion what is the portfolio?

Benjamin S. Butcher

I think portfolio is around somewhere around a $150 billion or $175 billion.

Unidentified Analyst

Okay and then you just talked a little bit about the development in the past you talked a little bit about development for adding on to our existing facility. Is there any spend dollars that you could maybe quantify for us either back half of the year or 2015?

Benjamin S. Butcher

Its not going to be if we buy $350 million to $400 million this year it’s a de minimis amount related to that.

Unidentified Analyst

All right thanks guys.

David Rodgers – Robert W. Baird & Co.

This is Dave with Matthew. I want to ask another question. Hi, Ben good morning with regard to the pipeline for acquisition you are looking at and 2 to 4x bigger its been in the last couple of years, volume year-to-date then, then come down and I know it usually waits for the back of the year, but is there something that’s happening this year causing this delay in terms of the overall closing ratio or there any specific things in these assets whether its credit whether the lease maturity schedule that it’s kind of catch the deals in the pipeline as a opposed to kind of moving through more quickly.

Benjamin S. Butcher

I think the pipeline has been this year has been slightly more static i.e. deals have stayed on a little bit longer than they have in the past. I don’t have a probably a reason for that I do think our conversion rate of deals that make it through initial three hours began on our pipeline our conversion rate historically on that has not been its been on the order of 10%.

So maybe a little bit higher during sometimes and a little bit lower during sometimes. But so the pipeline is also very dynamic so assets come on and off on a fairly frequent basis. I think they’re not coming on and off as quickly perhaps this year. Some of that is we’re just better identifying deals that might makes sense for us in the pipeline bigger because we have moreover facing sales people we’re spending more time in the market developing opportunities for us. So that is increase the size of the pipeline but they have also increased the size of the – or the number of assets on the pipeline that are not moving as quickly to sale, perhaps with the pipeline probably contains more today of non-marketed transactions whether there is an opportunity we know a leases have been signed through the approached seller about selling that going to take longer to trip for that deal to transact if it transacts that in deal with sellers lifting in on the market and getting to sell. So the correlated opportunities that particular type opportunity is probably slightly higher than the average pipeline asset but it’s just going to take for that deal to work through.

David Rodgers – Robert W. Baird & Co.

Great, thanks guys.

Operator

Our next question comes from Andrew Schaffer with Sandler O'Neill. Please proceed with your question.

Andrew Schaffer – Sandler O'Neill & Partners

Thanks. Before your stock [indiscernible] today. Can you talk about how you way dispositions can reflect across office assets for CPM.

Benjamin S. Butcher

I think that the – we are opportunistically selling assets in the flex arena, as we sign leases or the user shows up or whatever the dynamic might be. So I think we are just going to continue to sell those opportunistically not look at them as really look at that capital as a strategic source of capital to fund acquisitions. I guess, I think we will also look to sell some of our – if you will more claims and nil assets in the warehouse manufacturing area, when we signed leases that say a long-term lease for investment great credit where there is an opportunity to perhaps of that asset value more outside the portfolio than in the portfolio. But all of that stuff is more opportunistic as opposed to design in terms of producing the required equity capital to continuing our acquisition effort. We are committed to be in an external growth story although we are having internal growth and expect to have internal growth going forward. I think that equity capital is going to continue to come from external sources and primarily from common equity.

Andrew Schaffer – Sandler O'Neill & Partners

Okay, so recently expecting any meaningful dispositions in the second half of 2014.

Benjamin S. Butcher

No, it will be over the next couple of years there will be couple of dispositions a year, but more again more related to the opportunity and involve with that assets and it will be related to any strategic decisions to try and raise capital that way.

Andrew Schaffer – Sandler O'Neill & Partners

All right. That’s very helpful, thanks.

Operator

Our next question comes from Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Michael Salinsky – RBC Capital Markets

Good afternoon. Most of my question has been answered. Just had a quick question in terms of competition. Given the size of deal pipeline at this point are you seeing increased competition as industries change deal?

Benjamin S. Butcher

I’m sorry – increased competitions for assets

Michael Salinsky – RBC Capital Markets

Yes are you seeing more you typically have not had a lot of competition chasing in the secondary market are you seeing any kind of pick up in competition for assets there?

Stephen C. Mecke

Yes, well [indiscernible] sort of player group, that is in their computing we are definitely seeing more and more people bidding on deals an individual deal. But once again its that different players are leveraged you are trying to get back that- all that. So it’s now weighed in apples-to-apples competition we are bidding versus a single use of the bidder.

Benjamin S. Butcher

Yes, and our transactional certainty which we’ve talked about on previous calls remain at the huge advantage that we have versus the small bidders that Steve just referring to and does allow us to frequently prevail and we are not the highest bidders,– in fact throughout this obviously many times, the four field real estate transactions are very painful especially for a small seller. So, we will continue to hopefully to take advantage of that of our size, strength and reputation for transactional certainty.

Michael Salinsky – RBC Capital Markets

Thanks very much.

Operator

(Operator Instructions) Our next question comes from [indiscernible] with JPMorgan. Please proceed with your question.

Unidentified Analyst

Hi, good morning. Just real quick. What were some of the reasons for the leases that weren’t renewed this quarter?

Benjamin S. Butcher

We continue to look to see if there is anything in particular any themes. And as I said in the past, we’ve never had to the best my knowledge, we've never had a tenant leave, because they wanted to higher clear building or they wanted a cross stock building or something like that. Its generally a strategic decision or very frequently they just need a bigger building, that is the most common, the most common reason leaving is that they have decide through consolidation M&A activity simple growth of their business, they need a bigger building. So that’s a most consistent theme and then changes in logistical patterns et cetera. But there is no sort of consistent theme out there that he is troubling to loss versus our assets.

Unidentified Analyst

Okay, thank you.

Operator

There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Benjamin S. Butcher

Thank you very much all today for your interest and good questions. The one question I kind of expected to be asked this morning given the 10 basis points rise in the tenure yesterday is how do you feel about rising interest rates. And obviously the first answer to that is they haven’t really been – obviously we had a little blip but if that continue to stay low and it kind of feels like there is a lot of reasons why we may not be facing that environment.

Having said that we are in a position versus our competition in most of these markets again as Steve had mentioned earlier, were leverage buyers were – we are operating that 40% of the margin, 30% versus enterprise values, so we are very low levered entity. So increases in interest rates would actually make us more competitive in the market or more importantly we hurt our competition in the market far more than it would hurt us. And so, we actually think that 100 basis points rise in interest rates, probably provides pretty significant competitive advantage to us.

Obviously, it may affect our cost of equity capital, but I think the results that we will produced will correct that any short-term, again on our equity cost will be more than we outlaid overtime by our performance in that type of environment.

So, again thank you for your questions thank you for listening in the call today. And thank you for your continued support.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation. And have a great day.

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Source: Stag Industrial's (STAG) CEO Benjamin Butcher on Q2 2014 Results - Earnings Call Transcript

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