STAG Industrial's (STAG) CEO Ben Butcher on Q2 2016 Results - Earnings Call Transcript

| About: STAG Industrial, (STAG)

STAG Industrial, Inc. (NYSE:STAG)

Q2 2016 Earnings Conference Call

August 03, 2016 10:00 AM ET

Executives

Matts Pinard - Vice President, Investor Relations

Ben Butcher - Chairman, President and Chief Executive Officer

Bill Crooker - Chief Financial Officer, Executive Vice President and Treasurer

Dave King - Director of Real Estate Operations

Analysts

Sheila McGrath - Evercore ISI

Tom Lesnick - Capital One

Dave Rodgers - Baird

Blaine Heck - Wells Fargo

Jeremy Metz - UBS

Bill Crow - Raymond James

Scott Freitag - Bank of America

Michael Carroll - RBC

Dan Donlan - Ladenburg Thalmann

Operator

Greetings and welcome to the STAG Industrial Second Quarter 2016 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’d now like to turn the conference over to Matts Pinard, Vice President of Investor Relations. Thank you. You may begin.

Matts Pinard

Thank you. Welcome to STAG Industrial's conference call covering the second quarter 2016 results. In addition to the press release distributed yesterday, we've posted an unaudited quarterly supplemental information presentation on the company's website at stagindustrial.com under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements relating to earnings trends, G&A amounts, acquisition and disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends and other matters.

We encourage all of our listeners to review the more detailed 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 informational package available on the company's website.

As a reminder, forward-looking statements represent management's estimates as of today, Wednesday, August 03, 2016. STAG Industrial assumes no obligation to update any forward-looking statements.

On today's call, you will hear from Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer.

I will now turn the call over to Ben.

Ben Butcher

Thank you, Matts. Good morning, everybody. And welcome to the second quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about the second quarter results.

Presenting today in addition to myself will be Bill Crooker, our Chief Financial Officer, who'll discuss the bulk of the financial and operational data. Also with me today are Steve Mecke, our Chief Operating Officer and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.

The second quarter was yet another strong operational quarter for STAG. Our continued focus is to maximize long-term cash flow per dollar of equity invested and this focus has produced another quarter of strong growth. We continue to see widespread opportunities for accretive acquisitions, which were reflected in our current pipeline of $1.8 billion.

Our ability to identify and consummate these accretive acquisition opportunities is greatly aided by other investors’ widespread adherence to decision rules. These decision rules limit analysis and ultimately hinder risk adjusted returns. Other investors seek to maximize metrics such as lease term, tenant credit and certain market exposures. So long as other investors seek to maximize metrics other than long-term cash flow per share, this opportunity to make a accretive attractive relative value acquisitions should persist.

As we've described in previous quarterly calls, industrial real estate fundamentals are very strong. This is due in no small part to the continued growth of e-commerce and the significant incremental demand this generates. The strength in industrial fundamentals benefits STAG much as it benefits our industrial peers. We're seeing strong tenant demand for our buildings, declining vacancy and rising rents across the markets we operate in.

A little more on e-commerce. Within the last year, the National Association of Office and Industrial Parks, or NAIOP, has completed two white papers on dedicated e-commerce fulfilment centers. They identified 371 such facilities in the U.S. and at the risk of oversimplification they concluded that these e-commerce industrial buildings reflect parameters similar to the overall stock of industrial buildings. They tend to be located near population centers and intermodal points. They are a mix of property quality, 30% Class A, 50% Class B, and 20% Class C and have an average age of 22 years. These parameters with the exception of the C component are very similar to the overall STAG portfolio. E-commerce comes in many shapes and sizes and we believe this demand driver will continue to benefit STAG’s portfolio going forward.

With that, I'll turn it over to Bill to walkthrough our second quarter results.

Bill Crooker

Thank you, Ben, and good morning, everyone. The second quarter built on a positive momentum from Q1. We significantly increased our acquisition volume during and subsequent to the quarter, continue to make progress on our disposition program and produce strong operational results.

During the quarter, we acquired five buildings for a purchase price of $58 million with a weighted average cap rate of 7.9%. As part of these acquisitions, we acquired our second California asset, which has a 10.5-year lease term to a strong credit. This acquisition was completed in large part due to our relative value approach to real estate investing and the enhanced coverage afforded by our fully built out acquisition team.

We currently have 23 buildings for $284 million that are closed subsequent to quarter end are under LOI or under contract. We expect that these LOI and under contract properties will close prior to Europe. This year-to-date activity has enabled us to raise our acquisition guidance for the year to between $350 million and $415 million, while maintaining our guidance on cap rates, which are expected to be in the low-8s.

We continue to execute on our disposition plan. During the second quarter, we disposed 7 buildings for $18 million. These dispositions were a combination of individual opportunistic transactions and the disposition of non-core underperforming assets. The opportunistic dispositions resulted in unlevered IRR of 14%. We continue to expect dispositions in the range of $100 million to $200 million, which includes an accretive portfolio disposition expected to close by year end.

At quarter end, we own 290 buildings with a total of 55 million square feet. Occupancy stands at 94.9% for the portfolio with an average lease term of 4.1 years. The quarter’s cash and GAAP rent change for signed leases was down 1% and up 5% respectively. This quarter’s rent change results included the effect of one lease for 465,000 square feet to an investment grade tenant with a below market TI package. Excluding this one lease, the remaining 1.4 million square feet had cash and GAAP rent increases of 14% and 20% respectively.

We had a retention rate of 75% on the 900,000 square feet expiring in the quarter. The cash in GAAP rent change for the retained tenants was 6% and 10% percent respectively. We continue to expect the full year retention to be approximately 70%.

From an operation standpoint, cash NOI for the quarter grew by 13%. Same-store cash NOI grew by approximately 1% over the same period. Core FFO grew by 10% compared to the second quarter of 2015. On a per share basis, core FFO was $0.38 per share, an increase of approximately 6% compared to the prior year.

Our balance sheet continues to be quite strong and in line with our BBB investment grade rating. At quarter end, our debt to run rate EBITDA was 5.5 times and our fixed charge coverage ratio was 2.8 times. We continue to operate in our promulgated leverage ranges of 5 times to 6 times debt to run rate EBITDA and greater than 2.5 times on our fixed charge coverage ratio.

As of June 30, we had $64 million outstanding on our revolver and $438 million of immediately available liquidity, which includes cash on hand of $8 million and an unfunded $150 million 5-year term loan. This unfunded term loan is fully swapped for an all-in interest rate of 2.69% and will be drawn by December 2016.

Additionally, our Series A preferred, with a coupon of 9%, and a notional balance of $69 million becomes callable at par on November 2, 2016. We continue to focus on all sources and uses of our capital and will evaluate this portion of our capital structure in the near future. At quarter end, we had approximately $963 million of debt outstanding with the weighted average maturity of 6.1 years and a weighted average interest rate of 4%. All of our debt is either fixed rate or has been swapped to a fixed rate with the exception of our revolver.

Subsequent to quarter end we sold 3.2 million shares under our ATM program for a weighted average share price of $23.77 raising gross proceeds of $76 million. The net proceeds were used to repay amounts under our revolver, which had increased as a result of our accretive acquisition activity. Factoring in the reported subsequent acquisition and equity activity, our resultant debt to EBITDA is 5.2 times, which is on the low end of our promulgated leverage range. We'll continue to use a variety of capital sources to fund our accretive acquisitions for the remainder of the year.

I will now turn it back over to Ben.

Ben Butcher

Thanks, Bill. We're pleased with the results of the execution of our business plan have been recognized by the market over the past six months. The ability to source a properly prized capital is a major component for the effective execution of our strategy. As Bill mentioned, we sold $76 million of common equity subsequent to quarter end. Raising this common equity at $23.77 per share coupled with our operating and financial leverage allows us to continue to make very accretive acquisitions.

Having said that, we will continue to evaluate the various sources of equity capital, and in the case of asset sales, demonstrates our availability to us. Toward that end, we are planning to execute on the $60 million to $80 portfolio sale this year, find assets that are representative of the overall STAG portfolio. Resulting capital raise will be redeployed into accretive acquisitions with cap rates well above the portfolio execution cap rate.

As we move through the second half of 2016, we will continue to focus our efforts around the strengths of both our investment thesis and the company. This continued focus and the demonstrating capital discipline combined with the abundance of accretive acquisition opportunities make for a very bright future for our company. We thank you for the time this morning for your continued support of our company.

I will now turn it back to the operator to open the floor for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your question.

Sheila McGrath

Yes, good morning. Ben, I was wondering if you could talk about the acquisition in California, that’s a lower cap rate market, I know you're an IRR buyer, but just a little more detail on that transaction and how competitive that process was?

Ben Butcher

You know, as we mentioned in our prepared remarks, that is a strong credit and a long-term lease and as you suggest, probably quite a little lower cap rate, but we did not step away from our long-term cash return requirement to make that acquisition. We're able to find an acquisition in a more difficult market to acquire and it still met our long-term return goals.

Sheila McGrath

And were there many other bidders on that?

Ben Butcher

Yeah, it was a marketed process.

Sheila McGrath

Okay. And then, now that you are back using the ATM again, should we assume for modeling purposes 60% of equity kind of model or will the portfolio sales in the balance of the year kind of limit the ATM for the fourth quarter?

Ben Butcher

I think we’ve described before, nirvana for a REIT should be staying leverage neutral at all times, so we bring in the capital both debt and equity as needed on a day requiring an asset or spending money on some other worthwhile investment. So we certainly have sources of capital from asset sales. It'll be coming in and we will balance the ATM and any other potential other equity issuance around our needs and that nirvana is staying as close to leverage neutral as we can. We are currently a little lower in that spread of 5 times to 6 times debt to EBITDA than we were post-quarter, a little lower than we were at quarter end. That’s obviously in anticipation of large amount we have under a contract and LOI to be closed shortly.

Sheila McGrath

Okay. Last quick question, on the timing of the portfolio sale, you think – roughly, what should we be -- ?

Ben Butcher

We're in the market. We have a – we're calling for offers in the not too distant future. I think, you know, we're not exactly certain, but around quarter end we're hopeful that it will be in this quarter, but it certainly will be in this year.

Sheila McGrath

Okay, great. Thank you.

Operator

Your next question is coming from the line Tom Lesnick with Capital One. Please go ahead with your question.

Tom Lesnick

Thanks for taking my questions. I guess, first, the – not just you guys, but the entire industrial sector as a whole has really run here as of late. I'm just wondering, what are you seeing in terms of acquisition underwriting? Have cap rates compressed in the markets you're watching? And how do you guys kind of reconcile that with what you're seeing in the public equity markets?

Ben Butcher

Well, I'd say that our competition is not the large public REITs or large private buyers of industrials REIT. Our competition remains primarily smaller, perhaps less well-capitalized entities. So, although you could argue that our weighted average cost of capital has gone down, I'm not sure the weighted average cost of capital for our competitors has gone – to buy assets, has gone down as much. So, we're not really seeing cap rate compression in the markets. And again, we're not looking at markets – in particular, San Jose cap rates are up, so we're going to go buy in San Jose. We're still looking at everything on a granular basis. So, we're really not assessing markets as much as the individual opportunities within markets.

Tom Lesnick

Got it. And just to be clear on the ATM usage, was that you guys really being more opportunistic with where your stock is currently priced, or is that specifically because you had greater acquisition pipeline and a specific use of proceed?

Ben Butcher

Yes. We're very cognizant of the market's desire for us to demonstrate that we're prudent allocators of capital, both on the source and the use side. So, we raised this equity in anticipation – or actually, not anticipation, because we knew we were closing transactions shortly that would require that equity to be put to work. So, it's not a reflection of share price so much as we had developed uses for the capital.

Tom Lesnick

Makes sense. And then just one final one from me on the ATM. You guys have obviously been acquiring on the line and through other sources over the last year or so since you haven't been using the ATM, but now that the markets are in your favor and you are using the ATM, I guess, are you going to try to play catch-up a little bit on the matched funding since you've used mostly debt over the last year, or how are you thinking about the mix of equity as a piece of the entire component?

Ben Butcher

Yes. As I think I mentioned a few moments ago, our debt to EBITDA ratio right now is in the lower end of the range, so we're not under any great pressure to raise undue amounts of equity, et cetera. As we go through the year and as our acquisitions come to be closed, we'll be raising equity as we need it, but cognizant of the fact that we have, actually, a little bit of a cushion right now.

Tom Lesnick

All right, guys. Nice quarter. Thanks, again.

Ben Butcher

Thanks, Tom.

Operator

Our next question comes from the line of Dave Rodgers with Baird. Please go ahead with your question.

Dave Rodgers

Yeah, good morning, guys. I wanted to ask a little bit, I guess about – on the leasing front. And there'll be two parts. But the first part is, spreads are getting much better than we've seen historically, and really strengthened during the quarter. Can you talk a little bit more about, I guess, the economics that we're seeing, whether those are consistent with what we should expect to see overall, over the next couple of quarters and years?

Ben Butcher

I think that one of the things – we're very cognizant of the fact that the markets are strong, and I think you saw in our renewal spreads – very strong. We had some small sample anomalies around our overall leasing spreads. But one of the things that we would point out is that the leasing spreads are done on lease rates, not on net effective rates and we continue to be able to lease our buildings and produce good leasing income without spending a great deal of money. I think our leasing costs per foot were $0.20 in the quarter. I know some of the other industrial peers are spending numbers that are 10x that, to complete their leasing. So, I would caution people to be thinking about net effective rent spreads as opposed to just rent spreads.

Dave Rodgers

What's the – and maybe this is for Dave or you, Ben, but what does the traffic for new leasing look like? I mean, just looking at kind of some of the new leasing numbers. Maybe take economics out of it, but just in terms of true demand, are you continuing to see really good demand on that front? I'm not sure we saw that kind of come through in the quarter.

Dave King

We continue to see good traffic on the vacancies we have. We are only 5% vacant in aggregate, so we don't have a lot to lease on the new front, but interest and activity is strong.

Dave Rodgers

Bill, can you talk a little bit about G&A in the second quarter and the first half, kind of running a little bit ahead, and kind of thoughts on the second half and for guidance?

Bill Crooker

Yeah, sure. We're still on track to have $31 million of G&A for the year after excluding the one-time severance in Q1 of $3.1 million. So, it is a little bit ahead for the six months, but that was really just seasonal expenses. So, we'll be on track for $31 million for the year.

Dave Rodgers

Last question. Bill, I'll stick with you, and Ben, you get to throw some thoughts in there too. We've talked about equity a lot. What are you thinking on the debt market side of the equation right now? Clearly, you've got the ability to term out some of the line as you think about the second half of the year, or maybe do a forward debt offering, where rates are. What are you thinking about that, on the debt side of the equation today?

Bill Crooker

I mean, it's certainly something we're looking at. The debt capital markets are very attractive right now. We do have that 5-year unsecured term loan that we mentioned, that's swapped out for an all-in rate of 2.69%. We can draw that by December. And our line balance after the equity raise is $24 million. So, we have a lot of availability on our line. We have the 5-year term loan. And then – so, right now, we don't need to access the debt capital markets, but we're certainly looking at that. We have a big piece of secured debt that we can prepay next August that has a fixed rate of 6%. So, as that becomes closer, we may do a forward debt transaction for that.

Ben Butcher

Yes. I think it's – obviously, one of the things that we've done in terms of managing our balance sheet is that our – I think we have a [indiscernible] term on the unsecured is about 6 years, something like that?

Bill Crooker

That's right.

Ben Butcher

All that is either fixed or swapped to fixed. So, it's not like we have a bunch of floating rate debt we can now term out. We've been conscious of the ability or the opportunity to term out, and are running a balance sheet that is very well-laddered and has quite a bit of term to it already.

Dave Rodgers

Okay. Ben, maybe one last one for you. In terms of – we keep hearing that financing is getting more difficult. I mean, clearly, industrial construction's on the rise, but then [indiscernible]. But are you seeing that in your markets, where construction financing is still more and more difficult to get? Are you seeing more, maybe, smaller developers in your market, looking for either a takeout or a financing play, and how do you envision playing into that, if at all?

Ben Butcher

Yeah. I think we continue to see people looking for ways to finance capital. I think anecdotally, talking to construction lenders in the hallway at conferences, et cetera, they talk about how they used to have to compete for business, and now they're sometimes the only player. Certainly, construction lending continues to get more difficult. It is a tough business, and I think as banks look at their sort of the range of areas of endeavor for them, construction lending is something that historically has been a tough business for them. And so, as they get concerned about the world around them, that's one of the first areas they're going to tighten up. We are – thus far, our activity has been only on takeouts. We haven't advanced past that. And we are looking at a couple of takeouts today, but I don't think that activity as of yet has increased.

Dave Rodgers

Thank you.

Operator

Our next question comes from the Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck

Thanks. Ben, can you talk a little bit more about the disposition environment at this point, and whether you've seen any kind of change in the amount of interested buyers, or maybe their ability to obtain financing from kind of the regional banks they use for the kind of assets that you guys are selling?

Ben Butcher

So, the portfolio sale that we've undertaken in our marketing is of size that will probably appeal to regional private equity players, et cetera. They are, as we've mentioned in the past, likely to fund through local banks. I think that that type of financing remains available. These are pretty – the kind of people we're talking to are pretty strong players. And so, their cost of capital actually has probably declined a fair amount. And we're expecting very strong bids and the brokers are telling us that we should expect strong bids, that the number of players that are interested is still large; and again, their ability to financing remains available to them.

Blaine Heck

Great. That's helpful. And then I just wanted to get a little bit more color on the impairment charge you guys took during the quarter, maybe what the cause of that impairment was.

Bill Crooker

Sure. The impairments related primarily to two properties. One property had a military contract that was in place for years. The contract was cancelled due to a shift in the military defense strategy and we've placed a significant value on the lease there. The second one really related to a credit issue that happened with a tenant this quarter. A buyer came in and is looking to buy out that lease for some reduced rates. But on the whole, the impairments represent a small part of the portfolio, and have a small impact on our overall NOI and core FFO per share. So, although there were some impairments, they're small in the grand scheme of things.

Blaine Heck

Okay.

Ben Butcher

And Blaine, I would suggest, one of the things about GAAP, obviously, is it makes you write down things. When we have good results – we have a lease that's above – we sign above market, or a longer-term expectation, all those sort of things don't get reflected. So, it focuses in. And we are – and there's a lot of things like that, that happen to us in our endeavour that don't get reflected in accounting. We are a large, diverse portfolio, taking what we believe are calculated risks, where we are being overpaid for those risks. In order to bake this cake, we have to undertake risk, and we are occasionally going to have those bets, marginally at least, go against us. So, again, GAAP is going to point those times out and won't point out the – we think the more-often times where we win those bets.

Blaine Heck

Sure. No, that's understandable. But I guess more broadly, if you look across the portfolio, do you see any kind of similar credit situations, or has there been any kind of significant change in your tenant watch list?

Bill Crooker

No. I mean, we've had little to no tenant credit issues since we've been public. So, this one is unique to us. And I would say we're doing better than average, given the large size of our portfolio. And if there was anything that we foresee in the future, we would take that charge today. So, nothing else on the horizon.

Ben Butcher

And Blaine, I'd point out some of the facts that we occasionally point out in non-deal road shows and our supplemental. We have – our average building is close to 200,000 square feet. Our tenants are large. 90% of them have – approximately 90% have revenues over $100 million, and over 60% have revenues over $1 billion. These are big, sophisticated companies. We're not dealing with mom and pops and -- for the most part anyway, we're not dealing with moms and pops. So, we're not surprised that the credit quality of our portfolio is as strong as it is, and our experience with credit problems has been as minimal as it has been.

Blaine Heck

Yes, that's helpful. Then lastly, Ben, you guys have done a good job growing FFO, and I guess there are a few different camps out there with regard to what your FAD is, given differences in CapEx. But at this point, how are you thinking about your dividend payout targets and possible dividend growth in the future?

Ben Butcher

Yes. I think we will continue to pursue a policy of muted dividend growth as we restore some of the ratios to numbers that are – we think are more appropriate long-term. For the quarter, we're still under, I think, almost any ratio you look at, we're – it's still a covered dividend. We'd like it to be a little bit better covered, and that's why we're going to do a moderated dividend growth going forward.

Blaine Heck

Sounds good. Thanks.

Operator

Our next question comes from the line of Jeremy Metz of UBS. Please proceed with your question.

Jeremy Metz

Hi, guys. Good morning.

Ben Butcher

Good morning.

Jeremy Metz

In terms of the dispositions, you'd mentioned the portfolio deal earlier, about the rebound in the stock price bringing equity back into the equation. Does that push back some of the other single assets you were maybe previously considering on the sale front, I think given, Ben, some of your prior commentary on pricing not always meeting the value on single assets if they were part of a broader portfolio?

Ben Butcher

Well, I think the three areas of disposition that we've discussed previously are the culling of the herd of – selling things that we just don't want to own anymore and we'll do that opportunistically – continue to do that opportunistically. Primarily we're talking about the flex assets, which are 2% of our square footage, 3% of our ABR. The other category is where assets are worth more to somebody else than we believe they're worth to us within our portfolio. Those will continue to occur. They are not going to be a big part of the portfolio. If there's three or four of those a year, that would be probably a pretty big year. But those are all demonstrably worth more to somebody else than they were to us in our portfolio.

The last piece, which is the portfolio sale, I think there's a – you could have an elegant financial discussion of whether the – stock price versus portfolio sale price and I think we're in a range now where we expect to execute on this portfolio transaction. It's something that is fairly neutral to our portfolio value. But we believe that it's very important to demonstrate – to put in the market a small portfolio price premium to demonstrate that our ability to acquire assets and then sell them 100-plus basis points inside of where we bought them, is an important part of the overall story.

I will caution that this is still a relatively small portfolio. We believe that the larger portfolio – the whole of STAG, if you will, the enterprise is worth yet another leg up in terms of value. I think you can look at some of the large, aggregated portfolios, in particular our industrial peers, and see the value that people place on large, diversified cash flows from industrial assets. And we would suggest that our portfolio cash flows going forward are going to look very similar to those other companies'. And frankly, our cash flows are being sold at a – in the current market, are at a discounted rate.

Bill Crooker

And Jeremy, we did have three of those opportunistic dispositions this quarter, which resulted in a 14% unlevered IRR.

Jeremy Metz

Okay. Appreciate that color. And then just one on the acquisitions CapEx. If I look at the CapEx disclosure, it looks like you booked almost $4 million of that as acquisitions CapEx this quarter, yet I think the stuff you bought was 100% occupied. So, I just wonder if you can maybe just give a little color on what's in that expected spend.

Ben Butcher

Well, I mean, typically it's building improvements. Things that are just due at the time we're – capital improvements that are due at the time we made them.

Bill Crooker

Yes. So, a lot of times when we acquire properties, Jeremy, the seller will have done a lot of these improvements prior to putting the building on the market. To the extent we go through underwriting and we identify this CapEx, we negotiate with the seller to get a price reduction and we fix the building within the first 12 months. So, that's what that CapEx relates to. But there's a few roofs in there that we identified in our diligence process. And that's why the number is where it is.

Jeremy Metz

Right. Thanks, guys. Appreciate it.

Operator

Our next question comes from the line of Bill Crow with Raymond James. Please go ahead with your question.

Bill Crow

Hey, good morning, guys. I wanted to start with the e-commerce discussion and just get your take on whether your portfolio is close enough to the major population centers to really be able to exploit some of those trends. And I guess, more specifically, the next-day or even same-day delivery that seems to be driving some of this incremental warehouse demand.

Ben Butcher

Yes. Thanks, Bill. I think that the – it's important to note that the difference between e-commerce and last mile delivery discussions are – there is a difference. Product that is being put in warehouses to be delivered through e-commerce can be stored in the general warehouse infrastructure of the United States, so long as it can get to – again, we're talking about next-day now. And so long as it can get to a UPS, a FedEx or a USPS facility, it can be almost anywhere in the country the next day. And that is – the preponderance of e-commerce is that. Same-day, same-hour, same-minute, whatever, deliveries, are a very, very, very bleeding-edge concept that does occur and only will occur in certain very dense metropolitan areas.

And I don't think, or we don't believe, that that is going to a – very much of a real estate play, so much as a technology and people play, using some very small pieces of real estate very intensively. Those small pieces of real estate will be fed by – we believe, by the infrastructure that – industrial infrastructure that exists today out on the ring roads, whether it's the inner ring road or the outer ring road, but it's going to be fed in the same way that brick-and-mortar stores are fed today, just more intensively through – and it may be through stores or whatever. But last mile is different than – we believe it's different than the warehouse infrastructure, and we think that the warehouse infrastructure – and I think the NAIOP studies would suggest that is true – will tend to be relatively unchanged by the advent of e-commerce.

Bill Crow

Okay. Ben, I think you discussed your portfolio's very large and diverse, and we agree. And your average lease term is a short 4-plus years. So, I guess my question is – and I'm not sure you can answer it, but I think last quarter we were talking about one lease that – where the ownership of the tenant changed. They didn't move out, but it was recorded as a move-out for retention purposes. Now, we're talking about one lease, and on a net basis it was good, but it distorts the numbers. I remember talking about a big Wisconsin warehouse that went empty for – I guess my question is, how big do you have to get before we can look past one-off items each quarter?

Ben Butcher

Well, I think perhaps we're focused on these because of the focus that some of your peers have about numbers relative to our other peers. I think that – we believe that if you focus on our FFO per share growth and kind of, not ignore, but maybe pay less attention to the other noise, you'll see that what we're doing is producing FFO per share growth and not really – the one lease that we're talking about this quarter – and I admit we've been talking about one-off or two deals, or here or there – was a building that we bought with above-market rent that we re-leased for above-market rent, but for less than the above-market rent was initially, which is a – for our shareholders, was a good transaction at the time we purchased.

And the re-leasing at a lower number was a great transaction for our shareholders. We achieved a number above market. And that achievement will accrue to the benefit of our shareholders, but it does not accrue to the benefit of our same-store leasing – excuse me, to our leasing spread numbers. So, yes, we are a 300 – circa 300-asset portfolio, and it's still possible that the larger assets in that portfolio will, because of the small amounts that roll in certain quarters, will produce inordinate impacts on our numbers. But again, we're very confident of our ability to produce great FFO per share growth across the portfolio.

Bill Crow

Okay. One final question – risk of beating the ATM subject to death. Earlier this year, your narrative with shareholders really centered on the fact that when you came back for capital, that you thought it would be important to do a marketed overnight transaction. Just to kind of make sure shareholders aren't bored. So, I'm just curious, what changed your thought process – your strategy, in that regard?

Ben Butcher

I think we're – always wanted to do matched sources and uses as best we can. And I guess as we went through the beginning of this quarter, and we're looking at the amount of assets that we were going to be acquiring here in the third quarter, we started to recognize the need for raising capital and the needs for raising capital in incremental amounts that might be smaller than the fall one. So, maybe we're just fine-tuning, a little bit, that attempt to reach the nirvana of leverage-neutral. We have not dismissed the possibility of doing follow-on. I think that maybe it's sort of – I would look at it more as an evolvement of our long-term goal of matching capital sources and uses.

Ben Butcher

Thanks, Bill.

Bill Crooker

Thanks, Bill.

Bill Crow

Okay. I really appreciate the answers. Thanks, guys.

Operator

[Operator Instructions] Our next question comes from the line of Scott Freitag with Bank of America. Please go ahead with your question.

Scott Freitag

Great, thank you. Can you please walk us through your largest 2017 expirations and the pipeline that exists today to backfill?

Ben Butcher

No. I mean, our 2017 expirations are – I don't know how many different tenants we have rolling, but it's a significant number of tenants rolling. We're not going to discuss individual tenant rolls, et cetera. The backlog to fill the ones that may be coming vacant, as Dave described earlier, is strong. But we are not going to get into discussing individual tenant negotiations, et cetera.

Bill Crooker

Yes. But Scott, it is important to say that we do project 70% retention in 2017, which is consistent with what we have this year, as well as the prior years.

Scott Freitag

Okay, thanks. That's helpful. And then, additionally, can you just discuss some of the – or put some numbers around the rent growth that you're seeing maybe generally or across some of the major markets?

Ben Butcher

Yes. I mean, we are, across the markets that we're operating in – and again, we're looking at assets on an individual basis – we're seeing the same kind of thing that is generally true across the markets. The overall industrial market has now, I think, gone under 6% vacancy. So, you're seeing very strong rent growth, above-normal rent growth. Long-term rent growth in most markets is 1% to 2%. You're seeing some markets that are running along at 3% to 4%.

Now, having said that, there are also some major markets that we are – we use as a starting point – CBRE Econometric Advisors' rent growth numbers and we're seeing some major markets where they're projecting negative rent growth in the coming years because rents have moved so fast and supply has come in. So, it's very much a market-by-market assessment and those assessments are used in our underwriting and in our ability to project that we can derive the required returns for us to buy an asset.

Scott Freitag

Okay, thanks. That's it for me. Thanks, guys.

Ben Butcher

Thank you.

Operator

Our next question comes from the line of Michael Carroll with RBC. Please go ahead with your question.

Michael Carroll

Yeah, thanks. Maybe a little bit off of Jeremy's question earlier, as we move into next year, into 2017, can you describe the level of disposition activity we should expect going forward? Is this going to be more from the opportunistic bucket or are you going to still think about some of these portfolio sales that you're looking at this year?

Ben Butcher

Well, the portfolio sale that we're undertaking now is a demonstration, we believe, of the – that arrow is in the quiver. It's always available to us. And so, the decision to use that arrow, if you will, as we source equity to make accretive acquisitions, is dependent on where our share price is at the time. So, we will look at all the various sources of equity and choose the one that's most appropriate for us at that time and for the benefit of our shareholders at that time.

So, given, I think, the strength in the industrial market, and the strength of our peer group, we are hopeful that common equity will remain the principal source of equity capital for us going forward. So, I would not expect us to be an active disposer of assets that, frankly, are similar to the other assets in our portfolio. We are building a larger asset base, and we are taking advantage of significant operational leverage as we do that. And I think it behooves our shareholders to continue that process.

Bill Crooker

But we will continue to have the handful of opportunistic dispositions that result in double-digit unlevered IRRs annually, as well as we'll continue to dispose of our non-core flex office portfolio.

Michael Carroll

And then, can you talk a little bit about the non-core flex office portfolio? I mean, how long is it going to take you to lease that up, and how quickly would you want to dispose that? Is this a 1-, 2-, 3-year type thing?

Bill Crooker

I would say in the next 2 to 3 years, that portfolio – we will no longer have any flex office properties.

Michael Carroll

Great. Thank you.

Operator

Our next question comes from the line of Dan Donlan with Ladenburg Thalmann. Please go ahead with your question.

Dan Donlan

Thank you. Good morning. Just going back to the portfolio sale, so, are you guys committed to doing that this year, or if you continue to see your cost of equity improve, you might decide just to take it off the marketplace?

Ben Butcher

Dan, that is an excellent question. That's something that we've spent a fair amount of time thinking about, clearly, as we've messaged in the past. It's an alternative source of equity that, frankly, is on par with raising common equity today – even the net price of common equity. So, we certainly have thought about it. We think it's important to do two things. One is to follow through with the commitment we made to the market to sell this portfolio and establish at least an interim mark on portfolio – small portfolio values. And frankly, it is an okay source of capital. Whether it's marginally inferior to raising common equity today or not, it's certainly not a bad thing.

Dan Donlan

Okay. And –

Ben Butcher

And it is – that – the money raised there will be redeployed at – we think at significantly higher returns than what we're selling it for. So, it's not as though it's totally non-accretive. It is – we will benefit 100-plus basis points on the spread between where we will sell those assets and where we'll redeploy that capital.

Dan Donlan

Okay. That was – that kind of answered the next question, but I guess what I was going to say is, I mean, have you kind of seen – as you've gone out there with this portfolio and maybe lightly marketed it, have you seen kind of bids or interest levels increase? Have you seen maybe the pricing talk come down, and so you've kind of benefited from waiting to do this towards the latter half of the year versus the beginning half of the year?

Ben Butcher

I think we expected a strong response to this portfolio. The portfolio is not being lightly marketed; it is being marketed. It is out and being marketed by one of the major brokerage firms. We expected a strong response. We've gotten a strong response.

Dan Donlan

Okay. Thank you.

Operator

Okay. Thank you. This concludes today's question-and-answer session. I would like to turn the floor back over to management for closing remarks.

Ben Butcher

Thank you for your questions. We will continue to execute on our business plan to capitalize on the persisting investment opportunity in single-tenant industrial real estate, and the ongoing strength of our portfolio. Our goal is, and will continue to be, delivering best-in-class risk-adjusted returns to our shareholders. We appreciate your time this morning, and your continued support of STAG.

Operator

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

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