STAG Industrial, Inc. (STAG) CEO Ben Butcher on Q3 2018 Results - Earnings Call Transcript

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

STAG Industrial, Inc. (NYSE:STAG) Q3 2018 Earnings Conference Call November 2, 2018 10:00 AM ET

Executives

Matts Pinard - VP, IR

Ben Butcher - CEO

Bill Crooker - CFO

Analysts

Sheila McGrath - Evercore ISI

Brendan Finn - Wells Fargo

Jamie Feldman - Bank of America Merrill Lynch

David Rodgers - Robert W. Baird

Mitch Germain - JMP Securities

Brandon Travis - Ladenburg Thalmann

Operator

Greetings, and welcome to the STAG Industrial Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 Matts Pinard.

Matts Pinard

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2018 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental information presentation on the company's Web site 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 related 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 discussions 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 Web site. As a reminder, forward-looking statements represent management's estimates as of today; 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 third quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our third quarter results.

Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who will 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'll be available to answer questions specific to their areas of focus.

The overall health of the industrial sector and the underlying strength of the STAG portfolio combined with a continuation of the impressive country-wide execution translated to another quarter of solid core FFO growth. It has been a very successful year for acquisitions with volume approaching $500 million acquired year-to-date with two months of our historically busy fourth quarter to go. We are very confident we'll meet our current guidance of $600 million to $700 million for the year with a weighted average cap rate near the midpoint of our guidance, approximately 7%. Our pipeline of assets potentially worth acquiring currently stands at $2.2 billion, and contains assets similar to what we've acquired to date in 2018.

We've recently completed our second annual comprehensive tenant survey. We conducted survey to enhance our understanding of how tenants view our buildings, their business, and the world in general. We asked questions related to the opportunities and challenges of their business, how they evaluate the locational drivers of their operations, and questions focusing on broad trends in e-commerce and labor availability. We also strive to understand how their real estate needs are being met and how good they can be improved. By conducting the survey annually, we can benchmark responses and examine trends in our tenant basis use of the buildings they occupy and logistical patterns in general.

This year's survey indicates increased business activity and confidence. Hiring has increased. More shifts are being run, and additional lines are being added. Labor availability remains a widespread concern across both geographies and industries. E-commerce continues to be an important incremental demand driver; 36% of our portfolios buildings are currently handling the e-commerce activity, and 47% of those respondents indicate that e-commerce activity has increased in their facility over the past year. Not to be forgotten, the traditional demand drivers for industrial real estate such as GDP growth and improved business confidence continue to provide baseline support to industrial fundamentals.

We are frequently asked about the impact of the ongoing political rhetoric and trade restriction on our tenant base and future operations. We continue to believe it is too early to tell what these impacts will be, but note that the results from the tenant survey indicate continued expansion. Our geographic and industry diversification should provide a level of protection, should negative trade impacts start to be evidenced.

One of the more interesting themes seen in the responses to the tenant's survey was the reported pace of change in business activity; 29% of the respondents indicated that an increase in business activity has occurred very quickly, which compares to 22% last year. This is reflected in our tenants continuing to sign long-term leases and invest in their business. Our conversations with our tenants indicate that this is expected to continue.

The strength indicated in our survey is reflected in the strong quarter and year-to-date operating metrics including high retention and leasing spreads. These operating metrics are driving a continued improvement in our same-store NOI growth. Tenant confidence also reflected in the retention level greater than our initial expectations. This leads us to revise our annual retention expectation to 80%.

Moving to the balance sheet, our leverage and liquidity continue to be at very strong levels. Our balance sheet remains entirely fixed rate except for our revolving credit facility. This quarter we continued our history of maintaining healthy liquidity levels by originating attractively-priced, unsecured, fixed rate debts well in advance of need. We continue to market a portfolio of assets for sale. Interest and investor activity has been robust, and we look forward to describing the transaction in detail once close. This is targeted to close prior to the year end.

With that, I'll turn it over to Bill to provide more details on our third quarter results.

Bill Crooker

Thank you, Ben, and good morning everyone. Core FFO was $0.45 for the quarter, an increase of 4.7% as compared to the same period in 2017. Healthy underlying fundamentals coupled with high tenant confidence resulted in a strong operational quarter for STAG. Retention was 77% on the 1.3 million square feet expiring in the period, and it's 83% year-to-date. As Ben said, we expect retention for 2018 to be 80%. Cash and GAAP re-leasing spreads were up 6% and 11% respectively and up 8% and 15% year-to-date respectively. Through the third quarter of 2018, we have leased over 7 million square feet across 25 of our markets.

Same-store cash NOI for the quarter was up 1.4%, which compares positively to the 0.5% in Q2 and negative 0.8% in Q1. The increase this quarter is due primarily to the strong retention and leasing spreads we discussed. The year-to-date same-store NOI is up 50 basis points as compared to the prior year, which is in line with our current annual same-store guidance for the year of 25 basis points to 75 basis points of growth. The 27% of the portfolio that is excluded from the same-store metric due to the sector defined methodology consists of stabilized occupied space with growing cash flows driven by rental escalators averaging 2.3% which are embedded in the in-place leases.

There have been a handful of headline bankruptcies announced and discussed recently, particularly related to Sears. Our exposure to Sears consists of one 40,000 square foot suite which accounts for 5 basis points of annualized base rent. Other bankruptcies in the news include Mattress Firm, American Tire Distributors and Bon-Ton. Mattress Firm and ATD leased 584,000 across five buildings and account for approximately 1% of our annualized base ramp. They continue to operate at their respective space and are current on rent. The four ATD buildings were built in the past seven years and fit the markets there and well. The leases on average are 13% below market and to the extent, leases are rejected, we expect downtime well within our historical experience of 12 months. Bon-Ton moved out of the building in July and we expect to back for the asset soon.

G&A for the third quarter was $8.9 million and $25.6 million to date. We expect full year G&A to land within the current guidance range of $34 million to $35 million dollars. Note that a material portion and employee compensation is tied to total shareholder return and volatility in this metric can cause fluctuations in overall G&A as we look to the end of the year.

Related to G&A, the upcoming change to lease accounting in 2019 is expected to have a relatively small impact to our disclosure. Historically, STAG has not capitalized much in the way of internal leasing or third party legal costs. In 2017, we capitalized approximately $350,000 and year-to-date 2018, we have capitalized $213,000.

Most of the capitalization is a result of third party legal review and that cost associated with internal leasing personnel. The amounts impacting 2019 G&A related to the least accounting change will likely be in line with 2017 and 2018 amounts. We continue to operate the balance sheet at the low end of the leverage band with ample liquidity. At quarter end, net debt to EBITDA was 5.1 times in fixed charge coverage was 4.6 times.

During the quarter, we raised $100 million in gross proceeds through our ATM program at an average share price of $27.94 and closed down several previously announced capital markets transactions. On July 11, we funded - we fully redeemed our 70 million Series B preferred equity security. On July 26, we refinanced and upsized a revolving credit facility and originated a new $175 million term loan. The revolver notional was increased to $500 million and the term loan is fully swapped with the delay draw feature for up to one year with an attractive all-in rate of 4.12%.

On July 27, we drew the remaining $75 million of term loan D. This facility is now fully outstanding with an-all in swapped interest rate of 3.15%. This quarter's capital markets activities have resulted in liquidity of $580 million with no debt maturing until September, 2020. This places the balance sheet in great position to support STAG's attractive growth opportunity.

And I'll now turn it back over to Ben.

Ben Butcher

Thank you, Bill. STAG says in a great position to end 2018 on a strong note. We continue to evaluate a growing number of attractive investment opportunities in population centers across the U.S. Our diverse tenant base is healthy, confident and expanding, which is reflected in this year's impressive operating metrics.

The balance sheet is in position to capitalize on numerous opportunities we see today and expect to see in the future. Our various data and process initiatives are maturing and producing greater efficiencies and new insights as STAG continues to harness the power of data. And above all else, the platform continues to focus on and deliver per share growth.

We thank you for your time this morning and for your continued support of our company.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Sheila McGrath with Evercore ISI.

Sheila McGrath

Yes. Good morning. Ben, you moved the top end of disposition guidance down. We'd previously thought that you were considering a portfolio sale, I was just wondering if you could give us an update and thoughts around a portfolio sale.

Ben Butcher

I think we've -- at least a little too partially in our remarks, we are still pursuing the portfolio sale. I think we have probably upped the language a little bit to indicate, we're more sure that it's going to happen than it will likely close in the fourth quarter. There's been very good activity around the assets that we marketed and we're quite confident we're going to have a transaction for you in the fourth quarter.

Bill Crooker

And Sheila, the guidance on disposition excludes portfolio sales. Those are just non-core and opportunistic dispositions.

Sheila McGrath

Oh, okay. So we should consider in addition to the guidance a portfolio sale in fourth quarter.

Ben Butcher

That's correct.

Bill Crooker

And I think we previously mentioned somewhere in the range of $100 million to $150 million.

Sheila McGrath

Okay. And then, just on the same-store metric, historically you've guided people that it's not a good metric because you buy 100% occupied buildings, and results have been much better in historic context. So I was just wondering if you could talk through what's driving that, is it leasing spreads, just talk through why the metric is…

Ben Butcher

Yes. So Sheila, you're correct, I mean we do have the occupancy normalization headwind that continues to be an issue, which we're seeing with these positive leasing same-store NOI spreads going positive are the power of high retention and great leasing spreads, overwhelming and sort of the occupancy normalization. As long as we continue to grow at the pace that we grow at, we've been growing circa 20%, 20-plus percent a year on an asset basis, we're going to always have and primarily 100% occupied buildings, we're always going to have those occupancy headwinds. As a result of that growth, we typically at year-end have our same-store portfolios only about 70% of our assets where our peers are more likely to be in the low-90s percent. So it's just a very different dynamic. And they frequently will have occupancy gains in their same-store numbers where they have put in service assets that aren't fully occupied, but still have some upside in them.

Sheila McGrath

Okay. Great. Thank you.

Ben Butcher

Thank you, Sheila.

Operator

Our next questions are from the line with Brendan Finn with Wells Fargo.

Brendan Finn

Hey, guys, good morning. I just wanted to get your thoughts on the acquisition environment in general and in particular if there's any of your markets where competition has changed recently maybe in terms of changes in cap rates or more or less attention from institutional capital?

Ben Butcher

I think and I probably should defer to Steve, but I'll go ahead and answer it anyway, it's my predilection. I think what we're seeing is relatively neutral. There's still a fair amount of competition out there. I will note that the anecdotal evidence is that the non-backed lenders are starting to back away at least from higher leverage. And I think we'll see that impact some of the competition that we see in the markets, but we're still seeing -- obviously we're not seeing [indiscernible] who was one of our sort of public competitors anymore, but the private guys are still very strong and the small players are still very strong. So, we're still seeing a fair amount of competition out there, but depending on what happens with interest rates and certainly this potential trend with non-bank lenders moving to lower leverage throughout the year could cause some competitive landscape improvement for us.

Brendan Finn

Got you. And then just to follow up on the same story, I appreciate the additional color on your leases with ATD and Sears. Are you assuming any negative impact from those leases on Q4 same-store results?

Ben Butcher

Well. Currently we're not.

Brendan Finn

Okay. Sounds good. Thanks, guys.

Ben Butcher

Thanks.

Operator

Our next question comes from the line of Jamie Feldman with Bank of America.

Jamie Feldman

Great. Thanks. Very helpful color on the tenant survey, I'm just curious digging a little deeper, you know are there certain regions or certain types of tenants that seem the most optimistic, and then flip side any of that seem the least optimistic?

Ben Butcher

Jamie, I don't think there was a theme on optimism related to the type of business that people are in. Certainly, there was a broad confidence across the tenet portfolio. I would say the one item that stood out was, and we've mentioned this in the past was the sufficiency of labor in a market becoming more in Portland locational driver. So, I think the -- what we're seeing is that markets with a lot of labor availability are becoming more favorable regardless of whether they're considered primary or secondary.

Bill Crooker

And Jamie, I was talking to a an occupier the other day who was expressing their concern that Amazon had announced a facility in their close proximity that their labor was going to be buffeted by you know higher wage options et cetera. So, just again on a total basis, that's a real issue across the market. But I would say, you would expect auto industry people are a bit consumers of raw materials to have some ads, but we really haven't seen it because of the tariff issues, we really haven't seen that evidence in our tenant behavior.

Jamie Feldman

Okay, and then I guess sticking with the labor because that is a consistent comment we're hearing. How does that change your appetite for acquisitions? I mean what we're hearing is, people want to be in markets where they have public transit and closer to larger urban centers where there is a deeper labor pool. That shifted at all the types of assets you guys are after.

Ben Butcher

Well, I mean the reality is that the two 400,000 square foot building which is the sort of the middle of our strike zone is not going to be located in a highly unlikely to be located in a place that is accessed by mass transit other than bus. So and I think that ring road building is that, again it was what we typically own are going to be -- are going to be accessible by bus but it's still, I think most of the industrial labor, it tends to be car -- in cars and which is why you've seen increased demand for employee parking especially with regard to -- to people intensive businesses like e-commerce picking et cetera. The other thing that you see is, obviously, the trailer parking has become more important. We saw that in our tenant survey but that's something that we -- our buildings are generally - have adequate trailer parking for the needs.

Jamie Feldman

Okay. And then as we look ahead to next year, any thoughts on your mark to market on leases expiring and any large known move outs.

Ben Butcher

No, there's not. We expect tenant retention next year to be in the same range as everything else as prior years tenant retention, obviously takes in the [indiscernible] actually takes into account both retention and downtime. So we're not expecting anything unusual to happen going forward. We don't' because of our diversification even our large tenants, I mean our large buildings or large tenants are not really that significant to the overall portfolio.

Bill Crooker

Yes we've mentioned before, Jamie, in addition to the tenant retention being in the 70% range that mark to market we think in the next 12 months to 18 months, our leases are at or slightly below market.

Jamie Feldman

Okay. And then finally just thoughts on capital needs. I guess you're going to do this big portfolio sale but how should we think about sources and uses over the next 12 months or so.

Ben Butcher

No, the portfolio sale is a source of capital and accretive source of capital, we'll sell and redeploy at higher cap rates, higher IRRs et cetera. I think that we will continue to rely on ATM as our principal source of issuing equity. I know that your bank has gotten much better at it more recently and has focused on it as a source of business. I know that's on the other side of the Chinese wall but they really have to some extent gotten the -- are drinking the Kool-Aid in terms of an issuance way. So we are we will continue to issue at around 60% equity 40% debt. Debt as we have been doing is going to be a mixture of bank debt and private privately placed bonds.

Bill Crooker

Yes, we'll match and fund our acquisitions each quarter through ATMs as long as we're comfortable issuing equity and to the extent we're not, we have plenty of room on our leverage range. We can acquire today $450 million of acquisitions with all debt. And that will bring us to the upper end of our leverage band. We also have recycling of capital through portfolio dispositions if it comes to that

Ben Butcher

But obviously we don't intend to use that leverage now. We're still quite accretive issuing equity at this level and buying assets.

Jamie Feldman

Okay, what's the upper end of your leverage band again?

Ben Butcher

So we -- were five times to six times debt to EBITDA.

Jamie Feldman

We will go up to six, you think…

Ben Butcher

We've been operating as you know at the low end of that, we've been operating at or around five times, and again with equity pricing being in a range where we're comfortable, it's not likely we'll use leverage in any meaningful way.

Jamie Feldman

Okay. All right. Great. Congrats on the stocks.

Ben Butcher

Thank you, Jamie.

Bill Crooker

Thanks, Jamie.

Jamie Feldman

Back to you.

Operator

Our next question is from the line of Dave Rodgers with Baird.

David Rodgers

Yes. Good morning, guys. Ben, as you look out at the pipeline for new acquisitions that $2.2 billion that you mentioned, obviously cap rates coming down as the weighted average lease term has gone up, I assume that something your rent bumps in the contracts you are buying are higher than you had historically. So, do you see continued kind of downward pressure moving in into '19 on that cap rate or stable or slightly higher. What's your feeling here today?

Ben Butcher

Well, Dave, you are quite correct on those factors influencing cap rates down. I don't think that you'll see if you went back to those individual parameters. I think it's unlikely you'll see any of those provide additional downward pressure on cap rates. You're not going to see lease terms go longer. Indeed, I think after the wave of capital spending that occurred post the tax cut, you might actually see leases start to, terms to moderate a little bit. I don't think you're going to see bumps move past where they are today.

So, I don't think that those factors are going to put downward pressure on our cap rates going forward. If you believe that interest rates may drift up through the coming year as well as leverage levels that I alluded to earlier of possibly coming down. I think those will add to raise capital cap rates, especially as you move away from the, if you will, the super primary markets where the rate of capital has just continued to depress and hold cap rates down. I think the more rational return profiles that you see in markets 15 to 50 or whatever like that is -- those are going to remain you know attractive in where we'll do most of our acquisitions.

David Rodgers

Great. Thanks for that. And then seeing a bigger spread between your new and renewal leasing spreads, and obviously there's a different incentive there. Wondering if there's anything oriented around the mix of between the new and the renewals that you were doing there, or if that's just purely minimizing downtime and leveraging tenants?

Ben Butcher

No. I think that's when a particular lease or two. So, it is mix.

Bill Crooker

Yes, you know that the negative new leasing spread is entirely attributable to one lease of 100,000 feet, it was in a building that we bought very above market rent, we bought a double digit cap rates, so we went into this knowing that this would happen, and we backfill the space with zero downtime at very healthy rate, so…

Ben Butcher

A rate that's still above market.

Bill Crooker

And so it's -- the stat doesn't look particularly well, but the results vary.

Ben Butcher

And then obviously we took advantage of that above market lease term, the term of the lease we were able to strip off all that extra cash flow relative to simply you know if we bought a building that was at market we wouldn't have had all that cash flow, we wouldn't have this -- the less attractive rental spread this quarter, but we get all that cash flow. And frankly, the building performed, as Dave described, extremely well. No downtime and above market rental lease achievements.

David Rodgers

Okay. That's great. And maybe last question, you might not know the answer. But you had said that you have not built in any I guess downtime or downside from the potential bankruptcy that you talked about, but what's your sense on timing when you have better visibility on what you might need to do with those buildings, if anything?

Ben Butcher

Well, obviously it depends on the pace of the bankruptcy proceedings. I mean, I think you can run through them from the worst to best. I mean, Sears it kind of feels like it's a liquidation. I know that we don't know for certain but they're going to do, but it feels like a liquidation. So that 40,000 foot space is likely going to come back to us, to be release, the Bon-Ton situation was something we've talked about in prior quarters; it's been around for a while. Again it's likely a liquidation rejection of lease and releasing of that, we're very comfortable with that asset, the market that it's in -- it's position in the market and releasability, as you move up to the ATD leases, these are highly functional fungible warehouse buildings and the ATD bank of the transaction is largely a capital structure bankruptcy.

So they still have, we believe good operating and potential going forward, they need these buildings, they use these buildings. So to the extent, to the extent that they reject them in a bankruptcy proceeding and we're comfortable about releasing them and we're also comfortable that they're probably not going to reject a lot of them, at the end of the lease term, for all those deals we were you know - we were projecting certainly a chance that they were they would move out. So our analysis always has the potential for having to release that space at the end of the lease, this may just move that up a little bit, but we're very comfortable with the lease ability of those buildings.

Bill Crooker

And all the assets those tenants are current on their rent payments as well?

David Rodgers

All right, Bill, thanks a lot.

Operator

Our next questions are from the line of Mitch Germain with JMP.

Mitch Germain

Good morning. Some of the rate move and economic noise; does that made you rethink your underwriting assumptions?

Ben Butcher

So Mitch, we on a monthly basis, we evaluate our underwrite assumptions with regard to both our equity pricing and also our price -- that pricing, we look at forward Treasury curves to estimate the impact of when we would have to refinance these assets, what the initial obviously debt rate is. But also in the - in our own analysis we will have one or more refinancings during that time, so we're looking at forward curves to understand the impact on that. We are obviously looking at rental growth rates with regard to both supply and demand as well as capital availability which impacts -- in terms of the impact of rental growth rates as well. So we're looking at everything that is available to us to look forward and to understand the impact of the outside world on our buildings and on our capitalization.

Mitch Germain

Okay. And I know you do a substantial amount of credit analysis on tenants is there any specific, I don't know, industry sub sectors that are just like a no touch at this point because of some macro issues?

Ben Butcher

We won't lend to investment banks. No. We - everybody, I mean, every industry I always see has looked at on an individual basis and then the tenant within that industry and how they operate within the industry as well as how their own capital structure, or their own customer concentration issues, et cetera. So I don't, I mean - we've mentioned this in the past we have -- we read some of the same blogs everyone else read about the auto industry and the potential for diminished activity in that area. There certainly hasn't been any significant evidence of that to date but it's certainly something that we look at as we examine how a single purpose or non-single purpose of building may be, and whether the market is dominated by a particular auto plant, we go deeper if it is - if a market is dominated by an auto plant we see what they're making there, what the company's announced plans are for that plant, we would sell that -- we wouldn't buy the building with the EDSO [ph] plan but hopefully we'll buy the Ford and F-150 plan.

Mitch Germain

Appreciate that insight. And last one, I think you kind of touched on it, but obviously with Gramercy somewhat absent at this point from the markets. And not that you bid with so much against them, but I know that they were somebody that you saw probably more than your other REIT peers, has the competitive dynamics at all changed? Are you seeing any additional pockets of capital that have emerged, or is it really just kind of status quo in terms of who the typical business are?

Ben Butcher

Yes. I mean Gramercy was an outlier in terms of our industrial peers, or indeed you know the net lease peers to the extent that they venture into our markets in terms of how frequently we saw them. Our principal competition remains regional capital, individuals et cetera, that's the preponderance of our competition. And that mix remains fairly aggressive. I believe that some changes in cost and amount of leverage may diminish that competition as the year goes on, but you know I'm not saying we've seen that yet, but that certainly feels like it could happen, but I don't think the competition has changed greatly now.

Mitch Germain

Thank you.

Ben Butcher

Thank you.

Operator

Our next questions are from the line of Brian Hawthorne with RBC.

Unidentified Analyst

Yes. Thanks. It's Mike here with Brian. Just got a couple of quick questions on the portfolio of sale if you can give us a little bit more details, I know you said the mix between opportunistic and non-core assets. Can you kind of get a breakout, should we assume that's 50-50?

Ben Butcher

So, the portfolio sale is purely a sourcing of capital, so it is assets that look like the remainder of our portfolio, and they are -- they were chosen to -- with a variety of reasons in this instance they are not geographically proximate which is what we had in the prior portfolio sale. This is reflective of sort of a demand that's out there. Our goal was to sell Somewhere between $100 million and $150 million to demonstrate once again in excess of 100 basis points probably closer to 150 basis points of cap rate compression versus what we could buy assets today in that market and demonstrate accretive. What's the word I'm looking for here accretive reuse of capital? So we sell and redeploy at a better cap rates, better IRR.

Unidentified Analyst

Okay.

Bill Crooker

Yes, Mike the non-core opportunistic discussion on dispositions related to our guidance in our supplemental of $100 million to $150 million for the year. The portfolio disposition will be additive to those dispositions.

Unidentified Analyst

Okay, great. And then how are you thinking about the flex portfolio right now. And I believe historically you said that you wanted to lease that up a little bit before selling those assets. Is that still the plan?

Bill Crooker

That's still the plan. We're opportunistically disposing those assets. This quarter we disposed of three of those assets, so over time we will dispose of all of them. I think there's nine assets left in the portfolio.

Unidentified Analyst

Okay.

Ben Butcher

And then obviously we look at it you know what we think it's worth to us versus what we can get in the market. We're not as enthralled. We continue to own them, so it's not that -- it's not as perhaps as much of an absolute that it has to be a number higher than we think it might be worth to us for holding for cash flow but it's still an important factor in how we hold and obviously on our projections as to what the future might hold for that asset if there is a pretty strong chance of releasing that asset next year with a short lease term. Obviously it makes sense to hold on to that to take advantage of that release.

Unidentified Analyst

Okay. And then with regard to your acquisition guidance on valuations, and Ben, can you go real quick and have your hurdles on your IRR changed at all. I mean as you're going after slightly lower cap rate assets. What's the difference between the rent pumps and has those changed.

Ben Butcher

So the obviously better rent pumps, better rent growth, longer lease terms, longer time to exposure to market all we look to mitigate cap rates and to drive cap rates down. We still expect to average an IRR at or around -- maybe it's come down some through the years. So, when we were five years ago, we're probably averaging $9.5 an hour averaging less than that, but the overall metrics and the overall averages have not changed significantly.

Unidentified Analyst

Okay. Great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Brandon Travis with Ladenburg Thalmann.

Brandon Travis

Good morning and thank you for taking my questions.

Ben Butcher

Good morning.

Brandon Travis

For modeling purposes, can you give an indication on the timing of lease expirations in 2019?

Bill Crooker

Do we disclose that? Typically we disclose that in our investor presentation about the quarterly expirations. But if it's not disclosed in that, I would say for modeling it's probably best just to look at what the expiration were in 2018 and use that as a guide.

Brandon Travis

Okay. And then generally speaking what was the cap rate on dispositions in the third quarter?

Bill Crooker

So, the dispositions in third quarter were primarily non-core dispositions, so we don't disclose the cap rate on those dispositions.

Ben Butcher

Relatively de minimis amount of about $10 million total volume.

Brandon Travis

Okay. That's all from me. Thank you.

Ben Butcher

Thank you.

Bill Crooker

Thank you.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back to Ben Butcher for closing comments.

Ben Butcher

Thank you, everybody for joining us this morning. I think you can agree we had another very successful quarter. We're very excited about the opportunities going forward. Also, very excited about the advances we have made internally also very excited about the advances we've made internally perhaps not necessarily visible, but in terms of our processing capability, our use of data for targeting et cetera, things look very bright here, and we're looking forward to putting up some good numbers as we move into 2019. Thank you.

Operator

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