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Stag Industrial (STAG 0.33%)
Q4 2018 Earnings Conference Call
Feb. 14, 2019 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
And welcome to STAG Industrial's fourth-quarter 2018 earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Matts Pinard, senior vice president of investor relations. Thank you, please go ahead.
Matts Pinard -- Senior Vice President of Investor Relations
Thank you. Welcome to STAG Industrial's conference call covering the fourth-quarter 2018 results. In addition to the press release distributed yesterday, we 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 amount, 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 to 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.
STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear Ben Butcher, our chief executive officer; and Bill Crooker, our chief financial officer. I will now turn the call over to Ben.
Ben Butcher -- Chief Executive Officer
Thank you, Matts. Good morning, everybody, and welcome to the fourth-quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our fourth-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 fourth quarter wraps up an impressive 2018 for STAG Industrial. Our platform operated at a high level with continued accretion, driven by record acquisition volume, robust leasing spreads, and strong retention.
All this was accomplished while maintaining a defensive balance sheet. We capped off the year with the execution of a successful portfolio sale and the achievement of an additional investment-grade rating. The opportunity set before the company remains very attractive. The acquisition team continues to expand their marketing presence through seasoning, their time in market, and additional outward-facing personnel.
The investments made over the past several years to improve and enhance the company's use of data are producing noticeable returns. The underwriting process is more robust and closing is more efficient. The vast amount of internal and external data accumulated is being harnessed to provide insights and to investable opportunities. During the fourth quarter, STAG executed on the portfolio sale that we had previously described and metrics consistent with our expectations.
The transaction traded at a 6.2% cap rate, representing a 180-basis-point compression from where these assets were acquired. This attractive pricing provided proceeds that will be redeployed into our opportunity set in an accretive manner. This portfolio sale demonstrates once again the power of aggregation and diversification. STAG has constructed a platform capable of evaluating thousands of transactions a year.
Our strict pricing discipline has limited STAG's actual acquisitions to only between 10% and 15% of what we underwrite. This pricing/returns filter ensures that the assets we acquire generally represent the best relative value available across the wide landscape of markets we operate in. The risk reduction obtained through thoughtful aggregation only adds to this relative value. We do not anticipate any portfolio sales in 2019.
We will continue to sell non-core assets that no longer fit the portfolio, including the flex/office portion as well as continue to opportunistically sell assets that are worth more to buyers than they are to STAG. During the quarter, STAG obtained an investment-grade rating from Moody's Investor Services. This second investment-grade rating is yet another confirmation of the value of low leverage, broad diversification, and a strong portfolio. The end of 2018 and the beginning of this year have been marked by uncertainty.
Volatility has reintroduced itself to the markets and the headlines. The list of macro issues, current potential, likely and less likely, is long and maybe growing. However, from where we sit today, we can tell you that the underlying fundamentals of the industrial sector are strong and our tenant base remains active and healthy. We cannot point to a single thing that makes us overly concerned about our operations in the near term.
Adding to our confidence in these uncertain macro times, the company is both widely diversified and defensively positioned. The portfolio and its tenants are diversified across the metrics that provide for low correlation, geography, lease term, industry, etc. The balance sheet is well-positioned as we enter 2019 with leverage below 5 times net debt-to-EBITDA with no debt maturing until September of 2020 and with almost $600 million of immediately available liquidity. Before I turn it over to Bill to discuss our fourth-quarter results and to reintroduce our 2019 guidance, let me note that our board of directors voted to increase our common dividend to $1.43 annually effective January 2019.
We've increased our dividend every year since the IPO in 2011.
Bill Crooker -- Chief Financial Officer
Thank you, Ben. Good morning, everyone. The fourth quarter was active for STAG, highlighted by a new investment-grade rating from Moody's and the successful portfolio sale. Core FFO was $0.46 for the quarter and $1.79 for the year, an increase of 5.3% as compared to 2017.
This per share growth was achieved while operating the balance sheet at or below the low end of our targeted leverage band during 2018. Our 2018 acquisitions totaled $677 million with a stabilized cap rate of 6.9%. This volume included $29 million of value-add acquisitions across three assets, which are expected to stabilize at a yield of 7.2%. We estimate that these transactions would have traded at a 6% cap on an individual basis when stabilized.
We define value-add acquisitions as acquisitions with the redevelopment plan, expansion plan or vacancy, and expect us to continue to be part of our opportunity set going forward. Our 2018 acquisitions had a very attractive return profile, driven by weighted average lease term greater than any other prior year's acquisitions, coupled with very high contractual rental bumps. The strength of our portfolio continues to be reflected in the portfolio of operating results. Retention for the quarter was 81% and 83% for the year.
Cash and GAAP leasing spreads were 8% and 16% for the quarter and 8% and 15% for the year, respectively. Cash NOI grew by 30 basis points in the annual same-store pool when comparing full-year 2018 to 2017. The annual same-store pool accounted for 69% of the portfolio at year end. The balance sheet remains defensively positioned with ample liquidity.
The second investment-grade rating by Moody's allows STAG to reduce interest expense by approximately $2 million per year on our unsecured term loans and revolving credit facility. We raised $140 million of equity through our ATM issuance in Q4, resulting in net debt to run rate EBITDA of 4.9 times at year end. Fixed charge coverage was 4.6 times with liquidity of $577 million. Our initial 2019 guidance can be found on Page 22 of our supplemental package, which is available in the Investor Relations section on our website.
We expect acquisition volume to be between $650 million and $800 million in the aggregate for 2019. Beginning this year, we will disclose external guidance using two categories, stabilized and value-add acquisitions. The stabilized assets are predominantly 100% occupied. We expect to acquire $600 million to $700 million of stabilized assets with an expected cap rate range of 6.5% to 7%.
We expect between $50 million and $100 million of value-add acquisitions this year with NOI coming online in 2020 at a stabilized cap rate in line with our 2019 cap rate guidance. We estimate that the 2019 value-add transactions would have traded at a cap rate in the mid-5s on an individual basis when stabilized. We expect the 2019 annual same-store pool's cash NOI growth to be between 1% and 2% for the year. 2019 G&A is expected to be between $36 million and $38 million for the year, of which $10.1 million is noncash compensation and is fully reflected in our diluted share count.
The G&A guidance includes the impact of the new lease accounting guidance. For context, in 2018, we capitalized $333,000 related to external legal cost and internal time related to leasing. And on the balance sheet, we expect net debt to EBITDA to be between 4.75 times and 6 times with the expectation that we operate at the lower end of that band. Looking specifically at Q1 '19, we expect our acquisition volume to include $41 million of value-add acquisitions.
G&A for the quarter is expected to be between $9.5 million and $10 million due to seasonality. I will now turn it back over to Ben.
Ben Butcher -- Chief Executive Officer
Thank you, Bill. STAG is just in great position as we begin 2019. We continue to evaluate a growing number of attractive investment opportunities in and around 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 the 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 the company.
Before we turn it back to the moderator for questions, I want to wish everybody a happy Valentine's Day.
Questions and Answers:
Operator
[Operator instructions] Our first question comes from the line of Shelia McGrath with Evercore.
Shelia McGrath -- Evercore ISI -- Analyst
Yes. Good morning. I was wondering if you could discuss the same-store NOI guidance in '19? What's driving the improved outlook versus 2018 same-store NOI?
Ben Butcher -- Chief Executive Officer
I think, Sheila, the -- you note that we've had gradual improvement in our same-store NOI. It's reflective of the strength -- general strength of the market, and we see that improvement continuing into 2019.
Shelia McGrath -- Evercore ISI -- Analyst
OK. And then if you could give us a little more detail on the value-add acquisition part of the program, how the returns compare versus stabilized acquisitions? And are you going to stabilize these assets and hold them or stabilize and sell them?
Ben Butcher -- Chief Executive Officer
I think we'll -- the answer to last question first. Our intent is to stabilize and hold them. As always, we will look to the value of the asset once stabilized, if it's worth more to somebody else than it is to us within our portfolio, of course, we look to at least consider selling it. Value-add has always been a part of our strategy.
We've been doing it consistently over the years. We just haven't -- we're seeing more opportunity today as a bigger part of our opportunities set where we decide it'll make sense to disclose it in the interest of transparency. These assets will stabilize on a short-term basis and cap rates are the same, maybe slightly better than what we're buying in the market but the overall returns on these assets are similar, the long-term IRRs or similar because these are assets that will have value over and above the -- perhaps where they stabilize on a cap rate basis simply because of the quality of the asset and the quality of the markets we're finding them in.
Shelia McGrath -- Evercore ISI -- Analyst
OK. Thank you.
Operator
Thank you. Your next question comes from the line of Michael Carroll with RBC.
Michael Carroll -- RBC Capital Markets -- Analyst
Yes, thanks. Ben, just coming off of that last question related to the value-add deal. How many value-add acquisitions did you complete in 2018? And has there been a pickup in that activity and that's why you started providing guidance for it?
Ben Butcher -- Chief Executive Officer
Well, a couple of things. One is there were three deals in 2018 about $30 million. We are -- have frontloaded some value-add acquisitions into 2019, so we're expecting a larger amount of them but also to some extent frontloaded always that will -- those assets may be vacant through most of the year. So just wanted to let the people know that we're again frontloading a little bit -- at a little bit more and little more frontloaded.
Michael Carroll -- RBC Capital Markets -- Analyst
And then how should we think about these transactions? Are you putting more capital to renovate the assets that's why they're value-add? Is it just kind of a leasing play where you're buying and that's underutilized and leasing up the final spaces? How should we think about that?
Ben Butcher -- Chief Executive Officer
They are a variety of opportunities. They are releasing opportunities, they are capital investment value-creation opportunities. So there are a variety of ways that we see value that is not immediately -- does not immediately show up in income.
Michael Carroll -- RBC Capital Markets -- Analyst
OK. Great. And then just last question from me. Related to the cap rate, the 6.5% to 7%, is that based on just the stabilized acquisitions? Did I hear that correctly? And what's driving those lower cap rates compared to the prior year?
Ben Butcher -- Chief Executive Officer
Well, I think the cap rates, yes, they are the stabilized assets. What's driving those cap rates will be mix changes. So we're not changing our long-term return requirements. Mix changes could be lease term, contractual rent bumps, below-market rents, a variety of things that would change the initial cap rate -- the sort of the point-in-time measured at the time we acquired the assets.
Bill Crooker -- Chief Financial Officer
And, Mike, you saw that a little bit in Q4, where we had a weighted average cap rate of 6.6% and a lease term of nine years and contractual rental bumps averaging around 2.5%.
Michael Carroll -- RBC Capital Markets -- Analyst
OK. Great. Thank you.
Operator
Thank you. [Operator instructions] Our next question is coming from the line of Dave Rogers with Baird.
Dave Rogers -- Baird -- Analyst
Yes. Good morning. Ben, on the disposition front, good to see you guys selling some of the more -- more assets during 2018 and '19. Can you talk about geographically, maybe any areas that you're focused on or tenant concentrations that as you sit today you might lean toward in terms of pushing the button to sell?
Ben Butcher -- Chief Executive Officer
I mean, again, I think our mantra is to sell things that where we see we can garner more value than what we think they're worth to us within our portfolio. Clearly, we're still looking to sell down the flex office portfolio, which is not particularly geographically concentrated except there is one large asset within that portfolio. But it is not a, "Gee. We hate X, Y, Z states or markets and we want to get out of them." It is more looking at the individual assets and their value within the portfolio versus the value that we can gain by selling them.
Dave Rogers -- Baird -- Analyst
Great, then maybe a question for Bill. Can you talk a little bit about bad debt in 2018, kind of what your provision might be in 2019 as you sit here today and think about kind of any potential risks within the portfolio?
Bill Crooker -- Chief Financial Officer
Yes. Thanks, Dave. We have a watchlist bad debt. I mean, last quarter, we mentioned ATD and Mattress Firm, both of those tenants confirmed all of our leases, which was great news for us.
We are forecasting 50 basis points of watchlist for our bad debt in 2019, which was consistent with 2018, and that's the dynamic list. Tenants move on and off of that list depending on where they are in payments and bankruptcies, etc.
Ben Butcher -- Chief Executive Officer
I think, David -- it's Ben, again. I think what you see on a lot of these bankruptcies that -- certainly within our portfolio and nationally are retailer bankruptcies where, for instance, Mattress Firm was a retailer bankruptcy where they were looking to consolidate their retail footprint as opposed to their distribution footprint. So we were not surprised when we got an affirmation of those distribution center leases. We have some -- we're seeing that with other retailers where they're using bankruptcy to rationalize their store footprint as opposed to their distribution footprint.
Dave Rogers -- Baird -- Analyst
Great. Good color. And then maybe last for me, on the leasing spreads, those that are covered -- your long term kind of [Inaudible] used to that, that 1% to 2% leasing spread and now you're seeing some really good spread. How much of that is just a function of your market? Maybe finally catching up on the market rent growth side versus kind of what you've been buying maybe three, four years ago, and you're starting to get that maturity? And then the last part of that would be does that continue to those -- those positive leasing spread that we've seen continue into 2019?
Ben Butcher -- Chief Executive Officer
Well, one of the thing is we tend to buy assets that are leased at/or around market as opposed to having a portfolio that is made up of leases that were -- may have been made to garner occupancy, etc. So we may not have as much a dramatic leasing spreads generally because of that sort of model but certainly the markets that we operate in have been -- having their fair share of rental growth over the intervening year. So we continue to expect to have good leasing spreads.
Dave Rogers -- Baird -- Analyst
Great. Thank you.
Operator
And our next question comes from the line of John Massocca with Landenberg Thalmann.
John Massocca -- Landenberg Thalmann -- Analyst
Good morning, everyone.
Ben Butcher -- Chief Executive Officer
Good morning.
John Massocca -- Landenberg Thalmann -- Analyst
Just a quick detail question. On the occupancy bridge, there was about 170k of square foot you guys lost that ended up being in the other category. What was that?
Bill Crooker -- Chief Financial Officer
Yes, that's primarily short-term leasing.
John Massocca -- Landenberg Thalmann -- Analyst
OK. That's just short-term leasing that roll. It's not tenant credit at all?
Ben Butcher -- Chief Executive Officer
Exactly. That's right.
Bill Crooker -- Chief Financial Officer
Short-term leasing.
John Massocca -- Landenberg Thalmann -- Analyst
And then it looks like -- and mind you, it can be a little variable quarter to quarter. But that the leasing commissions and TIs, on a per square foot basis and overall basis kind of trended up in 4Q, what's driving that? And should that normalize as we look out in 2019?
Dave King -- Director of Real Estate Operations
This is Dave King. I think that's just an anomaly based on the deals done in '18. We expect '19 to be below what we were this year, but again that's -- it's dictated by the finish we put into spaces, the terminal lease, etc. So the longer lease is, it's going to have a higher commission.
Ben Butcher -- Chief Executive Officer
So again, mix -- it ends up being mixed.
John Massocca -- Landenberg Thalmann -- Analyst
Understood. And are you seeing any pressure -- I know it's kind of become a common question quarter to quarter. But any pressure on some of your automotive-based tenants? Or has that been relieved a little bit as maybe trade discussions have normalized in some of the operational stuff that needs to be done on the automotive side that's kind of happened?
Ben Butcher -- Chief Executive Officer
We have -- we obviously look at our automotive exposure. It is very widely diversified with good tenant credit across those individual entities. There are 40-plus leases, they're OEM, they're Tier 1, they're Tier 2, they're north, they're south, they're foreign, they're domestic. So it's very widely diversified.
The -- it is a -- category is a significant percentage. I think it's our second largest industry concentration, but it is a -- the granularity that exists underneath that concentration gives us a lot of comfort. And again, the individual tenants within there have pretty good credit.
John Massocca -- Landenberg Thalmann -- Analyst
Understood. That's it for me. Thank you very much.
Operator
Our next question comes from the line of Jon Petersen with Jefferies.
Jon Petersen -- Jefferies -- Analyst
Great. Thanks. So to come back to the leasing spread because I don't think we got a direct answer. What does the guidance assume in terms of what leasing spreads will be this year in terms of the 1% to 2% --
Ben Butcher -- Chief Executive Officer
Jon, I'm going to turn it back over to Bill, but I'm going to cascade you for not wishing us happy Valentine's Day.
Bill Crooker -- Chief Financial Officer
Hey, Jon, it's Bill. We're projecting mid-single digits for cash leasing spreads in 2019.
Jon Petersen -- Jefferies -- Analyst
OK. All right. Great. And then in terms of leverage, I think, with where the stock price is trading today, would it be fair to assume that you guys plan to stay at the low end of that debt-to-EBITDA target?
Bill Crooker -- Chief Financial Officer
Jon, yes, that's right. I mean, 4.75 to 6 is our range for the year. We've been operating around 4.95 for the past few quarters, so I think we'll be operating around that range for the foreseeable future.
Jon Petersen -- Jefferies -- Analyst
OK. And then maybe just one more question on value-add acquisitions, just to make sure I understand it. Is the reason you would go after these assets because they're primarily in better markets? So I guess, the other question -- I guess, another way to phrase it, are the value-add acquisitions primarily in primary markets where the rest of it's more of a mix of primary and secondary markets?
Ben Butcher -- Chief Executive Officer
I don't think you can make that -- necessary that characterization. We believe there is value here in these assets that may be as much as 100 basis points on a cap rate basis between where we can buy them considering that we have to accomplish this value-add versus fully stabilized assets. I might add that one of the reasons that we like the value-add component of our business is, as opposed to development, the time line to get into that value is relatively short. So to the extent that it hasn't been mentioned, where we are in the cycle, but we're pretty confident that we will be operating within a portion of the cycle as we accomplish its value add.
It is consistent with our expectations of garnering that value.
Jon Petersen -- Jefferies -- Analyst
All right. And then maybe just one last one. Are there any markets where you see a supply imbalance right now?
Ben Butcher -- Chief Executive Officer
The markets where -- this is consistent with prior quarter. The markets where we see supply imbalance are markers that we have not been terribly active in or should I say, maybe a little finer point is, we're not operating in the submarkets within the markets where that's my concerns. It's not that we wouldn't. It is just the underwriting that has to be undertaken or the rational underwriting that will be undertaken to invest.
For instance, in South Dallas, you have to understand the amount of new supply coming in and the probable impact on vacancy and downtime. So it's not that we wouldn't. We think that our -- we believe our rational underwriting of those risks perhaps prevents us from being able to buy where other people may be more optimistic about the time line for garnering occupancy in markets like that.
Jon Petersen -- Jefferies -- Analyst
Got it. All right. Have a wonderful Valentine's Day.
Ben Butcher -- Chief Executive Officer
Thank you, Jon.
Operator
Thank you. This concludes our question-and-answer session. I'd like to turn the floor back to Ben Butcher for closing comments.
Ben Butcher -- Chief Executive Officer
Thank you, everybody, for joining us today. As we mentioned in our comments earlier, we sit at a particularly attractive time. Fundamentals are strong. We have a lot of have available capital and a lot of opportunities to apply them to, so we're very excited about 2019 and we look forward to telling you more about it as the year progresses.
Thank you.
Operator
[Operator signoff]
Duration: 25 minutes
Call Participants:
Matts Pinard -- Senior Vice President of Investor Relations
Ben Butcher -- Chief Executive Officer
Bill Crooker -- Chief Financial Officer
Shelia McGrath -- Evercore ISI -- Analyst
Michael Carroll -- RBC Capital Markets -- Analyst
Dave Rogers -- Baird -- Analyst
John Massocca -- Landenberg Thalmann -- Analyst
Dave King -- Director of Real Estate Operations
Jon Petersen -- Jefferies -- Analyst
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