Edited Transcript of STAG earnings conference call or presentation 1-May-20 2:00pm GMT

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BOSTON May 18, 2020 (Thomson StreetEvents) — Edited Transcript of STAG Industrial Inc earnings conference call or presentation Friday, May 1, 2020 at 2:00:00pm GMT

* Benjamin S. Butcher

STAG Industrial, Inc. – Chairman, CEO & President

* David G. King

STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations

* Matts S. Pinard

STAG Industrial, Inc. – SVP of Capital Markets & IR

* William R. Crooker

STAG Industrial, Inc. – CFO, Executive VP & Treasurer

Capital One Securities, Inc., Research Division – Senior VP & Lead Equity Research Analyst

* Richard C. Schiller

Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst

Greetings, and welcome to the STAG Industrial, Inc. First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matts Pinard, Senior Vice President of Investor Relations. Thank you. You may begin.

Matts S. Pinard, STAG Industrial, Inc. – SVP of Capital Markets & IR [2]

Thank you. Welcome to STAG Industrial’s conference call covering the first quarter 2020 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 the 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 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 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 from Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer. I will now turn the call over to Ben.

Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [3]

Thank you, Matts. Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We’re pleased to have you join us and look forward to telling you about our first quarter results. Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who will be discussing the bulk of our 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. First and foremost, I hope and trust that you and your families are all staying safe and healthy during these unprecedented times.

I’m happy to report that despite the ongoing pandemic STAG and its employees remain safe and healthy. We spent a considerable amount of time and energy over the past few years, creating a strong culture of bright, talented and engaged employees. Our team has been working remotely for some time, and the company continues to function at a high level. The investments made over the years in process of improvement, data collection, storage and analytics are all paying dividends as we continue to navigate the current environment. The near-term impact on the industrial real estate sector due to the novel COVID-19 virus continues to be fluid. Virtually all GDP growth projections for Q2 are decidedly negative.

The disruptions in both the domestic and global economy will continue to dampen consumption to the current shutdowns and likely beyond. This is putting considerable strain on a broad spectrum of tenants and industries. The government has responded with large and varied policy initiatives, intend to inject liquidity into the economy. The size and case of these initiatives is unprecedented. The long-term impact of the government action is yet to be determined. However, we believe that the longer-term impact on the industrial sector will be net positive. Companies are reevaluating global supply chains and our reliance on China and other low cost manufacturing countries. Establishing more supply chain redundancy will also provide better defenses against future large global disruptions.

Nearshoring and onshoring has begun and this trend will grow. All of these trends are expected to directly benefit our portfolio. There will be permanent changes to supply chain strategies across all industries. Perhaps the biggest impact of the virus will be a permanent acceleration of the trend towards e-commerce. Having a viable e-commerce business plan will no longer be a luxury for retailers. Collectively, these factors should provide increased demand for industrial space post crisis. These positive effects for industrial real estate demand will likely manifest themselves later this year.

Speaking to the current investment market conditions, the real estate asset transaction market has generally paused, as market participants work to understand the current pricing environment. Brokers are recommending to sellers, who can wait, that new transaction offerings be delayed until summer. Renewal leasing activity remains steady, most corporate growth initiatives are on hold, eliminating much of the warehouse consolidation traditionally seen as a result of M&A activity or supply chain rationalization. New leasing has slowed and the duration of the negotiations is widely expected to increase. We expect that new supply will also decrease materially due to developer and lender uncertainty, construction moratoriums and permitting delays. So in the medium term, we expect modestly increasing demand and decreased supply generally for the industrial sector.

In response to the market disruption, we placed our acquisition efforts on pause. In mid-March, as the level of market disruption increased, we terminated several transactions that were under contract and LOI. These were deals that involve tenants and/or industries likely to face elevated levels of disruption during the crisis. On the remaining transactions we had under agreement, we requested a 60-day extension of any contract period. Where the seller would not agree to this concession be terminated our pursuit of the deal. We continue to monitor the market to determine when and how our acquisition efforts will resume.

We continue to see demand for our space in the current environment as evidenced by our healthy operating metrics for the first quarter, both strong retention and leasing spreads. This has continued even after the period of shutdown started. We’ve remained active on the leasing fronts during this time. From the third week in March through the day, we’ve executed 13 leases for 1.4 million square feet. We have seen increased demand from tenants in the logistics, retailer, food products and pharmaceutical industries. Tenants remain interested in available space, with 28 tenants representing 5 million square feet of requirements interested in our market space, similar to normal levels during more normal environments.

Credit underwriting and monitoring has been an integral part of our business since day one, and our dedicated team has a deep understanding of our tenancy’s operations and financial conditions. This understanding is vital to our operating under its operations and financial conditions. This understanding is vital under our current conditions. The credit team, in conjunction with our asset management and customer solutions teams [continue to communicate directly with tenants across various points of internal contacts].

Our balance sheet strategy was positioned to endure times like this. Incorporating our January equity offering and forward equity proceeds, our leverage sits at 4x debt to EBITDA, which is considerably less than the low end of our recently stated leverage bands. Our liquidity stands at $597 million before taking into account the forward equity proceeds available, with a large portion of that in cash on our balance sheet, it’s a testament to the business we have built and the strength of our portfolio that we were able to recently complete the refinancing of $300 million of term loan debt in these market conditions. This refinancing activity effectively extends all our debt maturities until 2022 and beyond.

Our company is well positioned to operate in the current environment. The benefit of not maintaining a development component is the ability to readily hit pause in capital deployment when the market dislocates and the ability to quickly reengage to capture the opportunities we expect to uncover as recovery begins. Our balance sheet and liquidity levels will allow us to be opportunistic when the time is right. We very much look forward to that day. The market remains volatile and it is difficult to predict both the timing and slope of the recovery. We have updated guidance knowing that a heightened level of uncertainty exists in the world. We’ve incorporated what we know now and what might reasonably be expected to occur based on our various scenario analyses across multiple inputs. Bill will discuss in detail our updated 2020 guidance in his remarks. We will continue to update the market as appropriate as we all move forward through this unprecedented time.

How 2020 plays out is uncertain for all market participants. The industrial sector has benefited from historical tailwinds and continue to display strong fundamentals even as we endure today’s current conditions. STAG has positioned its portfolio and balance sheet to withstand and eventually, benefit from today’s environment and during the recovery that follows.

With that, I’ll turn it over to Bill, who will discuss our first quarter operational results and our updated 2020 guidance.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [4]

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Thank you, Ben, and good morning, everyone. Core FFO was $0.47 for the quarter, an increase of 4.4% compared to the first quarter of 2019. Leverage is below the loan of our guidance as a result of our January equity offering and reduced acquisition activity in response to the current pandemic. Net debt to run rate adjusted EBITDA is 4.4x prior to factoring in the outstanding forward equity proceeds and 4.0x when those proceeds are included. Acquisition volume for the first quarter totaled $119 million with stabilized cash and straight-line cap rates of 6.7% and 7.2%, respectively. Our last acquisition closed on March 9 with no acquisition activity since then.

Disposition volume for the first quarter totaled $102 million, which includes both the previously discussed Camarillo, California disposition and additional disposition at the end of March. Portfolio operating results were strong for the quarter. Same-store cash NOI grew 2.5% for the first quarter. Same-store cash NOI growth was driven by a retention rate of 87.5% and cash leasing spreads of 3.3%. Straight-line leasing spreads continue to be strong, coming in at 11.2% for the quarter. As of April 30, we have collected 90% of our April base rental billing. An additional 2% of April base rental billings yet to be received relates to 4 investment-grade tenants that we expect to remit payment in the next week or 2, bringing the total of collection to 92%.

The timing of these expected payments is consistent with past practices, providing a further breakdown of the remaining 8% of uncollected based rental billings for April, 5% of those are associated with well-capitalized tenants and tenants working through logistical issues related to payments. The remaining 3% currently outstanding is associated with smaller tenants that have been impacted by the pandemic. We are evaluating the future collection of lease rental payments and updated our credit loss guidance accordingly. To date, we have received rent relief increase totaling 4.1% of annualized base rent for $16 million. Of that $16 million of rent relief requested, we expect to initially grant rent relief of approximately $1.5 million, equating to 38 basis points of ABR. The general framework includes a period of rent deferral as opposed to abatement with the deferred amounts be paid within the next 12 months.

Moving to the capital market activity. On January 13, we completed an equity offering at $31.40 per share, which resulted in aggregate net proceeds of approximately $311 million. Net proceeds of $173 million were received in January with the remaining proceeds to be settled in the future at our option. In late March, we drew the remaining $100 million of our delayed draw term loan out and drew $200 million of our revolving credit facility. This resulted in a cash balance of $325 million at quarter end. When incorporating the remaining undrawn balance available on our revolving credit facility and the $136 million of forward equity proceeds available to our [sale auction], liquidity today stands at $733 million with the material amount of our liquidity and cash.

Subsequent to quarter end, on April 17, we refinanced our 2 upcoming term loan maturities. Term loans B and C totaling $300 million were combined and now mature on April 16, 2021. STAG, at its sole discretion, has the option to execute 2 1-year extension periods, which are both exercised to result in an outside maturity date of April of 2023. The term loan is fully swapped with an all-in fixed rate of 1.78% through April 2023. As a result of this transaction, we have no debt maturing until March of 2022, if we exercise our right to extend.

Our initial 2020 guidance was set prior to the onset of the current pandemic and did not assume the severe disruption seen today. We’ve updated our guidance to incorporate the heightened uncertainty related to the health of the economy and capital markets to best availability as of today. Note that we will continue to update the market as warranted. Components of our updated 2020 guidance are as follows: We expect acquisition volume to be between $300 million and $600 million for 2020, with acquisition volume restarting in the second half of this year. We expect all acquisitions to be stabilized assets with expected cash cap rate range of 6. 25% to 6.75%.

We continue to expect disposition volume to be between $150 million and $250 million for 2020. We expect the 2020 annual same-store pools cash NOI growth to be between 0 and 100 basis points for the year. This range includes a credit loss range of 100 to 150 basis points on the same-store pool. 2020 G&A is expected to be between $39 million and $41 million for the year. The reduction is due to the pause in originally planned hiring, a reduction in corporate travel and other corporate expenses. We expect to run leverage between 4.5 and 5.5x for the year, reflecting lower leverage compared to recent levels. Capital expenditure per average per foot is still expected to be between $0.27 and $0.31 for the year. The above changes to our guidance result in a new core FFO per share range of $1.80 to $1.88 per share. I will now turn it back over to Ben.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [5]

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Thanks, Bill. In summary, I just want to reiterate that we, as a company and as a team, are in a good place as we endure the effects of the crisis and look forward to what may lie beyond. I hope and trust that you and your families are all staying safe and healthy during these unprecedented times. We thank you for your time this morning and for your continued support of our company. I will now turn it over to the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Manny Korchman from Citi.

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Kathleen McConnell, Citigroup Inc, Research Division – Research Analyst [2]

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This is Katy McConnell on for Manny. Wondering if you could provide a little more color on the increase in acquisition cap rate guidance for your underwriting for deals now? And how you’re thinking about your cost of capital and underwriting risk in general differently today?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [3]

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So the higher cap rates are a reflection, obviously, of the cap rate that we experienced — we had in the first quarter or 6, 7 as well as our expectation from the information we received anecdotally in the market of lower prices, higher cap rates coming out of the crisis. Our cost of capital, we tend to think of sort of on an instant basis. We’re looking at our current equity pricing for the equity component of cost of capital and as we look at getting back into the market, we will likely use slightly higher return requirements as we feel our way into what the new pricing regimen may be.

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Kathleen McConnell, Citigroup Inc, Research Division – Research Analyst [4]

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Okay. And then could you also provide an update on the large top tenant move-outs you are expecting from GSA and Solo Cup and to address those obviously. What are the prospects?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [5]

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So obviously, those — I’m sorry. I should let you finish, please. Please finish.

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Kathleen McConnell, Citigroup Inc, Research Division – Research Analyst [6]

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No, no. go ahead. I was just going to say whether you’re consulting about retenanting or marketing the assets?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [7]

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Yes. So obviously, those 2 million square foot vacancies are foremost in our mind as we think about leasing. And we’re happy to report that there’s lots of activity around — or fair amount of activity around both. We have a number of — we have at least 2 full building users interested in Solo Cup negotiating currently. And the asset — the GSA asset in Burlington, New Jersey, we still think has many options that would be positive for the company, including ongoing inquiries about — from potential buyers about buying the sort of the basket of opportunity that’s there, not only the existing building, but the development component that’s there. That market remains very strong. And so we feel, I would say, moderately better about those opportunities in those situations.

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Operator [8]

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Our next question comes from the line of Sheila McGrath from Evercore ISI.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division – Senior MD [9]

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I was wondering, Ben, if you could provide an update on your development project in New Jersey? Any leasing activity at this point on that building?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [10]

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I hope that we’ll all be on the golf course soon. But until then, I’m going to let the guy who is responsible for that project, Dave King respond with their successes there. Dave?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [11]

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Sure. Sheila, we are currently trading some lease documentation and hope to have some positive news to report to you on that — some final news to report to you on that fairly soon. That’s a full building — we have a full building user in lease negotiation for that building. An e-commerce tenant.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division – Senior MD [12]

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Okay, great. And the yield on that project will be significantly higher than your acquisition yields, I’m assuming?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [13]

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Yes.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division – Senior MD [14]

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Okay. And just on your same-store NOI guidance, you mentioned a higher credit loss as a factor in lowering that. I’m just wondering if that’s like a big picture macro observation. Or did you experience credit loss in first quarter or your watch list? Kind of what’s driving that?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [15]

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So we’re — it’s not from recent default experience. It’s more our underwriting on a granular basis, looking at all of our tenants and trying to understand that. I’ll turn it over to Bill to give you some more color.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [16]

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Sure. We did not experience any credit loss in Q1 and the change in our same-store guidance was primarily driven by the increased anticipated credit loss due to the pandemic of 100 to 150 basis points.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division – Senior MD [17]

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Okay, great. One last quick one. On that recent debt deal that you did, if you could give us some insight on how the pricing compared to what you would have expected kind of pre-COVID because I think you can [price] that?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [18]

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Sure. Bill, why don’t you take that, too.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [19]

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So pre-COVID, that deal probably would have looked like a 5-year term loan with a 100 basis point spread and no LIBOR floor. This one was a 1 1 1, which effectively is a 3-year term loan, we have the option to extend each year with the payment of fees and the spread on that was 150 basis points on the LIBOR 4 of 25 bps. But that being said, the swap rate was a lot lower. So all in, we were $178 million for 3-year paper, we would have been a little north of that for 5-year paper, call it, 2%. So net-net, not too dissimilar, except we just have to extend each year for the next couple of years.

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Operator [20]

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

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Elvis Rodriguez, BofA Merrill Lynch, Research Division – Research Analyst [21]

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This is Elvis Rodriguez here on for Jamie. Can you give us an update sort of on your exposure to the auto sector and specialty retail and apparel tenants? So it’s about 15% of your portfolio, how are they performing today? Are those assets open and operating? And how are you thinking about those tenants going forward?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [22]

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Well, I mean, obviously, those are some of the industries that are affected. Our exposure to retail is about 5% and our exposure to auto is a little more than 10%. I think that the breakdown of auto — Bill, do you have the breakdown of auto?

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [23]

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Well, it’s as we’ve said before, it’s widely diversified. There’s certainly some plant closures that have happened. The big 3, look like they’re opening up here in the next few weeks. But all of that is the various industries, both in positive industries and negative industries are incorporated in our guidance of 100 to 150 basis points of credit risk — credit watch — credit loss, excuse me, for the year. So we try to take all of that into consideration obviously.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division – Research Analyst [24]

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But — so some of those tenants are like suppliers along the chain. And given sort of the disruption in the stay-at-home mandates from the government, like how are those tenants been affected? Are those the ones that are asking for relief? I’m just trying to get a better understanding of what’s happening with those tenants.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [25]

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So I’ve mentioned the tenants…

Go ahead, Bill.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [26]

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Because there’s a fair bit of tenants that have asked for relief. Of those tenants that have asked for relief, we’re anticipating granting about 40 bps of relief, which will be in generally 1 to 3 months of relief and payback over the next 12 months. Because our portfolio consists of a lot of large tenants. Those tenants, there’s been some opportunistic requests, and a lot of our auto tenants, in particular, are high-rated tenants. And so even if their facilities are shut down or providing materials to a plant that’s shut down, the credit ratings are still very strong.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [27]

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The other thing I would say, Elvis, is that none of the shutdowns that have occurred have been mandated. Logistics is deemed almost everywhere — I believe, everywhere as essential business. So the shutdowns have been corporate decisions generally related to either plant shutdowns or the instances where it was elsewhere, it would be a worker safety issue. So really not a feature of our portfolio that mandated shutdowns.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division – Research Analyst [28]

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That’s helpful. And then just one more big picture. Ben, as you think about sort of what’s going on in your business, has your strategy changed at all? Have you thought about changing your strategy going forward, given what’s going on?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [29]

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Yes, so I mean, our strategy has always been to seek, to acquire and to manage buildings where we can get — we can identify relative value. Where basically we can buy the building for less than we think it’s worth based on its ability to just cash flow going forward. That strategy — that approach to the business is not going to change. We believe it’s the correct strategy. It’s the way to maximize value for our shareholders. What we don’t know today is how much dislocation will be in the market. This is not a situation we’ve really been through before with the stimulus and the banking system being in relatively good shape. You’re not going to have the normal sort of recession or credit crisis impact from lenders forcing distress on borrowers and therefore, sellers. So it’s a different situation than we might normally see. But our strategy will stand itself in good stead through this crisis and almost any other economic conditions that we encounter.

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Operator [30]

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Our next question comes from the line of Michael Carroll with RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, Research Division – Analyst [31]

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I wanted to dive into the rent collection trends, I guess, that you highlighted real quick. And I believe that you’re highlighting that there’s about 3% of unpaid rents from smaller tenants that’s being impacted by the pandemic. How should we think about, I guess, that 3%? I mean should we expect more deferrals from that bucket?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [32]

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Yes. Thanks for the question, Mike. Good to talk to you, and I’ll give this to Bill.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [33]

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Thanks, Ben. I would say the majority of our deferrals will come out of that bucket. Those are tenants that are being impacted by the pandemic. I would say the biggest struggle we have with forecasting credit loss for the year is the stimulus and how that impacts our tenants. Early on when this pandemic first hit, we had a couple of tenants come to us for rent relief and subsequently, 2 weeks later, contacted us and say — and indicate they were able to receive some stimulus, and they no longer need a rent relief. So we’re evaluating that bucket, we’re evaluating all of our tenants that have requested rent relief and going through that process. And as we mentioned on the prepared remarks, we expect about 40 bps of — to grant rent relief and that should be 1 to 3 months and payback within the next 12 months.

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Michael Albert Carroll, RBC Capital Markets, Research Division – Analyst [34]

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Great. And then I’m not sure if you said this or if I missed this, Bill, but did you give us a number of how many tenants within the portfolio have actually asked for rent relief to date?

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [35]

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There was 64 tenants who requested rent relief. But of that, as of today, we’re expecting to rent relief to approximately 8 tenants.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [36]

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And Mike, that’s out of a 400-plus tenant portfolio.

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Michael Albert Carroll, RBC Capital Markets, Research Division – Analyst [37]

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Okay. Great. And then just real quick on the GSA property. I know that you’ve kind of highlighted this in the Q&A a little bit already. But how should we think about that? I mean it seems like it’s vacant right now. So you’re able to give tours, tenants can make decisions, but it also seems like a much more complex decision given all the options that you have at the potential site. So is that activity, could we expect that to get resolved sooner rather than later in the beginning of 2021? Or is it just too tough to say given all the options that could occur?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [38]

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Well, Mike, the building actually is vacant, but we’re still getting rent on it. The GSA lease runs through July. So it’s still a part of our income stream. It’s a little early to tell how quickly the — I’m sorry, through the end of December, I get the 1 million square footers mixed up. So it’s really not a 2020 issue in terms of income stream. We need the crisis to settle out a little bit for the — sort of the full return of the interest in the development component of that. It is a very, very strong market.

There continues to be development interest in and around that market, so it’s at Exit 6A of the Jersey Turnpike, which is very much a focal point for e-commerce activity in the eastern seaboard. So we feel very good about that. Our expectations for the year is we’ll continue to collect rent. Should we — we have tenants that are interested in the building today. Those tenants, if they’re acquired occupancy before the end of the year, we can negotiate a buyout with the current tenant and get occupancy before them. So we have lots of flexibility. We have a consistent income strength through the year, and the options remain really positive for us. It’s just a little unclear as to, I should say, less clear as to the timing of when we will execute on those options.

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Michael Albert Carroll, RBC Capital Markets, Research Division – Analyst [39]

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Okay. And then lastly for me on the 2 full building users interested in on the Solo Cup space, mean is that — how close are those leasing transactions? And if one of those users want that space, when could they occupy it? Would this be something that could occur towards the end of this year? Or would it be longer than that?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [40]

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Well, we would be hopeful that it would be this year. It depends on how much work has to be done to prepare the building for the specific tenant needs. But I mean, we’re very encouraged by the fact that the 2 full building users have an interest in that property and a strong interest at the level of beginning to pass some paper around in terms of defining the requirement and the documentation. So we’re very encouraged about the level of interest on that building, and it’s something that things always move slower during this time. And I think it’s highly likely that you would have a resolution of that building by year-end.

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Operator [41]

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Our next question comes from the line of Mike Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division – Senior Analyst [42]

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In terms of 2020 guidance, I was wondering, can you walk through for your same-store NOI? The portfolio occupancies, I think, 96.2% at quarter end.

What — where are you anticipating that ending the year?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [43]

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It really depends on — I’m going to pass this to David in a second, but it really depends on what our default experience is. I think most of the variability and expected occupancy at this point is on unexpected vacancy due to default. We have a pretty good visibility as to renewals. Dave, would you like to add to that?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [44]

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I would say the spaces rolling in 2020 that we expect to renew, we’re close to 90% through that documentation. So there’s not a lot of mystery there. We expect positive results on the remainder. The question is really on new leasing. And at — the activity on the new leasing market remains strong. The logistics of showing space and getting things documented tends to — it’s going to be a hindrance in moving things along quickly. So we’re really — that the uncertainty is around the timing of new leasing. So I would expect occupancy to erode a little bit, but not tremendously.

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Michael William Mueller, JP Morgan Chase & Co, Research Division – Senior Analyst [45]

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Got it. So if you’re looking at the low end of the range, I mean, do you have something in there, would you say, 100, 200 basis points at the low end? Or — is that sort of magnitude or not that extreme?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [46]

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I think we are — our base case is not far off where we are now. And then we’ve got some scenario analysis around that, that doesn’t get you very far off that.

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Operator [47]

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Our next question comes from the line of Dave Rodgers with Robert W. Baird.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [48]

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It’s Dick on for Dave. The conversations you had on leasing to start first quarter, what is the tone been there? And like what industry has been driving those? And then like kind of where do those stand today?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [49]

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So I missed actually the first part of the question, my Internet buzzed at the wrong point. Could you repeat the question, please?

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [50]

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So the conversations you guys have had on the leasing front in like first quarter, what kind of has been the tone there? Like what industries are driving those discussions? And like, what are the status of those leases today or your discussions?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [51]

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Yes. So I mean, we’ve already mentioned some of the areas in our — in the script. We had some of the areas we’re seeing strength in pharmaceutical, e-commerce, et cetera. There’s sort of the poster children for who’s going to do well during this period. The demand though is pretty widespread. Dave, do you want to add something to that?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [52]

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I think the demand probably tends higher proportion of e-commerce tenants today than we might see on a regular day. But the — it is pretty widespread. We’ve got consumer staples, pharmaceuticals, et cetera, and even some auto uses. So there is a wide range of demand.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [53]

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Okay. And then for the cap rates on the year-to-date sales, I don’t know if you guys gave one, but can you update me on that? And then kind of for the timing and cap rates for the remaining assets? And are you guys kind of assuming maybe the sale of that GSA building potentially in that?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [54]

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So the cap rates on acquisitions or…

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [55]

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On dispositions.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [56]

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Oh, just the dispositions. Yes. So the proponents of the dispositions were made of the 2 buildings in Camarillo that we sold. Those were a 4.9% cap rate on market rents. They’re [diligently related] to the time we sold them, but that would be a 4.9% cap rate on market rents. GSA is not currently in our disposition guidance for the year. Obviously, we have rent through the remainder of the year and a lot of options. So we’ll say some — take some to figure it out. The high end of our range, $250 million probably would encompass the sale of one of those, either GSA or Solo Cup but at this point, we don’t think those are likely to happen.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [57]

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All right. And then the last one for me. You guys talked last quarter about scaling G&A this year, but due to the current circumstances around what portion of the cutbacks you guys made in the updated guidance, would you say, is cutting back on that scaling?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [58]

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Well, I think that’s — I mean, we gave the — Bill gave some of the components of what the cutback was. I think the scaling of staff is certainly a big part of it as well as reduction in corporate travel. The staff will probably — almost certainly probably come back as the markets come back. I think most people believe the corporate travel may be diminished for a more significant period of time. But those are the 2 big components.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division – Junior Analyst [59]

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Okay. So you’d see maybe more of like a step-up again in 2021 versus…

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [60]

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Yes. Sure when we get back to our normal business. There’ll be more travel as we get more actively involved in acquisitions.

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Operator [61]

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Our next question comes from the line of Bill Crow with Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division – Analyst [62]

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A couple of questions. What percent of your occupied properties are not open? I know we touched on the subject, but I just wanted to get a percentage.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [63]

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Bill, I’m surprised that you didn’t start with a “na na na” about Brady and Gronkowski, but I’ll let you slide on that. So I believe it — that we alluded to before, the buildings that are closed because of the auto plant shutdowns and then some — a couple of buildings because of worker safety concerns. So I believe it’s 18 buildings in total out of our 425.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division – Analyst [64]

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And what percentage of your rent abatement requests are represented by those 18 buildings?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [65]

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Dave, can you give some…

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [66]

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There’s actually not a very high correlation between the 2. Obviously, if you’ve got a — we’ve got some smaller tenants with quasi retail component, those are all shut as well as looking for relief. But in general, the ones related to auto is the biggest factor. They’re just trying to work through plans to change operations to ensure worker safety. So they are large organizations that aren’t particularly seeking rent relief.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division – Analyst [67]

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Got you. Okay. And then final for me. Ben, a lot of people are talking about how this event, this COVID-19 will pace on the move to e-commerce. And I’m just wondering, how does that play into your thoughts on what assets you might divest additional headwinds on buying an assets where the tenants might be old line economy tenants? How does it change your perception on a portfolio management basis?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [68]

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Yes. So I mean, obviously, we’re looking to call from the portfolio assets that we believe do not operate in the current environment. And the biggest example of that has been in buildings we bought 10-plus years ago prior to being a public company in the call center area, which is — that’s certainly not an area. But most of our buildings are fungible vast componentry builds a fungible distribution buildings located around population centers. We think that those buildings will remain an active part of the supply chain. And indeed, will be advantaged by the fact that these supply chains are fattening or redundancy being established in those supply chain.

So I don’t think that necessarily there’s a change in strategy inherent in sort of what the new normal may look like. Having said that, as the new normal plays out, our market’s team will be assessing the potential for rental rate increases specific to the markets and submarkets and building that we’re — the aspects of the buildings we’re looking at. So I think that our — not only our strategy, but our execution style allows us to adapt to the new normal and be fluid in finding opportunities as we move forward.

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Operator [69]

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Our next question comes from the line of Chris Lucas with Capital One Securities.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division – Senior VP & Lead Equity Research Analyst [70]

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A couple of quick questions for you. On the tenant retention guidance decline. Is there anything specific that drove that? Or was it more just a general feel?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [71]

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I mean I’ll turn that over to Dave. I think it’s a small sample variance.

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [72]

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Well, the — I think the major move there is that we’re now not projecting to sell the handset asset. So that’s 1 million feet that could have been sold and would have dropped out of the retention statistic. And now we are — we’re going to endure the non-retention event there, though we pretty pleased with the activity to date.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division – Senior VP & Lead Equity Research Analyst [73]

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Okay. And then as it relates to the operating expenses, does the current environment change your outlook for any of the nonreimbursed operating expenses, cleaning costs, utilities, whatever?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [74]

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Yes. Obviously, that’s specific to our vacancy for the most — we’re triple net leases. So we’re not impacted directly, except on our vacancy. And Dave, do you have anything to add to that?

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David G. King, STAG Industrial, Inc. – Executive VP & Director of Real Estate Operations [75]

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No. I mean our exposure to the operating costs are fairly low. As Ben mentioned, it’s 95% of our properties are occupied or 96%, and we don’t really have much exposure at all.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division – Senior VP & Lead Equity Research Analyst [76]

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Okay. Great. And then the last question. Just, Ben, just bigger picture, kind of where we sit today. Has your acquisition bias changed at all in terms of either the line of business exposure, geography, lease duration or credit quality?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [77]

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I think that, Chris, it’s a great question. I think the — what we’re looking for and have always looked for is trying to find the places where we can get the — an embedding parlance, we can get the most open overlay. So we get paid the most for whatever risk we’re taking. We’re obviously not buying 50-year leases to the federal government, we’re buying some combination of tenant credit, lease term, location, building quality, building conditions. And we’re trying to get — make sure that we — by analyzing that we get overpaid for the risks we’re taking. So if the entire market rushes back in and says “We only want to buy 15-year leases to investment-grade credits in 5 or 6 markets”, pretty clearly that we’re not going to be buying those assets because they’re going to — we believe they’ll be mispriced to the high side.

So we remain fluid now if the opposite is true and people rush back in and say “the secondary markets and shorter-term lease is where we need to be”. Well, you’ll see a pricing dislocation to the upside there, and maybe we’ll be operating in the longer-term basis. So we just have to remain, again, fluid in response to the opportunity and continue to have a very broad level of inquiry as to where that opportunity might eventuate.

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Operator [78]

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(Operator Instructions) Our next question comes from the line of Brendan Finn with Wells Fargo.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division – Associate Analyst [79]

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So I guess when you guys aren’t able to start back up with your acquisition activities, I guess what changes are you expecting to see from the seller pool? So like would you expect to see more mom-and-pop type sellers as opposed to institutional sellers that may have been forced to sell some assets as a result of the crisis?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [80]

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Well, I mean, I alluded to this a little bit earlier. It’s not 100% certain as it would have been during the credit crisis or some other recessions, where the distress is going to come from. So forced selling or heightened attempts to sell, it’s not as clear where that’s coming from or where the opportunities might be. I do think that the — more likely among smaller sellers, the — either the ability to wait or the predilection to wait, the desire to wait will be smaller there. So our normal activity, which is largely focused on small sellers, will likely continue that way.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division – Associate Analyst [81]

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Got you. That’s helpful. And then I apologize if I missed this, but in the press release, you talked about tenants, a small portion of the tenants that are working through logistical payment issues. Could you just clarify what those issues are? And then if you anticipate they will be resolved for May payments?

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [82]

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Yes. Let me turn that over to Bill.

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William R. Crooker, STAG Industrial, Inc. – CFO, Executive VP & Treasurer [83]

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Thanks, Brendan. The logistical issues are twofold. Some of the largest companies getting in and sending out checks. The other one was we implemented a new payment software. Interesting enough, we implemented it, going live with April rents and that’s partial pay. And so that has created some logistical payment issues with some of our well-capitalized tenants that we would have otherwise expected rent payments. So we’re working through those issues. And as of today, we’re expecting to collect those rents in May. But that’s — those are the 2 types of logistical issues we’re hearing from our tenants.

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Operator [84]

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There are no further questions in the queue. I’d like to hand it back to Ben Butcher for closing remarks.

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Benjamin S. Butcher, STAG Industrial, Inc. – Chairman, CEO & President [85]

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Thank you very much, operator, and thank you all for joining us today. This is — goes without saying, but it’s been said many times. We are in very much unprecedented times. STAG is extremely well positioned to survive and perhaps thrive following these times as we get back into whatever type of recovery we have. Obviously, things remain fluid, but we have a very strong tenant base and a very strong team to manage it. So we’re very encouraged as the potential for the company going forward. And we thank you for your time this morning, and we look forward to conversing with you in the coming months.

Thank you.

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Operator [86]

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

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