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Stag Industrial, Inc. (STAG)

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STAG Industrial, Inc. (STAG)

Q4 2016 Earnings Conference Call

February 17, 2017, 10:00 AM ET

Executives

Matts Pinard - Vice President, Investor Relations

Benjamin Butcher - Chairman, President and Chief Executive Officer

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

Stephen Mecke - Chief Operating Officer and Executive Vice President

Analysts

Gaurav Mehta - Cantor Fitzgerald

Sheila McGrath - Evercore ISI

Joshua Dennerlein - Bank of America Merrill Lynch

Michael Carroll - RBC Capital Markets LLC

Barry Oxford - D.A. Davidson

Mitch Germain - JMP Securities

Michael Mueller - JPMorgan

Tom Lesnick - Capital One Securities

Presentation

Operator

Greetings and welcome to the STAG Industrial Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now pleasure to introduce your host Matts Pinard, Vice President of Investor Relations. Thank you, Mr. Pinard. You may begin.

Matts Pinard

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

On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements 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 discussion related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental informational package available on the company’s website.

As a reminder, forward-looking statements represent management’s estimates as of today, Friday, February 17, 2017. 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 Butcher

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 the fourth quarter results.

Presenting today in addition to myself will be, Bill Crooker, our Chief Financial Officer, who will be discussing 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 macro events of the fourth quarter dominated the headlines and significantly impacted the REIT market. Following the presidential election, the broad equity markets rallied and the 10-year treasury rate spiked to a two-year high of 2.6%. This key interest rate has settled back and its future course remains to some degree unknown.

However, we are not overly concerned about a potential rise in interest rates for several reasons. First, we have a long duration, well-laddered, and almost entirely fixed rate balance sheet.

Second, a rise in interest rates is likely the result of continued economic growth, good for both rents and occupancy of our buildings.

Third, our acquisitions remain accretive with a moderate rise in interest rates.

Fourth, our principal competition, which is local private buyers to acquire buildings are more dependent on leverage than we are. Interest rate increases will impact them more adversely than us.

The Trump Presidency has also brought a lot of speculation around potential policy changes that may impact trade. As an owner of industrial assets that serve U.S. consumer demand, we believe the marginal changes in trade will not significantly impact the demand for our buildings. The U.S. economy is very insular and the U.S. consumer will still demand goods regardless of where they are produced.

The fourth quarter capped off a very strong year for STAG. In addition to 2016 being the largest acquisition year for STAG, we also sold our first significant portfolio as a public company. As we expected, this portfolio sale demonstrated the value creation inherent in the execution of our investment thesis, aggregating in individual industrial assets with binary risk cash flows into a diversified portfolio.

This portfolio disposition consisted of six assets that were representative of the overall STAG portfolio of more than 300 assets, consistent on parameters such as building size, age, lease term, and credit quality. The portfolio closed at a 6.9% cap rate, which compares to the going-in acquisition cap rate for these assets of 9.2%.

In the last 12 months, we have individually acquired four assets in the same geographic location with similar building and tenant characteristics for an average cap rate of 8.4%. We continue to see attractive opportunities for acquisitions, as we look broadly across U.S. industrial landscape.

Our pipeline sits at $1.8 billion and consists primarily of single tenant industrial buildings with the same general parameters of the buildings we’ve been acquiring over the past year. Because of this persisting opportunity, we expect to acquire between $500 million and $600 million of these accretive transactions in 2017.

On the operation side of the business, STAG continues to benefit from the strong industrial fundamentals. As we have discussed in previous quarters, the growth of e-commerce continues to be an incremental demand driver for our space. We are seeing strong tenant demand for our buildings, declining vacancy, and rising rents across the markets we operate in.

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