STAG Industrial, Inc. Q4 FY2020 Earnings Call

Greetings. Welcome to STAG Industrial’s Fourth Quarter 2020 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. Please note, this conference is being recorded. I will now turn the conference over to Matts Pinard, Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to STAG Industrial’s conference call covering fourth quarter 2020 results. In addition to the press release distributed yesterday, we have posted 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 forecasts of core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates, and other guidance, leasing prospects, rent collections, industry and economic trends, as well as other matters. We encourage all of our listeners to review the more detailed discussions related to the 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. Also here with us 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 the areas of focus. I will now turn the call over to Ben.

Thank you, Matts. Good morning, everybody, and welcome to the fourth quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our fourth quarter results. 2020 was a challenging year for our Company, our country, and the world as a whole. Despite the ravages of a global pandemic, significant social unrest, and a contentious political climate, we were able to efficiently and successfully navigate the year. I want to thank our team for the excellent work they have done in facing up to these challenges. Through their efforts, we were able to meet our original pre-pandemic financial guidance for core FFO per share and exceed on same-store cash NOI. We also finished the year with our largest acquisition quarter in the Company’s history. As we begin 2021, there are reasons for optimism as we move forward towards a new normal. Highlighting this has been the development and initial distribution of multiple, highly effective vaccines. Tempering that optimism has been the emergence of virus variants and mutations. These two will be overcome as we move forward to that new normal. In our corner of the world, industrial real estate, we continue to enjoy strong tenant demand and positive fundamentals. E-commerce continues to be a significant incremental demand driver and can reasonably be expected to continue for the foreseeable future. Online shopping will continue to grow. Not surprisingly, after many years of falling vacancy, supply has finally caught up with demand for the country as a whole, albeit at heightened levels for both. As has been the case in recent years, the excess supply tends to be concentrated in larger markets is not expected to significantly dampen prospects for rent growth. Supply-demand evaluations need to be done on a market-by-market basis and updated periodically. These market-specific evaluations are an integral part of the STAG underwriting process. In March, we paused our external acquisition efforts in order to more fully understand the scope of the pandemic and its impact on both capital markets generally and the industrial real estate sector, in particular. Over the next couple of months, we observed tenant and seller behavior to try and get a sense of the new market equilibrium. During this time, the team also identified and completed internal projects in data utilization and modeling that will support our long-term acquisition efforts. Towards the latter half of the second quarter, it became clear that market conditions and industrial fundamentals were supportive of a full return to our acquisition program. The pace of acquisitions accelerated in the back half of the year as we and sellers gained confidence in pricing levels and assets returned to market. The 32 buildings STAG acquired in the fourth quarter for an aggregate price of $579.9 million, represent the largest quarterly acquisition volume in our history. For 2021, we see acquisition volume continuing at a strong pace with guidance of $800 million to $1.2 billion. This guidance range is supported by our current $2.1 billion acquisition pipeline that reflects the large and attractive opportunities that we see today. 2020 was also our Company’s largest year for dispositions, highlighted by large granular dispositions in California and New Jersey. Seven buildings were sold during the year with gross proceeds of $279.4 million. These proceeds resulted in an aggregate disposition cap rate of 5.4%. The funds from these sales were then accretively redeployed in the fungible industrial assets. Our portfolio performed exceedingly well during this pandemic year. We collected 99.6% of rental billings for the year. The handful of rental deferrals we granted have concluded and the repayment is proceeding as scheduled. This demonstration of portfolio resilience was at a level at least in line with the experience of our public peers. We spent a significant amount of time over the last year discussing two large known vacates: the 1 million square-foot building leased to Solo Cup in Hampstead, Maryland, and the 1 million square-foot building leased to GSA in Burlington, New Jersey. Both lease maturities have been successfully resolved to great outcomes. The Hampstead building was backfilled to a strong credit tenant with zero downtime. The Burlington building was sold and produced outsized returns, a nominal gain of $41.5 million at a 5.4% cash cap rate. This year, we returned to a more normalized lease expiration schedule with no large tenant lease maturities. The level of annual credit loss we expected to occur in 2020 was heightened by the onset of the pandemic and the associated economic downturn. As credit concerns moderated through the year, we were able to increase our cash same-store guidance. We continue to benefit from the combination of widespread tenant demand and declining credit concerns across the portfolio. This is reflected in a more normal 2021 cash same-store guidance range of 2% to 3%. Bill will discuss all of our 2021 guidance in detail, but the takeaway is that our business remains vibrant and our guidance reflects a return to more normal conditions. In particular, our core FFO per share guidance implies solid accretion supported by a defensive balance sheet and ample liquidity. With that, I’ll turn it over to Bill, who will discuss our fourth quarter and annual operational results and our 2021 guidance.

Thank you, Ben. Good morning, everyone. Core FFO was $0.49 for the quarter and $1.89 for the year, an increase of 2.7% compared to 2019 and equal to the midpoint of our original pre-COVID 2020 guidance given last February. Leverage at quarter-end remained at the low end of our guidance range with net debt to run rate adjusted EBITDA equal to 4.6 times prior to factoring in the outstanding forward equity proceeds and 4.2 times when those proceeds are included. Acquisition volume for the fourth quarter totaled $579.9 million with stabilized cash and straight-line cap rates of 5.8% and 6.2%, respectively. This brings our full-year acquisition volume to $775.8 million, with stabilized cash and straight-line cap rates of 6% and 6.4%, respectively. Disposition volume for the fourth quarter totaled $155.5 million. The fourth quarter dispositions were highlighted by the sale of our GSA asset in Burlington, New Jersey, for $110.5 million at a 5.4% cash cap rate, which compares to an acquisition cash cap rate of 9.5%. This brings our full-year disposition volume to $279.4 million, with a cash cap rate of 5.4%. Retention for the quarter was 63.9% and 78.4% for the year, which exceeded the high end of our original pre-COVID 2020 guidance of 75%, given last February. Cash and straight-line leasing spreads were 4.9% and 12.9% for the quarter, and 2.2% and 8.2% for the year, respectively. Cash same-store NOI grew 1.7% during 2020, at the high end of our revised guidance range provided in December and above the midpoint of 1.5% of our original pre-COVID 2020 guidance given in February. We collected 99.6% of our base rental billings for 2020 and have collected 97.3% of our base rental billings for January as of today, consistent with our experience in 2020. We did not receive any new rent deferral increase in the fourth quarter. Moving to the capital market activity. In the fourth quarter, we completed a forward equity offering at $30.40 per share, which resulted in aggregate net proceeds of $276.2 million. On December 23rd, we partially settled the forward equity component of this transaction and received $135 million in net proceeds, which were used to fund fourth quarter acquisitions. Additionally, on December 23rd, we fully settled the forward equity component of our January 2020 equity transaction and received $131.2 million in net proceeds, which were also used to fund fourth quarter 2020 acquisitions. In total, we received $266.2 million in net proceeds from the two forward equity transactions. As of year-end, we have an additional $139.3 million of net proceeds available at our option to fund future acquisitions. Subsequent to quarter-end, on February 5th, we refinanced our $300 million term loan G, which is scheduled to mature in April of this year, subject to one-year extension option. The refinancing extended the maturity date an additional five years to February 2026. We were also able to reduce the credit spread by 50 basis points to the pre-COVID spread of 100 basis points. In conjunction with the refinance of term loan G, we upsized our revolving credit facility to a notional of $750 million by exercising the accordion feature within our loan document. This represents an increase in revolver capacity of $250 million and no change to the current maturity date. As a result of these debt transactions and including the forward equity proceeds available to us, our liquidity stands at $795 million. Our initial 2021 guidance can be found on page 22 of our supplemental package, which is available in the Investor Relations section of our website. We acknowledge the continued uncertainty related to the health of the economy, and we’ll continue to update the market as warranted. Components of our initial 2021 guidance are as follows. Our 2021 core FFO per share guidance is in the range of $1.94 to $2 per share with a midpoint of $1.97. We expect the acquisition volume to be between $800 million and $1.2 billion for 2021, with an expected cash capitalization rate of 5.75% to 6.25%. We expect straight-line cap rates to be 50 basis points higher than cash cap rates. We also expect disposition volume to be between $100 million and $200 million for 2021. We expect the 2021 annual same-store pools cash NOI growth to be between 2% and 3% for the year. 2021 G&A is expected to be between $43 million and $46 million for the year. Note that this range excludes a one-time expense of $2.3 million related to the adoption of our retirement plan. We expect net debt to run rate adjusted EBITDA to be between 4.75 times and 5.5 times. With that, I will now turn it back over to Ben.

Thanks, Bill. We see many reasons to be optimistic about our business as we head into 2021. There is significant momentum behind our acquisition efforts, the strength of the portfolio will continue to drive internal growth, and our balance sheet is well-positioned to support our business. Thank you for your time this morning. I’ll now turn it back to the operator for questions.

At this time, we’ll be conducting a question-and-answer session. Thank you. And our first question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your questions.

Yes. Good morning. Ben, I was wondering if you could talk about the mix of acquisitions in the quarter, some activity in Florida and California markets where you’ve not previously been that active. How competitive are those markets? Was that a driver of the slightly lower acquisition cap rate in the quarter?

I agree with your assessment, and I will hand it over to Bill for more details.

Hey, Sheila. Yes. I mean, the fourth quarter was a mix of assets. We were able to break into some markets we were not previously in. As you said, South Florida was one of those, example of that market was we were able to acquire a sale leaseback portfolio with a little over eight years of lease term. That portfolio is well below market. The buildings fit the submarkets well. And, I think, though - if we didn’t have the eight years of lease term and it was something in the order of three years, it would have been a much more competitive transaction. And that’s the benefit of what we do. We’re able to find relative value across the markets we operate in, and this is just one example. There are similar examples in the California markets we’re investing in. It was a little bit of a driver as to the lower cap rate this quarter. But for the year, it was a 6% cap rate and that’s what we’re projecting for 2021.

Yes. I think, we look at the reduction in cap rate. There’s a little bit of cap rate compression, and probably half cap rate compression and half mix.

Okay, perfect. And then, you did mention two opportunistic sales in the fourth quarter. I think you’ve gone in detail over the South Jersey sale. What was the other sale in the quarter? I’m sorry if I missed you saying it.

It was a sale to – excuse me, we didn’t include it in the script. It was a sale to a tenant in Memphis, a significant sale, again, consistent with that overall aggregate disposition cap rate of 5.4% for the tenant who had a large commitment to the building, probably looking at the reduced cost of debt and decided that they would rather own the building and continue to lease it. Obviously, it was a great result for us and consistent probably with returns we’ve gotten from leasing the building.

Okay. Thank you.

The next question is from the line of Emmanuel Korchman with Citi. Please proceed with your questions.

Hey. This is Chris McCurry on for Manny here. I was just wondering if you could discuss some of your funding sources and potential need to tap equity throughout the year.

Yes. I’m going to say that we have demonstrated in the prior years that we are pretty good stewards, both of deploying capital and accessing capital, and have shown that we can access different types of capital. But I’ll turn that over to Bill as well for a little more detail.

Thanks, Chris. I mean, we have been operating the balance sheet at very low leverage in 2020, and that was partially to be defensive, given the macro conditions of the market. In 2021, we’re reverting back to a more normalized leverage range of 4.75 times to 5.5 times. And the equity will be a mix of what we’ve done over the past several years. It will be larger transactions supplemented by ATM, and we’ll look to match fund our acquisitions as best we can, and we’ve been able to execute on that through ATMs and forward equity raises.

Okay. Got it. And just a quick follow-up. Could you discuss the bifurcation between some of your larger and smaller tenants? And what trends you’re seeing between those two?

Tenant demand and tenant health have remained robust throughout the pandemic and in 2020. There has been a noticeable trend towards increased demand for larger spaces. The demand for larger facilities, which likely reflects the rise in e-commerce, has increased significantly. While there hasn’t been a decline in smaller suite sizes, which we generally define as spaces over 100,000 square feet due to our portfolio's building size, there has been overall heightened interest in larger buildings. This uptick is evident in markets that faced challenges before the pandemic and the surge in online shopping, such as South Dallas and Lehigh Valley, where numerous large newer buildings struggled to attract tenants. These markets have since improved significantly. Notably, our Solo Cup building, which we anticipated would experience 12 to 18 months of downtime, was fully leased without any downtime. Major tenants with complex needs have been very active throughout the pandemic.

Yes, makes sense. Thanks for the color.

Thank you.

Thank you. Our next question is from the line of Brendan Finn with Wells Fargo. Please proceed with your question.

Yes. Thanks, guys. I wanted to talk about cap rate trends. Are you guys expecting further cap rate compression this year? And then, how have cap rates trended in your primary markets relative to those in your secondary and tertiary markets?

We are not active in tertiary markets, as previously mentioned. I would like to note that cap rates are measures that reflect a specific point in time and do not fully capture the essence of an investment. We concentrate on three, five, and occasionally ten-year core and CAD per share metrics. We place emphasis on a ten-year levered IRR to understand the future performance of an asset in our portfolio, rather than focusing solely on cap rates. That said, cap rates have indeed compressed more significantly as we look at larger markets that are appealing to investors. We continue to recognize the potential returns from investing primarily in the top five markets and possibly extending to the top ten. However, the returns in these areas are not sufficient for us to allocate capital because the demand for those assets is too high. Our underwriting process evaluates each market based on our outlook for future rent growth, taking into account the differences between market and contractual rent and other deal parameters, including future capital costs. Our ongoing focus remains on the cash flow generated from owning each asset, so we are more inclined to assess individual transactions within their respective markets rather than categorizing them strictly as primary or secondary.

And the cap rates for 2020, were 6% cash basis. On average, those are another 40 to 50 basis points higher when you factor in the straight-line component. Our guidance for 2021 is the midpoint of 6% and another 50 basis points on the straight-line cap rates. And that’s largely due to the bumps we’re seeing in some of the longer-term leases we’re acquiring, which are, I would say, minimum 2.5%, and we’ve seen some as high as 3.5%. So, bumps are a lot higher in some of these transactions that we’ve been acquiring over the last 12 to 18 months.

Great. Yes, that makes sense. And then, I apologize if I missed this, but in terms of acquisitions this year, what is the split you’re targeting in terms of stabilized acquisitions versus value-add acquisitions?

We’re looking at…

Sorry, Ben.

No, no. Go ahead, Bill.

So, the value-add is usually up to 10%. This year, it was just a lot lower. We didn’t see as many value-add deals come to the market, just given the market conditions. And we’re certainly underwriting a lot more now, and in our $2.1 billion pipeline, it’s a similar percentage of value-add deals as we’ve seen over the years.

And those value-add deals obviously have to meet our return thresholds just as stabilized deals would.

Thanks, guys.

Our next question is from the line of Elvis Rodriguez with Bank of America.

Just noticing that on your portfolio diversification, you added another Amazon lease this quarter, taking ABR to 3.8% from 2.9% in 3Q. Perhaps you could share a little bit more detail there? And what sort of exposure are you comfortable with to a single tenant in the longer term?

If you're looking for a strong credit in today's environment, Amazon is a solid choice. Given Amazon's market position, tenant relations with them are crucial. We recognize the importance of our relationship with Amazon, and if they show interest in one of our buildings, we will definitely pursue that opportunity. Our exposure to Amazon is currently at 3.8%, which we feel confident about, and we consider them a key tenant for our company moving forward. We're comfortable with this level of credit exposure and believe we could potentially increase it to 5% or higher. Overall, our strategy has been focused on diversification, and we have successfully achieved broad diversification in terms of individual tenant credit exposure.

Can you go through that weighted average… Sorry. Go ahead.

Elvis, just adding on to that, our diversification within that exposure, we have various lease terms. It’s across various markets. There’s different uses for the facilities. So, that exposure to Amazon at 3.8% is further diversified.

As you mentioned, are you able to share what the weighted average lease term is of those leases?

It's probably closer to 10 years, although I don't have the exact number. We have some longer-term leases, and the lease we acquired this year is around 7 years, which fits well for us. We can achieve good relative value when evaluating and bidding on these types of assets with longer-term leases. When lease terms extend into double digits, the competition becomes intense. This particular asset was located in the Columbus, Ohio market, a significant distribution area. With a 7-year lease term, we managed to attract some long-term investors, and in the market, we outperformed other investors. This allowed us to secure it at a favorable return, with strong rental escalators. Overall, we believe it was a very good investment.

And Ben or Steve, how should we think about the cadence of your acquisition pipeline this year? Will it be back-weighted in the back half of the year? I know the pandemic obviously pushed some of the activity last year. But, how should we think about the cadence throughout the year of acquisitions?

Yes, thank you. Our quarterly performance has traditionally been stronger in the fourth quarter. In reviewing our top five quarters by volume, I believe at least four of them fall in the fourth quarter. Typically, we can expect the third and fourth quarters to be the busiest, while the first quarter often sees the least activity. Last year was an exception due to the pandemic, but generally speaking, it's reasonable to anticipate a slower start to the year, with the second and third quarters likely showing similar volumes, and the fourth quarter usually being the highest. Bill, do you have anything to add?

Yes. I think, that’s right, Ben. I mean, typically, the answer is, hey, look at the last year and use that cadence, it’s not the case with 2020, just given everything that happened. But, I think, if you look at 2019, 2018, and look at the cadence of those years, that’s probably a pretty good estimate in terms of cadence for ‘21.

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

Ben, I want to talk a little bit about the competitive landscape for some of these industrial products that you guys are looking for. Has that changed, I guess, over the past 12 months, the interest from other institutional capital sources have picked up? And, are you seeing the mix of the buyers of the assets you’re targeting, is that different?

There continues to be capital flowing into industrial real estate, and interest in this sector is broadening among various players. However, the areas where we see the best returns may not align with where most of that capital is directed. As Bill mentioned in response to the previous question, securing properties with a 10-year lease term is often perceived more as a financial transaction than a real estate one. Consequently, a lot of passive and less experienced investors are chasing these opportunities, leading to cap rates being driven to unattractive levels for assets with long-term leases, strong credit, and favorable locations. The influx of capital appears to be focused on the less risky segments of the market. We continue to observe numerous transactions in robust secondary markets with medium lease terms and reasonable rents relative to the market, which allows us to identify relative value opportunities. Last year, our success rate in acquiring deals we thoroughly evaluated was under 15%, primarily because others were willing to pay higher prices. While we are encountering increased competition from new sources, this has not diminished the number of opportunities available; there is still a significant opportunity set. We aim to improve our success rate to around 15% or slightly better.

And then, is that capital source is coming in? Are they more interested in those larger transactions, I guess? And if so, are you seeing a bigger premium on those portfolio type deals?

There has always been a truth about industrial real estate: it comes in small chunks. If someone is looking to invest $1 billion or more, it's difficult to justify the time spent on acquiring a $5 million asset. Generally, once you reach $20 million or $25 million assets, there are more investors willing and able to focus their efforts on those opportunities. As transaction sizes increase to $100 million, $200 million, $250 million, or even $300 million portfolios, another tier of investors emerges who can rationalize spending time on those larger assets. Therefore, as the size of the transaction increases, the required returns demanded by potential investors tend to decrease.

And, is there a point where you’d be willing to bring another portfolio to the market? I think you’ve done two in the past five years or so, just on the disposition side to try to capitalize on that, I guess, that portfolio premium that’s out there and the increased interest.

Yes. So, I mean, we’re very, very cognizant of the fact that we’re in a market where industrial is very highly valued and our assessment is between various sources of capital raising? Does it make more sense to raise common equity or sell assets and redeploy that equity that was derived from the asset sales? I mean, there are a couple of things that factor into that. Obviously, we run the numbers to see which one is more attractive for our shareholders, the operating leverage that exists on adding to the portfolio versus a sale which subtracts from the portfolio, and is sort of anti-scaling comes into play. So, we are looking at whether it makes more sense to raise common equity at our current equity price versus selling assets. The other thing to keep in mind is raising common equity can be done in a matter of days, selling assets takes some time. Some of the two portfolio sales you alluded to, it made sense to sell those assets at the time we started the sales. It was less clear at the time because of recovery in our common equity pricing, is less clear at the time we executed those sales, whether it actually still made sense from a pure math exercise, whether it still made sense to sell the asset. We had committed to. It was accretive. I think the market appreciated it. But again, we will continue to look at these sources of equity, whether it be portfolio sales or raising common equity or some of the more esoteric ways of raising funds. We’ll continue to look at all of those, but we’ll do what we think is in the best interest of long-term shareholder accretion.

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

Ben, I wanted to maybe just talk about shorter term leases in the market as one question. Are you seeing more of this type of activity or at least more inquiries when you’re doing leasing? And then, maybe a second part of that question is on reverse logistics. How big has that been kind of in the fourth quarter? And as the pandemic kind of unfolded last year, is that a trend that you saw?

I'm going to hand it over to Dave to discuss short-term leasing for a moment. Our perspective on online shopping and its developments during the pandemic is that online shopping experienced significant growth, advancing several years ahead of expectations, possibly around five years. The share of goods sold online rose from the low teens to the mid-20s percent range. Consequently, the logistics and reverse logistics infrastructure has been struggling to adapt to this new reality. I believe they have not fully caught up yet. As a result, the demand for both outgoing and reverse logistics will likely remain an important market factor for some time. Dave, could you share your insights on short-term leasing?

Sure. Short-term leasing has been a part of our business and our leasing efforts for a long time. It usually is a fairly small percentage of the leasing that we do. And often, it leads sort of through a proof-of-concept into longer-term deals. So, tenants that are expanding or consolidating take short-term space that then turns into a long-term deal. So, we view it as a positive and an opportunity, but it tends to remain a small part of our business.

And then, Dave, maybe sticking with you, Ben, feel free to jump in. If you guys look at the utilization of the space within your building, can you talk about kind of where inventory levels would be for maybe your warehouse-oriented customers? And, are you seeing them using the space any differently, i.e., more racking, or are you getting into buildings with more racking as, of course, the floor space utilization? Any kind of broader comments that you’ve seen in the last year or so in those respects?

I think, anecdotally, the capacity utilization is up. We don’t have a tremendous amount of unracked buildings or just throughput. So, racking is quite common at our facilities. And given restrictions on travel, we don’t get to see those personally, but we certainly have folks that check in on our tenants, and capacity utilization is up in the last 12 months.

Great. Last question. I know you mentioned retirement costs, and I know that’s an accounting thing that you guys I think were forced to take in the year ahead, it sounds like. But, Ben, does that imply any change in plan or succession or retirement in the near future?

I think, we’re evaluating all of our analysts as potential new executive officers in the Company.

I would ask for better pay even.

No. It’s simply a maturation of the business. We did not have a retirement policy in place. As we were building the business, we may not have thought about it initially, but it certainly makes sense now as we have multiple employees with 15 years of experience, including experience from the predecessor company before we went public. So, it just makes sense, and the Board agreed that we should implement this. It will be reflected in our accounting numbers when we put it in place. This has been discussed a few times in the past, but it's largely unrelated to anything other than the company's maturation.

Our next question is from the line of John Massocca with Ladenburg Thalmann.

So, thinking sort of same-store NOI growth expectations, how much of your expectations come from fixed rent bumps and how much from kind of leasing expectations?

Bill, do you want to address that?

A significant factor is the lease increases, which have been rising annually. On average, we see about a 2.25% increase in our same-store portfolio. These escalations play a major role in our performance. Additionally, the rollover rents have typically been in the mid-single digits over the years. Our average occupancy has also been favorable, with improvements in downtime, demonstrated by the Solo Cup lease earlier this year. Each year presents a mix of factors, and in 2021, we're seeing some free rent contributing positively to our same-store cash NOI, as we've mentioned in previous discussions. Overall, escalators are a crucial component of our growth.

Okay. And then, speaking about the rent collection in January, kind of splitting hairs here, does that include the kind of 50 to 60 basis points of month-end payment in the portfolio? And is there any ongoing deferrals that are flowing through that? I remember you saying there’s no new deferrals, but I can’t remember if you said there were any ongoing deferrals as of January.

There are a few ongoing deferrals, John. We tried to structure our deferrals to be paid back by year and some tenants just need a little bit more time. All of our deferrals are being paid on time or ahead of schedule. And there are some, call it, month-end payers, some of those pay subsequent to the end of the month that are still outstanding in that number. Overall, I think a better representation of collections is what you saw in 2020 is the 99.6%, and a lot of the remaining outstanding collections will be completed in due time.

As I consider the reported collections for January and also the collections for October that are included in the third quarter, the figures show a positive trend, despite having a few extra weeks for January's collections compared to previous periods.

Yes.

Yes. Okay. And then, one last one on the balance sheet. As we think about the preferred that’s kind of callable here, I mean are there any plans in mind for that? How does, maybe debt versus new preferred versus just kind of holding on to the existing preferred shares, stack up and how you’re evaluating your balance sheet.

It’s something we’re evaluating. That piece of paper is callable in the next month or so. We’re looking at a variety of options as our prior preferreds were redeemed with equity. And both those redemptions were accretive with the equity redeemed, the preferred book. So, we’re looking at potentially redeeming it with common equity and also the other options. And, when we make a decision, certainly, that will be something that we announce publicly.

Do you feel like you have the ability to issue maybe fairly long-duration debt or is that attractive?

Long-duration debt today for us in the private placement market is, call it, 275. So, that’s very accretive if we were to redeem with that. If we redeemed the preferred with our forward equity, that’s still outstanding that would still be accretive in a deleveraging event in the eyes of a lot of our shareholders. So, again, there’s a lot of options here. And once we make a decision, we’ll make sure to let the market know.

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

Bill, maybe for you, going back to a topic we haven’t had to delve into for a couple of years. But, G&A now has gone from kind of $35 million to $40 million to $45 million, pretty significant step-up. If you could just talk about the underlying reasons. I get the growth part of it. Is there anything else besides simply portfolio size that’s driving that?

We continue to make investments in the platform, Bill. I mean, it’s growth in the portfolio size, which includes some new hires and the accounting and the asset management side of the business, but then you’ve also got some investment in our technology platform that we continue to improve on, as well as growth and the outward-facing acquisition folks when we added a new couple of members to our Dallas office this past year, including the acquisition person down there and analyst, a capital person. So, it’s growth in the portfolio and what we’re anticipating for future growth. We certainly don’t want to get behind the curve in terms of making investments in the platform. And we believe these investments are in the long-term best interest of the shareholders.

Yes, I’d like to add to that. I think of the increase in general and administrative expenses in two ways. One is scaling to the size of the portfolio, which I believe would be relatively minimal, like adding a management resource for every 50 assets or so, along with some accounting needs. However, as Bill mentioned, we are investing in larger and more intelligent acquisition totals and better processing of transactions that are meant to drive growth and offer a clear and healthy return on investment. We remain a very scalable business, but we have opted to invest more in general and administrative expenses beyond what is necessary for that scalability.

So, as we look beyond 2021, would you start to see that growth rate start to decline as you built the scale?

Well, yes, unless we see further investment in G&A that has really good return on investment. So, there may be continuing opportunities to become more efficient, more prolific, and more efficacious in identifying our purchasers and owners of industrial real estate. So, again, there are pieces of our business that have to grow with the portfolio growth, and then there are pieces of business that we choose to grow because we want to be better, and those things again have very strong return on investment.

We’re still trying to drive that G&A number as a percentage of NOI down, and we’ve continued to do that over the years.

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

Just a couple of quick ones from me. Ben, you talked a little bit about like the competitive level above 10-year lease maturity and then sort of sweet spot for you guys is probably upper single digits. But, you did acquire a few leases that had shorter duration to them. Can you maybe provide some sense as to what you’re looking for in the sort of sub three-year left on the maturity, and how that might play, either a larger or bigger role in terms of the portfolio acquisitions over the year?

We have historically been open to acquisitions with lease terms that range from zero years to as long as 25 years. Our main focus is to ensure that we are compensated for the risks involved. When we evaluate shorter leases, such as those of two or three years, we spend considerable time considering various factors that will impact future cash flows. Key considerations include tenant retention, potential capital costs, and the comparison of current rent to market rent. Tenant credit is less of a concern for these short-term leases, as the impact of a potential default is reduced due to the limited duration of the lease. Ultimately, we assess the anticipated cash flows from owning the property to decide if it fits within our portfolio. While we recognize that shorter lease expirations may result in more variability in returns compared to longer leases, we have many assets that do not correlate closely with one another. This allows us to be confident that, collectively, our portfolio will yield predictable cash flows. Therefore, acquiring riskier assets with shorter lease expirations remains a key part of our overall strategy.

Okay. And then, just kind of going back to the G&A questions. When you talk about investing in the platform, I guess, I’m just curious as to sort of when you think about the sort of incremental growth in G&A this year or just historically, what’s that split between people and technology? And is there sort of one-time components to the technology cost investments that essentially lever off of in the future years, or is that something that sort of just keeps recurring?

The technology aspect includes software and various proptech investments that may involve initial and ongoing costs. Most of the investments we are considering focus on people. For example, we recently hired a data analyst. These steps will enhance our capabilities in the data sector. Historically, we've estimated that the costs related to scaling and growing our portfolio are about 1.5% to 2% of net operating income. Currently, we exceed 10% of net operating income in average general and administrative costs. The scalability is around 1.5% to 2% of net operating income. Additionally, each year, general and administrative expenses will incur some form of cost of living and staff development expenses. However, the essential scaling needs fall within the 1.5% to 2% range.

Okay. And then, last question from me. Costco shows up as a top 20 tenant this quarter. Was that just an incremental lease, or were both leases acquired in the quarter?

Yes, it was an incremental acquisition this quarter, and again, an acquisition that we feel really good about the long run returns, strong rental bumps, and fits into that 6, 7-year lease term. So, anything double digits, as I said earlier, probably we get outbid on, or if it sits in, call it, a top 5, top 6 market, we’d probably get a bid on. But, it’s in a market that we have a great broker relationships in, and that was a key part of winning that transaction.

Thank you. Our next question comes from the line of Emmanuel Korchman with Citi.

Hey, guys. It’s Manny here. Ben, going back to your earlier comments on the tertiary markets, I guess you’re not expanding in those markets. The capital chasing industrial space is at highs, it’s not all-time highs. Why not accelerate the disposition program there, get out of those tertiary assets where there is a better cost of capital, if you will, there has been, and then use those proceeds to go into sort of the primary and secondary assets and markets that you’re now targeting? I look at a similar sort of what Duke announced this quarter where they’re selling a lot of this stuff frankly that you guys are buying, but they’re not doing it because they need the capital or they hate Amazon. They’re doing it because the pricing there is good. And so, they can rotate that into other types of assets?

Yes. So, I mean, I think, Manny, the answer is the pricing is good, and we look at that pricing on an individual asset basis. And trying to assess, given our return requirements, the cash flow that we expected to derive from continuing to own that asset versus the funds we received from selling it, with a little bit of an overlay of we are disposing of tertiary assets. But still our mantra is, if it’s worth more to us than it is to someone else is willing to pay, we’re not likely to sell that, again, with a little bit of an overlay that we are disposing of tertiary market assets. So, we think we’re being rational in this. We have not made sort of an overlay corporate decision to exit all of our tertiary markets. We are opportunistically and we think intelligently disposing of those when the situation allows us to derive at least the via that we think we derive from continuing to own that building.

At this time, we’ve reached the end of our question-and-answer session. And I’ll turn the call over to Ben Butcher for closing remarks.

Thank you, operator. And thank you all for joining us this morning. Obviously, a great performance by the team through the pandemic year operating remotely, learning how to continue to be a good acquirer and manager of assets with less travel. It is very gratifying that the culture of the Company I think was maintained through that year. And we look forward to 2021 as a year of great opportunity for the Company. We’re extremely well positioned from a balance sheet perspective. Opportunity is prevalent in the market and tenant demand remains very strong for our existing assets. So, we’re looking forward to a great 2021. And we thank you for joining us on the ride. Have a great day.

This will conclude today’s conference. Thank you for your participation. You may now disconnect your lines at this time.