STAG Industrial, Inc. Q4 FY2023 Earnings Call

Greetings, and welcome to the STAG Industrial Fourth Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Investor Relations. Thank you, sir. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the fourth quarter 2023 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the Company's website. 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, disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters. We encourage all 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 information 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 Bill Crooker, our Chief Executive Officer; and Matts Pinard, Chief Financial Officer. Also here with us today is Mike Chase, our Chief Investment Officer; and Steve Kimball, EVP of Real Estate Operations, who are available to answer questions specific to the areas of focus. I'll now turn the call over to Bill.

Thank you, Steve. 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 the fourth quarter and full year 2023 results. 2023 was one of the best operational years we had as a public company. We produced record leasing spreads and record cash same-store NOI. These leasing spreads and same-store NOI growth were driven by continued market rent growth in our portfolio. 2023 market rent growth for our portfolio was high single digits. On a national level, market rent growth has generally experienced a degree of normalization, with non-coastal markets outperforming coastal markets in 2023. Recent retail sales reports have been strong, especially in e-commerce, indicating that consumer health remains intact. Secular tailwinds, including near-shoring and on-shoring, have contributed to a boom in domestic manufacturing requirements, which grew by 60% in 2023. Some of the largest markets for manufacturing space in the U.S., including Chicago, Detroit, Minneapolis, and Greenville, experienced some of the highest rent growth last year. These are markets where we have a strong presence. While STAG has minimal direct exposure to manufacturing plants, this increased manufacturing activity is expected to further drive demand for warehouse distribution facilities. 2023 deliveries totaled approximately 3% of stock. While the existing supply is being absorbed at a healthy rate, vacancy ended the year above last quarter's expectations at 4.9%. While supply remains elevated, new construction starts have declined nationally by approximately 65% on a year-over-year basis as of Q4 of 2023. In addition, forecasts for 2024 and 2025 deliveries are expected to decrease to just 2.2% of stock. Vacancy rates are likely to continue to rise in the near term, but we expect the peak to occur sometime in the second half of 2024, with normalization around year-end. We still expect market rent growth for our portfolio to be in the mid-single digits for 2024. We are proud to report cash and straight-line leasing spreads of 31% and 44% in 2023. As of today, we have achieved 69% of leasing we expect to accomplish in 2024, or approximately 9 million square feet at cash leasing spreads of 29.5%. Moving to acquisitions and development. As discussed on our last call, rising interest rates put the transaction market back on hold for the latter part of 2023. Our acquisition volume for the fourth quarter totaled $48.7 million. This consisted of two buildings with cash and straight-line cap rates of 6.5% and 6.9%, respectively. In October, STAG closed on a 165,000 square foot front-load building for $30 million at a reported cap rate of 6.1%. Located in the spark submarket of Reno, Nevada, the building benefits from its central infill location within Reno as well as close proximity to I-80. With a weighted average lease term of 1.9 years and approximately 33% below market rents, the building offers a high-growth mark-to-market opportunity within a low vacancy submarket. Also in October, STAG closed on one vacant, newly developed spec building, totaling 233,000 square feet for $18.7 million at a cap rate of 7.1% upon stabilization. As part of this transaction, we also acquired one asset under development for $18.7 million. The adjacent buildings are well located in Spartanburg County, South Carolina, with direct frontage and visibility to I-85. STAG's ability to source the deal off-market after another buyer failed to perform gave STAG the opportunity to buy the assets at a below-market basis. STAG was able to negotiate a lease during due diligence and immediately after closing, signed a full building lease on the completed building, allowing us to exceed both our underwritten rent and downtime. There's good activity on the second 233,000 square foot building, which has an expected construction completion date in the second quarter of 2024. Including the project previously mentioned, we have over 1.2 million square feet of development and value-add activity across three projects located in the Southeast U.S. We achieved substantial shell completion and are performing office build-out work on our two-building 715,000 square foot project in Greer. This project is located next to the inland port, airport, BMW manufacturing facility, and I-85 in the Greenville, Spartanburg, South Carolina market. Activity remains healthy, and we anticipate leasing a meaningful amount of the space during the first half of 2024. The third development project is our two-building, 298,000 square foot project in Tampa, Florida. These buildings are under construction, with a Q4 2024 estimated delivery date and stabilization in 2025. The suite sizes of approximately 50,000 square feet align well with demand in this high barrier-to-entry low vacancy market. The acquisition market appears to be heading in a positive direction as we start 2024. We have underwritten more deals in January than in the entire fourth quarter of 2023. While there remains some price discovery to be made, we expect a more stable acquisition market in 2024.

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.58 for the quarter and $2.29 for the year, representing an increase of 3.6% compared to 2022. Cash available for distribution totaled $361.3 million in 2023, a year-over-year increase of 5.4%. Consistent with our previous messaging, the dividend payout ratio continues to moderate, declining from 78% at year-end 2022 to 75% at year-end 2023. This past year, we retained approximately $90 million of free cash flow after dividends paid. These dollars are available for incremental investment opportunities, debt repayment, and other general corporate purposes. Leverage remains below the low end of our guidance range, with net debt to annualized run rate adjusted EBITDA equal to 4.9x. Liquidity stood at $657 million at year-end, inclusive of available forward ATM proceeds issued in the fourth quarter. During the quarter, we commenced 23 leases totaling 2.6 million square feet, which generated cash and straight-line leasing spreads of 36.2% and 50.5%, respectively. Retention was 88% for the quarter and 77.7% for the year. When adjusted for instances of minimal downtime in immediate backfills, adjusted retention was 87.2% for 2023. Average same-store occupancy declined by 30 basis points in 2023, outperforming our initial expectations of a 50 basis point decline. Moving to capital market activity. In the fourth quarter, we issued 1.1 million shares on a forward basis under our ATM program at a gross average share price of $38, resulting in gross proceeds of $41.8 million. Subsequent to quarter-end, we issued approximately 567,000 shares on a forward basis under our ATM program at a gross share price of approximately $38.88, resulting in gross proceeds of $22.1 million. As of today, we have approximately $63 million of forward equity proceeds to fund at our discretion. The equity will be utilized to match fund our acquisition development pipeline. There are minimal debt maturities coming up this year, with a $50 million private placement note maturing in 2024. Same-store cash NOI grew by 6.8% for the quarter and 5.6% for the year, representing another annual same-store cash NOI growth record for STAG. We experienced 13 basis points of credit loss in 2023, well below our initial guidance of 50 basis points. As mentioned by Bill, we continue to see healthy dynamics across the portfolio. Our 2024 guidance range for same-store cash NOI growth is 4.75% to 5.25%, encouraged by weighted average rental escalators in the 2.7% area. We expect retention in the 70% to 75% range. Cash leasing spreads are expected to be between 25% to 30% and 13 million to 14 million square feet of projected new and renewal leasing for the year. As Bill mentioned, approximately 69% of our projected 2024 leasing has been addressed, with the aggregate cash leasing spreads of 29.5% accomplished to date. Our detailed 2024 guidance can be found in the supplemental package, which is available in the Investor Relations section of our website. Components of guidance include core FFO per share projected to range between $2.36 and $2.40 per share. We expect same-store cash NOI growth to be between 4.75% and 5.25% for the year. Average same-store portfolio occupancy is expected to decline by 50 basis points. Cash leasing spreads will be between 25% to 30%. Acquisition volume guidance is a range of $350 million to $650 million, with a cash capitalization rate projected between 6% and 6.5%. Disposition volume guidance is provided in a range of $75 million to $125 million. G&A is expected to be between $49 million and $51 million. And finally, we expect net debt to annualized run rate adjusted EBITDA to be between 5x and 5.5x. I will now turn it back over to Bill.

Thank you, Matts. I want to thank our team for their continued hard work and achievement of our 2023 goals. Our team continues to drive value in all macro environments. STAG is extremely well positioned for sustained growth through our operating and acquisition platform. With that, I will turn it back to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Bill, I just want to circle back to your commentary on the acquisition market. It seems like we've heard that sentiment a few times this earnings season about the acquisition market getting more positive on the margin. You guys have a pretty wide range in guidance. So I'm just kind of curious maybe what you have visibility on today that's close to LOI or going under contract and potential timing on that? And sort of the same thing on dispositions, just as we kind of think about the potential drag and timing delays of redeployment.

Ladies and gentlemen, please remain on the line. Your conference will resume momentarily.

Hello?

Hi. Can you guys hear me?

Yes. Sorry. I don't know what happened there.

No worries. Did you hear my question? You want me to start over?

Yes. No, I heard your question. Thank you. This year, we've had a lot more confidence in the acquisition market than we did at this time last year. Our pipeline sits at $3.1 billion. The pipeline consists of about 10% to 15% portfolios, 15% to 20%, and 25% of developments, redevelopments, and value add. With respect to the acquisition guidance, it is wider than a typical year. Like I said, we do have a little bit more confidence than we did last year. We're underwriting more transactions. We underwrote more transactions in January than we did all of Q4 2023. With all that being said, we are expecting acquisitions to be more back-end weighted, just given some of the uncertainty in the market. But we're seeing a lot more deals today. It gives us more confidence than we did last year.

And do you have anything kind of close to LOI or going under contract at this point?

Not right now. What happened at the end of last year was brokers and sellers were advising sellers to wait to put deals out to market until the start of the year. So, we have been underwriting a lot. I think we're close to reaching price agreement on some deals, but you got to get the price agreement, then you got to negotiate the contract and close. So all that takes a couple of months. So nothing is currently under price agreement or LOI today, as deals really hit the market at the start of the year.

It's Nick Joseph here with Craig. Just one more. You mentioned market rent growth in the mid-single digits. I was wondering if you can touch on kind of the markets at the high and low end and what that range would look like? And then, just how your product fits into that, just given that most of the supply is obviously impacting probably at the higher price point?

We operate in Tier 1 markets with a diverse range of areas. The markets that show lower expectations for market rent growth are primarily the big box markets, such as Indianapolis and Columbus, along with some submarkets in Dallas. In contrast, smaller box markets are experiencing better rent growth. The trend from 2023 continues, with leasing for first-generation big box spaces remaining slow, while there is more activity and demand for smaller spaces. Overall, the big box distribution markets are slower in rent growth compared to other market segments.

Our next question comes from the line of Vince Tibone with Green Street Advisors. Please proceed with your question.

A few of your recent acquisitions are more value-add in nature. Could you discuss how leasing risk is being priced in the transaction market today? Specifically, what is the typical spread between the core stabilized cap rate and one where you're taking on the leasing risk?

Yes, it generally depends on the market and demand, as well as the pace of transactions. You might see an increase of 25 to 50 basis points in return. The deal we made in the Greenville market during Q4 was a unique opportunity; it was initially under contract with another buyer who couldn't proceed. The seller was eager to finalize the deal before the year-end, which allowed us to step in. We acquired it at about 125 basis points higher return than what we would have achieved if it had been stabilized. Our underwriting indicated a stabilized yield of 7.1%, but we actually signed the lease at 7.6%. Essentially, we secured that deal, negotiated the lease during due diligence, and placed a tenant in there with a five-year lease and 4% annual escalators, at a 7.6 cap rate. Each situation varies, but in response to your original question, the typical increase for taking on leasing risk is usually 25 to 50 basis points. As you examine deals that involve completing developments or additional value-add components, like increasing dock capacity, making parking improvements, or expanding truck courts, you start to see enhanced returns compared to a stabilized deal.

It's all really helpful. And just in terms of your potential '24 acquisitions, do you have a target split between sites or buildings that are more value-add in nature versus core? Are you seeing more opportunities in one bucket versus the other? And also just from a risk perspective, just curious how we should think about the mix of acquisitions going forward?

Yes. What's great about our platform is we have the ability to invest across that spectrum. So developments like the one we mentioned last year in Tampa, to the value add, where we're just taking lease risk, to something that we're adding more value with redevelopment, as well as acquiring stabilized deals. So depending on the opportunity, we're going to deploy that capital at the best risk-adjusted returns. In Q4 and Q1, there just were not a lot of stabilized acquisitions on the market. I mean, in Q3 and Q4 of '23, there weren't a lot of stabilized acquisitions available, and part of that was just the volatility in the debt cost. Now, we're starting to see more of those stabilized opportunities. So my guess is there's going to be some split, probably weighted more towards stabilized deals, but there will certainly be some value-add redevelopments, and hopefully, some more of these developments that we announced last year. But it will be weighted more towards stabilized deals.

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

Bill, in your opinion, what is bringing sellers back to the table after kind of a quiet period for the last couple of years? Are they looking at fundamental concerns and rising vacancy rates? Are they figuring they missed the bottom on cap rates and that they might drift higher? Or what is causing that switch in their mentality?

Yes. And I'll answer the question, but I do want to point out a stat that we've said before is that the owners of industrial real estate are highly fragmented. The top 20 owners, including ourselves and some of our public peers, only own about 15% to 16% of the overall stock. So, there are generally uncorrelated reasons for assets coming to market. But what happened the past year was the volatility in interest rates, the rapid rise in interest rates created discomfort with where capital costs were coming in. Now that that's stabilized, there's more confidence in borrowing costs. Once you have your cost of capital or comfort in your cost of capital, then you can back into where an appropriate price to either buy or sell an asset. So did they miss the top of the market? Based on where interest rates are today, yes. I think because the 10-year has been somewhat stable over the past six to nine months, it gives sellers the confidence that they're selling at a market price versus a price that may not be at market.

The asset you acquired, the newly developed one, transitioned from a cap rate of 7.1 to 7.6. How does that compare to the construction costs that were the development cost of the seller?

Steve, Mike, I don't know if you have that?

Yes. I mean, we don't have pure visibility into the seller's development costs. But we feel that we were able to get that at a total per square foot price that was at replacement cost, given that it was a brand new building. The yield was above what we could typically get.

Yes. I think in this transaction, Bill, the seller had a lower basis than the land and also had an opportunity to develop some other parcels of land. So this was a good opportunity for them to realize some return on their investment without taking any leasing risk, which is where we were able to add our value. The fair market value of that land is obviously much higher than where the seller initially purchased the land and then went through the entitlement and permitting process.

Our next question comes from the line of Samir Khanal with Evercore. Please proceed with your question.

I guess, Bill or Matts, on the shifting to the internal growth guide here on same-store, I mean 5% is still a good number, but it is slowing a little bit. Maybe just talk about how you're thinking about occupancy through the year and your credit loss assumptions?

Yes. Last year, we incurred about 13 basis points of credit loss. We typically estimate 50 basis points of credit loss, which is our guidance for 2024. In terms of occupancy, average occupancy in our same-store pool last year was down 30 basis points, and we are guiding to an average occupancy decline of 50 basis points in 2024. There was a significant amount of supply that came online in 2023, which is currently being absorbed, and we expect another 2.2% of supply to come online in 2024. However, development starts have decreased by 65% year-over-year. Overall national vacancy rates are expected to rise throughout the year but should begin to decrease as the year progresses. For this year, we are guiding to 50 basis points of credit loss and a 50 basis points decline in average occupancy for our same-store pool. This is balanced by strong rollover rents, which we expect to be between 25% and 30%. We have already signed nearly 70% of our leases for 2024 at close to 30%. Overall, we feel optimistic about the initial guidance for our same-store performance.

I guess as a follow-up to that, I mean, like you said, you are signing close to 30% and then your guides like 25% to 30%. What's driving that a little bit, kind of on the pricing power side? Are you seeing anything material? Or are you just sort of being conservative?

Part of our strategy is to ensure that the properties we acquire align well with the submarket. By selecting these kinds of assets, we're able to increase rents due to strong demand. We expect leasing activity to pick up in the latter half of 2024, and while we are forecasting rent spreads, there's still a significant amount of time before these leases are finalized, which is why we're guiding for a range of 25% to 30%. I mentioned that we have signed nearly 70% of our leases for 2024 at around 30%. In comparison, this time last year, we were at about 60% to 61%, so we are ahead of our leasing progress from last year.

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Can you just talk about how you're thinking about your overall cost of capital today and the spread between your cost of debt or more importantly, probably cost of equity and your required returns on investment? Has that gap expanded, and that's what's driving a little bit more of the acquisition expectation?

Blaine, this is Matts. I think we can start with the cost of debt. You look at our investment-grade balance sheet; we have a mix on there. We have a mix of term loans and private placement notes primarily. The original tenors of those instruments are five years, seven years, and 10 years. You take a look at the 10-year; it bounced around recently, particularly yesterday. If we were to originate that today in the 6% area, granted, that's a little higher than what we have originated over the previous three years, a lot of that is related to the 10-year. If we think about capital allocation for this year, look, the funding plan for '24 really begins with the retained cash flow after dividends paid. As I mentioned in my prepared remarks, we did retain $90 million last year. We expect to retain roughly the same this year. We do have asset dispositions in our guidance. We'll have those proceeds to deploy as well. Importantly, we do have $63 million of unfunded equity that's available to us on the forward ATM. That's at a gross share price north of $38. So, you take that, and then you look at the balance sheet; it's under-leveraged compared to a range of 5 to 5.5. We have a lot of what we need right now. The movement in the 10-year does impact our cost of debt.

That's helpful. And then just on the mid-single-digit rent growth you guys are projecting this year. That seems to be a bit above some of your peers and some brokers that are guiding to flat or low single-digit growth. I guess what's giving you confidence in that higher number? Or what do you think is unique to your portfolio or markets that might push rent growth a little better this year?

Some of the things I mentioned in the prepared remarks and some previous questions. Our buildings fit the submarkets we're in really well. Generally, our buildings are on the smaller side compared to where the vacancy is now, which is generally big boxes, call it, 400,000 square feet and above. When you look at where the demand is, it's on the smaller boxes. We're still seeing near-shoring demand and anticipating some on-shoring demand in the coming years. The way our buildings fit the submarket provides us with confidence about their ability to lease and drive strong rental growth. Last year, we forecasted really well in terms of where we came out. I think we started the year at high single digits or mid- to high, and we ended up at a little north of 8%. This year, we're starting at mid-single digits. It's a ground-up analysis that our team spends a lot of time reviewing, and we have a lot of confidence in it.

Our next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question.

Can you expand more on the 31% outstanding leasing you have left to address in 2024? How much of that is near-term weighted versus back half? And are there any big concentrations in any one market?

No big concentrations in any one market. I think I mentioned this on the last call too; nothing over 400,000 square feet, which is just kind of our line of demarcation of big box versus small box. More of it is back-end weighted, which is why our range leasing spreads is 25% to 30%, and we're coming in close to 30% for the amount we've leased to date. So, because more of it is back-end weighted, that's why our range is where it is. But we're excited about where we are today. As I said, earlier, it was 61% at this time last year, and now we're close to 70%. There's really good activity on that.

Right. And for my second question, the core operations ended in a very solid place. But as we look to the bottom line and adjust for noncash-related items to get you to your cash available for distribution, this came in about 5% lower than the sell-side was expecting. So I was wondering how should we think about CAD growth this year? And would this be similar to the 4% FFO in your guidance?

Yes. So one thing, I'm not going to comment on where the sell side comes, and I think you guys have your own models. For this year, our same-store cash NOI came in at 5.6%, which was a record for us. Our cash available for distribution on a gross number was up 5.4%. So, it’s pretty consistent with our cash same-store NOI. Each year, you've got some nuances in that number with CapEx, but CapEx has averaged anywhere from $0.25 to $0.30 per square foot. That seems pretty consistent. Going forward, I think when you think about it as a percentage of NOI, it's around 7% of NOI. So that number should be pretty consistent. I think we can still drive some strong CAD growth and CAD per share growth going forward.

Our next question comes from the line of Michael Carroll with RBC. Please proceed with your question.

I know Bill that STAG is pursuing a lot of active development projects. What’s the opportunity set here? I believe earlier in the prepared remarks, you said there was about 25% of the pipeline developments. I think you threw around a lot of numbers, so I'm not sure if that was the exact number tied to the development projects. But what is the activity? I mean, how many do you think you can really pursue in 2024? Or how many do you want to pursue in 2024?

It's a good question, Mike. I did mention a lot of numbers, so I apologize if some information got lost. Our pipeline is $3.1 billion. Of that, about 15% to 25% consists of a mix of developments and value-add redevelopments. The wide range is because the $3.1 billion only includes land costs. For example, if it’s a $50 million project, it means $10 million is part of our pipeline today. We haven't provided specific guidance on development projects, just more starts. We currently have three projects underway, including the Port 290 project, the Tampa development, and one we recently acquired that should be completed by the end of Q2. Right now, we’re not negotiating any price agreements for the year. We expect there will be opportunities, and we are evaluating some in our own portfolio that we may subdivide. As we gain more clarity on those, we will provide guidance, but we're not ready to give specific guidance for 2024 yet. However, as we learn more about these projects, we'll certainly keep you and everyone updated. We do have some soft internal limits, and it’s certainly less than some of our peers as we ramp up that opportunity. The way we view it is outstanding developments, obviously, build-to-suit is less risky depending on the rights that the tenant has to bow out of if something gets delayed. As we lease up a project and it stabilizes, it drops off that cap. So we’re not close to the cap, Mike, right now. Guidance for starts and caps will be some more specific in the future, but we're not close to any sort of soft internal caps at this moment.

Our next question comes from the line of Nick Thillman with Baird. Please proceed with your question.

Maybe just touching a little bit on the dispositions and the composition or write-down of that. Is the bulk of that going to be in the non-CBRE Tier 1 market that you guys are trying to concentrate in and basically putting the portfolio here? Or are you viewing this more as sources for the acquisition pipeline?

Nick, this is Matts. Yes. Our disposition guidance of $75 million to $125 million is a mix between opportunistic capital recycling in non-core dispositions. If you think about the mix in 2023, it was roughly 50-50. There's always the bottom 5%, and to the extent we just don't think it's a good part of our portfolio, we'll disclose that. On the flip side, the opportunistic dispositions are generally reverse inquiries from users. They view the real estate a little differently; they have different expectations and mandates. Those reverse inquiries happen every single year. They’re a little unpredictable. So, there is called the unidentified opportunistic within that number. I think a 50-50 split is reasonable, given our history.

And Nick, I think you correctly pointed out that the non-core dispositions are primarily those non-CBRE Tier 1 markets that were legacy properties.

That's helpful. And you guys touched a little bit on weakness in big box demand. But maybe just on the pricing and what you're seeing in underwriting for acquisitions on maybe a stabilized basis. Is there a big differentiation between the pricing on those products, or are they still pretty similar?

Yes. I mean, there's so much that goes into the pricing, right? You could have a small box that's got a 10-year lease and 1.5% escalators, and that's going to trade much differently than a small box that has a five-year lease and 4% escalators. Mark-to-market is going to be impactful, too. If you've got a big box with a five-year lease in a market that has historically been a strong big box leasing market, I think that trades pretty close to small boxes with five-year leases. Properties fit the submarket well and have enough term; I think it's going to trade reasonably. Deals are coming out. They’re still coming out, and we’re hearing some deals come onto price agreements. It takes time for these deals to close, and all that will be vetted in the next couple of months, and I think it will give us and others more certainty about where these deals are closing.

Our next question comes from the line of Eric Borden with BMO Capital Markets. Please proceed with your question.

Just sticking with the disposition theme, how much of the portfolio left is in the non-core legacy non-CBRE Tier 1 markets that could be disposed of to use for future funding sources?

Yes. I do want to point out that we do have a portion of our portfolio that is non-CBRE Tier 1 that we really like and is not part of our non-core portfolio. Generally, circling around 5% of our portfolio is something that we are constantly evaluating for disposition to improve the quality of the portfolio.

Eric, on the guidance, could you just provide a bridge between the same-store midpoint of 5% to the implied core FFO growth of 3.9? What are the puts and takes in there and any potential drags? Or is there just some conservatism built into the guidance? Yes, absolutely. Look, there are two drivers. First is G&A, and the other is interest expense. At the midpoint of our G&A guidance, G&A is projected to grow 5% this year compared to last year. We're going to have higher average debt balances, and we know that's a little more expensive now. Over the past two years, average growth is roughly 1%. G&A guidance will grow 5%. That’s part of what’s bringing that delta.

Maybe one other point on that, too, is the same-store that we guide to is really a cash same-store number. When you consider the impact to core FFO, that's a GAAP number, and typically, that number is less.

We have no further questions at this time. I would like to turn the floor back over to you for closing comments.

I just want to thank everybody for joining the call. Thank you to the analysts for the questions, and for those that celebrate, Happy Valentine's Day. I look forward to seeing you all soon. Take care.

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