STAG Industrial, Inc. Q2 FY2025 Earnings Call

Ladies and gentlemen, greetings, and welcome to the STAG Industrial, Inc. Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to STAG Industrial's conference call covering the second quarter 2025 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.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 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'll hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our 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 second quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to sharing the second quarter 2025 results. Our year-to-date results have exceeded our initial business plan for the first half of the year. We had favorable results in our operating portfolio and meaningful progress leasing our development portfolio. I'm pleased to report that we have leased 90.8% of the operating portfolio square feet we currently expect to lease in 2025, achieving cash leasing spreads of 24.5%. This level of leasing is at a relatively similar pace to last year and consistent over the last few years. In the first quarter, news related to the global trade war drove significant market volatility. Broadly speaking, today, the theme has shifted to a general desensitization to tariff headlines. We are witnessing businesses continue to grow and make corporate decisions in an uncertain environment, a change to the broad pause seen in the past 12 months. While it's certainly not business as usual, users cannot delay space decisions in perpetuity, and supply chain diversification remains a priority for many companies. On the supply side, we have seen the pipeline moderate materially. New starts are down significantly from the first half of last year. The transaction market has been slow. We are seeing positive leading indicators that the transaction market is becoming more active. We have experienced an uptick in underwritten deals within the last 3 weeks and maintain a healthy deal pipeline. In June, we closed on an 183,000-square-foot building in a submarket of Milwaukee, Wisconsin for $18.4 million. This building was acquired at a cash cap rate of 7.1%. The building was a build-to-suit for the tenant and serves as a national distribution facility located less than 10 miles away from one of the tenant's primary manufacturing plants. This acquisition secured a newly constructed Class A asset with a strong credit profile at an accretive level. We had one disposition this quarter. We sold one non-core building in Calhoun, Georgia for gross proceeds of $9.1 million, representing a cash cap rate of 7.4% and an unlevered IRR of 14%. In terms of our development platform, we have approximately 3 million square feet of development activity across 12 buildings in the U.S. Roughly 42% of the 3 million square feet is under construction, and the remaining 58% has been delivered and is currently 69% leased. Included in these numbers is a 95-5 joint venture we entered into in May, whereby we will construct a 500,000-square-foot cross-stocked warehouse located in a submarket of Louisville, Kentucky. This is an infill site in a supply-constrained market due to topography, entitlement, and zoning difficulties. The project is estimated to cost $47 million and is expected to stabilize with a cash yield of 7.1%. The building is projected to be delivered in the second quarter of 2026. I'm happy with the progress we've been making on our development initiative, which will be a key component of STAG's future growth. With that, I will turn it over to Matts, who will cover our remaining results and update the guidance.

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.63 for the quarter, an increase of 3.3% compared to last year. Leverage remains low, with net debt to annualized run rate adjusted EBITDA equal to 5.1x. Liquidity stood at $961 million at quarter end. During the quarter, we commenced 32 leases totaling 4.2 million square feet, which generated cash and straight-line leasing spreads of 24.6% and 41.1%, respectively. Of the 4.2 million square feet of leases commenced, 1.6 million square feet was new leasing. This compares to 280,000 square feet of new leasing in the fourth quarter of 2024 and 280,000 square feet of new leasing in the first quarter of this year. Retention for the quarter was 75.3%. As Bill mentioned, we have accomplished 90.8% of the operating portfolio square feet we expect to lease in 2025, achieving 24.5% cash leasing spreads, demonstrating the strength of our portfolio. We expect cash leasing spreads to be between 23% and 25% for the year. We achieved same-store cash NOI growth of 3% for the quarter and 3.2% year-to-date. The primary drivers of our same-store growth in the first half of the year include the leasing spreads of 26.1% and annual escalators of 2.9%, partially offset by average occupancy loss of 90 basis points. In May, Moody's Investor Services raised STAG's corporate credit rating to Baa2 with a stable outlook. Achieving this upgrade despite this year's market turmoil is a testament to the strength of the STAG platform and balance sheet. On June 25, we funded $550 million of fixed-rate senior unsecured notes from a private placement offering completed in April of this year. The notes consisted of 5-, 8-, and 10-year tenors with a weighted average fixed interest rate of 5.65% and a weighted average tenor of 6.5 years. The proceeds were used to pay down the outstanding revolver balance. This quarter, we resolved two credit situations we have discussed previously. We reached an agreement with American Tire Distributors, which resulted in the assumption of all seven of our leases. As part of this resolution, STAG granted one month of free rent across five of the seven facilities. Vitamin Shoppe assumed their lease with no adjustments and no credit loss incurred. Through June 30, we have experienced approximately 17 basis points of cash credit loss, with 6 basis points related to the free rent granted to American Tire Distributors. Moving to guidance, we made the following updates. Our expected ending same-store portfolio occupancy losses have been moderated to 75 basis points compared to our previous guidance of 100 basis points. We've increased our retention guidance to 75% based on leases signed to date. Credit loss guidance has been reduced from 75 basis points to 50 basis points reflecting the resolution of the American Tire Distributors and Vitamin Shoppe leases. Cash same-store guidance has been increased to a range of 3.75% to 4% for the year, an increase of 25 basis points at the low end of the range. G&A expectations for the year have been updated to a range of $52 million to $53 million, a decrease of $500,000 at the midpoint. These guidance changes result in a core FFO per share guidance revision to a range of $2.48 to $2.52 per share, an increase of $0.02 at the midpoint. I will now turn it back over to Bill.

Thank you, Matts. I want to thank our team for their continued hard work and execution in 2025. The team has done an excellent job of executing our operating plan in the first half of the year. This strong first half sets us up well for the rest of the year. With that, I will now turn it back over to the operator for questions.

As there are no further questions, I would now hand the conference over to Bill Crooker for his closing comments.

Bill, I just want to touch back on leasing. You noted that things are getting better, but it's clearly not back to normal. Could you walk through what markets you're seeing better early signs of recovery versus markets that may be lagging at this point?

Yes, sure, Craig. Yes, I mean, this quarter was a really strong quarter for leasing, 4 million square feet leased, 1.6 million of that new leasing. As we look at some of the leasing that we've addressed in July, we've already signed about 500,000 square feet of new leases just in July thus far. We executed signings in July for around 760,000 square feet, which includes about 600,000 of renewals and around 100,000 of signed leases for new leasing in July. When you think about markets, the Midwest markets are still performing really well. Minneapolis, Milwaukee, Louisville, Detroit, Cleveland, and Nashville have done remarkably well. Houston has also been very strong. Some of the weaker markets I would categorize more as bulk distribution markets, such as Indianapolis, Columbus, and Memphis, which are still lagging a little bit. There are also some markets facing short-term tariff uncertainties, such as El Paso, but we really like that market on a medium-term basis.

That's helpful. As a follow-up, you mentioned that the transaction market is starting to improve. We've noticed some users out there, such as Samsung, opening mega plants and buying assets down in Atlanta. Could you talk about the competition from well-funded users and the impact this could have on some of your markets from a net absorption standpoint, where it may not get picked up as a lease, but essentially a lease to major companies because they will occupy that user?

Yes. We're definitely seeing that theme emerge. Our Q1 sale was to a user. We see some sales in our pipeline for dispositions that will be user sales. Those are commanding pretty attractive cap rates and pricing for those transactions. As you noted, it's taking some vacancy out of the market, which is beneficial for landlords in that area. This is happening mainly in the onshore manufacturing markets, particularly in the Midwest, Southeast, and some Texas markets.

I wanted to touch more on leasing demand and discuss further the vacancy within the operating portfolio. Are there any specific markets or asset types where you're seeing stubborn vacancies or extended downtimes? Given your broad range of markets, I'd like more clarity on this issue.

Yes. It's a broad range of markets, and I would emphasize that it greatly depends on the building type in each market. In some markets, a 200,000-square-foot building could have vacancy rates of 3.5%. However, if you have a 500,000-square-foot building or larger, you could be facing high single-digit vacancy rates. Overall, I would say the markets I previously mentioned are indicative of where you'll see higher vacancy rates, particularly in larger spaces. Regarding lease-up times, when things were booming, we were looking at 3 to 6 to 9 months for lease-up. Now, we're in a 9 to 12-month frame on average for lease-up. In the second quarter, we successfully leased a 500,000-square-foot facility with no downtime. So if you consider all of this, I’d say our average lease-up time is still in a good position.

That's helpful. Following up a bit, it seems your expiration schedule indicates you are beginning to work through some of '26, maybe like 2.7 million square feet of renewals. Can you provide more color on that? Is the timeline for those discussions tracking similarly to historical patterns, and have you noticed any changes in terms of escalators or terms when heading into those renewal discussions?

Yes, I'm glad you mentioned that. Early renewals for large, sophisticated tenants are very active. We're currently in discussions with them and have kicked off many of the upcoming expirations in 2026. We're ahead of where we were last year and the year before in terms of addressing next year's lease expirations. I believe this indicates that these tenants expect market rent growth to escalate at a faster pace as the supply gets absorbed this year. So we're feeling optimistic about our early renewal efforts within our portfolio.

Bill, I want to revisit your remarks about the improving acquisition market and how underwriting has been picking up. However, you left the guidance fairly wide. What does the current pipeline consist of in terms of singles and doubles versus larger deals today?

Yes. The pipeline makeup is very consistent with what we've seen in the past. I would say over 60% is comprised of one-off assets, with 20% to 30% in portfolios and the remaining in development deals. The market has experienced a resurgence in the last couple of weeks, with increased underwriting and offerings compared to the second quarter. So we're cautiously optimistic about the second half of the year.

From Q1 to Q2, our pipeline decreased a couple of hundred million dollars, sitting at $3.4 billion in Q2. However, the significant point is that the bid-ask spread between buyers and sellers is much narrower than it was in Q1. We're witnessing more one-off transactions take place. We've been very close on pricing on several deals, but we're continuing to uphold our discipline by selecting transactions that we believe are good fits for our portfolio and submarket, and are accretive transactions for us. While our range remains wide, we've done remarkable acquisitions in the past, such as $700 million to $800 million in a quarter. We believe the market is improving, and at a good pace.

My follow-up relates to the credit upgrade received in May. Does this result in any additional debt cost savings, either for your line or potential future debt races?

Eric, this is Matt. We are quite pleased with the upgrade, particularly given the current background, which I mentioned in my remarks. Historically, we have been a private placement issuer. Therefore, we anticipate receiving some marginal benefits if we return to the private placement market. However, the upgrade allows us to take another step toward becoming a public bond issuer. Our goal is to obtain an S&P investment-grade rating to complement our Moody's rating before entering the public market. We expect to begin working with S&P, and I foresee that we may transition to the public bond market within the next year. We will maintain our optionality and have had great success in the private placement market. In short, we are very pleased and think there may be modest benefits in the private placement market, while we are definitely positioned for potential public bonds.

Regarding how you are thinking in terms of financing the deals you're trying to close in the second half of this year, you have $300 million of debt coming due in the first quarter of next year. How are you thinking regarding financing for this?

Yes, that's a $300 million term loan maturing early next year. We're currently in the process of refinancing it. Typically, you begin the refinancing process for bank term loans about 6 to 9 months before expiration. We are well underway and expect a successful transaction. We anticipate rolling over that term loan. In terms of financing, we funded our $550 million private placement in June at a weighted average interest rate of 5.65% with a 6.5-year tenor. The proceeds were used to retire balances on the revolver. We currently have nearly $1 billion in liquidity. Regarding financing options for future acquisitions, we will be looking at a combination of debt and cash flow from operations. We continue to retain over $100 million of cash flow after dividends, which can be used to support our development platform and potential acquisitions. Incremental ATM issuance will also be considered if necessary and reasonable.

I look at the development pipeline in three different buckets. For in-service properties, we are at 76% leased, with two vacancies in the Greenville market, which has shown notable improvements from previous calls. Its vacancy rate is now under 10%, with good activity, and we have prospects for both vacant spaces. The second bucket includes properties not yet in service, which are 47% leased. One of these buildings is located in Tampa, which has a solid market with around 5% vacancy. We have prospects looking at that building as well. The other building in this bucket is in Nashville, where we leased 200,000 square feet in the second quarter and have approximately 95,000 square feet remaining. The market fundamentals are very strong in the I-40 East corridor. Lastly, for our buildings under construction, located in Reno and Concord, these are good projects in good markets, but it is still early in construction, and we have limited leasing activity to report right now.

I would like to circle back on your comments about an uptick in acquisition activity and more underwritten deals in the last three weeks. Is there a specific driver of this change? Is it due to tariff concerns calming down and stakeholders feeling more confident in bringing assets to market?

That's certainly a factor. Seller expectations also play a role, with them becoming more aware of where the capital markets are and what buyers are willing to pay. Buyers are feeling more confident as time goes on and they see that tariff threats aren't as dire as initially thought. This reassessment contributes to the overall market optimism. Additionally, as we say, underwritten deals are those we evaluate thoughtfully. We evaluate quite a few deals and then move them to further underwriting and present them to our internal investment team. The uptick we have seen in the past three weeks gives us more conviction to maintain our acquisition guidance. But I want to note, we anticipate the acquisition cadence to be more loaded towards the back end of the year. Our initial guidance had considered that as well.

How long does it typically take to get a deal locked in before closing it near year-end? Do you need to start working on these deals sooner rather than later for them to close by year-end?

Typically, from price agreement to closing, a deal can take anywhere from 30 to 45 days, and potentially up to 60 days depending on the seller’s responsiveness. However, at year-end, sellers are eager to close quickly. From price agreement to closing can be a more compressed timeline. Mike can elaborate on this.

Typically, when we get to the end of the year and have sellers eager for swift closings, we find it can significantly shorten the overall timeline from price agreement to closing. If we can secure price agreement by around Thanksgiving, we can hit the year-end close.

Can you remind us of the timing conventions for capitalizing interest on your buildings and whether you're still capitalizing interest on your assets?

We ceased capitalizing interest once the building is complete. So, these buildings are completed, and we are not capitalizing interest on them now.

Could you provide an update on how your embedded rent escalators are trending in the current environment and any shifts you may have observed in recent quarters?

Yes, as it stands today, our weighted average rental escalator across the portfolio is 2.9%. This rate will keep trending up, mainly due to math. We're not seeing leases starting with escalators below 3%. A year and a half ago, we saw rates in the high 3s, upwards of 4%. Recently, we're finding rates closer to 3% to 3.5%. Although there's been some moderation, it's not a new trend, and we've been experiencing this for about six months. Given that we are at 2.9% currently and signing leases at around 3.25%, we expect the 2.9% figure to rise over time.

Did you consider reducing the acquisition guidance? Or was that not on the table as you seem to be feeling more positive? If the past three weeks were a false start and acquisitions don’t materialize, what’s the sensitivity to 2026?

We haven't released any guidance for '26, so we could run some back-and-forth calculations. If we don't have any acquisitions for '25, which I do not foresee as likely, it probably amounts to around $0.005 to $0.0075 impact for the year. Concerning guidance, we evaluate every aspect of it carefully. We assess whether to adjust same-store guidance by 25 basis points, keep it flat, or adjust by 50 basis points, and similarly weigh our acquisition guidance. We spend substantial time considering our guidance and are confident with it.

You have a mix of multi- and single-tenant buildings in your development pipeline today. I'm curious if the multi-tenant category is easier to lease in the current environment. What considerations do you have when deciding which route to take when commencing a development project?

I appreciate your question, Jessica. When we set out to build these properties, we made a significant effort to ensure they could be divided into multi-tenant spaces because there was a greater demand for smaller tenant spaces at that time, while the bulk space was moving more slowly. Maintaining flexibility during the design of our building is important so we can cater to all sizes of tenants. Interestingly, in our lease-up activities, we have successfully secured several large tenants, which diverged from our original multi-tenant plans.

As for examples, Jessica, our Tampa building is 100% leased, as is our Greenville building. Initially, we planned for both as multi-tenant buildings, but larger full-building users came forward to lease them. The same flexibility applies to our under-construction or not-yet-in-service buildings, which could easily shift to single-tenant if a full-building user emerges. Maintaining optionality remains critical for our approach.

Addressing the Nashville market specifically, it is often regarded as one of the healthier markets. Here, we have a balanced presence in both manufacturing and distribution sectors. Overall, markets demonstrating a blend of distribution and manufacturing have remained in a more favorable supply-demand situation. Additionally, Nashville's supply has been controlled compared to larger bulk markets that faced oversupply. This balance has allowed Nashville to remain steady while generating considerable demand compatibility.

Population growth in that market has also been robust over the past 10 years, rendering it a high-consumption market, which is another key demand driver. Thanks, everybody, for joining the call. As always, I appreciate the thoughtful questions, and we look forward to talking to you soon. Thank you.

Thank you. The conference of STAG Industrial has now concluded. Thank you for your participation. You may now disconnect your lines.