STAG Industrial, Inc. (STAG) Q4 2014 Earnings Report, Transcript and Summary

Greetings. Welcome to the STAG Industrial Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brad Shepherd. Thank you Mr. Shepherd, you may now begin.

Thank you. Welcome to STAG Industrial’s conference call covering the yearend and fourth quarter 2014 results. In addition to the press release distributed this morning, 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 those related to STAG Industrial’s revenues and operating income, financial guidance, as well as non-GAAP financial measures such as trends from operations, core FFO and EBITDA. We encourage all of our listeners to review the more detailed discussion related to these forward-looking statements, contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company’s website. As a reminder, forward-looking statements represent management’s estimates as of today, Monday February 23, 2015. STAG Industrial will strive to keep its stockholders as current as possible on company matters, but assumes no obligations to update any forward-looking statements in the future. On today’s call, we will hear from Ben Butcher, our Chief Executive Officer; and Geoff Jervis, our Chief Financial Officer. I will now turn the call over to Ben

Thank you, Brad. Good morning, everybody, and welcome to the fourth quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our fourth quarter results, our full year results, and some significant subsequent events. Presenting today in addition to me will be Geoff Jervis, our Chief Financial Officer, who will present the bulk of the financial and operational data. My remarks will focus on the larger issues and opportunities. Also with me today are Steve Mecke, Chief Operating Officer; Dave King, our Director of Real Estate Operations; and Bill Crooker, our Chief Accounting Officer. They will be available to answer questions specific to their areas of focus. I also invite you to visit our new and improved website at www.stagindustrial.com. Both the fourth quarter and the full year 2014 were very successful periods for STAG. There were solid achievements in all facets of our business; both external and internal. Our accretive acquisition targets again exceeded, $136 million in the quarter and $429 million of acquisitions for the year, 31% growth. Our internal growth metrics, tenant retention and positive leasing spreads were also strong for both periods, approximately 70% tenant retention and positive rent spreads in the mid to upper single digits. Our capital market efforts on both the debt and equity fronts continued to drive our overall cost of capital lower and to increase our balance sheet flexibility. I believe that the fundamental reasons for our company's success to date can be traced to some pretty simple realities. First, the STAG team of bright, serious, and energetic individuals is second to none in their execution of our investment strategy and operational mandates. Second, we've a supportive and knowledgeable Board to understand the significant opportunities available to our company and then empowers us to take full advantage of those opportunities. Third, our differentiated investment strategy allows to operate broadly across the industrial landscape to acquire assets that we believe offer above-market long term returns, the elusive alpha of investing. Before I turn it over to Geoff, I would like to note the departure of Kathryn Arnone from STAG. On behalf of myself and the Board, I would like to thank Kathryn, who resigned in December, for her many years of devoted service to the company. Her wisdom, wit, and wealth of knowledge were essential elements of our growth and success, both as a private and a public company. Geoff will now review our fourth quarter financial results, our full year results, and provide some detail on our balance sheet and liquidity.

Thank you, Ben and good morning, everyone. As Ben mentioned, both the fourth quarter and the full year 2014 were very strong periods for STAG, not only in terms of operating and financial performance, but also in terms of platform development. From an operational standpoint, starting with property level cash flow, our portfolio-wide net operating income or NOI was $41 million for the fourth quarter, representing growth of 17% from the third quarter. For the full year, NOI grew by 24% to $142 million. It is important to note that given the growth orientation of our business model, metrics such as NOI can be misleading as they're not fully accounted for the income associated with the period's acquisitions. Had we owned the fourth quarter acquisitions for the full period, our run rate NOI would have been $160 million. On a corporate level, core funds from operations or core FFO was $24 million for the fourth quarter, representing growth of 14% from the third quarter. For the same period, core FFO per share was flat as we raised significant equity in the fourth quarter for acquisitions that slipped past yearend, and a majority of the acquisitions closed in the fourth quarter or closed in the second half of the quarter. For the full year, core FFO grew by 24% to $84 million and also grew on a per share basis by 6%. On the dividend front, at our regular Board Meeting this past Friday, the Board of Directors authorized a monthly dividend for the second quarter holding our dividend at $0.1125 per share. In 2014, we raised the dividend twice or 10% to reflect our growth in distributable cash flow. From a coverage standpoint, our fourth quarter dividend represents a 94% AFFO payout ratio, a level above our target of 90%. We feel comfortable with this level due to the fact that on a run rate basis, factoring in a full quarter of NOI contribution from our fourth quarter acquisitions and the impact of the being over-equitized during the period, our AFFO payout ratio would have been in line with our stated target of 90%. Looking at G&A, in 2014 we redoubled our commitment to sizing our platform for the next few years of anticipated growth, while there are some variable cost elements necessary to keep pace with the portfolio’s base line growth, predominantly asset management and accounting, these costs are relatively small as our business model benefits from being particularly scalable. The fixed cost as we refer to them are the cost of the acquisition components of the machine and these are the primary drivers of G&A growth. In 2014, we added 14 employees with the majority being acquisition oriented. As we look forward, we see the STAG growing to 70 employees in 2015 with the incremental hires having the same acquisition orientation. From a dollar standpoint, we anticipate that G&A in 2015 will be in the $30 million. As we grow, we anticipate that while G&A will need to continue to grow, G&A as a percentage of NOI will normalize in the range of 10%. We understand that STAG’s G&A levels are higher than our peers; however, we are a growth company, and as prudent managers, we're required to invest in a platform to service future growth. Investors in STAG have benefitted from our external growth as we've found outsized returns through our single-tenant, single-asset investment strategy. That said, the strategy is labor intensive as evidenced by our average acquisition size of only $10 million in 2014. In addition, while our platform and model requires higher fixed cost, this dynamic has acted as a constructive barrier to entry for many institutional investors. Looking at the balance sheet, immediately available liquidity was $455 million at year end, comprised of $24 million of cash and $430 million of immediate availability on our unsecured facilities. In addition, we had $7 million of additional capacity on these facilities for future acquisitions. Furthermore, subsequent to quarter end, we raised $120 million of net proceeds from the issuance of private placement notes, adding significant additional capacity to our balance sheet. As of today, we have liquidity in the form of cash and available credit, sufficient to fund our projected level of acquisitions for all of 2015. Furthermore, we do not have any debt maturities in 2015, and we have less than $30 million of maturing debt in all of 2015, 2016, and 2017 combined. As Ben mentioned, our acquisition and leasing activities were very strong for 2014. We acquired $136 million of industrial properties during the fourth quarter bringing full year acquisitions to $429 million. Our beginning of the year target was approximately $350 million, and our actual performance exceeded target by almost 25%. As we look forward, given our $1.2 billion pipeline, we feel confident that we will be able to meet our 25% growth target for 2015, equating to $450 million of calendar year acquisitions. As of today, we've acquired $34 million of properties and have $133 million under contract or letter of intent. From a return standpoint, our acquisitions in the fourth quarter had a weighted average cap rate of 8% and we anticipate that acquisitions in 2015 will have similar cap rates. Our promise to investors is we will buy good relative value or assets at prices less than they were. We have found that the resulting portfolio we've constructed surprises many investors with respect to its location, physical and credit attributes. We encourage investors to review our supplement, specifically the sections relating to market, building characteristics and tenant profile. From a leasing standpoint, 2014 was very strong as we ended the year with portfolio occupancy of 94.9%. Specifically we signed leases for six million square feet, including 4.3 million square feet of renewal leases and 650,000 square feet of new leases. From a rent standpoint, both cash and GAAP rents grew significantly in 2014 with cash and GAAP rents increasing by 5% and 9% respectively. Furthermore, our leasing efforts were aided by our fourth quarter retention rate of 72%, bringing full year retention levels to 70%. We anticipate that retention rates will be in the 70% range for 2015. We spend a lot of time recently discussing same store NOI at STAG, as STAG experience over the last several quarters has been flat to negative same store NOI growth. For a mature stable portfolio, such results would lead one to conclude that the combination of occupancy and/or rental rates was subpar, especially in light of the positive industrial dynamics of the U.S. economy and the positive leasing environment for warehouse distribution centers. STAG however is not a mature stable company; quite the opposite. STAG is a young, fast growing company. Our growth has been consistent with our adding on average 41% to our portfolio every year. Furthermore, the properties that we have acquired have been near 100% occupied. Unfortunately, the market itself is not 100% occupied. In fact, our markets are occupied in the range of 90% to 95%. So as our portfolio matures, occupancy will decline into a market based level. Historically, STAG has achieved occupancy levels roughly 200 basis points above market, but still well below 100%. So when we look at NOI on a same-store basis, the portfolio continues to add 100% occupied properties or the older vintages and properties are trending down in occupancy to market levels. The result should be significantly declining same-store NOI. However, because our rent growth on renewal and new leases has been strong, as I mentioned before, we have achieved benign same-store NOI growth in the face of several hundred basis points of occupancy headwind. Therefore, until we start acquiring at the pace and the profile that we have experienced since IPO, our same-store numbers will not be representative of our leasing performance or comparable to our fellow industrial operating companies who are not growing in the same manner. We have attempted to address the inapplicability of this conventional performance metric by disclosing same-store statistics by Vintage, a metric that isolates each year's acquisitions. It is our hope that investors will review our supplemental disclosure and is our expectation that they will conclude that STAG's performance as been at least as strong as its competitors with respect to occupancy and rental rate experience. Back to the balance sheet. We remain committed to a low-leverage balance sheet, capitalizing our acquisitions at 40% debt and 60% equity. The result of this design has been very strong credit metrics with net debt to annualized adjusted EBITDA at 4.9 times at year-end. We continue to strive for a defensive balance sheet and believe that we have achieved our goal today as evidenced by Fitch's January 6 affirmation of our investment grade rating and positive outlook assessment. Going forward, we hope to improve our ratings and may increase the number of agencies that rate the company. Looking at our liabilities at year-end, we had approximately $686 million of debt outstanding with a weighted average remaining term of 6.9 years and a weighted average interest rate of 4.04%. During the year, we refinanced, modified and issued over $1 billion or 100% of our unsecured debt, the impacts being; one, continued low overall cost of debts; two, no floating rate exposure with the exception of our revolver; three, introduction of a new class of liability in the form of private placements; four, a material increase in the number of providers of debt capital to the company. And five, materially longer term capital structure. As we look forward, we will strive to raise liabilities that are appropriate, given the profile of our assets and as of today, we remain committed to our conclusion that the best capital structure includes predominantly unsecured debt. On the equity front, in order to capitalize our acquisitions, we raised a total of $317 million of equity in 2014 from a combination of our ATM programs and a follow-on offering in October. On a weighted average basis, our equity capital was raised to $21.98 per share for 2014. In 2014 we raised more equity than we ultimately needed as two large acquisitions slipped from 2014 to 2015. As a result, we have not issued any equity under our ATM thus far in 2015. We do, however, anticipate opening up the program at some point in the first quarter. Going forward, we expect to continue to primarily rely on the ATM for our equity needs; and as may be required, look to use discrete equity offerings like the one we executed in October. In summary, it was a very good quarter and year for STAG. Success in the left hand side of balance sheet with record acquisitions and strong retention and leasing activity, as well as success on the right hand side of balance sheet with opportunistic debt and equity capital raises. As we look forward, we as managers are excited that we are building a best-in-class platform, not only for the opportunities presented to us today, but also for the opportunities that we foresee in the future. And with that I will turn it back to Ben.

Thank you, Geoff. With the support of our Board we've committed to building on and improving the STAG machine. This is evidenced by the increased headcount in our outward facing positions, both acquisitions and asset management, increased investment and internal support functions, people systems and processes, and a focus on being able to capture the experience that we are certain will present themselves in the coming years. One of the big focuses for 2015 at STAT will improving our use of data to better identify opportunities and more confidently predict outcomes from our investment and leasing decisions. On a relative basis, we believe that we are already one of the most sophisticated users of data in the REIT world, utilizing the merit of both internal and external data sources. Our 2015 data initiative is intended to extend that advance to improve the accessibility to data across the organization, increase flexibility and utilization of existing data sources and the melding of data sources both internal and external. Although I'm a big fan of architecture as an art form, the fundamental beauty of real estate from an investment standpoint is its ability to produce predictable cash flows. We believe that virtually all the parameters that will affect the cash flows to be derived from owning an asset are subject to analysis and projections that the all too common use of decision rules has no place in real estate investment decisions. We have developed and continue to refine a proprietary risk assessment model that allows us to evaluate and project the cash flows expected from an asset on a real estate risk and credit neutral basis. This allows us to identify, triage, evaluate and acquire assets that we believe will deliver above-average, long-term returns delivering not just growth, but accretive growth to our shareholders. Our fourth quarter and full-year 2014 operational results provide continued validation of our relative value investment pieces and broad market investment focus. Going forward, we'll maintain our investment discipline and focus on shareholder returns. By almost any measurement standard, our four years as a public company have been a great success. The tendency might be for us to rest on our laurels or perhaps to try and confirm more generally to mainstream REIT practices. Instead, the next generations of STAG will be continuation and amplification of what has brought success over the last four years since our IPO. We thank you for your continued support.

Thank you. We'll now be conducting question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Good morning, guys. Just a clarification, Geoff, per your comments on -- and I guess Ben as well -- per your comments on increasing staff, last quarter you talked about an increase in personnel, a G&A target of $28 million. Now it's up to $30 million. What changed over the course of the last couple of months?

I think for the most part it's just continuation of our planning to meet the opportunities or challenges over the next two, three, five years ahead; and also recognition that we are best served by home grown talent. So we have formalized both intern; junior financial, senior financial analyst programs and are populating those lower level areas, and some of the headcount comes from that, the desire to build the team on a more in-house basis. I think the top line number, rather the dollars associated with it, is just a reflection of the building of staff and the building of machine, the building machine out of the systems process, etcetera inherent in that.

Okay. And then there was a modest decline in the deal pipeline, $1.4 billion to $1.2 billion. Is that just in your view seasonality?

Yeah. That's seasonality. The fact that we're -- we had a couple deals roll over into the first quarter, which are – so our expectation is we're going to have a very large quarter in terms of closing. But I also think that the pipeline is pretty robust for this time of the year in terms of things that are coming on to the pipeline, so we've had some -- on our weekly deal meeting, we've had a significant number of new deals every week. So we're pretty encouraged actually by the vibrancy of the market at this time.

Great. And then last one for me, Geoff. I think you talked about maybe broadening out some of your credit rating agency discussions. Can you provide some insight there?

Sure. I think we've mentioned it in the past. We're obviously very pleased with our relationships with Fitch, but ultimately this company is going to be a public unsecured debt issuer, and we will need a second rating at some point until this is just getting ahead of that.

Right. Thanks guys. Good quarter.

Thanks Mitch.

Thank you. Our next question is from the line of Sheila McGrath with Evercore Partners. Please proceed with your question.

Yes. Good morning. You did do equity and ATM in fourth quarter, and then an OP unit deal in first quarter. So do you think as you stand right now that you're over equitized or probably have more debt financing from the pipeline from now until year-end.

Yeah. We are -- obviously it's part of the transactions in the fourth quarter, both the ATM and the follow-on, our anticipation with a level of closings that included those deals that had slipped in the first quarter, so we are certainly over-appetized sort of at the end of the year. We did about -- our acquisitions last year were about 75% equity, 25% of debt at the margin, and so that clearly is an evidence. Our long term goal is 60/40. So I think we've just by -- somewhat by happenstance -- by these deals slipping into the first quarter, we ended at being little over equitized for the year. And we have, over, our course since the IPO, there has been a general trend towards lower leverage. I think that we are -- our goal is to stabilize in that 4.5 to 5.5 debt to EBITDA range. We certainly drifted below that on a sort of a run rate post follow-on operating basis or in the re-leveringing stage. I think we've said in the past we tend to instead of over-levering and then delivering some follow-on offerings, we tend to equitize and then re-lever. So we tend to at least in part consciously, so that we will always end up on the right side of the delivering line should there be dislocation in the markets.

Okay, great. And then on acquisitions, there were a couple of acquisitions in fourth quarter that only have about two years left remaining on the lease. Do you have a high degree of certainty on the renewal or could you just explain that?

Well, were we surprised when we found that out now. Just kidding. Our risk assessment model is designed to analyze all the variables that will affect the cash flows going forward, and remaining lease term is an input into the model. It is not the -- not necessarily the most important input of the model. We could -- seriously could have a -- that input could be zero. We assess the markets, the real estate markets that had views of the building, their probable retention, all those things go into projection of cash flows going forward. I don't think it's necessary that the particular building has a -- is mission critical. If you understand the criticality of that building, and there will be the probability on recent basis whether they are fair enough, they're going to assess that building's likelihood of leasing and at what kind of rate? Steve, do you have something there?

Yeah. Just to give you -- the two building you're referring to are both -- sort of Ben's comment, they're pretty critical to the tenant's businesses. One of them is their primarily distribution facility for the United States. They're really well located. They are both on major highways. The buildings themselves are good clear heights, strong docking, ESFR, etcetera. So they meet all the qualifications, and it's not just Geoff when we see buildings in good markets with these kind of characteristics, we're just as happy to go after short-term deals or long-term deal, the longest that risk adjusted returns are adequate.

Okay. Thank you.

Our next question is from the line of Blaine Heck of Wells Fargo. Go ahead with your question.

Hi guys, good morning. So, as the economy has been getting better, it seems like some of your tenants should be becoming more profitable. And you guys have been very upfront in saying that the biggest challenge for retention for you guys usually stems from tenants expanding and growing out of your buildings. So, I just wanted to get some color as to whether you guys think that could be a bigger issue for you guys this year when you look at some of the upcoming expirations in 2015?

Yeah. I don't think that's necessarily growth, sort of granular organic growth the company is generally the reason why they leave. They leased more because of building consolidations. They're operating on trade facilities, inside they want to operate on one or M&A activities, so they are two organizations combined and they have multiple buildings they want to consolidate or consolidate from one entity's building to the other. It's not so much granular growth. That's especially true sort of in Class B assets where the intensity of use sort of a more of a square foot user than a cubic foot user. Dave, do you have anything to add to that?

Most of our sites can accommodate expansion square footage, so we've done a few of those deals in the last year. We do have one instance coming in this quarter where the tenant wanted to expand. We couldn’t accommodate it onsite and they ended up building a building. So it goes both ways. We do have the capacity to add to our buildings and we’re doing.

And one more thing, in my remarks, I just said, we did expect in 2015, a 70% retention. So that is our expectation for the next 12 months.

Okay, and that’s helpful. So you guys have done a great job growing the portfolio into the past few years and getting attractive pricing on acquisitions. Do you think it might be getting closer to the point that it may make sense to sell some groups of properties just given where we've seen pricing for some portfolio deals out there lately?

It’s clearly the in core pricing, the cobalt pricing or at least sort of what the market believes those trades we're priced at are very attractive and I think that we still believe that the individual assets were more in the portfolio than they are outside of the portfolio. We’re also still trying to grow. We believe there are the advantages to the diversifications supplied by additional growth. There is also some invest ability issues at the margin with -- in terms of liquidity and equity market cap. So we believe it's still growing make sense. We don’t believe that by and large, our efforts are worth more outside of the portfolio which is the ultimate -- litmus assets whether you sell or not, we do believe there is margin individual assets will be sold to users. We have not made any determination, we have one asset class that's not part of our long-term plan, is the single story fixed assets. We’re still showing those opportunities and to users as those opportunities arrive. There is some time in the future when they may a more determined attempt to sell those assets. But right now it’s more opportunistic, basically the pipeline that's worth more to somebody else than it is to us, we will sell it.

Okay, that’s helpful. Thanks.

Our next question is from the line of Jamie Feldman with Bank of America, Merrill Lynch.

Great, thanks good morning.

Good morning.

Good morning.

Can you talk about -- you had some pretty good leasing spreads in the quarter and in the year. As you look ahead to your lease expiration schedule, do you think we're going to see similar or better, worse level of leasing spreads?

I think this is global responses broadly across the market that we operate in -- if you look at the projection market -- growth projections that we look at CBRE who provides us most often, but if you look at some of the other sources, there are pretty general belief that we’re having -- we’re going to have cyclical above normal and maybe way above normal rent growth in those markets. So I think that rent growth are in place versus our rent, I am sorry, so the market rent growth are in place or actually we believe that supply itself would drive increased or rather maintain high leasing spread, I think that the projected growth over the next few years is frankly and likely to widen those spreads.

Okay. And then thinking about your expirations for 2015, I know you guys don't give guidance, but any large chunks we should be thinking about that might be vacating?

We did give a loan guidance and that we expect 2015 to around that 70% number. We’re -- the clarity as to what tenants are going to do will develop over the year and we have some clarity now, which gives us the believe I mean gives us the understanding that that 70% number is achievable. 70% and clearly we're expecting 30% vacancy that a couple million square feet, right. So there won't be vacancies $40 million or 15% of almost $50 million now, we’re expecting 30% vacancy on that. So, the markets that we'll be building that are going vacant into, we're very comfortable about the lease ability of our assets and are now also very comfortable about the strength of our leasing team.

Okay, that's helpful. And then can you talk about the cap rates on I guess two questions. One, the cap rates and pricing on your development -- or your acquisition pipeline. And then related to just your pipeline, as you had new people, how should we think about whether you'll be able to penetrate additional markets better and find even more assets?

Yes, I think the story that remain clear, we put somebody into California and starting in the middle of last year and we closed one asset in California. We have another one under agreement now. I don't think we would have assets in California if we didn’t have somebody owning ground there, with our experience in broker relationships in end market, there just wouldn’t have been the level of discovery to identify and acquire that asset, hopefully now those assets. So I think as we continue to add people with margin, we will be much better at defining trends into now posting relationships with leasing brokers in those markets. So the one new five or ten year leases signed on a building with that leasing broker, thanks to the cost rather than just a sales broker in that market. So I believe that we will continue to expand and more importantly increase the depth of our core and acquisitions in market across the country.

Okay. And then on cap rate, where were they in the quarter and what are you expecting for your pipeline?

So for the quarter we’re just under 8%. The pipeline is remaining a little bit higher than that, but our expectation is and this reflective of the cap rate that we're seeing today or rather than we're acquiring assets on are reflective of this above normal rent growth and broadly across those markets. So we’ve not changed our investment return requirements as I've discussed probably far too many times with far too many people, we're really not a cap rate buyer. We’re looking at long-term cash flow measurement and we haven't changed those requirements or those goals in terms of long-term cash flow whether it's 10-year IRR, levered or unlevered, average cash flow over 10, 15, 20 years, none of those metrics have changed. We're just able to find those at lower cap rates because of the expected rent growth broadly across most markets.

Okay. That’s helpful. Thank you.

Thank you.

Our next question is from the line of Dave Rodgers from Robert W. Baird. Please proceed with your question.

Yeah, good morning guys. Ben, with regard to some of the build-to-suits that are in the acquisition pipeline and to the extent that you do more, assuming these have longer-term leases and greater rent bumps, what kind of impact are they going to have on the acquisition cap rates? Even though you just said you don't really focus on those I guess we do, so I'll ask the question.

Yeah, when we acquire assets generally and most of our assets are third-party owned as opposed to sale leasebacks or build-to-suit. We're looking at places where we think pricing inefficiency exist and I think that's also true in our build-to-suit endeavors and so we’re not giving up much in terms of cash flow over long period of times. And the reality is, we're really not giving out much in cap rate. The build-to-suits that we've done have been within probably 25 basis points or so of where our rate of acquisition activity is. So upper seven is probably where we’re seeing most of that activity.

And then I wanted to ask a little bit with regard to some of the temporary leasing that you've done and just with respect to how that compares to your expirations. You've got a little over 3 million square feet expiring this year. Last year, you did a little over 1 million square feet in temporary leasing. So I guess I'm curious on two fronts. One is how does that really impact your retention this year? And I know it's 70%, but I'm curious if that helps the retention, if that is expected to hurt the retention, especially considering the fact that you probably have 30-year leases this year that are temporarily expiring, just kind of even midyear conventions. So, one on retention. And then two, kind of what does that do to leasing economics in 2015? It sounds like you still expect good spreads but are these helping or hurting on the temporary leasing side?

In terms of the retention, we don’t count those mark-to-market, the short-term leases in that statistic. The nature of a lot of those deals, there will be logistics deals that have a three month trial period and then a three year follow on. So we try to get tenants in the building and hope for the best that they continue to win the business. Regards to spread, we anticipate spreads to be above where they were this year. We’re on a eight quarter streak of raising cash rents and based on our 70% renewal rate for longer term leases, all we think will be up for the year.

Okay. And then anywhere I guess in the country from an acquisition perspective that you've kind of pulled back or you are waiting to see a market like Dallas for instance where maybe there is too much supply? Anything out there, that's cautioning you a little bit in terms of just being more cautious than deploying capital.

Well I hope if we do what we say we're going to do is that what will happen in a market like Dallas is that we would moderate and see what would moderate there rental growth assumptions based on expectations of supply equally or surpassing demand. I think that we're to the extent, we have a contrarian bet, we're probably going to have spend a little more time in Houston because so many other people have put black marks that confuses, likely that we may see some pricing breathing room in Houston and able to acquire some assets in what we think is a great long term market, but is a short term black market against them.

Okay. Great, thank you.

[Operator Instruction] The next question is from the line Daniel Donlan with Ladenburg Thalmann. Please proceed with your question.

Sorry. Just looking at some of your markets and the occupancies, some of the weakest occupancies are in markets like Iowa, Kansas, Missouri, Mississippi, Oregon. Is there -- have you guys thought a little bit about moving further and further away from tertiary markets and focusing more on primary or secondary just kind of curious kind of given where your vacancies are, your thought process going forward on acquisitions.

We certainly have trended over time probably towards more primary and secondary markets. 85% of our assets are either in primary or secondary market. I will note however that our occupancy in tertiary market has been very strong and then partially because I think we've talked before about the demand that our tenant have for spaces primary demand just happens to be in either primary, secondary or tertiary markets. And one of the features of tertiary market demand is its very -- the key customers is in a lot of other stuff -- the building that suites them, it's not the other alternative are really apparent. It's also probably easier to expand buildings in tertiary market, etcetera. So we have pretty good experience with tenant retention in tertiary markets. I don’t think -- I think we'll continue to see a reasoned approach to underwriting. Tertiary market rent growth is obviously has not been and will not be as strong. So the tertiary market deals are much more existing the economics than they are of expectations of rental growth. But I think we will continue -- I certainly hope we will continue to be rational in our assessment of mark-to-market dynamics that underlie the investment or any of these assets.

Okay. And then as far as your exposure to investment grade rated tenant, it came down year-over-year, was it just the nature of what you guys acquire or was this a conscious decision or just kind of curious as to how…

We're not -- we don't start the year and go -- we need to buy more investment grade deals. We will buy investment grade deals at a price right for us to acquire them. Again I mentioned the word contrary in plans, like we're contrary as much as the opportunities are a result of what other people do. So if everybody is rushing to the buy atlas in the England Empire, if the year leases, we're actually that far we're going to be. Just the opposite side of that coin is as I mentioned earlier is a number of people could black mark against Houston. So you hate some of the bitter down in the market, you're likely to plan better transactions there. If you went back five years ago, four years ago, you might have lost certainly if you're looking at Eastern Michigan, where nobody wanted to go and they’ll probably -- there certainly were some very good deal structure in that time, simply because nobody wanted to go there. We are somewhere between 15% to 20% primary markets in order for us to participate in primary markets by the way of capital, push capital rates very low there we have to look for opportunities where short lease term, we could correct something that's going on that allows us to acquire that asset and deepen our discount for us to get our returns.

Okay understood. And then you sold two assets in the quarter, what were the Cap rates on those and kind what was decision process behind letting those things go?

They were both. They were vacant assets and user sales. So we got economics that we think were essentially equivalent to leasing the building through selling the building. So selling out the lease ability or at least a tenant showed up that want to buy our building. On a net basis I think we sold them for about what we bought them for, roughly we bought them for. So we view those as to some extent, we're not a loss on underwriting, but we underwrite say we underwrite those deals to 75% tenant retention while the one half four claims that came up, but we were comfortable in how we underwrote them and that was substantiated by the fact that somebody came in and paid what we paid for it at the user to use that building.

Okay. And then may be sticking with that to some degree, what is the longest running vacancy through that you guys have in the portfolio from a single tenant industrial perspective and how do you look at that going forward? Does it become a point in time where you just instruct the asset up for sale or just kind of curious…

The documental analysis continues to be as they work more to us with given our belief in how long it will take a lease, we will cut lease or what it should be as achievable that it is to somebody else. And so the chances that with our cost of capital that a value added investors is going to find an asset that they work more than we think it is with our low cost of capital not very high. So we tend to sell to users who have obviously like -- it’s the kind of users or combination of investor and a space users showing up to acquire a building. It's unlikely we would sell buildings simply to investors who want to go out and try to make money obviously those are 20 to 25 IRR type people generally. So that's not a likely scenario for us. I have mentioned, well Dave has mention there is a possibility in the future that we may decide to exit that one remaining asset class, the single story flex building and that could be where it's simply a strategic dynamic that we decide to exit that business.

Okay. And then just lastly looking at Page 24, the same store NOI advantage, which was very helpful that you guys put this in there. If we're looking at kind of the NOI in those cases, the NOI changes better than the occupancy change, so you're clearly getting rent growth, but when we think about your vintages when should we start to think about NOI eventually turning positive? The pre IPO stuff from 2011 is the only well, actually the one from '12 is slightly positive, but is the only that's materially positive on the NOI side. So is it kind of four to five year period?

Obviously the dynamics change or we're in a heavier rent increase market today and so may be that means it's going to happen a little faster. But we generally look at our model, we look at somewhere in the range of four to five years.

Okay. All right. Thank you.

Our next question is from Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Hey. Good afternoon, guys. Just to go back to Jamie's question. you talked a little bit about pricing on the pipeline at this point, but can you talk about composition just in terms of is it, here you're moving a little bit more secondary as opposed to tertiary and where you're seeing the better opportunities currently?

Certainly, I won't talk about the non-availability of assets in prior markets of the competition etcetera. So certainly you would think again in this timeframe that we might be looking more at secondary market. Not to sound too much like a broker in the market, but obviously we are reacting to the opportunities. I think our advantage in the market is that we build this machine that allows us to look at on a real estate credit neutral basis to evaluate assets whether they are in primary, secondary, or tertiary markets based on their ability to produce risk adjusted cash flows over time. I don’t have a sense for I don't know, if it's the only sense right now and it's probably more secondary markets, but…

Yes it's definitely pushing closer to secondary and primary rather than secondary and tertiary. The portfolio composition itself has been pretty static between single deals, smart portfolio and build a suits. So it's interesting month-to-month, year-over-year how similar the portfolio or the pipeline continues to be even though the size if it has increased.

I think one thing is there and noted last year's remaining lease term and acquisition were shorter than has been in the past. I say that and that's a reflection of sort of how people look at them, but our pipeline -- our current pipeline is extensively long in terms of remaining lease terms. But its again -- its just what’s available in the market, some of that because sale-leaseback activity seems to have picked up and so we're seeing more sale-leaseback opportunities than we have in the past.

That’s helpful. And then Geoff, you gave some very good color on the same store NOI and how that compares versus your peers, but one thing that seems to be interesting, how does that same store NOI compare versus your underwriting on those assets? Is the better rent growth that you’re seeing more than offsetting your occupancy loss? How far ahead are you, on underwriting versus…

No I think that our tenant retention has been at least in, last year, has been pretty close to our underwriting. What has been a little bit of a surprise is the rent growth because we had in legal acquisition models going back two or three years ago are probably underwriting, 1.5% rent growth sort of across the Board and certainly rent growth is evident in our leasing spreads has been stronger than that. So we don’t have any idea we’re going to share at this point, but I do think that we are probably on occupancy we're at or around where we thought we would be there on retention, but certainly rental growth has been stronger.

Fair enough. Thank you.

Our next question is from the line of Tom Lesnick, Capital One Securities. Please proceed with your question.

Good morning. Thanks for taking my question. Most of them have been already been answered, but just a couple housekeeping ones. I guess first on acquisitions, obviously historically properties in the contract have been a really good one month leading indicator for actual closings and excluding the three builders, you guys have four properties under contracts in January. I was just wondering how that work kind of at the end of February, where you guys stand on that and actually getting those close or if there is anything just kind of process related holding those up.

I don’t think there is anything particular that's affecting the assets we have under leading contract NOI. They are proceeding along. There is nothing unusual with regard to prior experience. Things are just tracking along. Our typical -- just to give you a sense, our typical timeframe is 30 days and somewhere between 10 and 15 to up to 20 days to close out that. So the stuff we had under contract in January is probably proceeding along just as normal.

Okay. Appreciate that, and then obviously you guys had a nice leasing quarter in 4Q, I was just kind of thinking about how that timing of the new lease is actually commenced through 2015? How should we be thinking about the time?

The timing of the leases that were signed in 2014?

Really specifically 4Q was it 270,000 square feet or so? How should we be thinking about that actually coming online.

So occupancy of the new leases signed in the fourth quarter one -- I am looking at data, we can see looking at them, but…

The occupancy of the '14 leases?

Of the 270,000 feet the new leases.

Yeah most of them commenced already. We typically will sign on a lease and have to do some work and occasionally will be 60 days on that, usually closer to 30 before the, the rental commence.

Okay, that’s helpful

Yeah.

And then I guess in terms of progress, I know there is obviously seasonality to the winter month, but as you think about velocity here in 1Q, you guys had a couple weeks this quarter to date, what are your expirations for 1Q and where do you guys stand kind of in terms of getting renewals done on this?

The fourth quarter of last year, we certainly had some leases accelerate, I had a schedule, I think that NOI might have been taking care of in the first quarter of this year. So we expect the first quarter to be relatively slow, both in terms of new renewal leases and in terms of expirations. We do one fairly sizable tenant who I had mentioned earlier who's moved to a new building, but other than that, we get a fairly low volume rolling and we expect retention to be a little bit below 70% than we anticipate for the year that’s back open in the second half of the year.

Okay, I appreciate that color. Nice to hear you guys.

Thank you very much.

Thank you. There are no additional questions at this time. I will turn the floor back to management for closing comments.

Thank you, everybody for joining us today. Some very good questions. We obviously appreciate the thought that went into them. As I mentioned in my remarks earlier, we're very excited and intrigued with the opportunities that are alive for us. We've got some very good things going on internally in terms of improving what I think is already pretty strong remarkable risk assessment model, increasing our predicted capacity, increasing our deal sourcing potential, all that sort of stuff. So we’re excited about the future. We’re looking forward to a great 2015 and thank you for your attention.

This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.