STAG Industrial, Inc. (STAG) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the STAG Industrial Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Spenard, Vice President of Investor Relations. Thank you sir, you may now begin.

Thank you. Welcome to STAG Industrial’s conference call covering the second quarter 2015 results. In addition to the press release distributed yesterday, we've 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 the 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 informational package available on the company’s website. As a reminder, forward-looking statements represent management’s estimates as of today, Friday, July 24, 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.

Thanks Matt. Good morning, everybody and welcome to the second quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about the quarter. Presenting today in addition to me will be Geoff Jervis, our Chief Financial Officer, who will discuss the bulk of the financial and operational data. Also with me today are Steve Mecke, our 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. The second quarter marked continued progress on our all operational fronts. This was readily apparent in the strong acquisition results, continued pipeline growth, robust leasing activity and the very successful inaugural Investor Day. Less apparent to the outside world is the continued development of our people, systems and processes. STAG's business opportunities and it's execution are stronger now than at any point in the company's history. One of the things we find interesting about our experience as a public company is the difficulty in getting people to fully understand our differentiated investment theses and operating model. It is probably the assuming nature to seek to categorize and our model may present some challenges to what has been the conventional wisdom. So for the record, we view STAG as an industrial operating company, not as a net lease company. Like our industrial operating peers, we're active managers of our assets in order to maintain and enhance cash flow. This is evidenced in the depth of our asset management structure approximately 40 assets per line asset management, the annual leasing activity we accomplished, 10% to 15% of our portfolio annually, the capital projects undertaken including significant building expansions and our willingness to embrace vacancy/exposure to market leasing conditions. We acquire shorter term leases including the occasional non move-outs. We view the bright clear line that separates the industrial operating companies from net lease companies is how they view/deal with vacancy. At STAG and the other industrial operating companies, we take whatever asset management steps are dictated, renovate, expand, demise etcetera towards getting the vacant asset released to restoring value and cash flow for the long term benefit of our shareholders. Most net lease rates on the other hand look to sell vacancy i.e. liquidate assets rather than address the operational issues associated with those vacant assets. In our view, this is short sighted as we believe that the real estate assets we own are and will be valuable and productive producers of cash flow for the long term. Vacancy will occur, underwriting it's probability and understand the consequence of exposure to market additions and being well prepared to address it when it occurs are critical elements of our long term investment theses and operating model. One thing that sets us apart from the other industrial operating companies is our attitude towards development and particularly speculative development. Our limited involvement in development activity, expenses of existing billings and build-to-suite take outs is not because we dislike development, we don't, or that we lack the internal capacity to develop industrial real estate. We do have that capacity. It is because we on a considered basis believe that returns to our shareholder's equity will be better and with significantly lower risk by concentrating on our focused and accretive acquisition activity rather than speculative development. We strong believe that our prognostic approach to risk assessment and our general avoidance of decision rules provides us with a greater opportunity set that our industrial operating company brethren. This allows us to be both selective in our investment and very active in making accretive transactions, witness our achievement of and commitment to 25% annual in assets. Now let's get back to the principal purpose of this call, our second quarter. For that I'll turn it over to Geoff, to review our financial results and provide some detail on our balance sheet and liquidity.

Thank you, Ben and good morning, everyone. As Ben mentioned, second quarter was another strong operating period for STAG. Starting with acquisitions ,during the quarter, we acquired 12 properties, plus an additional property post quarter end for a purchase price of $96 million and a weighted average cap rate of 8.4%. In addition we've contracted to purchase an additional 26 properties for $198 million at comparable cap rates. Inclusive of the $97 million of Q1 acquisitions, year-to-date we have acquired or are under price agreement to acquire $381 million of properties. We've probably stated that our goal is to grow our asset base by 25% a year and our resulting 2015 acquisition target is $450 million. Our activities to date account for over 80% of the target. Furthermore, our pipeline of potential investments was at a record high of $1.9 billion at quarter end. With five months remaining in the year, we're very confident that we will meet or exceed our target. I want to take a moment and explain why we are currently so focused on acquisitions. For us, we have two prong test for making an investment. First, does the investment make sense in isolation from a return of activity standpoint? Our 8% unleveraged yields when capitalized at our 60% equity, 40% debt mix and accounting for incremental G&A yield 10.5%. We find these double-digit returns to be very attractive, especially in light of the current rate environment. The second test for us is accretion to our shareholders. Using a $20.50 stock price and the 10.5% equity yield from the example, each new share we raise to capitalize our acquisition equity earns FFO of $2.15 per share. This is extraordinarily accretive when compared to our 2014 FFO per share results of $1.45 for the year. Taking it one step further, our acquisitions are not only accretive at today’s stock price, but remain accretive through a stock price in the mid teens. Not only are acquisitions attractive from a return standpoint, but also from a risk standpoint. As we illustrated at our Inaugural Investor Day, we have a differentiated method by which we assess risk in our acquisitions through the use of our proprietary risk assessment model. I encourage interested parties to listen to the webcast on our website as the leaders of our business units explain in great detail our origination process with specific focus on our sophisticated underwriting model. Furthermore, while our quantitative approach to risk assessment allows us to efficiently assess risk in a broader array of markets, we remain extraordinarily selective. In 2014, we reviewed 1,000 transactions, underwrote 350, bid around 200 and closed 43. As we look forward, the trillion dollar U.S. industrial market offers us a deep opportunity set. We believe that our target market is approximately $250 billion and at our current size, we account for less than 1% of our target market. In summary, we're very excited about growth by acquisitions because it generates excellent absolute returns. It is extraordinarily accretive to our shareholders and we have a very long runway for continued accretive, selective growth. Turning to our portfolio, at quarter end we own 265 buildings in 37 states with a total of 50 million square feet. Occupancy stands at 95% for the portfolio and our average lease term and rent are 4.2 years and $3.97 per square foot respectively. All of these measures improved from last quarter as we continue to see robust activity in the leasing markets. This quarter only 1% of our portfolio as leases expire and a single 313,000 square foot move out resulted in a 29% retention rate. Over the last 12 months our retention rate has been 69% with cash rent growth of 5.1%. We continue to expect retention levels to be in the 70% range for 2015. From a rent standpoint, again a small sample this quarter cash rents grew by 3%. Furthermore as we acquire properties below replacement cost, we believe that our positive rent growth experience is repeatable. From a market standpoint, we continue to find value in secondary markets. Again, I think there is some confusion on what a secondary market is so I will list a few. Denver, Orlando, Kansas City, Cincinnati, Louisville, Baltimore, Boston, Detroit, Minneapolis, Saint Louis, The Lehigh Valley, Charlotte, Columbus, Pittsburgh, Nashville, and Milwaukie. These markets were defined by CBRE as secondary are robust, dynamic markets that are an integral part of the economy and U.S. manufacturing, supply and distribution chain. While we in our target markets we do target attractive risk adjusted returns and while we bid on many assets in primary, secondary and tertiary markets, our model typically identifies the best value in secondary markets today. Evidence is in our acquisition activity since IPO as we have acquired 65% of our assets in secondary markets, 26% in primary markets and 9% in tertiary markets. If the relative value proposition changes, I promise you that we will as well. We're not emotional about the markets in which invest. We reserve our motion for relative value and therefore enjoy broad opportunity set that is not arbitrarily limited. Turning to the quarter's operations, cash and operating income on cash NOI was $43.4 million representing growth of 29% from the year ago period. Cash NOI growth comes from two sources; internal or same store NOI and external or new acquisitions. Obviously, our external growth has been strong and remains robust. We are however often criticized for poor internal growth prospects and our critics often justify their conclusions by criticizing our markets and assets. This is simply not true or fair. Our acquisition line was generally to acquire occupied assets a 100% occupied assets. Over time these assets will stabilize at market occupancy 93.5% currently. This downward occupancy pressure is underwritten and expected. True internal growth however should be assessed based upon rent and expense growth and our rent growth has been equal to our peers. Furthermore with our tenants picking up the operating expenses at our proprieties as is customary in warehouse leases, our rent growth will fall more directly to our bottom line. Although not argued that same-store NOI will have downward pressure due to the impact of stabilizing occupancy, we will argue until we are blue in the face that our real, comparative internal growth is as good as any of our peers in the long run. On a corporate level, adjusted EBITDA broadly speaking cash NOI less SG&A was $36.5 million representing growth of 26%. Adjusted EBITDA did not grow at the same pace as cash NOI due to the increase in G&A as our G&A expense was $7.5 million in Q2 compared to recurring G&A of $5.4 million in the comparable period last year. Moving down the ledger, core funds from operation or core FFO generally speaking adjusted EBITDA less our cash of debt capital was $24.7 million, representing growth of 22% compared to 2014. On a per share basis, core FFO was $0.36 per share, flat compared to last year. This result was due to the aforementioned G&A increases as well as the fact we remained on average over-equitized for the quarter and due to the fact that we've refinanced a 100% of our unsecured debt in the last year adding 4.5 years of duration to our unsecured liabilities. All that said, the aggregate impact of these factors was offset entirely by the accretive nature of our acquisitions. In large part, due to our refinancing efforts over the last year, we were awarded this quarter by an upgrade from Fitch ratings from BBB minus to BBB flat. In this press release Fitch cited our strong leverage metrics, strong liquidity and increasing capital markets access as the primary rationale for the upgrade. A copy of Fitch’s press release is on our website. G&A has been a topic of much discussion amongst the analyst investment communities and appropriately so. The growth in G&A over the last year has caused our bottom line numbers FFO and FFO per share to be basically flat for multiple cores. Had G&A not grown over the last year, but held at the Q2 2014 levels our Q2 2015 FFO per share would have been $0.39 per share or $0.03 per share higher than what we reported today. On an annualized basis this would equate to FFO growth of over 10% on a per share basis. Obviously our investment in G&A has impacted results. But we firmly believe that we have an opportunity as I described earlier that warrants the investment. As long as we see investment in G&A leading to opportunities akin to what we see today, we will invest in our platform in order to maintain our sophisticated and selective approach to investing. As G&A growth levels off over the next few years, our G&A is projected to be at least in line with the industry and this makes sense. We have primarily single tenant leases, leases where the tenant effective access property manager under a modified net lease structure; therefore requiring only management of oversight on our part. Turning to the balance sheet, at the end of the second quarter our immediately available liquidity was $375 million and as of today, we have liquidity in the form of cash and available credit just sufficient to fund our projected level of acquisition 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, '16 and '17 combined. We remain committed to a low level balance sheet, capitalizing our acquisitions with 40% debt and 60% equity. The result of this design has been very strong credit metrics with net debt to run rate annualized adjusted EBITDA at five times at quarter end. We continue to strive for a defensive balance sheet and believe we have achieved our goal today as evidenced by our ratings upgrade to BBB flat. Looking at our liabilities at year end, we had approximately $765 million of debt outstanding with a weighted average remaining term of 7.1 years and a weighted average interest rate of 4.4%. All of our debt is at a fixed rate or has been swapped to fixed rate with the exception of our revolver. Going forward, we will likely increase the size of our revolver in order to account for our growing investment pipeline and have initiated those discussions. In addition, we remain committed to financing our long term investments with long term capital and expect that future debt issuances will be in the form of fixed rate, long dated private placements. On the equity front in order to capitalize our acquisitions, we raised a total of $62 million of equity in Q2 from our ATM programs. On a weighted average basis, our equity capital was raised at $21.36 per share for the quarter. Going forward we expect to continue to primarily rely on the ATM and OP unit issuances for our equity needs and as maybe required look to use discreet follow-on equity offerings like the one we executed last October. In summary, it was a very good quarter for STAG. Success on the left hand side of the balance sheet with acquisition and leasing as well as success from the right hand side of the balance sheet with equity capital raises and the upgrade from Fitch. As we look forward, these 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. Before I turn it back to Ben, I want to encourage anyone interested in STAG to go to our website at www.stagindustrial.com and navigate to our Investor Day webcast, which can be found on the Investor Relations page. I think that webcast will go a long way to demystifying STAG business model and has left listeners with a new appreciation for the sophistication and selectivity of our origination process. And with that, I will turn it back to Ben.

Thank you, Geoff. Another aspect of conventional wisdom is the notion that some markets are good and other markets are bad. Unfortunately or perhaps fortunately for STAG, the world is not that simple. Markets and sub markets are certainly different from one another, but those differences are observable and can be incorporated into our analysis. That is a part of what our probabilistic risk assessment model does and in doing so, allows us to rationally compare an investment in Ontario, California with one in Dayton, Ohio. We are actively interested in buying assets in each of those markets, but only if the acquired asset will produce sufficient cash flow returns for our shareholders. One other item that I would like to touch on today is the widely held believe that the primary markets always outperform secondary markets. For the purposes of this discussion, we use a CBRE econometric advisor's definition. Primary markets are the top 30 markets. Secondary are the next 30. The data we reviewed do not support the contention of primary outperform secondary markets. The performance of these two market segments are largely the same in the aggregate on both occupancy and rental growth. The primary markets exhibit slightly higher volatility and as a result, can show relatively better or worse metrics depending on the time series chosen, but there are no real long term differences. This is certainly at odds with the conventional wisdom. What tend to be very different between primary and secondary markets is pricing, the entry point for acquiring an asset. Two very similar investment opportunities same lease terms, billing, quality, age, tenant credit profile, both leads the current market rents etcetera will be priced rationally differently depending on whether they’re located in primary or secondary market. Even if the five-year market rent growth prospects for the two markets are identical, the difference in entry cap rates between these two investment opportunities can easily be 200 basis points and maybe significantly higher. 10 and 20 year IRR calculations will show similar disparities. There is simply non-economic or financial justification for these types of pricing differentials. Our willingness to pursue assets across a larger geographic footprint than our peers, allows us to garner both higher long term cash flow returns and greater diversification, a winning combination. Thus we continue to be excited about the future for our company over the coming years and the fundamentally strong U.S. industrial markets. As we move forward, we will maintain our investment discipline and focus on shareholder returns. We thank you for your continued support. And with that, I’ll now turn it back to the operator and open the floor for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Sheila McGrath with Evercore. Please proceed with your question.

Yes, good morning. I was just wondering Ben or Geoff, if you could talk about your thoughts on the mix of equity even for the balance of the year, is it reasonable to assume that you could lower it from the 60% target just in the near term given where the stock price is?

Good morning, Sheila. Thank you for the question. I think the answer is we came in -- we did an equity deal late last year. So we came into the year probably little lower equitized, and our activity thus far in the year is maintain that slightly over-equitized basis. So I think that for the year, we’re still looking to do something on the order of 60/40 for the year, but we’re little over-equitized now. So then we could be slightly slower in our equity raise in the near term.

Okay. Great. And just another question on G&A, you mentioned that you’re targeting to level-off to a level of peers. I was just wondering are you looking at G&A of peers as a percent of revenues, as a percent of total assets and how long would that take and finally on 2016, if we can look at $30 million this year, do you think it could be a more modest growth rate from this year…

The other -- we are talking about leveling off the other peers as a percentage of NOI and I think that in our models, we have a pretty aggressive growth forecast as you know and so we’re talking about leveling off over the next three to five years with muted growth in those intermediate years and then getting down to more of a scaling growth relative to the size of our portfolio over that time. I think our expectations for 2016 are something on the order of 10% growth in G&A so were 30 this year, 33 next year and Geoff, do you have anything to add?

No I think that’s right. I think that when we think about where we’re going to get in line with peers we really look at it as G&A as a percentage of NOI and we think we will get down into the single digit range on that metric as Ben mentioned over the next five years.

Okay. Thank you.

Our next question comes from the line of Jamie Feldman with Bank of America, Merrill Lynch. Please proceed with your question.

Great. Thank you. You put up some good leasing spreads this quarter, can you give an outlook for maybe what we can expect to see over the next year and what your mark-to-market looks like even on your '16 rule?

I will turn that over to Dave, what’s your view there?

We have pretty good visibility for Q3, we expect the cash flows to be almost identical to this quarter and it gets a little less clear further out. We continue to think we’re going to roll slightly up not dramatically up.

I think that the general market conditions, the most recent customer report had indicated vacancy is going down at 35 out of the 38 markets they track. I think that the backdrop for all the industrial operating companies is for continued rent growth as vacancy continues to decline. I don’t think that there is -- I haven’t seen a forecast yet, it shows development exceeding or new supply exceeding absorption. Of course at some point it’s going to have because we're down to near historic lows in vacancy numbers nationally and so there some individual markets are very tight. So I think the backdrop is one where the expectations are for continued rent growth.

Okay. And then year-to-date, can you talk about any changes you’ve seen in the type of tenant demand either by market, either there are certain markets that are picking up more than others, are there certain types of tenants or types of use on the leasing?

Our business is obviously very broad and we’re agnostic as to markets and industries except for introducing too much of anything into the incarnated risk, post the growth, both financial crisis, auto has been big, house building, home building has been big, energy obviously was big. But I think we’re seeing pretty broad tenant interest Dave.

This quarter we have new largest category being air and logistics in terms of our tenant mix. So we are seeing more logistics companies leasing space rather than end users.

And that’s more in secondary markets or more in some of the core markets?

That's across the Board, broadly across the Board.

All right. And then I know you guys spend a lot of time in the call walking through the investment case and why continue to issue equity makes sense, but as we think about the next year or so or if the stock remains under pressure, you guys think internally about any shift in strategy?

One of the benefits of our strategy is at the margin where we remain very accretive even at what some people will consider depressed stock prices. Certainly compared to our 52-week high, our stock price is depressed, but again very accretive at these levels. And so as opposed to some people you might view as stock because they’re looking at an equity price that doesn’t make sense to continue to pursue their strategy that’s not the case for us. Our growth remains very accretive and I think that the numbers that we will show going forward will be appreciated by the markets. So I don’t view us as stock in that sense. What we rather issue equity at higher numbers of course, but we're accretive at these levels and we will continue to pursue this strategy and grow the company.

Okay. All right, thank you.

Thanks Jamie.

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

Yes, good morning, guys. Hey Ben a question for you, you talked in your earlier comments about being operators of industrial and so I guess two questions around that. One, why not stock buying more vacancy at this point in this cycle and I realize I’m asking that question when you bought more vacancy this quarter than you have, but why not be not aggressive doing that? And then the second question on that I guess is the flip side what the flex office portfolio, is your desire to lease that up before you sell it given the 260 basis point negative impact of same-store NOI or do you think that, that's something that you can just offload and update us on that please?

I think we remain at least mildly confident of our ability to lease and sell stabilized assets in that area. We will over time make the harder decisions to sell assets that we don’t think have good long-term prospects that basically we can sell them for more than we hope we were selling that for more than we think they are worth to us within the portfolio. We had an asset this quarter we sold that was selling in that category a long-term vacancy. We took a small impairment on it, but is the right thing to do from a portfolio perspective. I think that what we do is and perhaps we will expand our acquisition activities to look at more vacant assets, but we've always consider buying vacancy and I think that our -- I am very confident that our risk assessment model allows us to look at vacancy again on a risk neutral basis to buying occupied assets. And as such, as we increase the scope of what we look at with our larger, I would say in acquisition team, I think it's likely that we will look at more vacant assets, but we're only going to buy them if they can produce the returns at least equal to if not better than the occupied assets that we're able to buy.

Okay. And then with regard to the acquisition pipeline what's under contract and LOI? Can you talk about any portfolios in there, kind of cap rate going in and I guess maybe I will ask the vacancy question there and any slight degree of higher vacancy that you're able to bring on in that portfolio or that group of assets?

I will let Steve answer that. I don't know if I might close…

So the contract in LOIs I think we have one or two what we consider are small portfolio, which is $2 billion portfolio for us, but most of it is still the granular assets. There is -- I don’t believe that in that group there is any more vacancy, but as Ben mentioned, we do look at it on a consistent basis. It really comes back to a pricing issue and if we're going to be competitive with our brother out there. So yes, the pipeline looks very similar to what it has been for -- cap rates are still running on 8%. So we're pretty confident that it looks like a good year. And I would say that we do feel that cap rates across the markets that we're looking at and in the assets that we're able to get on a contract to acquire are not falling. They actually may be rising slightly but we feel very confident about our ability to maintain the cap rates we have today. I will say there is one asset that we have. I think it’s under Letter of Intent at this point that is a larger known move out of the high quality asset as a short term sale lease back coming out of an M&A activity by the tenant. High quality asset that I think it’s a one-year sale leaseback. So that’s a kind of acquisition of vacancy.

Last question Geoff or Ben, thoughts on maybe blending in more debt in the capital structure, one it could get larger and two if the stock price comes down.

We’re always evaluating or reevaluating our capital plan. As we indicated earlier in the call, we probably remain a little over-equitized and our run rate debt to EBID at five is certainly very, very conservative relative to our peers and there is capacity around to do that. But again we remain very accretive even at these share prices. So I don't think you’ll see much in the way of traffic moves or anything significant in that area Geoff?

Yeah. I think that my personal preference would be to continue to run the company at these levels and try and keep getting upgraded to BBB plus and see if we can drive our cost to debt down.

All right. Great. Thanks guys.

Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Good morning, guys. Are you seeing any landlords put more products on the market because of any concerns about the rate environment?

I don’t think that -- I think that the -- obviously the rate environment is tied to perhaps not directly tied, but with some degree of lag tied to the cap rate environment and so I think you've seen probably starting in 2013, you’re seeing assets starting to come to market while people are worried about where the future of cap rates are going. Clearly some of the bids that you're seeing in the secondary market, excuse me, in the secondary market and the private market for our assets have been very strong. There has been some indication that that strength has peaked, but we're hearing some of these big portfolios continue to be moving forward to be sold. So our pipeline continues to grow $1.9 billion because of our outward facing -- increase in our outward facing acquisition effort and I think that is going to be -- allow us to continue to find more and more accretive deals as we move forward.

Great. And last one for me, have you seen any slowdown in competing against the non-trade REITs.

I don’t think we’ve seen much activity from the non-traded REITs in our core business really ever. They’ve come in with their height they are coming in on larger longer term deals that we thought because of the nature, we're going to probably be priced at the margin of where we might participate. So they've never been a really a big factor in our business.

Great. Thanks Ben.

[Operator Instructions] Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. Good morning. So Ben, if you took a pool of assets in your portfolio where you think you’ve maximized value and you brought it out to market and looks like it was a reasonable size portfolio. What do you think it would trade at on a cap rate basis?

So and we could easily take out of our under-covered pool and create nearly exactly what the one of the portfolios that’s on the market right now, the Wells portfolio, we could easily create that portfolio out of our asset; something very akin to that portfolio out of our asset base. We’re being told that that's going to trade somewhere in the 6 to 6.25 range. So I think that's not a bad mark for where we could execute that.

So you guys are trading at an 8 right now, at 8 implied cap and if you could -- if stuff that you value is at a 6 and I completely get that every acquisition that you're doing is $2.25 a share accretive versus $1.45 run rate since very accretive from that perspective. But it would seem like a 200 basis point differential between where your stock is trading where you guys are buying stuff and where you probably could sell is probably about as accretive even though that wouldn't -- you wouldn't be improving your ratios on a G&A load. Do you think about given where the share price is maybe selling a little bit more as a way to fund acquisitions and still having that be very accretive to earnings or is that not something that's contemplated?

I don't think we've that much in a way of serious consideration at this point. I think that there are -- as you've pointed out, there are still some pretty significant returns to scale and that continues to be our focus. I think that we're buying assets that are long term cash flow productive assets that we think are worth to us in the long run with where our shareholders sort of where the market would trade if we sold them. So we think holding them for the benefit of our shareholders is probably the best thing to do.

Is part of it the reluctance maybe to asset recycle that you're looking at -- you're kind of building out the platform right. So you guys have well documented your -- you got the G&A increase this year and probably looking at increasing G&A above sort of inflationary levels for the next couple of years and to do that you got to justify, you got to have a bigger portfolio over time. Is that part of maybe the reluctance to be a recycler because you just don't have the scale that you want to have yet and maybe ultimately that becomes something that you get to?

I think that's fair as we move through the size levels we're at now. I think ultimately where we come down is that the assets have to be worth more to somebody else on to us in our portfolio. That's the ultimate test for us. We're buying assets we think at a discount to their value based on their ability for this cash flow. Clearly someone else will have to come to us and pay more than it's worth based on their ability for this cash flow. So there is a spread there that we're taking -- by buying them, we're taking advantage for our shareholders, but in the long run, somebody would have to pay more than they were of worth and I am not sure that's necessarily going to happen.

I would add that the reason that we're not selling assets is because we think that the math is better for us to acquire assets. Obviously we went over the accretion levels of acquiring assets $2.15 a share with the stock price in this range is extraordinarily accretive. And you're right, there is some benefit to the scale from bearing G&A, but we think that the better long term proposition for the shareholders is to continue to acquire assets at the extraordinarily accretive levels that we are even though the stock price is depressed, it is a very attractive investment opportunity for the equity. And over time, attempt to continue to get the story out about what we own and normalize our valuation more in line with the operating companies. If we do that, we're going to have extraordinary returns, if you look at where our peers are trading, we trade at a very steep discount to them and we don't think that that is warranted and we think that the shareholders ultimately will benefit if that difference compresses and that's not in the math.

Yes and I wasn’t suggesting you guys stop acquiring. I was more sell to fund the acquisitions, which I would if you guys could sell at $6 and buy at an $8, that's pretty accretive too even though issuing shares even at $20 a share and funding a portion of it with that as accretive.

So Brendan, that's kind of the private equity model and if we weren’t a public company, that's probably what we would be doing, but this is a permanent capital model and long term investment of the shareholders is derived from the cash flow.

Fair enough. Geoff just so we understand or have a better sense, so when you're looking at G&A as portion of NOI, sort of getting in line with peer set, are you thinking 10% G&A load as a portion of kind of run rate NOI is where you would like to level out?

I think that we see long term being probably one of if not the most efficient. So probably well into the single digits, but again we're a growth company, which is pretty much unique relative to the established peers and so really comparing us right now doesn’t make sense. I think in the long term we will compare well if not frankly given the operating structure we have, I think that we will lower G&A as a percentage of cash NOI than our peers.

Got you. Okay. Thanks guys.

Thanks Brendan.

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.

Hi, thanks. Not to beat the dead horse on G&A, but just one other one on G&A, so I think it was mentioned about 10% growth in 2016 and just out of curiosity, what is that growth funding that's had additional $3 million, because it seems like over the past couple of years, you built out the acquisitions team. So I was just curious as to what those funds are year marked for?

So Mike, we're adding people during this year. So a significant portion of that is full year as opposed to partial year. I think that's a big part of it.

Yes that's almost all of it. It's very much related to the fact that the employees that we have in chairs today will be -- are estimated to be in chairs for the full 12 months. Next year and this year they were -- and a large portion of the employees were in partial year.

Got it. And what's -- basically what sort of seats do the people fill who are being hired this year?

They're certainly analytic capacity in the acquisitions area, but it's also analytic capacity broadly across the platform. We've increased our capacity in support areas like credit business and corporate analytics, a variety of areas. Our asset management continues to grow as our portfolio of growth. So it's broadly increasing the capacity of the platform.

Okay. That was it. Thank you.

Thanks Mike.

[Operator Instructions] Our next question is a follow-up question from Sheila McGrath with Evercore. Please proceed with your question.

Yes, Ben you have mentioned in your release you have a $142 million under contract. Should we assume the majority of those close in third quarter.

Hi Sheila, it's Steve Mecke. It's going to be -- it's a mix. There is probably I think somewhere around $90 million of that is coming from third quarter and balances from the fourth quarter and then some of the LOI close to third quarter. So it's probably close to that, but not the whole $142 million.

Okay. All right. Thank you.

Thank you. It appears we have no further questions at this time. Mr. Butcher, I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. One of the thing I just -- and the primary versus secondary market discussion, just one thing I would like to point out is we're not saying that we like secondary markets. We're saying we don't primary markets or making any sort of broad category or market segment call. We look at every market and indeed every sub market where an asset is located, specifically we look at the asset with a context of that sub market. So there are primary markets where there may be muted rent growth and secondary markets there may be double-digit rent growth expected over the next couple of years. So it's one of the things that I think our risk assessment model does a very good job of allowing us to assess the returns we develop from owning an asset in that particular sub market. So just a little point of clarification. I just want to thank you all for joining us this morning. It was a good quarter and we're looking forward to a very good second half of 2015. Thank you.

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.