Greetings and welcome to STAG Industrial's Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Matts Pinard, Senior Vice President of Investor Relations. Thank you, please go ahead.

Thank you. Welcome to STAG Industrial's conference call covering the fourth quarter 2018 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental information presentation on the company's website at stagindustrial.com, under the Investor Relations section. On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements relating to earnings trends, G&A amounts, acquisition, disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends and other matters. 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 to non-GAAP measures contained in the supplemental informational package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you'll hear Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer. I will now turn the call over to Ben.

Thank you, Matt. 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. Presenting today in addition to myself will be Bill Crooker, our Chief Financial Officer, who'll discuss the bulk of the financial and operational data. Also with me today are Steve Mecke, our Chief Operating Officer; and Dave King, our Director of Real Estate Operations. They'll be available to answer questions specific to their areas of focus. The fourth quarter wraps up an impressive 2018 for STAG Industrial. Our platform operated at a high level with continued accretion driven by record acquisition volume, robust leasing spreads and strong retention. All this was accomplished while maintaining a defensive balance sheet. We capped off the year with the execution of a successful portfolio sale and the achievement of an additional investment grade rating. The opportunity set for the company remains very attractive. The acquisition team continues to expand their marketing presence through seasoning, their time in market and additional outward-facing personnel. The investments made over the past several years to improve and enhance the company's use of data are producing noticeable returns. The underwriting process is more robust and closing is more efficient. The vast amount of internal and external data accumulated is being harnessed through wide insights and through investable opportunities. During the fourth quarter, STAG executed on the portfolio sale that we had previously described and metrics consistent with our expectations. The transaction traded at a 6.2% cap rate, representing a 180 basis point compression from where these assets were acquired. These attractive pricing provided proceeds that will be redeployed into our opportunity set in an accretive manner. This portfolio sale demonstrates, once again, the power…

Thank you, Ben. Good morning, everyone. The fourth quarter was active for STAG, highlighted by a new investment grade rating from Moody's and the successful portfolio sale. Core FFO was $0.46 for the quarter, and $1.79 for the year, an increase of 5.3% as compared to 2017. This per share growth was achieved while operating the balance sheet at or below the low end of our targeted leverage band during 2018. Our 2018 acquisitions totaled $677 million with a stabilized cap rate of 6.9%. This volume included $29 million of value-add acquisitions across 3 assets, which are expected to stabilize at a yield of 7.2%. We estimate that these transactions would have traded at a 6% cap on an individual basis when stabilized. We define value-add acquisitions as acquisitions with the redevelopment plan, expansion plan or vacancy, and expect us to continue to be part of our opportunity set going forward. Our 2018 acquisitions had a very attractive return profile, driven by weighted average lease term greater than any other prior year's acquisitions, coupled with very high contractual rental bumps. The strength of our portfolio continues to be reflected in the portfolio of operating results. Retention for the quarter was 81% and 83% for the year. Cash and GAAP leasing spreads were 8% and 16% for the quarter and 8% and 15% for the year, respectively. Cash NOI grew by 30 basis points in the annual same-store pool when comparing full year 2018 to 2017. The annual same-store pool accounted for 69% of the portfolio at year end. The balance sheet remains defensively positioned with ample liquidity. The second investment grade rating by Moody's allowed STAG to reduce interest expense by approximately $2 million per year on our unsecured term loans and revolving credit facility. We raised $140 million of…

Thank you, Bill. STAG is just in great position as we begin 2019. We continue to evaluate a growing number of attractive investment opportunities in and around population centers across the U.S. Our diverse tenant base is healthy, confident and expanding, which is reflected in this year's impressive operating metrics. The balance sheet is in position to capitalize on the numerous opportunities we see today and expect to see in the future. Our various data and process initiatives are maturing and producing greater efficiencies and new insights as STAG continues to harness the power of data. And above all else, the platform continues to focus on and deliver per share growth. We thank you for your time this morning and for your continued support of the company. Before I turn it back to the moderator for questions, I want to wish everybody a happy Valentine's Day.

[Operator Instructions]. Our first question comes from the line of Shelia McGrath with Evercore.

I was wondering if you could discuss the same-store NOI guidance in '19? What's driving the improved outlook versus 2018 same-store NOI?

I think, Sheila, you note that we've had gradual improvement in our same-store NOI. It's reflective of the general strength of the market, and we see that improvement continuing into 2019.

Okay. And then if you could give us a little more detail on the value-add acquisition part of the program. How the returns compare versus stabilized acquisitions? And are you going to stabilize these assets and hold them or stabilize and sell them?

I think the answer to last question first, our intent is to stabilize and hold them. As always we will look to the value of the asset once stabilized. If it's worth more to somebody else than it is to us within our portfolio, of course, we look to at least consider selling it. Value-add has always been a part of our strategy. We've been doing it consistently over the years. We just haven't -- we're seeing more opportunity today as a bigger part of our opportunities set where we decide it'll make sense to disclose it in the interest of transparency. These assets will stabilize on a short-term basis and cap rates are the same, may be slightly better than what we're buying in the market. But the overall returns on these assets are similar to long-term IRRs or similar because these are assets that'll have value over and above the -- perhaps where they stabilize on a cap rate basis simply because of the quality of the asset and the quality of the markets we're finding them in.

Your next question comes from the line of Michael Carroll with RBC.

Ben, just coming off of that last question related to the value-add deal. How many value-add acquisitions did you complete in 2018? And has there been a pickup in that activity and that's why you started providing guidance for it?

Couple of things. One is, there were 3 deals in 2018 about $30 million. We are -- have frontloaded some value-add acquisitions into 2019. So we're expecting a larger amount of them, but also to some extent frontloaded always that will -- those assets may be vacant through most of the year. So just wanted to let the people know we're again frontloading a little bit -- at a little bit more and little more frontloaded.

And then how should we think about these transactions? Are you putting more capital to renovate the assets, that's why they are value-add, is it just kind of a leasing play where you're buying and that's underutilized and leasing up the final spaces and how should we think about that?

There are a variety of opportunities. They are releasing opportunities, they are capital investment value-creation opportunities. So there are a variety of ways that we see value that is not immediately -- does not immediately show up in income.

Okay, great. And then just last question from me. Related to the cap rate 6.5% to 7%, is that based off of just the stabilized acquisitions? Did I hear that correctly? And then what's driving those lower cap rates compared to the prior year?

Well, I think the cap rates, yes, they are the stabilized assets. What's driving those cap rates will be mix changes. So we're not changing our long-term return requirements. Mix changes could be lease term, contractual rent bumps, below-market rents, a variety of things that would change the initial cap rate -- the sort of the point in time measured at the time we acquire the assets.

And Mike, you saw that a little bit in Q4, where we had a weighted average cap rate of 6.6% and a lease term of 9 years and contractual rental bumps averaging about 2.5%.

[Operator Instructions]. Our next question is coming from the line of Dave Rogers with Baird.

Ben, on the disposition front, good to see you guys selling some of the more -- more assets during '18 and '19. Can you talk about geographically, maybe any areas that you're focused on or tenant concentrations that as you sit today you might lean toward in terms of pushing the button to sell?

I mean, again, I think our mantra is to sell things that where we see we can garner more value than what we think they're worth to was within our portfolio. Clearly, we're still looking to sell down the flex/office portfolio, which is not particularly geographically concentrated except there is one large asset within that portfolio. But it is not a, gee, we hate XYZ states or markets that we want to get out of them. It is more looking at the individual assets and their value within the portfolio versus the value that we can gain by selling them.

Great, then maybe a question for Bill. Can you talk a little bit about bad debt in 2018, kind of what your provision might be in 2019 as you sit here today and think about kind of any potential risks within the portfolio?

Dave, we have a watchlist bad debt. I mean, last quarter, we mentioned ATD and Mattress Firm, both of those tenants confirmed all of our leases, which was great news for us. We are forecasting 50 basis points watchlist for our bad debt in 2019, which was consistent with 2018. That's the dynamic list. Tenants we wanted off of that list depending on where they are in payments and bankruptcies, et cetera.

I think David. Ben, again. I think what you see a lot of these bankruptcies that -- certainly within our portfolio and nationally are retailer bankruptcies where for instance Mattress Firm was a retailer bankruptcy where they were looking to consolidate their retail footprint as opposed to their distribution footprint. So we were not surprised when we got an affirmation of those distribution center leases. We have some -- we're seeing that with other retailers where they're using bankruptcy to rationalize their store footprint as opposed to their distribution footprint.

Great, good color. And then maybe last for me. On the leasing spreads, those that are covered, your long term kind of get used to that 1% to 2% leasing spread and now you're seeing some really good spread. How much of that is just a function of your market? Maybe finally catching up on the market rent growth side versus kind of what you've been buying maybe 3, 4 years ago, and you're starting to get that maturity? And then the last part of that would be does that continue to those positive leasing spread that we have seen continue into 2019?

One of the thing is we tend to buy assets that are leased at or around market as opposed to having a portfolio that is made up of leases that were -- may have been made to garner occupancy, et cetera. So we may not have as much a dramatic leasing spreads generally because of that sort of model. But certainly the markets that we operate in have been -- having their fair share of rental growth over the intervening year. So we continue to expect to have good leasing spreads.

And our next question comes from the line of John Massocca with Landenberg Thalmann.

Just a quick detail question. On the occupancy bridge, there was about 170k of square foot you guys lost that ended up being in the other category. What was that?

That's primarily short-term leasing.

Okay. That's just short-term leasing that roll is not tenant credit at all?

Exactly, that's right, short-term leasing.

And then it looks like -- and mind you, it can be a little variable quarter-to-quarter. But that the leasing commissions in TIs, on a per square foot basis and overall basis kind of trended up in 4Q. What's driving that? And should that normalize as we look out in 2019?

This is David King. I think that's just an anomaly based on the deals done in '18. We expect '19 to be below what we were this year. But again that's -- it's dictated by the finish we put into spaces, the terminal lease, et cetera. So the longer lease is going to have a higher commission.

So again, mix -- it ends up being mix.

Understood. And are you seeing any pressure and those kind of become a common question quarter-to-quarter. But any pressure on some of your automotive-based tenants? Or has that been relieved a little bit as maybe trade discussions have normalized in some of the operational stuff that needs to be done on the automotive side that's kind of happened?

We obviously look at our automotive exposure. It is very widely diversified with good tenant credit across those individual entities. There are 40-plus leases. They're OEM. They're Tier 1, they're Tier 2. They're North and South, they're foreign, they're domestic. So it's very widely diversified. The -- it is a -- category is a significant percentage. I think it's our second largest industry concentration. But it is a -- the granularity that exits underneath that concentration gives us a lot of comfort. And again, the individual tenants within there have pretty good credit.

And our next question comes from the line of Jon Petersen with Jefferies.

So to come back to the leasing spread. I don't think we got a direct answer. What is the guidance assumed in terms of what leasing spreads will be this year in terms of 1% to 2%?

I am going to turn it back over to Bill, but I'm going to cascade you for not wishing us happy Valentine's Day.

John, it's Bill. We're projecting mid single-digits for cash leasing spreads in 2019.

Okay, all right, great. And then in terms of leverage, I think, with where the stock price is trading today, would it be fair to assume that you guys plan to stay at the low end of that debt-to-EBITDA target?

John, that's right. 4.75 to 6 is our range for the year. We've been operating around 4.95 for the past few quarters. So I think we'll be operating around that range for the foreseeable future.

Okay. And then maybe just one more question on value-add acquisitions, just to make sure I understand it. Is the reason you would go after these assets because they're primarily in better markets? So I guess, the other question -- I guess the another way to phrase it, are the value-add acquisitions primarily in primary markets where the rest of it's more of a mix of primary and secondary markets?

I don't think you can make that necessary that characterization. We believe there is value here in these assets that may be as much as 100 basis points on a cap rate basis between where we can buy them considering that we have to accomplish this value-add versus fully stabilized assets. I might add that one of the reasons that we like the value-add component of our business is, as opposed to development the time line to get into that value is relatively short. So to the extent that it hasn't been mentioned where we are in the cycle, but we're pretty confident that we will be operating within a portion of the cycle as we accomplish its value add, it is consistent with our expectations of garnering that value.

All right. And then maybe just one last one. Are there any markets where you see a supply imbalance right now?

The markets where this is consistent with prior quarter is the markets where we see supply imbalance are markers that we have not been terribly active in. Or should I say, maybe a little finer point is, we're not operating in the submarkets within the markets where that's my concerns. It's not that we wouldn't. It is just the underwriting that has to be undertaken or the rational underwriting that will be undertaken to invest for instance in South Dallas. You have to understand the amount of new supply coming in and the probable impact on vacancy and downtime. So it's not that we wouldn't. We think that our -- we believe our rational underwriting of those risks perhaps prevents us from being able to buy where other people may be more optimistic about the time line for garnering occupancy in markets like that.

This concludes our question-and-answer session. I would like to turn the floor back to Ben Butcher for closing comments.

Thank you, everybody, for joining us today. As we mentioned in our comments earlier, we sit at a particularly attractive time. Fundamentals are strong. We have a lot of have available capital and a lot of opportunities to apply them to. So we're very excited about 2019 and look forward to telling you more about it as the year progresses. Thank you.

This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.