ABOUT THE EPISODE
Recently Brad interviewed the CEO of STAG Industrial (STAG) to discuss the latest earnings period (Q2-20) and the steady pipeline of opportunities.
Ben Butcher has served as STAG's CEO, President and Chairman of the Board of Directors since July 2010. Prior to that he oversaw the growth of the predecessor business, serving as a member of the Board of Managers of STAG Capital Partners, LLC, STAG Capital Partners III, LLC, and their affiliates from 2003 to 2011. Butcher holds a Bachelor of Arts degree from Bowdoin College and a Master of Business Administration degree from the Tuck School of Business at Dartmouth.
- Logistics has been safe during COVID. STAG has a 98% rent collection and twice as much leasing in 2Q as 1Q
- STAG regards Greenville-Spartanburg in South Carolina as a top market. Economic fatality and lack of institutional interest in the area have provided a few attractive opportunities
- STAG has 90mn sqft and 15mn sqft coming up in the next few years. Book publisher lease in Maryland and GSA lease in New Jersey are resolvers for the downtime performance
- STAG has 43% of its portfolio related to e-commerce, mid-teen for dedicated e-commerce
- STAG’s valuation is at 13 P/FFO, below its peers’ 17 P/FFO. Mid-single digit FFO growth will drive up the valuation
- STAG has a cost of capital disadvantage to enter gateway markets, but there are plenty of assets in fragmented smaller markets. STAG will continue to look across mid-market for premium return
- STAG pays monthly dividends for retail investors. Since its IPO, the company has successfully lowered its payout ratio while growing its dividend yield
BRAD THOMAS: Hello. This is Brad Thomas with iREIT, and I'm back here again with another CEO Roundtable discussion. Today I'm honored and pleased to have Ben Butcher, the CEO of STAG Industrial, ticker symbol (STAG), here on the show. Good to see you this morning, Ben.
BEN BUTCHER: Good to see you, Brad - albeit virtually, but still good to catch up.
BRAD THOMAS: Great. You know, I got a little casual today. Actually, I had a t-shirt, but I decided to dress up a little bit with a shirt I had in the car. But anyway, thanks for joining us here, under these conditions. I know we spoke again in the first quarter - and now we're into second quarter - time flies. This summer has certainly flown by, but can you give us a high level of how STAG has performed in the second quarter?
BEN BUTCHER: Yeah, well like many of our industrial peers, you know - the Logistics business, is considered an essential service. So, our sector has been relatively - as unaffected as anybody can be during this time. But as always, we've had the tailwinds of e-commerce helping us along - and the pandemic accelerated the move towards online shopping - and for companies getting ready for the world that's going to have more online shopping. So, we've seen a tremendous uptick in leasing activity in the second quarter. I think we did, probably, twice as much leasing, or more, in the second quarter - as we did in the first quarter. And so, we collected, I think, 98% of our rents in the second quarter.
We recently announced - obviously, last couple of days - a 1.0 million square foot lease in Maryland. That was not to an e-commerce tenant, but there were e-commerce tenants researching the building at the same time. So, e-commerce has been a big driver of the industrial business – it’s a good business to be in - and will be for some time.
BRAD THOMAS: Yeah. I saw that news yesterday on the 1.0 million square feet: I think that was a publisher, if I'm not mistaken.
BEN BUTCHER: Yup.
BRAD THOMAS: So, good to see that. I did flip through the latest Investor Deck, and I see that you have included some of your top markets - and one of those, of course - as you know - is where I'm at right now: in Greenville-Spartanburg, South Carolina - one of your top markets. Obviously, as a developer for about 20 years here, I know that market well. I built for one of the BMW suppliers when they came into the market, but I'm just curious, what's your take on the Greenville-Spartanburg market?
BEN BUTCHER: Well, as you know, one of my favorite terms, "agnostic" - as we tend not to overly favor any one market. But we have been very active in Greenville-Spartanburg because it's a great market for us. We're able to find good, functional buildings, with good tenants, and buy them at good returns, with really good long-term prospects. So, it's the economic vitality of the area, combined with probably some lack of institutional interest in the area - created an atmosphere where we could find some - quite a few good transactions, to acquire. And I think we're maybe number three on our overall markets. Gramercy - before they were bought by Blackstone - it was one of their largest markets as well. Again, reflecting the amount of opportunity that we see in that market.
BRAD THOMAS: Yeah. So, you've been able to diversify quite steadily since your IPO a number of years ago. How does that translate into your retention? Looks like you've smoothed out a lot of this retention. Of course, we reported on your company since early listing - and you had some lumpy periods of retention - but looks like you've been able to smooth that out.
BEN BUTCHER: Yeah - obviously, as the sample sizes get bigger, you would expect the variability of the numbers to get smaller. We're now over 90 million square feet. We probably have on the order of 15 million square feet coming up a year - it's really in the close in years. And so, the fact that the numbers have gotten smoother, is expected. But our numbers this year will be down a little, ‘cause we had two 1.0 million square foot tenants that both were vacated. And so, that affects retention numbers. But as we just talked about, that book publisher in Maryland is a no downtime renewal. So, there is some free rent involved, which is fairly typical in a tenant of that size. They have to do the fit out on the building, but that was a building we either rode somewhere between 12 and 18 months of downtime, so the non-retention was - by projection - was going to be pretty painful, but the reality is that a no downtime renewal, with a very strong credit tenant, was a great result for us, and far exceeded our expectations.
The other million-footer we have is a GSA lease up in Burlington, New Jersey at Exit 6A of the Jersey Turnpike in a very, very, very dynamic market. We have multiple, full-building users pushing around at occupying that building - that lease with the GSA runs out at the end of the year. They haven't occupied that building for some time. But that's an opportunity - again, we think will dramatically outperform our expectations. We recently completed, as you probably know, our first speculative development in that same market. We had very close to, if not double-digit return on cost on that Greenfield development. So again, far exceeding our expectations, we're thinking somewhere between 7% and 8% return on cost. And so that market is - by those two accounts and other accounts - is a very strong market. And so, we're expecting again, to outperform the result in the GSA building.
BRAD THOMAS: Yep. Well, I also noticed in your latest Investor Deck - and this number really stuck out - you have 43% portfolio related to e-commerce. Is that a number that you have intentionally targeted? Or where do you see that number today?
BEN BUTCHER: Well, 43% is the number of tenants who occupy our buildings who are doing some level of e-commerce within structure. I think the number of dedicated e-commerce facilities - it's a lower number - somewhere in the mid-teens, I think. But you're seeing e-commerce as a percentage of retail go from the low to mid-teens, to the mid-teens - and projections are obviously continuing up from there. If you look at some of the European markets and stuff like that: the numbers are higher, and certainly the pandemic has accelerated that trend. And I think nationally, the leasing at the margin has been certainly - way more than 50% has been e-commerce related, in the last quarter or so. So, I think you'll see that number continue to trend up, as online shopping continues to grow, and the development and finishing out of supply chains is continued by these e-commerce companies.
BRAD THOMAS: Yep. So, looks like you've got - and again, referring to your deck again - you've got opportunity sets span 60 markets. So, what is that opportunity set - and the pipeline - look like for STAG? I know you intentionally went West Coast. Are you still pursuing activities out West? What is your focus model?
BEN BUTCHER: We're - again - use that word, “agnostic.” We're really paying attention to about 60 to 65 markets that have - we think - enough mass to be fungible, so that if you have a building there, you can find tenants, etc. And so, those are markets that have more than 25 million square feet of functional industrial real estate in them. Obviously, they range up to the very big markets like Chicago, L.A., New Jersey, etc., which are a billion plus.
But there are certainly functional markets down in the 50 million square foot range where we're able to find good opportunities. So, we'll continue to look across all those markets. We certainly don't mind buying a building in Ontario, California, or in Oakland, or in some of these hotter markets, but we're on it. We're not going to sacrifice our returns in order to do that. So, it's more likely that our activity will continue to center around, sort of, the middle markets - markets say, 15 or 20, through 50, is probably where a lot of our activity will occur.
BRAD THOMAS: Great. Again, we've covered STAG since the IPO.
BEN BUTCHER: Well, for 10 years now, Brad.
BRAD THOMAS: Yeah, I know. (laughs) And so your valuation has always been below the peers. I know you've been able to close the valuation gap some, but how do you continue to close that gap? Right now - again, referring to the deck: 17.7x multiple, based on FFO peers' 30.8x. So how do you continue to close that valuation gap?
BEN BUTCHER: Well, I mean, I think first and foremost is performance. So, I think the thing that investors are most concerned with is FFO per share growth. And we've done some things in the past that probably inhibited our FFO per share growth. We put out an Investor Deck at the end of last year, which showed a pretty clear path, this sort of sustainable - low to mid-single digits FFO per share growth, going forward. A combination of what we've always done: external growth, but also growing internal growth power from the large portfolio, much of it with in-place contractual rent bumps - as well as our portfolio in general, I think, is slightly below market. So, continue to have rent spreads on rollover.
So, a combination of factors, and also scaling. We've always talked about the fact that we're a very scalable business, that we don't need a lot of extra people in order to continue to grow the portfolio. We're in a little over 90 million square feet now. Looking forward to crossing that 100 million square foot threshold. The pandemic is probably gonna keep us from doing it in this calendar year, but certainly early in next calendar year, I think we'll probably cross that threshold.
BRAD THOMAS: Yep. And how are you able to - given your cost of capital today - and again - you're not as low-cost as many of your larger peers - how do you compare in terms of acquisitions? Are you able to go into some of these gateway markets at all - to compete with those more trophy assets?
BEN BUTCHER: Yeah, we're able to go in, but our cost of capital makes it harder for us to compete on. If everybody wants to buy a 200,000-foot building in Ontario, California, with a 10-year lease with investment grade credit, we're not going to be competitive on that. Now, some of our peers may decide that's something they want to buy, and their cost of capital allows them to buy at an accretive number. But we're very cognizant of where the level of accretion that we're looking for, exists. And so that keeps us - there might be a deal out there where there's some misunderstood credit issue, or there's something where our underwriting - we can glean that return, but we can't kid ourselves: we do have a cost of capital disadvantage. And so, going and competing head to head for trophy assets in gateway markets is probably not a good allocation of resources for us.
The good news is there's plenty of assets out there - this widely fragmented industrial market - lots of small sellers. We're still able to go out there and find those assets that will deliver the returns that we want to deliver to our shareholders.
BRAD THOMAS: Yeah. Well, last thing I want to touch on Ben: I know your company, and I'm sure you personally, have always really been interested in the retail investor, as evidenced by the fact you pay monthly dividends. And a lot of my followers and subscribers really resonate around those companies that pay monthly dividends - but safe monthly dividends. So, you've been able to reduce that payout ratio and grow that dividend. So, can you talk a little bit about your dividend policy, and how you've been able to really balance those two?
BEN BUTCHER: Yeah. So, we started off - at the time of the IPO, we had a very high payout ratio, and a high dividend rate, which was necessary to have a good, effective initial public offering. We've since - for a couple of years, we tried to grow the dividend, commensurate with our FFO per share growth, basically - and keeping the payout ratio high. We made the conscious decision to limit the growth of the dividend on an annual basis - still grow it every year - but limit the growth as we drove that payout ratio down. We've been successful in doing that. We'll continue to be able to do that. When we get down to something around 80% of cash available for distribution, we'll go back to increasing the dividend at a higher level, more commensurate with our FFO per share growth.
BRAD THOMAS: Well, Ben, I wanted to thank you for your time today, and checking in with us. Looks like another great quarter. And obviously, you've been able to manage through this pandemic quite well, so - glad to see you're doing well.
BEN BUTCHER: I think one of the great things about this pandemic is we were in pretty good shape in terms of being able to work from home, having the systems in place. I've been extraordinarily heartened by how effective the team has been - working from home. I do - like many other CEOs - share concern about engagement and culture, as this drags on. But we're doing everything we can to keep the team engaged - as I said, they're doing a great job - and to maintain that culture - which is - I think, over time - will be a big differentiator in our performance versus our peers.
BRAD THOMAS: That's great to hear, Ben. Well, listen, I appreciate it again. Thanks for your time. And we'll see you again soon.
BEN BUTCHER: Thank you, Brad.