STAG Industrial, Inc. (STAG) Earnings Call Transcript & Summary

Greetings. Welcome to the STAG Industrial, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Steve Xiarhos, Vice President, Investor Relations. Thank you, Steve. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2026 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.stagindustrial.com, under the Investor Relations section. On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecast of Core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters. We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our Chief Financial Officer. Also here with us today are Mike Chase, our Chief Investment Officer; and Steve Kimball, our Chief Operating Officer. We're available to answer questions specific to their areas of focus. I'll now turn the call over to Bill.

Thank you, Steve. Good morning, everybody, and welcome to the third quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to discussing the third quarter 2026 results. The third quarter marked the continued improvement in industrial fundamentals with national vacancy rates down since last quarter. Net absorption totaled approximately 75 million square feet nationally, the highest quarterly figure since early 2023 and has now topped 69 million square feet in each of the last 2 quarters. Through 9 months, market has absorbed more than 186 million square feet, a pace we have not seen since 2022, and non-coastal markets drove 80% of year-to-date absorption. New construction remains disciplined. While development starts are up, product under construction totals less than 2% of existing inventory with much of it already committed through pre-leasing or build-to-suit agreements. We are seeing broad-based demand primarily from 3PLs, hence manufacturing and data center-related tenants. We have now leased 2.5 million square feet to data center related tenants since the start of 2025. This data center-related leasing activity accounted for 26% of all of our new operating portfolio leasing during that same period. The table is set for us to see upward pressure on rent growth in many markets as leverage gradually shifts back to the landlord. We expect our market rent growth for next year to be in the range of 2% to 4%, an acceleration as compared to the 1.6% market rent growth expected for 2026. Geographically, the strength has been most pronounced in the markets where STAG is concentrated. Acquisition volume for the third quarter totaled $107.9 million. This consisted of 2 buildings with Cash and Straight-Line cap rate of 6.9% and 7.2%, respectively. Subsequent to quarter end, we acquired 1 building for $55 million at a Cash and Straight-Line cap rate of 6.7% and 7.1%, respectively. In terms of our development platform, we have 7 buildings or 1.8 million square feet of development activity that is not in service as of the end of Q3. These buildings are in various stages of development and have an expected stabilized yield of 7%. We executed 2 development leases this quarter, totaling 69,000 square feet. The first was a 47,000 square feet lease at our Resource Drive building in Reno, bringing that building to 62% leased. The other was for 21,000 square feet at our Piedmont Commerce Street building in Charlotte, bringing that building to 100% leased. With that, I will turn it over to Matts who will cover our remaining results and guidance for 2026.

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.66 for the quarter, an increase of 1.5% as compared to last year. Net debt to annualized run rate adjusted EBITDA was equal to 5.1x, while liquidity stood at $546 million. During the quarter, we commenced 30 leases across 3.6 million square feet generating Cash and Straight-Line leasing spreads of 23.8% and 35.7%, respectively. Retention for the quarter was 90.3%. Same-store cash NOI grew 3.5% for the quarter and 3.9% year-to-date. Year-to-date same-store cash NOI growth of 3.9% includes approximately 30 basis points of benefit related to a single tenant whose rent was unpaid as of the third quarter of 2025 and substantially collected in the fourth quarter of 2025. The benefit reverses in Q4 and we expect full year same-store growth within our guidance range, which we revised upwards since our last earnings call. Moving to capital market activity. As discussed on our last call, we did repay the $50 million private placement note fee, which matured on July 1. Also mentioned on our last call in July, we combined our Term Loan A and F, both of which were [indiscernible] march of 2027 into a single $350 million term loan returning January 2032. The swap fixed rate is 3.53% until March 2027 and 4.79% from then on until maturity. We also repriced our revolver in all of our term loans, saving 5 basis points across our [indiscernible] debt. As of today, the company has total forward equity net proceeds $70 million available to settle at our discretion. We're pleased to announce that in August of this year, STAG received an investment grade rating from S&P Global Ratings. S&P assigned a rating of BBB to STAG with a stable outlook. The company also maintains an investment-grade rating of BBB with a stable outlook with Fitch and an investment-grade rating of Baa2 with a stable outlook from Moody's. Moving to guidance. We have made the following updates. Average same-store occupancy guidance has been increased to a range of 96.75% to 97.85%, an increase of 25 basis points at the midpoint. Cash same-store growth guidance has also been increased from a range of 3% to 3.5% to a range of 3.5% to 3.75% for the year. This increase is driven by the upward revision of expectations and lower-than-expected cash credit loss. We have narrowed the range of expected acquisition volume to a range of $530 million to $600 million. We now expect to stabilize capitalization rate range between 6.3% and 6.4%. G&A guidance has been increased to a range of $56 million to $57 million. These guidance changes resulted in an increase in [indiscernible] guidance to a range of $2.64 to $2.66 per share, an increase of $0.02 at the midpoint. 2026 guidance can be found on Page 21 of our supplemental package, which is available in the Investor Relations section of our website. I will now turn the call back over to Bill.

Thank you, Matts, and thank you to our team for their continued hard work and achievement towards our 2026 goals. We will finish this year ahead of our initial budgets and are well positioned going into 2027. With that, I will turn it back to the operator for questions.

[Operator Instructions] [Audio Gap].

[indiscernible] If I missed this, but did you discuss where you think rent spreads are coming in and maybe give us an update on progress on 2027 expirations to date? I know you used to give this metric in the press release.

Yes. Craig, yes, we didn't include that, but I can give an update now. We're about 40% through our 2027 leasing plan. If those spreads on the 40% were 12% cash rollover spreads. The one nuance there is almost all of our fixed renewal items are in that 40%. So when you take those out, the spreads on that 40% was 17.5%. We expect leasing spreads next year to be around 15%.

Okay. That is helpful. And I know you guys I'm asking for 2027, not going to get greedy and ask for 2028. But a lot of questions I'm getting are just -- you guys and some of your have talked about the sort of mid- to high teens spread for next year. Can you just walk us through the math or how we should think about maybe a normalized rate of decel or where like '28, '29 could be from a rent spread perspective on a cash basis? And just kind of walk us through the math and what that could look like.

Yes. I mean do you want to go out to '30 and '31 or no?

If your crystal ball is that good, go for it.

No, I understand the question. The way we look at it, I mean, with moderate market rent growth, we're probably in the low double digits to mid-double digits of leasing spreads as you kind of move out to '28 and '29. I mean it kind of wouldn't say it bottoms out in '27, but it should be pretty steady from here on out.

Our next question is from Nick Thillman with Baird.

Maybe I wanted to comment on -- get your thoughts on the updated deployment strategy. Obviously, the Board is authorizing the buyback here. As you look across acquisitions, with the interest rate rises. Are you seeing more opportunities there? Or do you see opportunity on the buyback? I guess, weighing all the buckets you can pick at where are you seeing the best opportunity to deploy capital is at?

Yes. It's interesting, Nick. I mean, it changes. The good thing is the buyback, it's another tool in our toolkit here. So when that's the best use of capital, we'll deploy it to that. And if we can find stabilized acquisitions at higher yields that we like those assets in those markets, we'll deploy it there. And historically, or at least in the past year, 2 years, we've seen developments has been opportunity to deploy capital. Right now, we're -- and those developments are yielding 7% plus and build-to-suits a little bit inside of that. And you saw we were able to pick off some nice acquisitions in -- in this quarter, I think those came in at about a 6.9% cap rate. So we'll look across all those opportunities. And frankly, if none of them are what we view as a good opportunity to put capital, and we won't do any of it. So we've done a good job of allocating capital in the past, and this just gives us another another tool to use if we see that as the best opportunity.

And then maybe for my follow-up, just on the overall development leasing and the progress you're seeing at some of your projects. I believe you guys underwrite 12 months post completion for lease up for a lot of these projects. So maybe just some of the bigger ones, how discussions have progressed on that front? And where the overall tenant mix and how far along we are within the pipeline on executed deals?

Yes, I can pass it over to Steve to walk through the details there. But I will say our disclosure have developments that we've placed in service that are well within the 12-month lease-up. So I think that that's something that needs to be factored into when you look at the progress on developments.

Yes. Thanks, Bill. Thanks, Nick. Probably get a few questions on the development side to [indiscernible] in a little bit first. We've kind of this has become a core part of our business with over 100 million annual starts, and we expect that to trend up as we go forward. So if you're looking at Page 10 and 11 of the supplemental, we're tracking over $500 million of investment in 16 buildings, and we spread that out across 11 markets and with 20% plus in build-to-suit category. So -- and as you too were just mentioned, we do underwrite 12 months of downtime for the spec construction. I think that's why Bill directed you did a couple of deals that we have stabilized and put into service as of September 30, and those 2 are obviously 100% occupied. If you put those together with the assets that we're working on right now that are complete but not in service, that bring that occupancy number up a little higher to like 37%. But on the 1.8 million square feet as a total that we have active projects to work on, let me just walk you through them quickly. In the [indiscernible] construction side because I think there's some good news there. We're in Kansas City with 188,000 square foot deal. That's a 4% vacancy market, and we've had excellent activity on that, Nick. So we feel very good about that project. Dallas, that's a build-to-suit for 343,000 square feet. So construction is on [indiscernible] and, we expect that delivery to be smooth. The third project is Phoenix. And we're only breaking ground in Phoenix right now and just starting that construction. But it's a 184,000 square foot project in West Chandler, which is just off the I-10 and the Phoenix dynamics of that market continued to improve with vacancies moving down closer to 9%. They were a little bit higher prior to that. So there's a lot of activity in Phoenix, and we feel really good about those projects. So the under construction bucket, 48% leased through 2027 deliveries, and we think we'll lease up and feel comfortable with that 12 months of downtime. When you move to the more highlighted section, the complete not in service, we're really looking at three markets. I think the first property that's listed there is Resource Driven only has 28 000 square foot left lease there. That's currently being demised with office built out, and we expect that will be leased up pretty quickly. You move down to Reno, the Mt Henderson building, the 284. And candidly, that's the one project that probably sticks out that has the most leasing risk right now. The Reno market when it comes to pure distribution fulfillment uses and the submarket where the North Valleys has been slower. Now the good news there is the trend is that vacancy is coming down, absorption picked back up in the fourth quarter of '25 and has been consistently positive, but we do have some leasing challenges in the Reno North Valleys market as the traditional fulfillment logistics users have not pushed back out to Reno. So we do have activity there. We've had activity since we delivered it. We just haven't landed those deals. They tend to be multi-market opportunities and there's a lot of competition. Moving down to Charlotte. Charlotte is on the list here. But remember, that was a 2-building -- 2-building development. The first building leased within 7 months. We did 4 leases in that building, just systematically leased it up. We are very active on the building that shows here the 200,000 square feet, and those leases, you can expect will come in at 40,000 to 50,000 square foot leases, and I would expect we'll have 3 or 4 leases to lease up that final building. When you put the tubings together, we should average 12 or 13 months of downtime to stabilization. So feeling good about that market and the progress that we have in Charlotte. And then the large project that really jumps off the page is our 500,000 square footer in Louisville. Again, a very healthy market of 5.9% vacancy. We're in the right part. We're in the right submarket, and there's been a lot of very positive activity in that market with some of the competing buildings being taken down, and we are active as well with prospects for that building. So in general, we feel pretty good about the complete not-in-service portfolio.

Our next question is from Dave Rodgers with Raymond James.

I wanted to ask about the step-up in earnings from 3Q to 4Q. It's a pretty strong increase sequentially for this late in the year. So was leasing just well ahead of expectations? Is the business just performing better than anticipated? And then you mentioned the same-store kind of slip between 3 and 4Q. Can you quantify kind of what that looks like from the last year?

Yes, absolutely, Dave. It's Matts. You're right. If you were to take a look at the midpoint of our guidance, we would expect the step up in [indiscernible] for the fourth quarter. One of the drivers is the fact that what we acquired this quarter occurred literally in the last week of September. So you had a full quarter of economics on the 6.9% cap rate deals. And then the same-store, right? We increased occupancy, credit losses trending much better than we had initially projected in February. We did moderate our expectation of credit loss in the last call, and we continue to outperform there. Those are the two big drivers. And was there a second part to your question?

You had mentioned that there was a same-store NOI kind of impact from the tenant last year. I don't know if there's going to be a bigger impact? Or what's that look like from a quantification standpoint?

Yes, absolutely. So the simple answer is cap same-store is 3.9% year-to-date. And if you adjust the timing, which I'll walk into a second, that 3.9% would be 3.6%. So just to kind of back up and reframe what occurred. The tenant last year in the third quarter was affiliated with the first brands bankruptcy. We moved them to cash basis. There was kind of a disruption in communication. They're domiciled in Europe. They did not pay rent in the third quarter. They fully paid the third quarter rents and the current rent fourth quarter. So no payment in the third quarter, double payment in the fourth quarter. Again, on a calendar year basis, no impact. But in our third quarter, Q3 artificially high due to the favorable comp, and it would reverse in the fourth quarter. I think really the story here, Dave, is our 3.9% year-to-date, if you accounted this timing mismatch in 2025, 3.9% is 3.6%, which is in the -- basically the midpoint of our updated guidance. Does that clearly answer that question?

Yes, I got that. That's helpful. And then just a follow-up. I think Nick asked a good capital question earlier. But I'm curious if you change that math instead of just saying, where do we put money, but where can we raise money have you guys kind of looked at the convert market or something to maybe lower initial borrowing costs, take advantage of the backup in cap rate that convert market probably lets you equity in the mid -- low to mid-40s, which is above the 39% where you seem comfortable. So curious if maybe changing that equation of how do we raise money maybe more accretively today to take advantage of this backup in [indiscernible] that could help you drive growth even more. Is that something you're thinking of?

Yes, Dave, we valuate everything. We're obviously very familiar with the convert market. The good news is, look, we have a revolver balance of $500 million. We have $70 million of unfunded equity. We retained $130 million of cash after dividends paid. So we don't -- we don't need additional count right now. We would raise capital in the sense that we saw opportunities to deploy it. But where we are right now with where our balance sheet is, our liquidity and our retained cash flow, we're in a very comfortable spot capital wise.

Our next question is from Michael Griffin with Evercore ISI.

Maybe just starting on the acquisition environment. I saw the cap rate guidance ticked up marginally. I imagine that was largely due to the acquisitions in the third quarter, but have you gotten a sense if you've seen any repricing or re-trading yields, just given the volatility in interest rates recently? Curious if higher seller expectations have moved, the bid-ask spreads widened? Any additional color there would be helpful.

Michael, this is Mike Chase. I appreciate the question. I mean, it takes a little while for the volatility to push the market, but there has been some indications of higher re-trades and general repricing on deals that are coming to market. I'm not -- the cap rate -- the movement in cap rates we'll take a little bit to flush through the system. But I would say so far, I would say it's probably somewhere in the 25 basis points to 30 basis points based on kind of the re-trades we've heard about. Some of those re-trades are happening and some the sellers are saying no and either waiting to see what happens with the capital markets and the kind of market volatility or buyers are pushing through. So we have seen a few -- a few re-trades here and there or hearing about them.

Yes. We expect it to stabilize all else being equal, 25 basis points to 35 basis points higher than what it was this year. And the reason for the lag generally is 1031 buyers hold the pricing for a little bit. And that usually, as Mike was saying, flushes through within 3 to 6 months. And with respect to our guidance, yes, really, our guidance was was moved and represented very little acquisition activity for the rest of the year just due to the uncertain capital markets environment.

I certainly appreciate the context there. And then, Bill, just going back to your comments in the prepared remarks about continued improvement in industrial fundamentals. As you talk to your big customers, your big tenants out there, I mean, what are they saying is the reason for this increased demand? Is there more certainty in their business? And do they just feel more confident about the macro outlook and the need to lease space? And then just also if you could add anything whether proposal activity, decision time lines shrunk. Some commentary around that would be great, too.