Stag Industrial, Inc. · NYSE:STAG
Stag Industrial — Investor Day (June 2015)
67 slides from Stag Industrial's investor day presentation, June 2015
Slide 1: Investor Day – June 2015
STG INDUSTRIAL INVESTOR DAY — JUNE 2015
Slide 2: Legal Notices
LEGAL NOTICES The following presentations, together with other statements and information publicly disseminated by STAG Industrial, Inc. (the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Se
Slide 3: Agenda
AGENDA I. INTRODUCTION 1 Geoffrey G. Jervis - EVP/Chief Financial Officer II. INVESTMENT THESIS 4 Benjamin S. Butcher – Founder/Chief Executive Officer & President III. ORIGINATION PLATFORM 14 Stephen C. Mecke – EVP/Chief Operating Officer IV. UNDERWRITING – MARKETS & BUILDINGS 23 David G. King – EV
Slide 4: Investment Thesis
INVESTMENT THESIS Benjamin S. Butcher Founder/Chief Executive Officer & President 4
Slide 5: History of the Investment Thesis
HISTORY OF THE INVESTMENT THESIS Probabilistic assessment of RE risk and a focus on cash flow were influential in developing the STAG thesis Single tenant net lease mortgage transactions were largely confined to the CTL arena The ‘binary risk’ associated with transactions that did not meet CTL
Slide 6: Focus – Single Tenant Industrial
FOCUS – SINGLE TENANT INDUSTRIAL Attractive Characteristics of the US Industrial Market Large - $750 billion to a trillion dollar market (approximately half single tenant) but with “bite-sized” assets Non-homogenous assets – relatively low correlation among individual transactions Fragmented
Slide 7: Cash Flow Isn't Everything, It's the Only Thing
“CASH FLOW ISN’T EVERYTHING, IT’S THE ONLY THING” Imperfect Information Renewal Future Market Capital Needs Tenant Credit Market Rent Probability Conditions Virtually all the factors that will influence future cash flow derived from owning a RE asset are subject to analysis These factors must be
Slide 8: Modeling Exposure to Market / Downtime
MODELING EXPOSURE TO MARKET / DOWNTIME EVERY MONTH PREDICTED VACANCY CREATES EXPOSURE TO MARKET Current Tenancy Probability of Vacancy Exposure to Market Probability of Vacancy Exposure to Market Probability of Vacancy Exposure to Market Vacancy Can Occur From: Credit Default Probability Non-Ret
Slide 9: Term as the "Holy Grail"
TERM AS THE “HOLY GRAIL” BB 12yr Purchase Price $5,000,000 Free Cash Flow Rent $3.00 $500,000 Market Rent $3.00 Contractual Yearly Rent Increases 2% Cap Rate 6.0% $400,000 SF 100,000 $300,000 $200,000 Free Cash Flow $ Building assumed to be well located, modern structure $100,000 subject to projec
Slide 10: Mispriced Assets?
MISPRICED ASSETS? BB 7yr BB 12yr Purchase Price $5,000,000 $5,000,000 Free Cash Flow Rent $3.00 $3.00 $600,000 Market Rent $3.00 $3.00 Contractual Yearly Rent Increases 2% 2% $500,000 Cap Rate 8.0% 6.0% SF 133,200 100,000 $400,000 Free Cash Flow $ $300,000 Buildings assumed to be the $200,000 same
Slide 11: Cumulative Cash Flows
CUMULATIVE CASH FLOWS Cumulative Free Cash Flow $8,000,000 $7,000,000 $6,000,000 $5,000,000 Free Cash Flow $ $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year BB Credit Tenant - 7yr Lease BB Credit Tenant - 12 Yr Lease Rigid Decision Rules Do Not
Slide 12: Diversification and Simulation
DIVERSIFICATION AND SIMULATION Individual binary risk assets have high potential volatility in cash flow Like a multi-tenant industrial park, a portfolio of single tenant industrial assets reduces that risk Single asset risk/volatility assessed “Monte Carlo” simulation Portfolio diversificat
Slide 13: STAG Evolution
STAG EVOLUTION Started in 2003 – A model idea scratched on the back of an envelope Focus continues to be on probabilistic risk assessment and the generation of cash flow The STAG team is expert in: Sourcing transactions Closing transactions Determining model inputs Operating our portfo
Slide 14: Origination Platform
ORIGINATION PLATFORM Stephen C. Mecke EVP/Chief Operating Officer 14
Slide 15: Deal Process Flow Chart
DEAL PROCESS FLOW CHART OFFER CLOSING & TRANSACTION INPUT PRICE & DUE ASSET MODEL SOURCED VALIDATION TERMS DILIGENCE TRANSITION NEGOTIATED INVESTMENT COMMITTEE APPROVAL 15
Slide 16: Investment Committee
INVESTMENT COMMITTEE BENJAMIN S. BUTCHER CHIEF EXECUTIVE OFFICER & PRESIDENT STEPHEN C. MECKE DAVID G. KING JEFFREY M. GEOFFREY G. JERVIS EVP/CHIEF OPERATING EVP/DIRECTOR OF REAL SULLIVAN EVP/CHIEF FINANCIAL OFFICER ESTATE OPERATIONS EVP/GENERAL COUNSEL OFFICER ASSET ACQUISITIONS LEGAL ACCOUNTING MA
Slide 17: Underwriting Assumption Validation
UNDERWRITING ASSUMPTION VALIDATION BENJAMIN S. BUTCHER CHIEF EXECUTIVE OFFICER & PRESIDENT STEPHEN C. MECKE DAVID G. KING JEFFREY M. GEOFFREY G. JERVIS EVP/CHIEF OPERATING EVP/DIRECTOR OF REAL SULLIVAN EVP/CHIEF FINANCIAL OFFICER ESTATE OPERATIONS EVP/GENERAL COUNSEL OFFICER ASSET ACQUISITIONS LEGAL
Slide 18: Origination Platform
ORIGINATION PLATFORM CHIEF OPERATING OFFICER DATA + INFORMATION ACQUISITIONS UNDERWRITING DUE DILIGENCE TECHNOLOGY SHARED FINANCIAL ANALYST & INTERN POOLS 18
Slide 19: Positioned for Growth
POSITIONED FOR GROWTH Acquisitions Years with STAG Team 12 Years 11 Years 11 Years 4 Years 2 Years 1 Year 1 Year 19
Slide 20: Deal Sources
DEAL SOURCES REAL ESTATE BROKERS PROPERTY OWNERS FINANCIAL INTERMEDIARIES Database of over 9,000 Since inception, STAG has Continuous conversations with industrial brokers closed over 325 transactions investment bankers & with a wide variety of owners business intermediaries 12 year history
Slide 21: Growth of the Pipeline
STAG GROWTH OF THE PIPELINE INDUSTRIAL $2.08 $1.88 $1.68 $1.48 $1.28 Pipeline Value $1.08 $0.88 $0.68 $0.48 $0.28 $0.08 Q2 2012 Q2 2013 Q2 2014 Q2 2015
Slide 22: 2014 Activity
2014 ACTIVITY SELECTIVITY DISCIPLINE 1,000+ 350 200 OFFERS UNDERWRITTEN 43 CLOSED CONSIDERED MADE Acquired $429 Million of Properties in 2014 22
Slide 23: Underwriting – Markets & Buildings
UNDERWRITING – MARKETS & BUILDINGS David G. King EVP/Director of Real Estate Operations 23
Slide 24: Underwriting – Markets & Buildings
UNDERWRITING – MARKETS & BUILDINGS OFFER CLOSING & TRANSACTION INPUT PRICE & DUE MODEL ASSET SOURCED VALIDATION TERMS DILIGENCE TRANSITION NEGOTIATED 24
Slide 25: Underwriting – Markets & Buildings
UNDERWRITING – MARKETS & BUILDINGS OFFER CLOSING & TRANSACTION MODEL INPUT PRICE & DUE ASSET SOURCED VALIDATION TERMS DILIGENCE TRANSITION NEGOTIATED 25
Slide 26: Three Pillars of Underwriting
THREE PILLARS OF UNDERWRITING MARKET BUILDING TENANT Healthy Tension Creates a System of Checks & Balances 26
Slide 27: Asset Management Platform
ASSET MANAGEMENT PLATFORM EVP/DIRECTOR OF REAL ESTATE OPERATIONS ASSET MANAGEMENT ENGINEERING & DISPOSITIONS & LEASING CONSTRUCTION SHARED FINANCIAL ANALYST & INTERN POOLS 27
Slide 28: Underwriting – Two Approaches by Two Teams
UNDERWRITING – TWO APPROACHES BY TWO TEAMS TOP DOWN BOTTOM UP INPUTS Market Driven Asset Driven Market Rent Quantitative Qualitative Downtime Market Rent Growth Tenant Improvements Leasing Commissions MARKET BUILDING Building Attributes Additional Capital Two Independent Teams
Slide 29: Market – Top Down Approach
MARKET – TOP DOWN APPROACH MARKET LEVEL SUBMARKET LEVEL LOCAL LEVEL Brokerage House Brokerage – Unpublished Brokerage & Primary CoStar Pending Development Research RCA Pending Vacancy Comps/”Rent Roll” in Park Demand Drivers Internal Comp Database Themes/Trends/Averages Compariso
Slide 30: Building – Bottom Up Approach
BUILDING – BOTTOM UP APPROACH BUILDING SITE LOCATION RETENTION/RELEASING Interior – Column Transportation Network “Next Tenant” Concerns Spacing, Clear Height, Building Depth, Labor Pool Market Sweet Spot Mezzanine Fit in Tenant’s Supply Anticipated Capital Costs Exterior – Access, C
Slide 31: Asset Specific Capital
ASSET SPECIFIC CAPITAL PASS / FAIL PRIMARY SECONDARY Unfixable Roof & Structure Demising Unquantifiable Parking Lot / Site Lighting Conditions Sprinkler Mechanical Systems Power Walk Away Maintaining Competitiveness, Fixing Deficiencies 31
Slide 32: Real Estate Inputs
REAL ESTATE INPUTS DISCOVERY MARKET BUILDING CAPITAL INPUTS Iterative Process is Continually Refined – Creates Constant Feedback Loop 32
Slide 33: Underwriting – Tenants
UNDERWRITING – TENANTS Kurt N. Flionis Vice President, Credit 33
Slide 34: Three Pillars of Underwriting
THREE PILLARS OF UNDERWRITING MARKET BUILDING TENANT Healthy Tension Creates a System of Checks & Balances 34
Slide 35: Tenant Assessment Overview
TENANT ASSESSMENT OVERVIEW LEADERSHIP: CO-HEADS STAG EXPERIENCE CREDIT KURT N. FLIONIS, CFA 9 YEARS RYAN E. MURPHY, CFA 5 YEARS Combined credit underwriting experience of over 17 years 1,800+ companies underwritten CREDIT GOAL: Best possible assessment of the creditworthiness of prospective an
Slide 36: Differentiated Approach to Credit
DIFFERENTIATED APPROACH TO CREDIT In-depth management calls and discussions with third party references Every single tenant is assigned a credit rating and every rating is evaluated at least on a quarterly basis Internal database with over 1,800 historical credit underwritings Proprietary Ri
Slide 37: Tenant Risk Assessment Factors
TENANT RISK ASSESSMENT FACTORS TENANT, GUARANTOR, AND NON-GUARANTOR PARENT RATING FACTORS REORG / LIQUIDATION AFFIRM / REJECT CONFIDENCE FACTORS Market position/scale Asset Size Primary/Secondary Facility Access to information both in Industry/Competition Revenue Size quantity and qualit
Slide 38: Multi-Stage Research, Review, and Refinement Process
MULTI-STAGE RESEARCH, REVIEW, AND REFINEMENT PROCESS INITIAL INPUTS INTERIM INPUTS FINAL INPUTS Public and Seller Deeper dive on Access to all Available Info Public and Private available private Information and public info Tenant Interview DUE CLOSING & TRANSACTION DECISION TO CONTRACT DILIGENCE
Slide 39: Credit Loss of Less than 0.3% Since IPO
“Diligence is the mother of good-fortune,” – Miguel de Cervantes Credit Loss of Less than 0.3% Since IPO 39
Slide 40: Tenant Assessment Key Takeaways
TENANT ASSESSMENT KEY TAKEAWAYS Differentiated Approach to Credit Highly vetted, probabilistic inputs In-depth management calls and discussions with third-party references Extensive database of historical credit underwritings Process vs. Outcome Long-Term vs. Short-term 40
Slide 41: Risk Assessment Model
RISK ASSESSMENT MODEL Rowan McFeely Vice President, Underwriting 41
Slide 42: Risk Assessment Model
RISK ASSESSMENT MODEL OFFER CLOSING & TRANSACTION INPUT PRICE & DUE MODEL ASSET SOURCED VALIDATION TERMS DILIGENCE TRANSITION NEGOTIATED 42
Slide 43: Risk Assessment Model
RISK ASSESSMENT MODEL OFFER CLOSING & TRANSACTION INPUT PRICE & DUE MODEL ASSET SOURCED VALIDATION TERMS DILIGENCE TRANSITION NEGOTIATED 43
Slide 44: Underwriting Group Structure
UNDERWRITING GROUP STRUCTURE CONTINUOUS IMPROVEMENT PEOPLE SYSTEMS PROCESSES CASH FLOW MODEL PLAYBOOK EVP/CHIEF OPERATING OFFICER 3 Pillars of Value Repeated Process VP, UNDERWRITING 20-year Horizon Imbedded QC Probability Based Expert Advice DEDICATED SENIOR FINANCIAL ANALYSTS IRR
Slide 45: The Three Pillars of Underwriting
THE THREE PILLARS OF UNDERWRITING MARKET BUILDING TENANT 45
Slide 46: Model Inputs
MODEL INPUTS MARKET 5 Inputs BUILDING OUTPUTS & 26 Inputs TENANT / LEASE SENSITIVITY TABLES 21 Inputs GENERAL 10 Inputs 46
Slide 47: Sample Industrial Cash Flow Model
SAMPLE INDUSTRIAL CASH FLOW MODEL THE MODEL IS USED TO ASSESS THE LONG-TERM CASH FLOW POTENTIAL OF AN ASSET Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Gross Potential Revenue $X $X $X $X $X $X
Slide 48: The Difference
THE DIFFERENCE PROBABILISTIC ASSESSMENT OF RISK – IMPERATIVE IN AN UNCERTAIN WORLD 48
Slide 49: Probabilistic Credit Approach
“PROBABILISTIC” CREDIT APPROACH TENANT PERFORMS DEFAULT REORGANIZATION LIQUIDATION EXPOSURE TO MARKET AFFIRM REJECT EXPOSURE TO MARKET 49
Slide 50: The Suite Effect of Credit Default Probability
THE “SUITE” EFFECT OF CREDIT DEFAULT PROBABILTY MONTH 0 MONTH 1 MONTH 2 ORIGINAL SUITE ORIGINAL SUITE ORIGINAL SUITE Probability of Vacancy Probability NEW SUITE of Vacancy NEW SUITE NEW SUITE Probability of Vacancy NEW SUITE 50
Slide 51: Standard Transaction – Exponential Suite Effect
STANDARD TRANSACTION – EXPONENTIAL “SUITE” EFFECT Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Slide 52: Sample Industrial Cash Flow Model
SAMPLE INDUSTRIAL CASH FLOW MODEL Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Gross Potential Revenue $ 786,182 $ 797,431 $ 809,012 $ 821,846 $ 835,465 $ 841,058 $ 857,479 $ 871,407 $ 885,117 $
Slide 53: Breakdown of Free Cash Flow – Gross Potential Revenue
BREAKDOWN OF FREE CASH FLOW – GROSS POTENTIAL REVENUE $1,200,000 $1,000,000 $800,000 $ Amount $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Gross Potential Revenue 53
Slide 54: Breakdown of Free Cash Flow – Collection Loss/Vacancy
BREAKDOWN OF FREE CASH FLOW – COLLECTION LOSS/VACANCY $1,200,000 $1,000,000 $800,000 $ Amount $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Gross Potential Revenue Collection Loss/Vacancy 54
Slide 55: Breakdown of Free Cash Flow – Operating Expenses (Vacancy Only)
BREAKDOWN OF FREE CASH FLOW – OPERATING EXPENSES (VACANCY ONLY) $1,200,000 $1,000,000 $800,000 $ Amount $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Gross Potential Revenue Collection Loss/Vacancy Operating Expenses (Vacancy Only) 55
Slide 56: Breakdown of Free Cash Flow – Leasing Costs
BREAKDOWN OF FREE CASH FLOW – LEASING COSTS $1,200,000 $1,000,000 $800,000 $ Amount $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Gross Potential Revenue Collection Loss/Vacancy Leasing Costs (incl. Default Legal Fees) Operating Expenses
Slide 57: Breakdown of Free Cash Flow – Capital Expenditures
BREAKDOWN OF FREE CASH FLOW – CAPITAL EXPENDITURES $1,200,000 $1,000,000 $800,000 $ Amount $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Gross Potential Revenue Collection Loss/Vacancy Leasing Costs (incl. Default Legal Fees) Operating Ex
Slide 58: Breakdown of Free Cash Flow
BREAKDOWN OF FREE CASH FLOW $1,200,000 $1,000,000 $800,000 $600,000 $ Amount $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Unlevered Free Cash Flow 58
Slide 59: Breakdown of Free Cash Flow – Plus the Portfolio Effect
BREAKDOWN OF FREE CASH FLOW – PLUS THE PORTFOLIO EFFECT PORTFOLIO EFFECT $1,200,000 $50,000,000 $45,000,000 $1,000,000 $40,000,000 $35,000,000 $800,000 $30,000,000 Single Deal - 2014 Portfolio - Unlevered $600,000 $25,000,000 Unlevered Free Cash Flow Free Cash Flow $20,000,000 $400,000 $15,000,000 $
Slide 60: Monte Carlo Analysis
MONTE CARLO ANALYSIS MARKET TENANT BUILDING 60
Slide 61: Simulation Analysis: 1000 Iterations
SIMULATION ANALYSIS: 1000 ITERATIONS % of Iterations 60% 40% Levered IRR Validation of Resulting IRR 61
Slide 62: Risk Assessment Model Takeaways
RISK ASSESSMENT MODEL TAKEAWAYS People, Systems, & Processes Constant improvement Positioned for growth Probabilistic Assessment of Risk Focus on cash flows from properties Agnostic on underwriting parameters 62
Slide 63: Corporate Perspective
CORPORATE PERSPECTIVE Geoffrey G. Jervis EVP/Chief Financial Officer 63
Slide 64: Attractive Individual Asset Returns
ATTRACTIVE INDIVIDUAL ASSET RETURNS Single Tenant Example $1,200,000 $1,000,000 $800,000 Free cash Flow ($) $600,000 $400,000 $200,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Investment Horizon - Years Free Cash Flow 10 Year IRR: 8% Unlevered, 10%+ Levered 20 Year IRR: 8% Unlevered, 10
Slide 65: Portfolio Construction is Value Add
PORTFOLIO CONSTRUCTION IS VALUE ADD Diversification From Portfolio Construction Leads to Dramatically Different Risk Profile While Maintaining Returns 65
Slide 66: The Power of Acquisitions
THE POWER OF ACQUISITIONS Typical Transaction Accretion Analysis Single Asset Single Asset $ Invested $10,000,000 Equity $6,000,000 Unlevered IRR 8.00% Share Price $21.50 Capitalization New Shares 279,070 Equity Cap % 60.00% Debt Cap % 40.00% FFO $630,000 Cost of Debt 4.00% FFO/New Share $2.26 Addit
Slide 67: STG
STG INDUSTRIAL