STAG Industrial | The Largest Public Industrial REIT Operating in its Markets | William Crooker

Good morning, yeah, thank you all for joining. I'm going to give an overview of STAG Industrial and then I will open up to questions. We're going to mix things up here; we've gone through many multiple medical office REITs, so this is I think the sole industrial REIT at this conference. My name is Bill Crocker, I'm the CFO. To my left is Matt Spenard, he's the Senior Vice President of Investor Relations and Capital Markets. STAG Industrial is an industrial owner and operator of real estate; we're a public REIT with the ticker STAG listed on the New York Stock Exchange, about $5 billion in enterprise value, a little less than $4 billion equity market cap. We pay a 5% dividend, we pay that on a monthly basis, and we've been a public company since 2011. Since that time, we've grown our dividend every year, sometimes multiple times a year. We've also returned approximately 300% total shareholder return since our IPO in 2011. We have about 400 buildings, we operate across 38 states, widely diversified. Really our focus is on cash flow, and that cash flow has resulted in, as I said, a 5% dividend but also the ability to provide income to our shareholders as well as growth, because we've got a wide opportunity set to continue to grow our company.

These properties that we want are generally big, simple buildings—on average building size about 200,000 square feet, single-tenant buildings. The reason our buildings are single tenant goes back to the investment thesis. Our CEO and Founder founded the company back in the early 2000s, as I said went public in 2011, and the investment thesis was to buy individual binary risk cash flows. Those binary risk cash flows have a higher, a higher cap rate. For example, we're buying individual buildings today at a 7% cap rate—so a $10 million building will produce $700,000 of income. The trick is, with single-tenant properties, because they're binary risk, you're either getting on average $4 per square foot in rent, or you're paying $2 of expenses. Because of that binary risk, you need to get a higher return—that's the 7% cap rate. But as you aggregate those binary risk assets into a portfolio, you've diversified the risk and you've effectively created a virtual industrial park. By diversifying that risk, you've created—we've created—value in a portfolio. We've demonstrated this several times pre-IPO and a couple times as a public company: we've sold portfolios, small portfolios, that have created contemporaneous 100 to 150 basis points of cap rate compression, so value by just aggregating those single-tenant binary risk cash flows. So that was the thought, that was the thesis—it was tested, proven. And then after that, what type of real estate should we invest in? And that's what went to industrial real estate. The thought there is big, simple buildings. As I said earlier, we're focused on cash flow. Industrial real estate is the lowest capex real estate out there—really think about it, it's a four walls and a roof. The capex load is very low. Then there's a large market of industrial real estate; we estimate about a trillion dollars of industrial real estate, and it's highly fragmented. Green Street just came out with a report that the top 20 industrial owners owned less than 10%, or approximately 10%, of the stock. So there's a lot of owners of industrial real estate that own 2 or 3 buildings. For that reason, there's uncorrelated reasons why assets are coming to market—a partnership could just break up, owner needs to put his kids through college, wants to buy a boat. Whatever that reason may be, there's an uncorrelated reason, so through cycles we see continued opportunity to acquire industrial real estate. Lastly, that was the reason to go industrial when we first started the company. We've been fortunate enough over the past five years or so to have this eCommerce tailwind as well. eCommerce has created incremental demand for industrial warehouses. Typically, industrial rents would grow highly correlated to the growth in GDP, so it goes up 1 or 2 percent a year, but now you've got this incremental demand driver of eCommerce which has allowed us to drive rents, grow cash flows, and distribute those cash flows to our shareholders. We've been pretty fortunate there, and from an eCommerce perspective, we're still early stages. Think about the percentage of eCommerce of retail sales—it's still relatively low in the United States as compared to the rest of the world.

Target market size: we estimate about $1 trillion. About half of that is single tenant, and half of that we estimate is about what we would invest in. That could exclude the top six markets where we don't find the right appropriate value—there's too much dollars chasing industrial eCommerce buildings in the top six markets, so we stay away from those markets. We invest in about 60 markets, and these are NFL cities. One of our top markets, third biggest market, is Greenville-Spartanburg. For whatever reason, our public peers have made decision rules to not invest in those markets. Greenville-Spartanburg is growing, population generally younger, it's got a BMW manufacturing plant, there's some challenges to develop certain parts of that area. For all those reasons, it's been a great industrial market. We were able to acquire assets at a 7% yield there, so it's a pretty attractive investment when you look at where some of the industrial product is trading at in the top six markets—you can see some buildings trade for 3.5% cap rates.

This is just showing the volatility of what rents and occupancy have done across various markets. You've got the top six markets which we've identified as super primary, and you get secondary and primary markets as well. What you see is that the volatility in these markets is very similar. If the volatility of occupancy and rent growth is very similar, then you would think you'd have a similar going-in yield, but that's just not the case. So we're able to have a higher going-in yield with very similar volatility with occupancy and rent growth. We're able to discern a lot of relative value by acquiring in the markets we acquire. We only acquire in about 60 plus markets, and we stop our vertical integration at the asset manager level. What I mean by that is we don't have a property management function, because by owning single-tenant buildings, the property manager generally is the tenant. For us, it's allowed us to cast a much wider net and invest in more markets without having boots on the ground and having that incremental G&A load. It's been a great opportunity when you have a tenant that's managing the property—they're managing because they treat it like it's their own. It's been working out very well for us.

The next two pages are just a lot of information—I told Matt to remove these, you did not—so this is on our website, I encourage you to look at it. I'll also take questions. This just goes through, we're a very data-driven company, we take a data-driven approach. This walks through some of that data-driven approach in terms of investing in secondary primary markets, not just super primary markets, discerning relative value. We've been very acquisitive since our IPO: we have acquired on average 25% of our float each year. This year we're right around 20% of acquisitions, and from a net acquisitions perspective, we're higher than what we've done in the last year. The risk there is that you just grow for growth's sake, and that's not what we do. We have built up our people, our processes, and our systems to look at a number of transactions a year. Last year we looked at 286 transactions and we closed on 1446, so roughly a 16% hit rate. Our hit rate has been right around 10 to 16% every year. The 84% that we didn't buy was solely due to price. It's very easy to be a real estate investor and fall in love with the building—you look at the building, it's pretty, it's great, and you want to buy it, and next thing you know the price goes up and up and you get attached to it. It happens with residential real estate as well, and you end up buying it and you overpay. For us, we focus on cash flow, so we have checks and balances in our underwriting. We go through all those checks and balances, and at the end, it spits out what we think is the appropriate cash flows coming out of that investment on a probabilistic basis. From there, we determine what the appropriate price to pay, and we look at a number of different factors: we look at 10-year IRR, we look at average cash flow over a 3, 5, and 10-year period, we look at average cash available for distribution over 3, 5, and 10-year period, and we look at average FFO per share over 3, 5, and 10-year period. From all those factors, that creates what we're willing to pay. To the extent that we get outbid, that's fine, we'll move on and continue to look at other buildings. Being investing in these markets—I use Greenville-Spartanburg as an example—we're one of the largest institutions investing in those markets, so we have the ability to not be the highest bidder and win on a transaction. That's because of surety of close. A failed real estate transaction can be very costly for the seller. Just think about if you're going to buy a house and the buyer before you had it under contract, they backed out—well, why they backed out you don't really know. That impacts your price. So we're often the second highest bidder and we win the transaction just because of our ability and our surety of close. We do a lot of underwriting before we even get into the bidding process. Investors, brokers know us and they know that our bid is good and we will close the transaction so long as there's not something major that comes up in diligence, like an environmental issue or something.

Page 9 is a good illustration of the volatility of cash flows. The first graph shows what a single asset cash flow is on a probabilistic basis. It has a 5-year at least 75% renewal probability—you're getting $4 of rent, when you know the 25% chance they leave, you have to pay expenses. You look at that cash flow and you need to get paid to take that risk. But when you aggregate into a portfolio, that's when you mitigate a lot of that risk, a lot of the volatility of the cash flows. You create that virtual industrial park, and that generally trades 150 basis points inside of the way you can acquire those individual assets. So you buy at a 7% cap, you can sell it for a 5.5% cap, create a lot of value there. And then the next leg is the enterprise value. When you look at all 400 of our buildings, what do those cash flows produce? Then you layer on the external growth for 10 years. You look at that set of cash flows, you compare that to any of our industrial peers—let's say on a volatility basis, it's very similar, but it's more upward sloping due to the external growth opportunity we have and not self-selecting into a handful of markets.

Page 10 is just an illustration of two portfolio sales we executed on. One was at the end of last year, where this shows a cap rate compression of 1.8%. Part of that was some market cap rate compression. This portfolio traded for about on a contemporaneous basis where we could buy assets of similar quality in the same markets at the same time about 150 basis points. That's the same thing with the 2016 portfolio, but you just had a lot more market cap rate compression there as well. We've executed these transactions, these trades, as a private company as well.