Earnings Call: Q4 2020

Feb 11, 2021

Greetings. Welcome to STACK Industrial's 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Matt Spennard, Vice President, Investor Relations. Please go ahead. Thank you. Welcome to SCAG Industrial's conference call covering our Q1 2020 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at staginvestor.com under the Investor Relations section. On today's call, the company's prepared remarks and the 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 forecasted core FFO, same store NOI, G and A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends as well as other matters. We encourage all of our listeners to receive a more detailed discussion related to the 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 informational package available on Lumpy's website. As a reminder, forward looking statements represent management's estimates as of today. SAG Industrial assumes no obligation to update any forward looking statements. On today's call, you will hear from Ben Butcher, our Chief Executive Officer and Bill Crooker, our Chief Financial Officer. Also here with us are Steve Mekke, our Chief Operating Officer and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus. I will now turn the call over to Ben. Thank you, Mats. Good morning, everybody, and welcome to the Q4 earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about our Q4 results. 2020 was a challenging year for our company, our country and the world as a whole. Despite the ravages of a global pandemic, significant social unrest and a contentious political climate, we're able to efficiently and successfully navigate the year. I want to thank our team for the excellent work they have done in facing up to these challenges. Through their efforts, we're able to meet our original pre pandemic financial guidance for core FFO per share and exceed on same store cash NOI. We also finished the year with our largest acquisition quarter in the company's history. As we begin 2021, there are reasons for optimism as we move forward towards a new normal. Highlighting this has been the development and initial distribution of multiple highly effective vaccines. Tempering that optimism has made an emergence of virus variants and mutations. These 2 will be overcome as we move forward to that new normal. In our corner of the world, industrial real estate, we continue to enjoy strong tenant demand and positive fundamentals. E commerce continues to be a significant incremental demand driver and can reasonably be expected to continue for the foreseeable future. Online shopping will continue to grow. Not surprisingly, after many years of falling vacancy, supply has finally caught up with demand for the country as a whole, albeit at heightened levels for both. As has been in the case in recent years, the excess supply tends to be concentrated in larger markets is not expected to significantly dampen prospects for rent growth. Supply demand evaluations need to be done on a market by market basis and updated periodically. These market specific evaluations are an integral part of the STAG underwriting process. In March, we paused our external acquisition efforts in order to more fully understand the scope of the pandemic and its impact on both capital markets generally and the industrial real estate sector in particular. Over the next couple of months, we observed tenant and seller behavior to try and get a sense of the new market equilibrium. During this time, the team also identified and completed internal projects in data utilization and modeling that will support our long term acquisition efforts. Towards the latter half of the second quarter, it became clear that market conditions and industrial fundamentals were supportive of a full return to our acquisition program. The pace of acquisitions accelerated in the back half of the year as we and sellers gain confidence in pricing levels and assets return to market. The 32 buildings STAG acquired in the 4th quarter for an aggregate price of $579,900,000 represent the largest quarterly acquisition volume in our history. For dollars dollars This guidance range is supported by our current $2,100,000,000 acquisition pipeline that reflects the large and attractive opportunities that we see today. 2020 was also our company's largest year for dispositions, highlighted by large granular dispositions in California and New Jersey. 7 buildings were sold during the year with gross proceeds of $279,400,000 These proceeds resulted in an aggregate disposition cap rate of 5.4%. The funds from these sales were then accretively redeployed into fungible industrial assets. Our portfolio performed exceedingly well during this pandemic year. We collected 99.6 percent of rental billings for the year. The handful of rental deferrals we granted have concluded and the repayment is proceeding as scheduled. This demonstration of portfolio resilience was at a level at least in line with the experience of our public peers. We spent a significant amount of time over the last year discussing 2 large known vacates, the 1,000,000 square foot building leased to Solo Cup in Hampstead, Maryland and the 1,000,000 square foot building leased to GSA in Burlington, New Jersey. Both lease maturities have been successfully resolved to great outcomes. The Hampstead building was backfilled to a strong credit tenant with 0 downtime occurred. The Burlington building was sold and produced outsized returns, a nominal gain of $41,500,000 at a 5.4% cash cap rate. This year, we returned to a more normalized lease expiration schedule with no large tenant lease maturities. The level of annual credit loss we expect to occur in 2020 was heightened by the onset of the pandemic and the associated economic downturn. As credit concerns moderated through the year, we were able to increase our cash same store guidance. We continue to benefit from the combination of widespread tenant demand and declining credit concerns across the portfolio. This is reflected in a more normal 2021 cash same store guidance range of 2% to 3%. Bill will discuss all of our 2021 guidance in detail, but the takeaway is that our business remains vibrant and our guidance reflects a return to more normal conditions. In particular, our core FFO per share guidance implies solid accretion supported by a defensive balance sheet and ample liquidity. With that, I'll turn it over to Bill, who will discuss our Q4 and annual operational results and our 2021 guidance. Thank you, Ben. Good morning, everyone. Core FFO was $0.49 for the quarter and $1.89 for the year, an increase of 2.7% compared to 2019 and equal to the midpoint of our original pre COVID 2020 guidance given last February. Leverage at quarter end remained at the low end of our guidance range with net debt to run rate adjusted EBITDA equal to 4.6x prior to factoring in the outstanding forward equity proceeds and 4.2x when those proceeds are included. Acquisition volume for the Q4 totaled $579,900,000 with stabilized cash and straight line cap rates of 5.8% and 6.2%, respectively. This brings our full year acquisition volume to $775,800,000 with stabilized cash and straight line cap rates of 6% and 6.4% respectively. Disposition volume for the 4th quarter totaled $155,500,000 The 4th quarter dispositions were highlighted by the sale of our GSA asset in Burlington, New Jersey for $110,500,000 at a 5.4% cash cap rate, which compares to an acquisition cash cap rate of 9.5%. This brings our full disposition volume to $279,400,000 with a cash cap rate of 5.4%. Retention for the quarter was 63.9 percent 78.4 percent for the year, which exceeded the high end of our original pre COVID 2020 guidance of 75% given last February. Cash and straight line leasing spreads were 4.9% 12.9% for the quarter and 2.2% and 8.2% for the year, respectively. Cash same store NOI grew 1.7% during 2020, at the high end of our revised guidance range provided in December and above the midpoint of 1.5% of our original pre COVID 2020 guidance given in February. We collected 99.6% of our base rental billings for 2020 and have collected 97.3% of our base rental billings for January as of today, consistent with our experience in 2020. We did not receive any new rent deferral increase in the 4th quarter. Moving to the capital market activity. In the 4th quarter, we completed a forward equity offering at $30.40 per share, which resulted in aggregate net proceeds of $276,200,000 On December 23, we partially settled the forward equity component of this transaction and received $135,000,000 in net proceeds, which were used to fund 4th quarter acquisitions. Additionally, on December 23, we fully settled the forward equity component of our January 2020 equity transaction and received $131,200,000 in net proceeds, which were also used to fund Q4 2020 acquisitions. In total, we received 266 $200,000 in net proceeds from the 2 forward equity transactions. As of year end, we have an additional 139,300,000 dollars of net proceeds available at our option to fund future acquisitions. Subsequent to quarter end, on February 5, we refinanced our $300,000,000 Term Loan G, which was scheduled to mature in April of this year, subject to 1 year extension option. The refinancing extended the maturity date an additional 5 years to February 2026. We're also able to reduce the credit spread by 50 basis points to the pre COVID spread of 100 basis points. In conjunction with the refinance of Terminal MG, we upsized our Rivala credit facility to a notional of $750,000,000 by exercising the accordion feature within our loan document. This represents an increase in revolver capacity of $250,000,000 and no change to the current maturity date. As a result of these debt transactions and including the forward equity proceeds available to us, our liquidity stands at $795,000,000 Our initial 2021 guidance can be found on Page 22 of our supplemental package, which is available in the Investor Relations section of our website. We acknowledge the continued uncertainty related to the health of the economy and we'll continue to update the market as warranted. Components of our initial 2021 guidance are as follows. Our 2021 core FFO per share guidance is in a range of $1.94 to $2 per share with a midpoint of $1.97 We expect acquisition volume be between $800,000,000 $1,200,000,000 for 2021 with an expected cash capitalization rate of 5.75 percent to 6.25 percent. We expect straight line cap rates to be 50 basis points higher than cash cap rates. We also expect disposition volumes to be between $100,000,000 $200,000,000 for 2021. We expect the 2021 annual same store pools cash NOI growth to be between 2% 3% for the year. 2021 G and A is expected to be between $43,000,000 $46,000,000 for the year. Note that this range excludes a one time expense of $2,300,000 related to the adoption of our retirement plan. We expect net debt to run rate adjusted EBITDA to be between 4.75 times and 5.5 times. With that, I will now turn it back over to Ben. Thanks, Bill. We see many reasons to be optimistic about our business as we head into 2021. There is significant momentum behind our acquisition efforts. The strength of the portfolio will continue to drive internal growth and our balance sheet is well positioned to support our business. Thank you for your time this morning. We'll now turn it back to the operator for questions. Thank you. Thank you. And our first question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your question. Yes, good morning. Ben, I was wondering if you could talk about the mix of acquisitions in the quarter, some activity in Florida and California, markets where you're not previously been that active. How competitive are those markets? Was that a driver of the slightly lower acquisition cap rate in the quarter? I think that the answer to that you're correct in your assessments, but I'll turn it over to Bill for a little more detail. To some markets we were not previously in. As you said, South Florida was one of those. An example of that market was we were able to acquire a sale leaseback portfolio with a little over 8 years of lease term. That portfolio is well below market. The buildings fit the submarkets well. And I think if we didn't have the 8 years of lease term and it was something in the order of 3 years, it would have been a much more competitive transaction. And that's the benefit of what we do. We're able to find relative value across the markets we operate in, invested in. It was a little bit of a driver as to the lower cap rate this quarter. But for the year, it was 6% cap rate, and that's what we're projecting for 2021. Yes. I think we look at the I think we look at the reduction in cap rate as a little bit of cap rate compression and probably half cap rate compression and half mix. Okay, perfect. And then you did mention 2 opportunistic sales in 4th quarter. I think you've gone in detail over the South Jersey sale. What was the other sale in the quarter? I'm sorry if I missed you saying it. It. It was a sale to excuse me, we didn't include it in the script. It was a sale to a tenant in Memphis, a significant sale, again, consistent with that overall aggregate disposition cap rate of 5.4 percent for the tenant who had a large commitment to the building, probably looking at the reduced cost of debt and decided that they would rather own the building than continue to lease it. Obviously, it was a great result for us and consistent probably with returns we've gotten from leasing the building. Okay. Thank you. The next question is from the line of Manuel Korchman with Citi. Please proceed with your question. Hey, this is Chris McCurry on for Manny here. I was just wondering if you could discuss some of your funding sources and potential lead to cap equity throughout the year. Yes. I'm going to say that we have demonstrated in the prior years that we are pretty good stewards both of deploying capital and accessing capital and have shown that we can access different types of capital. But I'll turn that over to Bill as well for a little more detail. Thanks, Chris. I mean, we have been operating the balance sheet at very low leverage in 2020 and that was partially to be defensive given the macro conditions of the market. In 2021, we're reverting back to a more normalized leverage range of 4.75x to 5.5x. And the equity will be a mix of what we've done over the past several years. It will be larger transactions supplemented by ATM, and we'll look to match fund our acquisitions as best we can. And we've been able to execute on that through ATMs and forward equity raises. Okay, got it. Just a quick follow-up. Could you discuss the bifurcation between some of your larger and smaller tenants and what trends you're seeing between those 2? The tenant demand and tenant health has been very strong throughout the pandemic and throughout 2020, which are basically the same thing. There has been certainly a trend towards larger tenant demand. The big boxes have probably a reflection of e commerce demand have been in probably we've seen more increase in demand for the boxes. It isn't so much that we've seen a drop off in some of the smaller suite sizes. And again, for us, smaller suite is generally over 100,000 square feet because of the size of the buildings in our portfolio. But there certainly has been across the markets increased demand for larger boxes. And you've seen that in the sort of the return to health for some markets that perhaps were a little challenged pre pandemic and pre this surge in online shopping such as South Dallas, Lehigh Valley, etcetera, where you have a lot of large newer buildings that were struggling to find tenants have those markets have become much healthier. Indeed, our big building, Solo Cup, which we had projected downtime of 12 months to 18 months leased up with no downtime. Again, big tenants with sophisticated needs were very active during the pandemic. Yes, makes sense. Thanks for the color. Thank you. Thank you. Our next question is from the line of Brendan Finn with Wells Fargo. Please proceed with your question. Yes. Thanks guys. I wanted to talk about cap rate trends. Are you guys expecting further cap rate compression this year? And then how have cap rates trended in your primary markets relative to those in your secondary and tertiary markets? Well, we're not active in tertiary markets as we've talked about previously. We also would further comment that cap rates are a point in time measure. They'll necessarily capture the essence of the investment. We focus on 3, 5 and sometimes 10 year core and CAD per share. We focus on 10 year levered IRR to try and capture what that asset will do for us in cap rates. Having said that, certainly cap rates have compressed more so in the as you move up to the higher markets, the higher size markets and perhaps attractive to investor markets. And so we continue to see the returns that could be derived from investing in generally in, say, the top 5 markets and maybe even the top 10 markets it's insufficient for us to deploy capital there. The returns just aren't good enough because the demand for those assets is too great. We underwrite every market based on our ability to or not our ability, our view on market rent growth going forward. Obviously, the difference between market and contractual rent, the other parameters of the deal, etcetera, capital costs going forward. Our focus has been and continues to be on the cash flow that you derive from owning that asset. So we're not really making assessments on primary versus secondary so much as looking at individual transactions in the context of the market that they're in. And the cap rates for 2020 were 6% cash basis. On average, those are another 40 to 50 basis points higher when you factor in the straight line component. Our guidance for 2021 is the midpoint of 6% and another 50 basis points on the straight line cap rates. And that's largely due to the bumps we're seeing in some of the longer term leases we're acquiring, which are, I would say, minimum 2.5%, and we've seen some as high as 3.5%. So bumps are a lot higher in some of these transactions that we've been acquiring over the last 12 to 18 months. Great. Yes, that makes sense. And then I apologize if I missed this, but in terms of acquisitions this year, what is the split you're targeting in terms of stabilized acquisitions versus value add acquisitions? We value add acquisitions. I'm sorry, Bill. No, no. Go ahead, Bill. So the value add is usually up to 10%. This year, it was just a lot lower. We didn't see as many value add deals come to the market just given the market conditions. We're certainly underwriting a lot more now. And in our $2,100,000,000 pipeline, it's a similar percentage of value add deals that we've seen over the years. And those value add deals obviously have to meet our return thresholds just as stabilized deals would. Thanks, guys. Our next question is from the line of Elvis Rodriguez with Bank of America. Please proceed with your question. Hey, good morning guys and thank you for taking my question. Just noticing on your portfolio diversification, you added another Amazon lease this quarter, taking your ABR to 3.8% from 2.9% and 3Q. Perhaps you could share a little bit more detail there and what sort of exposure are you comfortable with to a single tenant in the longer term? Well, if you're going to pick a in today's environment, if you're going to pick a credit to be close to Amazon is probably not a bad one to be close to. And indeed, we're because of Amazon's position in the market, position within the overall demand structure by tenants, tenant relations with Amazon are important. So, we obviously are very cognizant of the fact that they that relationship with Amazon is important to us. If we have a building or look at a building that they're interested in, we obviously are going to be interested in doing business with them. 3.8% is our highest credit exposure. Again, this is a credit we're very comfortable with and think they're an important tenant to the company going forward. We're very comfortable with that credit exposure. I think that it would probably could go somewhat higher than that 5% or more even with Amazon with that particular credit. I think the generally speaking, we have focused on diversification and indeed have maintained very wide diversification on individual tenant credit exposure. Can you please share what the way that sorry, go ahead. Just adding on to that, our diversification within that exposure, we have various lease terms. It's across various markets. There's different uses for the facilities. So that exposure to Amazon at 3.8% is further diversified. As you mentioned, are you able to share what the weighted average lease term is of those leases? It's probably closer to 10 years, Elvis, without having the exact number. And we have some longer term leases that the lease we bought this year is in the 7 year range, which was a good sweet spot for us. We're able to achieve some good relative value when you start evaluating and bidding on these type of assets with longer term leases, double digit lease terms, it gets really competitive. And this asset, it was in the Columbus, Ohio market. It's a big distribution market, but with 7 years of lease term, that weeded out some long term investors and in the market weeded out some investors. So we were able to get this at a pretty attractive return, strong rental escalators and overall we feel like a very good investment. Great. Thank you. And Ben or Steve, how should we think about the cadence of your acquisition pipeline this year? Will it be back weighted in the back half of the year? I know the pandemic obviously pushed some of the activity last year, but how should we think about the cadence throughout the year of acquisitions? Yes. So, Elvis, thank you. I mean, our cadence has always been 4th quarter heavy. The top I'm trying to think of the top 5 quarters in volume, I think 4 at least 4 of them are 4th quarters. So you would always look to have the 3rd and 4th quarter be the heavier quarters. And occasionally, the second and the first quarter is almost always the lightest quarter. It wasn't last year because of the pandemic, but I think that's probably not a bad way to view the year sort of starting slow, 2nd quarter and Q3 probably of similar volumes and then the Q4 usually is the largest. Bill, I don't know if you have any thoughts with that. Yes, I think that's right, Ben. I mean, typically, the answer is, hey, look at the last year and use that cadence. It's not the case with 2020, just given everything happened. But I think if you look at 2019, 2018 and look at the cadence of those years, that's probably a pretty good estimate in terms of cadence for 2021. Great. Thanks guys for the time. Great quarter. Thanks, Alex. The next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question. Yes, thanks. Ben, I want to talk a little bit about the competitive landscape for some of these industrial products that you guys are looking for. Has that changed, I guess, over the past 12 months as the interest from other institutional capital sources have picked up and now that you're seeing the mix of the buyers of the assets you're targeting, is that different? I mean, there continues to be capital flowing into industrial real estate and the players who are involved in industrial real estate or continue to be interested in industrial real estate has widened. The places where we find the best returns are probably not where all that capital is flowing. I think Bill alluded to in the last question about the fact that the if you get 10 years of term, there's a lot of people who view that as a perhaps more a little bit more of a financial transaction as opposed to a real estate transaction. So lots of capital, passive and or less sophisticated capital, we'll be pursuing those and you'll see cap rates on going back sort of the CTL, the credit tenant lease, long term good credit, good location, those things tend to get bid down to levels that we would find unattractive. So I think that the increase in capital has been weighted towards the less risky end of the continuum. We continue to see lots of transactions being brought to market in good strong secondary markets with medium lease term, good rents relative to market, I. E. Not way above market, where we can find relative value. And as we've always done, we're looking broadly and deeply to find those relative values. Last year, we were under 15% hit rate. So of the deals that we actually thoroughly underwrote, we bought less than 15% of them. In virtually every case, the reason was someone else was willing to pay more. So yes, we are seeing more competition from new sources, but that has not changed the what we see at the opportunity set. There's still a large opportunity set where we will be successful in that sort of 15% or maybe a little bit better hit rate. I mean, is that capital sources coming in, are they more interested in those larger transactions, I guess? And if so, are you seeing a bigger premium on those portfolio type deals? There always been has been a I mean, one of the truisms of industrial real estate is that it comes in small chunks. And so if you're looking somebody looking to deploy $1,000,000,000 or 1,000,000,000 of dollars, it's hard to justify going and spending the time to buy a $5,000,000 asset. And so it has always been the case that if you get to $20,000,000 $25,000,000 assets that are more people who are willing to spend the time or have actually can afford to spend the time to focus on those assets. And it's always been the case that as you get up to $100,000,000 $200,000,000 $250,000,000 $300,000,000 portfolios, there's yet another yet again another tier that comes in, that is willing to and can afford to spend the time or can rationalize spending their time on those assets. So yes, there is a return as the size of the transaction goes up, the required returns by the potential investors goes down. And is there at a point where you'd be willing to bring another portfolio to the market? I think you've done 2 in the past 5 years or so just on the disposition side to try to capitalize on that, I guess, that portfolio premium that's out there and the increased interest? Yes. So I mean, we're very, very cognizant of the fact that we're in a market where industrial is very highly valued and our assessment is between various sources of capital raising. What is it making more sense to raise common equity or sell assets and redeploy that equity that was derived from the asset sales. I mean, there's a couple of things that factor in that. Obviously, we run the numbers to see which one is more attractive for our shareholders. The operating leverage that exists on adding to the portfolio versus a sale which subtracts from the portfolio and is sort of anti scaling, it comes into play. So we are looking at whether it makes more sense to raise common equity at a current equity price versus selling assets. The other thing to keep in mind is raising common equity can be done in a matter of days, selling assets takes some time. Some of the 2 portfolio sales you alluded to, it made sense to sell those assets at the time we started the sales. It was less clear at the time because of recovery in our common equity pricing. It was less clear at the time we executed those sales whether it actually still made sense from a pure math exercise, whether it still made sense to sell the asset. We had committed to, it was accretive. I think the market appreciated it. But again, we will continue to look at these sources of equity, whether it be portfolio sales or raising common equity or some of the more esoteric ways of raising funds. We'll continue to look at all of those, but we'll do what we think is in the best interest of long term shareholder accretion. Okay. Thanks, Ben. Thanks, Mike. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your question. Yes, good morning. Ben, wanted to maybe just talk about shorter term leases in the market as one question. Are you seeing more of this type of activity or at least more inquiries when you're doing leasing? And then maybe a second part of that question is on reverse logistics. How big has that been kind of in the Q4? And as the pandemic kind of unfolded last year, is that a trend that you saw? Well, I'm going to turn it over to Dave to talk to about short term leasing for just a sec. But the our view on online shopping and what happened during the pandemic, there was online shopping got pulled forward, the adoption of it got pulled forward multiple years, maybe 5 years. So you jumped from low teens percent of goods sold to mid-20s percent of goods sold. And so the infrastructure both on logistics and reverse logistics has been struggling to catch up to that sort of new normal. And I don't believe they have caught up yet. So that demand driver on both outgoing and reverse will continue to be, I think, a factor in the market for some time to come. Dave, would you comment on that short term leasing? Sure. The short term leasing has been a part of our business and our leasing efforts for a long time. It usually is a fairly small percentage of the leasing that we do. And often it leads sort of through a proof of concept into longer term deals. So tenants that are expanding or consolidating might take short term space that then turns into a long term deal. So it's we view it as a positive and an opportunity, but it tends to remain a small part of our business. And then Dave maybe sticking with you, Ben feel free to jump in. Can you guys look at the utilization of the space within your building? Can you talk about kind of where inventory levels would be for maybe your warehouse oriented customers? And are you seeing them using the space any differently, I. E. More racking or are you getting into building with more racking as of course the floor space utilization? Any kind of broader comments that you've seen in the last year or so in those respects? I think anecdotally, the capacity utilization is up. We don't have a tremendous amount of unracked buildings or just throughput. So racking is quite common in our facilities. And given restrictions on travel, we don't get to see those personally, but we certainly have folks that check-in on our tenants and capacity utilization is up in the last 12 months. Great. Last question. I know you mentioned retirement costs and I know that's an accounting thing that you guys, I think, were forced to take in the year ahead, it sounds like. But then does that imply any change in plan or succession or retirement in the near future? I think we're evaluating all of our analysts as potential new executive officers in the company. I would ask better questions. No, it's simply a maturation of the business. We did not have a retirement policy in place. That's something that as we were building in the business, maybe we didn't think about initially, but it's something that certainly makes sense as we have multiple employees with 15 years experience with it, including the pre public company experience, the predecessor company. So just it just makes sense. It's something that the Board was, dollars 5.8 to put into place and it obviously happens at some time. So it gets reflected in the county numbers at the time that it is put into place. It's been a topic that has come up a few times in the past, but it's sort of unrelated to nothing other than maturation of the company. Fair enough. Thank you all. Thank you. Our next question is from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question. Thank you. Good morning. Good morning. So thinking into the same store NOI growth expectations, how much of your expectations come from fixed rent bumps and how much from kind of leasing expectations? Bill, you want to address that? Sure. Yes. I mean a big part is lease bumps. Our lease bumps have been increasing annually. We have, I think, on average, about 2.25% bumps in our same store pool. So escalators are a big driving force there. And then the other impacts to same store NOI is the rollover rents, which have been averaging, call it, mid single digits over the years. And then just the occupancy, average occupancy, which has been positive for us and downtimes have been improving. You saw that as an example of the Solo Cup lease earlier this year. So it is a mix every year and there's some free rent that we're getting a bump in our same store cash NOI in 2021 as well as we've discussed in previous calls. So it is a mix, but escalator is a big part of it, John. Okay. And then thinking about the rent collection in January, at the risk and kind of splitting hairs here, does that include the kind of 50 to 60 basis points of month end payment in the portfolio? And is there any ongoing deferrals that are flowing through that? I thought I remember you saying there's no new deferrals. I can't remember if you said there were any ongoing deferrals as of January. There's a few ongoing deferrals, John. We tried to structure our deferrals to be paid back by year and some tenants just need a little bit more time. All of our deferrals are being paid on time or ahead of schedule. And there are some, call it, month end payers. Some of those pay subsequent to the end of the month that are still outstanding in that number. Overall, I think a better representation of collections is what you saw in 2020 is the 99.6% and a lot of the remaining outstanding collections will be completed in due time. As I think about the reported kind of January collections and maybe some of the like for instance October collections that reported at 3Q, I mean those numbers in terms of what's flowing through there are fairly copacetic even though you've got a couple extra weeks here in terms of collection for January versus when you put it over? Yes. Okay. And then one last one on the balance sheet. As we think about the preferred that's kind of callable here, I mean, are there any plans in mind for that? How does maybe debt versus new preferred versus just kind of holding on to the existing preferred shares stack up and how you're evaluating your balance sheet? It's something we're evaluating. That piece of paper is callable in the next month or so. We're looking at a variety of options as our prior preferreds were redeemed with equity, and both those redemptions were accretive with the equity redeemed the preferred with. So we're looking at potentially redeeming it with common equity and also the other options. And when we make a decision, certainly that will be something that we announce publicly. Do you feel like you have the ability to issue maybe fairly long duration debt or is that attractive? Long duration debt today for us in private placement market is, call it, dollars 275, so that's very accretive if we were to redeem it with that, if we redeemed the preferred with our forward equity that's still outstanding, that would still be accretive and deleveraging event in the eyes of a lot of our shareholders. So again, there's a lot of options here. And once we make a decision, we'll make sure to let the market know. Okay. That's very helpful. And that's it for me. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question. Hey, good morning guys. Bill, maybe for you, going back to a topic we haven't had to delve into for a couple of years, but G and A now has gone from kind of $35,000,000 to $40,000,000 to $45,000,000 pretty significant step up. If you could just talk about the underlying reasons, I get the growth part of it. Is there anything else besides simply portfolio size that's driving that? We continue to make investments in the platform, Bill. I mean, it's growth in the portfolio size, which includes some new hires in the accounting and the asset management side of the business. But then you've also got some investment in our technology platform that we continue to improve on as well as growth in the outward facing acquisition folks. And we added a new couple of members to our Dallas office this past year, including the acquisition person down there, an analyst, a capital person. So it's growth in the portfolio and what we're anticipating for future growth. We certainly don't want to get behind the curve in terms of making investments in the platform. And we believe these investments are in the long term best interest of the shareholders. Yes. Bill, this is if I might add. I'll just add to that. I mean, there I think of the increase in G and A in two lines. One is scaling to the size of the portfolio, and I believe those would be relatively de minimis, adding an asset manager for every 50 assets or something like that, some accounting, etcetera. But as Bill pointed out, we are investing in larger acquisition totals, more intelligent acquisition totals, more efficient processing of transactions that are growth vehicles and have a return, have a well defined and we think very healthy return on investment. So they're not we still are a very scalable business. We've just chosen to make additional investments over in G and A over and above that scalable requirement. So as we look beyond 2021, would you start to see that growth rate start to decline as you build the scale? Well, yes, unless we see further investment in G and A that has really good return on investment. So there may be continuing opportunities to become a more efficient, more prolific and more efficacious identifier, purchaser and owner of industrial real estate. So again, there are pieces of our business that have to grow as the portfolio grows and then there are pieces of the business that we choose to grow because we want to be better and those things again have very strong return on investment. We're still trying to drive that G and A number as a percentage of NOI down, and we've continued to do that over the years. Great. Thank you. Thanks. The next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question. Hi. Good morning, guys. Just a couple of quick ones for me. Ben, you talked a little bit about like the competitive level above 10 year lease maturity and then sort of the sweet spot for you guys is probably upper single digits, but you did acquire a few leases that had shorter duration to them. Can you maybe provide some sense as to what you're looking for in the sort of sub-three year left on the maturity? And how that might play either a larger or bigger role in terms of the portfolio acquisitions over the year? Well, we have been historically, we've been willing to and have count as acquisitions with lease terms as short as 0. And as long as I think the longest term we ever go is 25 years. And what we look at in all of these things is to sure that we are getting paid for the risk. Well, make sure it's probably a little overstatement, but on a probabilistic basis, believe or establish that we're getting paid for the risk we're taking. And indeed, in an overlay sense that we're getting overpaid for the risk we're taking. So when we look at a 3 year lease or a 2 year lease, we're obviously spending a lot of time thinking about the a number of things, but actually everything that will affect the cash flows going forward. But on the shorter leases, retention is obviously a big item. Potential capital costs is a big item. Current rent versus market rent is a big item. Less important on the short term leases is tenant credit, because the impact of potential default on a tenant that's only there only contracted there for a short period of time is less important. So again, there on a probabilistic basis, we're going to at the cash flows that we think will be derived from owning that building and make a determination as to whether it makes sense to put into our portfolio. We take solace in the fact that with more decision point early decision points, I. E. Lease expirations that the standard deviation of returns may be larger on that asset than would be on a 10 year asset to a BB credit. But we have a lot of assets that have low correlation between them and we can take solace in that the aggregated whole will produce aggregated cash flows that are quite predictable. So buying those riskier assets in terms of a shorter lease exploration is still part of the overall portfolio strategy. Okay. And then just kind of going back to the G and A questions. When you talk about investing in the platform, I guess I'm curious as to sort of when you think about the sort of incremental growth in G and A this year or just historically, what's that split between people and technology? And is there sort of one time components to the technology cost investment that essentially lever off of in the future years? Or is that something that sort of just keeps recurring? Well, yes, the technology piece has software or various incentive prop tech investments that may have an upfront cost as well as continuing cost. I think most of the investments that we're talking about doing are more people. So we're looking at we just hired a data analyst. These are things that will make us better at what we're doing in the data area. So we historically have thought about the scalable or the costs that are associated with growing the portfolio or something they were 1.5% to 2% of NOI. Obviously, we are 10% plus of NOI on an average cost base, average G and A cost basis. So the scalability is in that 1.5% to 2% of NOI. Now there's over and above that, each year G and A is going to have some kind of cost of living as well as maturation of staff component to it. But the truly need to scale portion is in the 1.5% to 2% range. Okay. And the last question for me. Costco shows up as a top 20 tenant this quarter. Was that just an incremental lease? Or were both leases acquired in the quarter? Yes, there was an incremental acquisition this quarter. And again, an acquisition that we feel really good about the long run returns, strong rental bumps and pits into that 6, 7 year lease term. So anything double digits, as I said earlier, probably we get outbid on or if it sits in, call it, a top 5, top 6 market, we probably get outbid on. But it's in a market that we've great broker relationships in, and that was a key part of winning that transaction. That's all I had. Thank you. Thank you. Thank you. The next question comes from the line of Manuel Karshan with Citi. Please proceed with your question. Hey guys, it's Manny here. Ben, going back to your earlier comments on the tertiary markets, I guess you're not expanding those markets. The capital chasing industrial space is at highs, if not all time highs. Why not accelerate the disposition program there, get out of those tertiary assets, where there's a better cost of capital, if you will, than there has been? And then use those proceeds to go into sort of the primary and secondary assets and markets that you're now targeting. I look at it similar to sort of what Duke announced this quarter where they're selling a lot of the stuff, frankly, that you guys are buying, but they're not doing it because they need the capital or they hate Amazon, they're doing it because the pricing there is good. And so they can rotate that into other types of assets. Thanks. Yes. So I mean, I think Manny, the answer is the pricing is good and we look at that pricing on an individual asset basis and try and assess given our return requirements, the cash flow that we expect to derive from only continue to own that asset versus the funds we receive from selling them. With a little bit of an overlay of we are disposing of tertiary assets, but still our mantra is if it's worth more to us than it is to someone else who's willing to pay, we're not likely to sell that, again, with a little bit of an overlay that we are disposing of tertiary market assets. So we think we're being rational in this. We have not made sort of an overlay corporate decision to exit the all of our tertiary markets. We are opportunistically and we think intelligently disposing of those when the situation allows us to derive at least the value that we think we derive from continuing to own that building. All right. Thanks. Thank you, Manny. Thank you. At this time, we've reached the end of our question and answer session. And I'll turn the call over to Ben Butcher for closing remarks. Excuse me. Thank you, operator, and thank you all for joining us this morning. Obviously, a great performance by the team through the pandemic year, operating remotely, learning how to continue to be a good acquirer and manager of assets with less travel. It is very gratifying that the culture of the company, I think, was maintained through that year. And we look forward to 2021 as a year of great opportunity for the company. We're extremely well positioned from a balance sheet perspective. Opportunity is prevalent in the market and tenant demand remains very strong for our existing assets. So we're looking forward to a great 2021 and we thank you for joining us on the ride. Have a great day. This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.