STAG Industrial (NYSE:STAG) Q1 2020 Earnings Call

0:00 Greetings and welcome to the Stagg Industrial, Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matts Pinard, Senior Vice President of Investor Relations. Thank you. You may begin.

0:30 Thank you. Welcome to Stagg Industrial's conference call covering the first quarter 2020 results. In addition to the press release distributed yesterday, we've posted an unaudited quarterly supplemental information presentation on the company's website at staggindustrial.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 risk, and more. As a reminder, Forward-looking statements represent management's estimates as of today.

1:31 Stagg 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. I will now turn the call over to Ben.

1:45 Thank you, Matts. Good morning, everybody, and welcome to the first quarter earnings call for Stagg Industrial. We're pleased to have you join us and look forward to telling you about our first quarter results. Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who will be discussing the bulk of our financial and operational data. Also with me today are Steve Mechie, 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. First and foremost, I hope and trust that you and your families are all staying safe and healthy during these unprecedented times. I'm happy to report that, despite the ongoing pandemic, Stag and its employees remain safe and healthy. We've spent a considerable amount of time and energy over the past few years creating a strong culture of bright, talented, and engaged employees.

2:35 Our team has been working remotely for some time, and the company continues to function at a high level. The investments made over the years and process of improvement, data collection, storage, and analytics are all paying dividends as we continue to navigate the current environment. The near-term impact on the industrial real estate sector due to the novel COVID-19 virus continues to be fluid. Virtually all GDP growth predictions for Q2 are decidedly negative. The disruptions in both the domestic and global economy will continue to dampen consumption through the current shutdowns and likely beyond. This is putting considerable strain on a broad spectrum of tenants and industries. The government has responded with large and varied policy initiatives intended to inject liquidity into the economy. The size and pace of these initiatives is unprecedented.

3:24 The long-term impact of these government actions is yet to be determined. However, we believe the longer-term impact on the industrial sector will be net positive. Companies are reevaluating global supply chains and are reliant on China and other low-cost manufacturing countries. Establishing more supply chain redundancy will also provide better defenses. and many more. Collectively, these factors should provide increased demand for industrial space post-crisis.

4:15 These positive effects for industrial real estate demand will likely manifest themselves later this year. Speaking of the current investment market conditions, the real estate asset transaction market has generally paused as market participants work to understand the current pricing environment. Brokers are recommending to sellers, who can wait, that new transaction offerings be delayed until summer. Renewal leasing activity remains steady. Most corporate growth initiatives are on hold, eliminating much of the warehouse consolidation traditionally seen as a result of M&A activity or supply chain rationalization. New leasing has slowed, and the duration of negotiations is widely expected to increase. We expect that new supply will also decrease materially due to developer and lender uncertainty, construction moratoriums, and permitting delays.

5:06 So, in the medium term, we expect modestly increasing demand and decreased supply generally for the industrial sector. In response to the market disruption, we place our acquisition efforts on pause. In mid-March, as the level of market disruption increased, we terminated several transactions that were under contract and LOI. These were deals that involved tenants and or industries likely to face elevated levels of disruption during the crisis. On the remaining transactions we had under remitment, The request of a 60-day expense of any contract period. Where the seller would not agree to this concession, we terminate our pursuit of the deal. We continue to monitor the market to determine when and how our acquisition efforts will resume. We continue to see demand for our space in the current environment, as evidenced by our healthy operating metrics for the first quarter, both strong retention and leasing spreads.

5:55 This has continued even after the period of shutdown started. We have remained active on the leasing front during this time. From the third week in March through today, we've executed 13 leases for 1.4 million square feet. We have seen increased demand from tenants in the logistics, retailer, food products, and pharmaceutical industries. Tenants remain interested in available space, with 28 tenants representing 5 million square feet of requirements interested in our marketed space, similar to normal levels during more normal environments. Credit underwriting and monitoring has been an integral part of our business since day one, and our dedicated team has a deep understanding of our tenancies, operations, and financial conditions. This understanding is vital to our operating under current conditions.

6:40 The credit team, in conjunction with our asset management and customer solution teams, continue to communicate directly with tenants across various points of internal contacts. Our balance sheet strategy was positioned to endure times like this. Incorporating our January equity offering and forward equity proceeds, our leverage sits at four times that of the EBITDA, which is considerably less than the low end of our recently stated leverage bands. Our liquidity stands at $597 million before taking into account the forward equity proceeds available, with a large portion of that in cash on our balance sheet. It is a testament to the business we have built and the strength of our portfolio that we were able to recently complete the refinancing of $300 million last year. of term loan debt in these market conditions. This refinancing activity effectively extends all of debt maturities until 2022 and beyond.

7:31 Our company is well positioned to operate in the current environment. The benefit of not maintaining a development component is the ability to readily hit pause in capital deployment when the market dislocates and the ability to quickly reengage to capture the opportunities we expect to uncover as recovery begins. Our balance sheet and liquidity levels will allow us to be opportunistic when the time is right. We very much look forward to that day. The market remains volatile, and it is difficult to predict both the time and the slope of the recovery. We have updated guidance knowing that a heightened level of uncertainty exists in the world. We have incorporated what we know now and what might recently be expected to occur based on our various scenario analyses across multiple inputs. Bill will discuss in detail our updated 2020 guidance in his remarks. We will continue to update the market as appropriate as we all move forward through this unprecedented time.

8:21 How 2020 plays out is uncertain for all market participants. The industrial sector has benefited from historical tailwinds and continues to display strong fundamentals even as we endure today's current conditions. SPAG has positioned its portfolio and balance sheet to withstand and eventually benefit from today's environment and during the recovery that follows. With that, I'll turn it over to Bill who will discuss our first quarter operational results and our updated 2020 guidance.

8:49 Thank you, Ben, and good morning, everyone. Core FFO was $0.47 for the quarter, an increase of 4.4% compared to the first quarter of 2019. Leverage is below the loan of our guidance as a result of our January equity offering and reduced acquisition activity in response to the current pandemic. Net debt to run rate adjusted EBITDA is 4.4 times prior to factoring in the outstanding forward equity proceeds and 4.0 times when those proceeds are included. Acquisition volume for the first quarter totaled $119 million with stabilized cash and straight line cap rates of 6.7% and 7.2% respectively. Our last acquisition closed on March 9th with no acquisition activity since then.

9:36 Disposition volume for the first quarter totaled $102 million which includes both the previously discussed Camarillo, California disposition and addition of distribution at the end of March. Corporate operating results were strong for the quarter. Same-store cash and LI grew 2.5% for the first quarter. Same-store cash and LI growth was driven by a retention rate of 87.5% and cash leasing spreads of 3.3%. Straight-line leasing spreads continue to be strong, coming in at 11.2% for the quarter. As of April 30th, we have collected 90% of our April-based rental billings. An additional 2% of April base rental billings yet to be received relates to four investment grade tenants who we expect to remit payment in the next week or two, bringing the total of collections to 92%.

10:27 The timing of these expected payments is consistent with past practices. Providing a further breakdown of the remaining 8% of uncollected base rental billings for April, 5% are associated with well-capitalized tenants and tenants working through logistical issues related to payment. The remaining 3% currently outstanding is associated with smaller tenants that have been impacted by the pandemic. We are evaluating the future collection of these rental payments and have updated our credit loss guidance accordingly. To date, we have received rent relief increase totaling 4.1% of annualized base rent, or $15 million. Of that $16 million of rent relief requested, we expect to initially grant rent relief of approximately $1.5 million, equating to 38 basis points of ABR.

11:18 The general framework includes a period of rent deferral as opposed to abatement, with the deferred amounts to be paid within the next 12 months. Moving to the capital market activity, on January 13th, We completed an equity offering at $31.40 per share, which resulted in an aggregate net proceeds of approximately $311 million. Net proceeds of $173 million were received in January, with the remaining proceeds to be settled in the future at our auction. In late March, we drew the remaining $100 million of our delayed draw of Terminal F and drew $200 million of our revolving credit facilities. This resulted in a cash balance of $325 million at quarter end.

12:05 When incorporating the remaining undrawn balance available in our evolving credit facility and the $136 million of forward equity proceeds available to us at our option, liquidity today stands at $733 million with a material amount of that liquidity in cash. Subsequent to quarter end on April 17th, we refinanced our two upcoming terminal maturities. Term Loans B and C totaling $300 million were combined and now mature on April 16, 2021. SAG, at its sole discretion, has the option to execute two one-year extension periods, which if both exercised will result in an outside maturity date of April of 2023. The term loan is fully swapped with an all-in fixed rate of 1.78% through April 2023. As a result of this transaction, We have no debt maturing until March of 2022 if we're to exercise our right to extend.

13:06 Our initial 2020 guidance was set prior to the onset of the current pandemic and denies soon the severe disruption seen today. We've updated our guidance to incorporate the heightened uncertainty related to the health of the economy and capital markets to the best of our ability as of today. Note that we will continue to update the market as warranted. Components of our updated 2020 guidance are as follows. We expect acquisition volume to be between $300 million and $600 million for 2020, with acquisition volume restarting in the second half of this year. We expect all acquisitions to be stabilized assets with expected cash cap rate range of 6.25% to 6.75%. We continue to expect acquisition volume to be between $150 million and $250 million for 2020.

13:56 We expect the 2020 annual same store pools cash and OI growth to be between 0 and 100 basis points for the year. This range includes a credit loss range of 100 to 150 basis points on the same store pool. 2020 G&A is expected to be between $39 and $41 million for the year. The reduction is due to the pause in originally planned hiring, a reduction in corporate travel, and other corporate expenses. Thanks, Bill.

14:49 In summary, I just want to reiterate that we as a company and as a team are in a good place as we endure the effects of the crisis and look forward to what may lie beyond. I hope and trust that you and your families are all staying safe and healthy during these unprecedented times. We thank you for your time this morning and for your continued support of our company. I will now turn it over to the operator to open up the call for questions. Thank you. We will now be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Manny Korchman from Citi. Please proceed with your question.

15:42 Good morning. This is Katie McConnell. I'm for Manny. wondering if you could provide a little more color on the increase in acquisition cap rate guidance that you're underwriting for deals now and how you're thinking about your cost of capital and underwriting risk in general differently today.

15:58 So the higher cap rates are a reflection, obviously, of the cap rate that we experienced we had in the first quarter, or 6-7, as well as our expectation from the information we received anecdotally in the market of Lower prices, higher cap rates coming out of the crisis. Our cost of capital, we tend to think of sort of on an instant basis. We're looking at our current equity pricing for the equity component of cost of capital. And as we look at getting back into the market, we will likely use slightly higher return requirements as we feel our way into what the new pricing regimen may be.

16:40 Okay, thanks. And then, can you also provide an update on the large top tenant move-outs you're expecting from GSA and Solocop, and to address those agencies?

16:49 Yeah, so, obviously those, I'm sorry, I should let you finish, please. Please finish.

16:54 Yeah, go ahead. I was just going to say, whether you're still thinking about re-tenanting or marketing the assets.

16:59 Yeah, so, obviously those 2 million square foot vacancies are foremost in our mind as we think about leasing, and we're happy to report that there's lots of activity and a fair amount of activity around both. We have at least two full building users interested in Solo Cup negotiating currently. And the asset, the GSA asset in Burlington, New Jersey, we still think has many options that would be positive for the company, including ongoing inquiries from potential buyers about buying the basket of opportunity that's there, not only the existing building, but the development component that's there. That market remains very strong, and so we feel, I would say, moderately better about those opportunities and those situations.

17:52 Okay, great. Thanks. Our next question comes from the line of Sheila McGrath. from Evercore ISI. Please proceed with your question.

18:05 Yes, good morning. I was wondering, Ben, if you could provide an update on your development project in New Jersey, any leasing activity at this point on that building.

18:17 Good morning, Sheila. I hope that we'll all be on the golf course soon, but until then, I'm going to let the guy who is responsible for that project, Dave King, respond with our successes there. Dave? Sure. Hi, Sheila. We are currently trading some lease documentation and hope to have some positive news to report to you on that, some final news to report to you on that fairly soon. That's a full building. We have a full building user in lease negotiation for that building, an e-commerce tenant.

18:53 Okay, great. And the yield on that project will be Yes. Okay. And just on your same-store NOI guidance, you mentioned a higher credit loss as a factor in lowering that. I'm just wondering if that's like a big-picture macro observation, or did you experience credit loss in first quarter or your watch list? Kind of what's driving that change?

19:28 So it's not from recent default experience. It's more our underwriting on a granular basis, looking at all of our tenants and trying to understand that. I'll turn it over to Bill to give you some more color.

19:42 Hey, Sheila. We did not experience any credit loss in Q1, and the change in our same-store guidance was primarily driven by the increased anticipated credit loss due to the pandemic. of 100 to 150 basis points.

20:00 Okay, great. One last quick one. On that recent debt deal that you did, if you could give us some insight on how the pricing compared to what you would have expected kind of pre-COVID. Sure.

20:14 Bill, why don't you take that too?

20:18 So pre-COVID, that deal probably would have looked like a five-year deal. were all in. We were 178 for a three-year paper. We would have been a little north of that for a five-year paper, call it 2%. So net-net, not too dissimilar, except we just have to extend each year for the next couple years.

21:05 Got it. Thank you. You're welcome. Thank you. Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your questions.

21:16 Good morning, gentlemen. This is Elvis Rodriguez here. I'm on for Jamie. Can you give us an update sort of on your exposure to the auto sector and specialty retail and apparel tenants? It's about 15% of your portfolio. How are they performing today? Are those assets open and operating? And, you know, how are you thinking about those tenants going forward?

21:38 Well, I mean, obviously those are some of the industries that are affected. Our exposure to retail is about 5% and our exposure to auto is a little more than 10%. I think that the breakdown of auto Bill do you have the breakdown of auto?

21:58 Well it's as we've said before it's widely diversified there's certainly some plant closures that have happened the big three it looks like they're opening up here in the next few weeks but all of that is the various industries both the positive industries and negative industries are incorporated in are guidance of 100 to 150 basis points of credit loss for the year. We try to take all of that into consideration.

22:33 Some of those tenants are suppliers along the chain and given the disruption in the stay-at-home mandates from the government, how have those tenants been affected? Are those the ones that are asking for relief? I'm just trying to get a better understanding of what's happening. with those tenants.

22:54 Go ahead, Bill. There's a fair bit of tenants that have asked for relief. Of those tenants that have asked for relief, we're anticipating grants for relief. We're anticipating granting about 40 dips of relief, which will The other thing I would say, Elvis, is that

23:44 None of the shutdowns that have occurred have been mandated. Logistics is deemed almost everywhere, I believe everywhere, as an essential business. So the shutdowns have been corporate decisions generally related to either planned shutdowns or instances where it was elsewhere, it would be a worker safety issue. So really not a feature of our portfolio that mandated shutdowns.

24:13 No, that's helpful. Thank you. And then just one more big picture. Ben, as you think about sort of what's going on in your business, has your strategy changed at all? Have you thought about changing your strategy going forward, given what's going on?

24:28 Yeah, I mean, our strategy has always been to seek to acquire and to manage buildings effectively. where we can identify relative value, where basically we can buy the building for less than we think it's worth based on its ability to cash flow going forward. That strategy, that approach to the business is not going to change. We believe it's the correct strategy. It's the way to maximize value for our shareholders. What we don't know today is how much dislocation will be in the market. This is not a situation we've really been through before with the stimulus and the banking system being in relatively good shape. You're not going to have the normal sort of recession or credit crisis impact from lenders forcing distress on borrowers and therefore sellers.

25:19 So it's a different situation than we might normally see. But our strategy will stand itself in good stead through this crisis. and almost any other economic conditions that we encounter.

25:33 Thanks, guys. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

25:45 Yeah, thanks. I wanted to dive into the rent collection trends, I guess, that you highlighted real quick. Yeah, thanks. I wanted to dive into the rent collection trends, I guess, that you highlighted real quick, and I believe that you were highlighting that there's about 3% of 3%. I mean, should we expect more deferrals from that bucket?

26:06 Yeah, thanks for the question, Mike. Good to talk to you, and I'll give this to Bill.

26:11 Thanks, Ben. I would say the majority of our deferrals will come out of that bucket. Those are tenants that are being impacted by the pandemic. I would say the biggest struggle we have with forecasting credit loss for the year is the stimulus and how that impacts our tenants. Early on, when this pandemic first hit, we had a couple tenants come to us for rent relief, and subsequently, two weeks later, contacted us and indicated they were able to receive some stimulus and no longer need a rent relief. So we're evaluating... We're evaluating all of our tenants that have requested rent relief and going through that process. And as we mentioned on the prepare remarks, we expect about 40 bits to grant rent relief, and that should be one to three months and paid back within the next 12 months.

27:06 Brandon, I'm not sure if you said this or if I missed this, Bill, but did you give us a number of how many tenants within the portfolio have actually asked for rent relief to date?

27:16 It was 64 tenants who requested rent relief, but of that, as of today, we're expecting rent relief to approximately 8 tenants.

27:28 And Mike, that's out of a 400-plus tenant portfolio.

27:34 Okay, great. And then just real quick on the GSA property, I know that you kind of highlighted this in the Q&A a little bit already. But how should we think about that? I mean, it seems like it's vacant right now, so you're able to give tours, tenants can make decisions, but it also seems like a much more complex decision given all the options that you have at a potential site. So is that activity, could we expect that to get resolved sooner rather than later in the beginning of 2021, or is it just too tough to say given all the options that could occur?

28:09 Well, Mike, the building actually is vacant, but we're still getting rent on it. The GSA lease runs through July. So it's still a part of our income stream. You know, it's a little early to tell how quickly the – I'm sorry, through the end of December, I get the million square footers mixed up. So it's really not a 2020 issue in terms of income stream. We need the crisis to settle out a little bit for the full return of the interest in the development component of that. It is a very, very strong market. There continues to be development interest in and around that market. So it's an exit 6A of the Jersey Turnpike, which is very much a focal point for e-commerce activity in the eastern seaboard.

29:03 So We feel very good about that. Our expectations for the year is we'll continue to collect rent. Should we have tenants that are interested in the building today, those tenants, if they're acquired occupancy before the end of the year, we can negotiate a buyout with the current tenant and get occupancy before then. So we have lots of flexibility. We have a consistent income stream through the year. and the options remain really positive for us. It's just a little unclear as to, I should say less clear as to the timing of when we will execute on those options.

29:39 Okay, and then lastly for me, on the two full building users interested in the solo cup space, I mean is that, how close are those leasing transactions and if one of those users want that space, when could they occupy it? Would this be something that could occur towards the end of this year or would it be longer than that?

29:58 Well, we would be hopeful that it would be this year. It depends on how much work has to be done to prepare the building for the specific tenant needs. But, I mean, we're very encouraged by the fact that two full building users have an interest in that property and a strong interest at the level of beginning to pass some paper around in terms of defining the requirement and the documentation. So, we're very encouraged about the level of interest on that building and It's something that, you know, things always move slower during this time. And I think it's highly likely that you would have a resolution of that building by year ends. Okay, great. Thank you. Our next question comes from the line of Mike Muller with J.P.

30:48 Morgan. Please proceed with your question.

30:52 Yeah, hi.

30:53 In terms of 2020 guidance, I was wondering, can you walk through for your same story on why portfolio occupancy is at 96.2 at quarter end? Where are you anticipating that ending the year?

31:10 You know, it really depends on, I'm going to pass this to David in a second, but it really depends on what our default experience is. I think most of the variability in expected occupancy at this point is on unexpected vacancy due to default. We have a pretty good visibility as to renewals. Dave, would you like to add to that? I would say that the spaces rolling in 2020 that we expect to renew were close to 90% through that documentation, so there's not a lot of mystery there. We expect positive results on the remainder. The question is really on new leasing. The activity in the new leasing market remains strong. The logistics of showing space and getting things documented tends to – it's going to be a hindrance in moving things along quickly.

31:58 So really the uncertainty is around the timing of new leasing. I would expect occupancy to erode a little bit, but not tremendously.

32:10 Got it. So if you're looking at the low end of the range, I mean, do you have something in there, would you say, 100,200 basis points at the low end or that sort of magnitude or not that extreme?

32:23 I think we are. I mean, our base case is not far off where we are now, and then we've got some scenario analysis around that that doesn't get you very far off that.

32:34 Got it. Okay, that was it. Thank you. Our next question comes from the line of Dave Rogers with Robert W. Baird. Please proceed with your question. Hey guys, it's Nick on for Dave. The conversations you had on leasing to start first quarter, what has the tone been there? And like what industry has been driving those? And then like kind of where do those stand today?

33:03 So, I missed actually the first part of that question. My internet buzzed at the wrong point. Could you repeat the question, please? So, the conversations you guys have had on the leasing front in, like, first quarter, what kind of has been the tone there? Like, what industries are driving those discussions? And, like, what are the status of those leases today or discussions?

33:25 Yeah, so, I mean, we've already mentioned some of the areas in the script. Some of the areas we're seeing... and so forth. So, there's a lot of strength, you know, in pharmaceutical, e-commerce, you know, et cetera. There's sort of the poster children for who's going to do well during this period. The demand, though, is pretty widespread. Dave, do you want to add something to that? I think the demand probably tends higher, well, the higher proportion of e-commerce tends today than we might see on a regular day. It is pretty widespread. We've got consumer staples, pharmaceuticals, etc., and even some auto uses. So there is a wide range of demand.

34:13 Okay, thanks. And then for the cap rates on the year-to-date sales, I don't know if you guys gave one, but can you update me on that? And then kind of for the timing and cap rates for the remaining assets, are you guys kind of assuming maybe the sale of that GSA building potentially in that?

34:31 So the cap rates on acquisitions were... On dispositions. Oh, this is dispositions, yeah. So the proponents of the dispositions were made up of the two buildings in Camarillo that we sold. Those were a 4.9 cap rate on market rents. There were villagers 18 times we sold them, but that would be a 4.9 cap rate on market rents. GSA is not currently in our disposition guidance for the year. Obviously, we have rent through the remainder of the year and a lot of options, so we'll take some time to figure it out. The high end of our range, $250 million, probably would encompass the sale of one of those, either GSA or Soloco, but at this point, we don't think those are likely to happen.

35:22 Thanks. And then the last one for me, you guys talked last quarter about scaling G&A this year, but Due to the current circumstances, around what portion of the cutbacks you guys made and the updated guidance would you say is cutting back on that scaling?

35:40 Well, I think that's – I mean, we gave the – Bill gave some of the components of what the cutback was. I think the scaling of staff is certainly a big part of it as well as reduction in corporate travel. The staff will probably almost certainly probably come back as the markets come back. I think most people believe that corporate travel may be diminished for a more significant period of time. But those are the two big components. Okay, so you'd see maybe more of like a step up again in like 2021 versus... Yeah, sort of when we get back to our normal business.

36:17 There'll be more travel as we get more actively involved in acquisitions. Okay, sounds good. That was it for me. Thanks, guys. Our next question comes from the line of Bill Crowe. with Raymond James. Please proceed with your question.

36:34 Hey, good morning, guys. A couple of questions. What percent of your occupied properties are not open? I know we touched on the subject, but I just wanted to get a percentage.

36:46 Bill, I'm surprised that you didn't start with a na-na-na-na-na-na about Brady and Gronkowski, but I'll let you slide on that.

36:55 Let's at least get one game later, guys.

36:58 The buildings that we alluded to before, the buildings that are closed because of the auto plant shutdowns and then a couple of buildings because of worker safety concerns. So I believe it's 18 buildings in total out of our 425.

37:13 And what percentage of your rent abatement requests are represented by those 18 buildings? Dave, can you give some...

37:26 There's actually not a very high correlation between the two. Obviously, if you've got a – we've got some smaller tenants with a quasi-retail component. Those are all shut as well as looking for relief. But in general, the ones related to auto is the biggest factor. They're just trying to work through plans to change operations to ensure worker safety. So they're large organizations that aren't particularly seeking rent relief.

37:57 Gotcha. Okay, thanks. And then final for me, Ben, a lot of people are talking about how this event, this COVID-19 will hasten the move to e-commerce. And I'm just wondering, how does that play into your thoughts on what assets you might divest, additional headwinds on buying assets where the tenants might be, old line economy tenants? How does it change your perception of it? on a portfolio management basis.

38:28 Yeah, so I mean, obviously we're looking to call from the portfolio assets that we believe do not operate in the current environment. And the biggest example of that has been in buildings we bought, you know, 10 plus years ago prior to being a public company in the call center area, which is that's certainly not an area. But most of our buildings are, you know, fungible, vast and ponderous buildings are fungible buildings. Distribution buildings located around population centers. We think that those buildings will remain an active part of the supply chain and indeed would be advantaged by the fact that these supply chains are fattening or redundancy being established in those supply chains. So I don't think that necessarily there's a change in strategy inherent in sort of what the new normal may look like. Having said that, as the new normal plays out, our markets team will be assessing the potential for rental rate increases specific to the markets and sub-markets and building that we're, the aspects of the buildings we're looking at.

39:31 So I think that our, not only our strategy, but our execution style allows us to adapt to the new normal and be fluid in finding opportunities as we move forward. Great.

39:45 Thanks, Utah. Thanks, Bill. Our next question comes from the line of Chris Lucas with Capital One Securities. Please distribute your question.

39:57 Good morning, guys. A couple quick questions for you. On the tenant retention guidance decline, is there anything specific that grows that, or was it more just a general feel?

40:09 I'll turn that over to Dave. I think it's a small sample variance. Okay. I think a major move there is that we're now not projecting to sell the Hampstead asset. So that's a million feet that could have been sold and would have dropped out of the retention statistic. And now we are going to endure the non-retention event there, though we're pretty pleased with the activity to date. Okay. Okay. And then, is it really operating expenses?

40:41 Does the current environment change or outlook for any of the non-reimbursed operating expenses, cleaning costs, utilities, whatever?

40:51 Yeah, obviously that's specific to our vacancy. We're triple net leases, so we're not impacted directly except on our vacancy. Dave, do you have anything to add to that? Our exposure to the operating cost is fairly low, as Ben mentioned. 95% of our properties are occupied or in many states, and we don't really have much exposure at all. Okay, great. Thank you. And then the last question.

41:20 Ben, just a bigger picture, kind of where we sit today, has your acquisition bias changed at all in terms of either the line of business exposure, geography, lease duration, or credit quality?

41:34 You know, I think that, Chris, it's a great question. I think the – what we're looking for and have always looked for is trying to find the places where we can get the – on a betting parlance, we can get the most open overdose, so we get paid the most for whatever risk we're taking. We're obviously not buying, you know, 50-year leases to the federal government. We're buying, you know, some combination of tenant credit, lease term, location, building quality, building condition. and we're trying to make sure that by analyzing that we get overpaid for the risks we're taking. So if the entire market rushes back in and says we only want to buy 15-year leases to investment-grade credits in five or six markets, pretty clearly we're not going to be buying those assets because we believe they'll be mispriced to the high side. So we remain fluid now that the opposite is true and people rush back in and say the secondary markets and shorter-term leases where we need to be.

42:32 You know, you'll see a pricing dislocation to the upside there, and maybe we'll be operating in the longer term, Lisa. So we just have to remain, again, fluid in response to the opportunity and continue to have a very broad level of inquiry as to where that opportunity might eventuate. Great. Thank you. That's all I have for now. Thank you, Chris. As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Brandon Finn with Wells Fargo. Please proceed with your question.

43:09 Thanks for taking my questions. So I guess when you guys are able to start back up with your acquisition activities, I guess what changes are you expecting to see from the seller pool? So like would you expect to see more mom-and-pop type sellers as opposed to institutional sellers? Sellers that may have been forced to sell some assets as a result of the crisis.

43:34 Well, I alluded to this a little bit earlier. It's not 100% certain, as it would have been during the credit crisis or some other recession, where the distress is going to come from. So forced selling or heightened attempts to sell, it's not as clear where that's coming from or where the opportunities might be. I do think that the... More likely among smaller sellers, either the ability to wait or the predilection to wait, the desire to wait will be smaller there. So our normal activity, which is largely focused on small sellers, will likely continue that way.

44:18 Gotcha, that's helpful. And then I apologize if I missed this, but in the press release you talked about us, A small portion of tenants that are working through logistical payment issues. Could you just clarify what those issues are and then if you anticipate they will be resolved for May payments?

44:39 Yeah, let me turn that over to Bill.

44:42 Okay, thanks, Brendan. The logistical issues are twofold. Some of them are just companies getting in and sending out checks. The other one was We implemented a new payment software. Interesting enough, we implemented it going live with April rents, and that's pressure pay. And so that has created some logistical payment issues with some of our well-capitalized tenants that we would have otherwise expected rent payments. So we're working through those issues. And as of today, we're expecting to collect those rents. in May. But those are the two types of logistical issues we're hearing from our tenants.

45:27 Great. Thanks, guys. Thank you. There are no further questions in the queue. I'd like to hand it back to Ben Butcher for closing remarks.

45:38 Thank you very much, Operator. And thank you all for joining us today. This goes without saying, but it's been said many times, we're in very much unprecedented times Stagg is extremely well positioned to survive and perhaps thrive following these times as we get back into whatever type of recovery we have. Obviously, things remain fluid, but we have a very strong tenant base and a very strong team to manage it. So we're very encouraged as to the potential for the company going forward, and we thank you for your time this morning. We look forward to conversing with you in the coming months. Thank you. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.