STAG Industrial, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. STAG is a U.S. industrial-property REIT focused on single-tenant buildings. At quarter-end it owned 300 buildings totaling about 58.6 million rentable square feet; portfolio occupancy was 95.3%.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $62.6m | $55.9m | $183.7m | $159.7m |
| Net income (loss) | $(0.4)m | $(4.7)m | $0.9m | $(11.3)m |
| Net loss attributable to common stockholders | $(4.3)m | $(7.1)m | $(9.8)m | $(18.8)m |
| Net loss per common share | $(0.06) | $(0.11) | $(0.14) | $(0.29) |
| FFO attributable to common stockholders and unit holders | $26.8m | $25.1m | $72.5m | $68.8m |
| Net operating income (NOI) | $51.3m | $44.8m | $147.9m | $128.0m |
For the first nine months, operating cash flow was $97.9m, versus $90.1m in 2015. Investing activities used $220.0m and financing activities provided $122.4m. Cash and cash equivalents were $12.3m at September 30.
Total debt principal was $1.031bn, with a 4.03% weighted-average interest rate, 5.7-year weighted-average duration, and 43% net debt to real estate cost basis. About 20% of debt was secured and 2% matured within the next 12 months. Reported immediate liquidity was approximately $479.8m, including $467.5m of undrawn credit-facility and term-loan commitments; actual borrowing capacity is subject to covenants. Assets were $2.049bn and total liabilities $1.115bn.
Changes versus comparable periods
- Q3 revenue rose 11.9%; nine-month revenue rose 15.0%, reflecting portfolio growth and acquisitions. Same-store revenue grew 1.7% for the quarter and 1.3% for the nine-month period.
- Q3 consolidated net loss narrowed to $0.4m from $4.7m. Nine-month consolidated results moved to $0.9m net income from an $11.3m loss, helped substantially by $21.6m of gains on property sales.
- Same-store occupancy was 95.9% at quarter-end, down from 96.7% a year earlier; operating-portfolio occupancy was 96.4%. Nine-month same-store NOI increased 1.7%.
- Debt principal increased from $986.7m at year-end 2015 to $1.031bn. Interest expense rose $5.6m year over year for the first nine months, primarily with higher average debt outstanding.
Outlook, risks and notable items
- Management described the outlook as positive but moderated, citing slow economic growth, election uncertainty and asset appreciation. It expected industrial demand to benefit from job growth, e-commerce and favorable supply-demand conditions, while noting increased development activity and economic caution.
- No specific quantitative earnings or FFO guidance was provided. Management said liquidity needs would be met through operating cash flow, dispositions and financing, including capital-market access for acquisitions.
- Management expected rents on new leases for space expiring from October 2016 through September 2017 generally to be below existing rents. Leases representing about 9.7% of annualized base rental revenue expire in that period.
- During the nine months, STAG acquired 23 buildings for $252.1m and sold 14 buildings, generating $50.3m net proceeds and a $21.6m gain. It recorded $11.2m of impairment losses on nine buildings, primarily following changes in hold periods or market leasing conditions.
- General and administrative expenses included approximately $3.1m of costs related to the departure of a former executive, including accelerated non-cash compensation and cash severance/benefits. A $2.2m estimated involuntary-conversion loss was fully offset by expected insurance proceeds.
- All variable-rate debt was fixed with interest-rate swaps at quarter-end. Swap liabilities were about $16.0m; management estimated $3.3m would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
- Subsequent to quarter-end, STAG acquired nine buildings totaling about 1.9 million square feet for approximately $101.7m. It also sold shares under its ATM program for $71.1m gross proceeds, using $70.2m net proceeds to repay its credit facility. On November 2, it redeemed all Series A preferred shares.
- Management reported compliance with debt covenants, no material off-balance-sheet arrangements, and no legal proceedings expected to have a material adverse effect. The filing identified risks including tenant defaults and vacancies, acquisition execution, capital-market access, interest rates, insurance, environmental liabilities and maintaining REIT status.
Key facts for investors to verify
- Whether occupancy, tenant retention and rental growth can offset the disclosed near-term lease expirations and weaker same-store occupancy.
- How much of reported earnings and FFO growth reflects recurring property operations versus dispositions, acquisitions and impairments.
- Dividend coverage and funding needs relative to operating cash flow, debt service, preferred dividends and continuing equity issuance.
- Available borrowing capacity under covenants, upcoming secured-debt maturities and the cost and effectiveness of interest-rate swaps.
- Integration, occupancy and returns from the post-quarter acquisitions, and the effect of ATM share issuance and the Series A redemption on per-share economics.