STAG Industrial, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. STAG is a U.S. industrial REIT focused on single-tenant properties. At quarter-end it owned 281 buildings totaling approximately 52.1 million square feet across 37 states; the portfolio was 95.7% leased.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $55.9 million | $42.4 million | $159.7 million | $123.8 million |
| Net income (loss) | $(4.7) million | $0.3 million | $(11.3) million | $(2.4) million |
| Net loss attributable to common stockholders | $(7.1) million; $(0.11) per share | $(2.5) million; $(0.04) per share | $(18.8) million; $(0.29) per share | $(10.0) million; $(0.20) per share |
| FFO attributable to common stockholders and unit holders | $25.1 million | $17.2 million | $68.8 million | $49.5 million |
| Net operating income (NOI) | $44.8 million | $34.5 million | $128.0 million | $99.0 million |
| Cash provided by operating activities | — | $90.1 million | $66.4 million |
Revenue increased 32.0% in Q3 and 29.1% year to date, primarily reflecting portfolio acquisitions. NOI was approximately 80% of revenue in both nine-month periods. Same-store NOI decreased 0.9% in Q3 and 0.5% year to date; same-store occupancy declined 0.7 and 0.8 percentage points, respectively. GAAP rent growth on new and renewal leases was 5.2% in Q3 and 6.2% year to date.
Balance sheet, debt and liquidity
- Total assets were $1.824 billion and total debt carrying value was $860.3 million at September 30, 2015, versus $1.629 billion and $686.3 million at year-end 2014. Weighted-average debt interest rate was 4.09%; 27% of debt was secured.
- Net debt to real estate cost basis rose to 41% from 37%, and total debt to enterprise value rose to 37% from 28%. The company reported compliance with all financial covenants.
- Cash and cash equivalents were $12.5 million. Management reported $479.3 million of immediate liquidity, including $466.8 million available under the unsecured credit facility and term loans. Actual borrowing capacity is subject to asset-based limits.
- Nine-month investing cash outflow was $244.9 million, mainly for acquisitions and property improvements; financing cash inflow was $143.4 million. Dividends and distributions paid were $78.5 million.
Material changes and unusual items
- STAG acquired 35 buildings totaling 5.6 million square feet for approximately $289.2 million during the first nine months, and sold two buildings. Acquisitions materially expanded revenue and NOI, while also increasing depreciation and interest costs.
- Impairment losses were $5.7 million in Q3 and $8.4 million year to date, compared with none in 2014. The charges related to four properties; one proposed sale was terminated after quarter-end and other contemplated sales remained subject to contingencies.
- Interest expense increased to $9.3 million in Q3 from $6.5 million, and to $26.3 million for the nine months from $17.9 million, reflecting higher average debt and borrowing costs.
- STAG issued $120 million of unsecured notes in February. In September it increased its revolving credit facility capacity from $300 million to $450 million and entered into a $150 million delayed-draw term loan, with a 2020 maturity. The term loan was undrawn at quarter-end.
- The company raised $74.9 million gross through ATM common-stock sales in the first nine months. Common shares outstanding increased to 68.1 million from 64.4 million at year-end.
Outlook, risks and contingencies
Management described its outlook as positive but moderated amid equity-market volatility and asset appreciation. It expected improving U.S. industrial demand, e-commerce, and limited supply in its markets to support rents and occupancy, while noting that new industrial supply can emerge quickly. Management viewed the company as positioned for rising rates, citing hedged floating-rate debt and the potential for higher rental rates and acquisition yields. No specific earnings or acquisition guidance was provided.
- Of variable-rate debt, $27.8 million was not fixed by swaps at quarter-end; management estimated a 100-basis-point rate increase would add approximately $0.2 million of interest expense over nine months at that balance. Swaps had a reported liability fair value of approximately $7.0 million. Five additional swaps covering $150 million were entered into on October 14, 2015.
- Approximately 9.6% of annualized base rental revenue was scheduled to expire from October 2015 through September 2016. Management’s assumptions indicated that re-leasing this space could generally be at lower rents.
- Tenant defaults, vacancies, rent declines, acquisition execution, refinancing and interest-rate changes, and real estate market conditions remain material risks. No tenant represented more than 2.7% of annualized base rent; the largest industry concentrations were approximately 11.8% each.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth translates into durable same-store operating improvement, given modest same-store NOI declines and lower occupancy.
- The causes, valuation assumptions, and potential sale outcomes for impaired properties, particularly the Canton, Jefferson, and Milwaukee assets.
- Debt availability and leverage after the new facility and term-loan arrangements, including covenant headroom, maturities, and the impact of higher rates.
- Lease rollover exposure and actual renewal/re-leasing rents compared with management’s assumptions for the coming year.
- Dividend coverage from operating cash flow, considering debt service, acquisition spending, and continued equity issuance. FFO is a non-GAAP measure and is not a measure of cash available to pay dividends.