STAG Industrial, Inc. — FY 2013 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed February 26, 2014. STAG is a U.S. industrial REIT focused on owning and managing single-tenant industrial properties. At year-end it owned 209 buildings across 34 states, totaling 38.1 million rentable square feet; portfolio occupancy was 95.6%, across 191 tenants. The weighted average remaining lease term was approximately 4.8 years.
Key financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $133.9 million | $84.1 million |
| Net income (loss) | $4.9 million | $(10.2) million |
| Net income (loss) attributable to common stockholders | $(4.2) million | $(12.8) million |
| Net operating income (NOI), excluding discontinued operations | $109.0 million | $70.0 million |
| FFO attributable to common stockholders and unit holders | $60.4 million | $31.3 million |
| Cash from operating activities | $82.7 million | $48.0 million |
| Cash used in investing activities | $(325.2) million | $(417.2) million |
| Cash from financing activities | $230.2 million | $371.7 million |
At December 31, 2013, total assets were $1.270 billion, total debt $556.1 million, total liabilities $595.7 million, total equity $674.6 million, and cash and cash equivalents $6.7 million. The company reported $119.3 million of available capacity under its unsecured revolver, subject to borrowing-base and other conditions. Of $330.5 million in variable-rate debt, $200 million was hedged; management estimated a 100-basis-point rate increase would add approximately $1.3 million to annual interest expense under its stated assumptions.
Fourth-quarter 2013 revenue was $37.4 million, continuing-operations income $1.1 million, net income attributable to common stockholders $2.1 million, and diluted EPS $0.05. In Q4 2012, revenue was $26.9 million, common-stockholder net loss $3.4 million, and diluted loss per share $0.10.
Material changes versus the prior comparable period
- Annual revenue increased 59.3%, principally reflecting acquisitions. STAG acquired 39 buildings totaling approximately 9.0 million square feet in 2013; acquisitions since January 2012 totaled 109 buildings.
- Same-store operating revenue rose 0.8%, but same-store NOI fell 3.9% to $53.8 million. Same-store occupancy declined to 93.0% from 93.7%; vacancies and lease downtime reduced rental income, while expenses increased.
- Reported net income improved from a loss to income, helped by $5.3 million of gains on real estate sales. Common stockholders nevertheless recorded a $4.2 million net loss, although narrower than the prior year. Depreciation and amortization rose 59.2% to $67.6 million as the property base expanded.
- Operating cash flow increased 72.2%. Investing outflows remained substantial as STAG funded acquisitions; financing cash flow declined as equity proceeds and net borrowing inflows were lower than in 2012.
- Total debt increased to $556.1 million from $479.2 million. STAG issued $110.1 million net from a common-stock offering and $67.8 million net from Series B preferred stock; it also added a $100 million Wells Fargo term-loan draw during 2013.
Outlook, commentary, risks and unusual items
Management described the industrial-property outlook as positive, citing improving economic conditions, limited speculative development, and tenant demand to shorten supply chains. It expected acquisition activity to support results and said low interest rates and available properties could provide attractive investment spreads. These are qualitative expectations; the filing does not provide formal earnings or FFO guidance.
- Leasing remains a key exposure: 33.0% of annualized rent was scheduled to expire before the end of 2016. The 2013 tenant retention rate was 59%; approximately 1.7 million square feet was available for lease at year-end.
- Tenant, sector, and regional risks include single-tenant vacancies, tenant financial distress, and exposure to industrial businesses. Automotive represented 12.5% of annualized rent; Illinois was the largest state concentration at 8.9%.
- Debt covenants, refinancing, variable interest rates, cross-collateralized loans, and reliance on external equity and debt financing could constrain distributions or acquisitions. STAG reported covenant compliance at year-end.
- Environmental liabilities are possible despite property assessments and environmental insurance. The filing identifies asbestos-containing materials at 17 properties and suspected materials at 31; no immediate action was recommended.
- Unusual items include $5.3 million of gains on 2013 property sales, including a $4.8 million gain on the Creedmoor, North Carolina sale, and a $2.5 million tenant lease-termination fee associated with that property. The prior-year comparison included a $3.9 million impairment on Great Bend properties.
- Related-party context: STAG acquired properties from Fund II, an affiliate with common management; an independent board committee oversaw the transactions. The CFO notified the company in February 2014 that he would leave effective April 21, 2014.
- Common dividends were $1.20 per share for 2013, paid monthly beginning in Q4. The board approved an increase to an annual rate of $1.26 starting with the January 2014 dividend. Dividends remain subject to board discretion and cash availability.
Most important facts for investors to verify
- Reconcile positive consolidated net income with the net loss attributable to common stockholders, including preferred dividends and noncontrolling interests.
- Assess whether acquisition-driven growth and reported FFO translate into durable per-share cash generation, considering same-store NOI decline, leasing costs, and dilution.
- Review debt maturities, revolver availability, covenant headroom, hedging coverage, and the effect of subsequent borrowing on liquidity.
- Track renewals and leasing outcomes for near-term expirations and available space, especially after the 59% retention rate in 2013.
- Confirm the sustainability and funding of common and preferred dividends; the filing notes that some common distributions were treated as return of capital for tax purposes.
- Monitor environmental exposures, related-party transactions, and the CFO transition. The filing reports no material pending legal proceedings and an unqualified audit opinion with effective internal controls.