Business context and reporting period
STAG Industrial, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company is a REIT focused on owning and managing single-tenant industrial properties. At quarter-end it owned 121 properties across 29 states, totaling approximately 20.4 million rentable square feet; the portfolio was 95.7% leased to 104 tenants.
Comparisons with 2011 require caution: STAG began operations following its April 20, 2011 IPO and formation transactions, so the prior-year periods include predecessor results and are not directly comparable.
Financial results and liquidity
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total revenue | $20.0 million | $38.0 million |
| Net loss | $1.5 million | $2.9 million |
| Net loss per common share | $0.11 | $0.24 |
| FFO attributable to common stockholders and unit holders | $6.6 million | $12.5 million |
| Cash from operating activities | Not separately presented | $17.6 million |
For the second quarter, revenue increased 61.2% and net loss narrowed from $6.0 million in the comparable reported period. For the first half, revenue doubled and net loss narrowed from $6.1 million. Management cautions that the comparisons are not meaningful measures of like-for-like operating trends because of the IPO, formation transactions, and portfolio growth. The filing does not provide a clear operating-margin measure.
First-half investing cash use was $110.9 million, mainly for property acquisitions; financing provided $81.9 million. Cash and cash equivalents were $5.1 million at June 30, versus $16.5 million at year-end 2011; restricted cash was $10.0 million, including $1.6 million held for preferred dividends subsequently paid. The company reported no off-balance-sheet arrangements.
At June 30, total debt principal was $292.3 million, including $287.3 million of mortgage notes and $5.0 million drawn on the credit facility. The facility had $95.0 million of remaining availability. Weighted-average debt interest was 4.71%; the company was in compliance with financial covenants. Total assets were $709.8 million and stockholders’ equity, including noncontrolling interests, was $392.4 million.
Material changes and notable items
- Acquisition-led expansion: the company acquired 17 properties during the first half. The June 15 purchase of six properties totaled approximately $30 million; acquisitions completed in the first half had an aggregate purchase price of $111.9 million.
- A May common-stock offering of 8.34 million shares generated $102.8 million net proceeds. Common shares outstanding increased to 24.96 million at June 30 from 15.90 million at December 31, 2011.
- Operating expenses rose with the larger portfolio and public-company staffing. First-half property acquisition costs were $1.4 million; depreciation and amortization was $18.1 million.
- Interest expense increased year over year, partly due to acquisition-related debt and credit-facility borrowings. The prior interest-rate swap expired January 31, 2012; no swaps remained at quarter-end.
- A tenant elected to reduce leased space from approximately 190,000 to 60,000 square feet effective March 31, 2013. This led to a noncash $0.6 million impairment of lease intangibles.
- The company sold a vacant Youngstown, Ohio property for $3.4 million, receiving $3.2 million net proceeds and recognizing a $0.2 million gain.
Outlook, risks and contingencies
No quantified earnings or FFO guidance was provided. Management said limited speculative development, improving tenant economic conditions, low interest rates, and available acquisition opportunities could support occupancy, rents, and acquisition returns. It expects acquisitions to enhance financial performance and believes operating cash flow, financings, and selective property sales can meet liquidity needs.
- Interest-rate exposure: $124.8 million of Wells Fargo debt and the $5.0 million facility balance were variable-rate at quarter-end. Management estimated a 100-basis-point rate increase would add $0.6 million to interest expense over six months, assuming quarter-end balances.
- The Wells Fargo loan, approximately $124.8 million, matures in October 2013. Contractual debt principal payments total $291.9 million, including $132.3 million due in 2013–2014. Refinancing may be more difficult or costly given tighter lending conditions, as management noted.
- Other risks include tenant defaults or nonrenewals, vacancy and rent pressure, acquisition performance, local economic conditions, financing availability, REIT qualification, insurance and environmental exposure. No tenant represented more than 3.8% of base rent; no industry exceeded 12.6% of annualized rent.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Risk factors were unchanged from the 2011 Form 10-K. A potential Columbus Nova incentive fee based on returns through May 2017 had a reported fair value of zero at June 30.
- After quarter-end, STAG acquired three fully leased properties for approximately $22.5 million in total, funded with cash on hand, and incurred a further $30 million of net credit-facility borrowings through August 6. The filing also reports subsequent common and preferred dividend payments.
- Management reported effective disclosure controls and procedures as of quarter-end.
Important facts for investors to verify
- Whether the 95.7% leased rate and 76% retention rate (for leases expired or expiring in 2012) translate into durable occupancy and rent growth.
- The performance and funding economics of recent acquisitions, including the post-quarter purchases and related additional credit-facility borrowing.
- Refinancing plans for the October 2013 Wells Fargo maturity and the company’s exposure to variable interest rates.
- The sustainability of cash available for common dividends after preferred dividends, debt service, acquisition spending, and leasing or capital requirements; first-half common dividends declared were $0.53 per share.
- The effect of the tenant’s 2013 space reduction and other lease expirations on future rental income and portfolio occupancy.