STAG Industrial, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. STAG is a REIT focused on single-tenant industrial properties. At quarter-end, it owned 360 buildings across 37 states, totaling approximately 70.8 million rentable square feet; portfolio occupancy was 94.7%.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $83.3 million | $69.5 million | Up 19.9% |
| Net income | $25.1 million | $0.1 million | Includes a $22.7 million property-sale gain |
| Net income attributable to common stockholders | $21.7 million; $0.22/share | $(2.4) million; $(0.03)/share | Reported improvement substantially reflects property-sale gain |
| FFO attributable to common stockholders and unit holders | $42.8 million | $33.2 million | FFO is a non-GAAP measure |
| NOI | $65.8 million | $56.2 million | Up 17.0%; non-GAAP measure |
| Operating cash flow | $42.0 million | $31.4 million | Up 33.6% |
Same-store rental income increased 0.2% and tenant recoveries increased 10.4%, but same-store property expenses rose 12.2%; same-store NOI consequently fell 0.6%. Same-store occupancy was 95.6%, down from 96.5% a year earlier. For new and renewal Operating Portfolio leases signed during the quarter, weighted-average straight-line rent change was 16.8% (8.7% cash rent change).
Cash and cash equivalents were $10.5 million, with restricted cash of $7.3 million. Immediate liquidity was approximately $311.6 million, including $301.1 million of stated availability under the unsecured credit facility and term loans. Total debt principal was approximately $1.20 billion, with a 3.56% weighted-average interest rate and 4.3-year weighted-average duration. Secured debt was 5% of debt; net debt to real estate cost basis was 39%. The company reported compliance with debt covenants.
Material changes and notable items
- Revenue growth primarily reflected acquired properties and tenant recoveries. Acquisitions contributed $11.5 million to NOI in Q1 2018 versus $1.2 million in Q1 2017.
- STAG acquired six buildings totaling approximately 1.1 million square feet for $78.8 million and sold two buildings for net proceeds of $49.6 million, recognizing a $22.7 million gain.
- Two properties were impaired, resulting in a $2.9 million charge. Depreciation and amortization increased by $4.0 million year over year, primarily due to acquisitions.
- Interest expense increased 8.7% to $11.4 million. The company drew $75 million on a term loan in March. It had $218 million outstanding on its revolving credit facility and $525 million in term-loan principal.
- Cash used in investing activities was $36.1 million, compared with $102.1 million in Q1 2017; cash used in financing activities was $16.3 million, versus $64.7 million provided in Q1 2017. Dividends and distributions paid were $36.2 million.
Outlook, risks and contingencies
Management described the business outlook as positive but moderated. It cited industrial demand drivers, including e-commerce and manufacturing and distribution needs, and expected that economic strengthening and favorable supply-demand conditions could support rent growth and acquisition yields. Management also noted a pickup in industrial development and tenant concerns about labor availability. No quantified earnings or FFO guidance was provided.
Management said most variable-rate debt was hedged: of $743 million in variable-rate debt, $143 million remained unhedged at quarter-end. A 100-basis-point rate increase, applied to that unhedged balance for the quarter, would have increased interest expense by approximately $0.4 million. Risks include interest rates and refinancing, leasing and tenant credit, property-market conditions, acquisition execution, and access to capital. Management reported no material change to previously disclosed risk factors, no material litigation expected to adversely affect the company, and no other material off-balance-sheet arrangements beyond approximately $5.9 million of letters of credit.
Subsequent to quarter-end, STAG entered into an agreement for $175 million of senior unsecured notes: $75 million due in 2025 at 4.10% and $100 million due in 2028 at 4.27%. The company also declared monthly common dividends of $0.118333 per share for April through June 2018.
Important facts for investors to verify
- How much of reported earnings growth is recurring: Q1 net income included a $22.7 million gain on property sales.
- Whether same-store occupancy and NOI stabilize, given lower same-store occupancy and higher property costs.
- Actual borrowing availability under covenants and the effect of rising rates on the $143 million unhedged balance.
- Acquisition and disposition performance, including the contribution and leasing progress of recently acquired properties.
- Lease rollover exposure: approximately 10.3% of annualized base rent was scheduled to expire from April 1, 2018 through March 31, 2019.
- Execution and final terms of the post-quarter $175 million note placement, and future dividend coverage from operating cash flow.