STAG Industrial, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. STAG is a U.S. industrial REIT focused on single-tenant properties. At quarter-end, it owned 395 buildings across 38 states, totaling approximately 78.2 million rentable square feet; the portfolio was 95.2% leased.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $95.7 million | $83.3 million | +14.9% |
| Net income | $7.4 million | $25.1 million | -70.6% |
| Net income per diluted common share | $0.05 | $0.22 | Down |
| FFO attributable to common stockholders and unit holders | $52.2 million | $42.6 million | +22.4% |
| Net cash from operating activities | $47.2 million | $42.0 million | +12.3% |
| Net cash used in investing activities | $176.8 million | $36.1 million | Higher outflow |
Property NOI was $76.2 million, up 15.8%; total-portfolio NOI margin was approximately 79.6%, versus 79.0% a year earlier. Same-store NOI rose 2.3%, while same-store occupancy declined to 95.5% from 96.2%. Same-store rental income increased 4.1%.
GAAP net income fell chiefly because the prior-year quarter included a $22.7 million gain on property sales, compared with $1.3 million in Q1 2019. Q1 2019 also included $5.3 million of impairment losses, up from $2.9 million, and higher interest expense. FFO, a non-GAAP measure, increased; it should not be treated as a substitute for net income or cash available for dividends.
Balance sheet, debt and liquidity
- Total assets were $3.24 billion and total liabilities were $1.46 billion at March 31, 2019. Cash and cash equivalents were $7.9 million; cash plus restricted cash totaled $12.3 million.
- Total debt principal was approximately $1.35 billion, with a weighted-average interest rate of 3.56% and weighted-average duration of 4.4 years. Secured debt represented 4% of principal; no debt was scheduled to mature in the next 12 months. Net debt to real estate cost basis was 37%.
- Immediate liquidity was approximately $561.8 million: $7.9 million cash and $553.9 million of aggregate undrawn nominal credit-facility and term-loan commitments. Actual borrowing capacity may be lower depending on covenant compliance.
- All debt covenants were in compliance at quarter-end. Most variable-rate debt was hedged; $115.5 million drawn on the unsecured credit facility remained unhedged. A 100-basis-point rate increase on that balance would have increased quarterly interest expense by approximately $0.3 million.
Material changes and notable items
- STAG acquired 10 buildings totaling 2.36 million square feet for $185.4 million and sold five buildings totaling approximately 1.0 million square feet, receiving $16.6 million net proceeds.
- It raised $150.2 million gross, or $148.9 million net, through its at-the-market common stock program, issuing 5.44 million shares at a weighted-average $27.60 per share. Weighted-average common shares outstanding rose to 114.7 million from 97.0 million.
- After quarter-end, the company completed an underwritten offering of 7.475 million shares, receiving approximately $214.7 million net. It also increased authorized common shares to 300 million and authorized preferred shares to 20 million.
- Cash flow from operations increased, while investing outflows rose with acquisition activity. Financing cash flow was $119.4 million, principally reflecting equity proceeds and credit-facility activity. Dividends and distributions paid were $42.3 million.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of $16.3 million in operating lease right-of-use assets and approximately $18.0 million in lease liabilities, with no material overall financial-statement impact. Comparative periods were not restated.
Outlook, risks and contingencies
Management described the outlook as positive but moderated, citing continued industrial demand, low market availability and expected benefits from rising rents and strong occupancy. It highlighted e-commerce and distribution demand, U.S. manufacturing trends and transportation infrastructure. Management also plans to monitor rising development activity and tenant labor availability. No specific full-year financial guidance is provided in the supplied filing text.
Key risks include economic or local-market weakness, new supply, tenant defaults or non-renewals, changes in rents and occupancy, acquisition execution, interest rates and refinancing, access to equity capital, REIT qualification, insurance, environmental liabilities and natural disasters. Management noted that the broader economic expansion was mature and policy uncertainty remained.
Legal matters arising in the ordinary course were not expected to have a material adverse effect. The filing disclosed $5.6 million of letters of credit and a $9.8 million development commitment for a tenant-related building expansion. A Rapid City property impairment of $5.3 million followed a change in the estimated hold period; valuation used Level 3 discounted cash flow assumptions, including 12% discount and exit-capitalization rates. The filing reported no material changes to risk factors from the 2018 Form 10-K.
Most important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth translate into durable same-store NOI growth, given the 0.7-point year-over-year same-store occupancy decline.
- The contribution of the prior-year property-sale gain to the sharp GAAP earnings comparison, and the significance of current and future impairment charges.
- Debt capacity and refinancing exposure, including covenant limits on stated undrawn commitments and the unhedged credit-facility balance.
- The effects of share issuance and subsequent offering on per-share performance, dividend coverage and capital deployment returns.
- Lease rollover and re-leasing assumptions: leases representing 7.8% of annualized base rent expire between April 2019 and March 2020; management expected comparable revenue from that space under its assumptions.