STAG Industrial, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. STAG is a U.S. industrial-property REIT focused on single-tenant assets. This filing covers the quarter and nine months ended September 30, 2017. At quarter-end, it owned 347 buildings across 37 states, totaling approximately 69.1 million rentable square feet; the portfolio was 94.6% leased to 301 tenants.
Financial and operating performance
- Revenue: Q3 revenue was $78.1 million, up 24.8% from $62.6 million. Nine-month revenue was $219.8 million, up 19.7% from $183.7 million.
- Profit and EPS: Q3 net income was $21.8 million and net income attributable to common stockholders was $18.5 million, or $0.20 per diluted share, versus a $3.8 million common-stockholder loss, or $(0.05) per share, in Q3 2016. Nine-month net income was $23.3 million versus $2.5 million; common-stockholder income was $15.0 million versus a loss of $8.3 million. Gains on property sales materially affected reported earnings.
- FFO: FFO attributable to common stockholders and unit holders was $39.9 million in Q3 versus $26.8 million, and $106.8 million for nine months versus $72.5 million.
- Property operations: Total portfolio NOI was $62.7 million in Q3, up 22.2%, and $177.5 million for nine months, up 19.9%. Same-store NOI was essentially flat in Q3 ($45.3 million) and rose 0.6% for nine months ($130.3 million). Operating Portfolio occupancy was 95.4%; same-store occupancy declined 0.7 percentage points year over year. For leases signed in the first nine months, weighted average cash and GAAP rent increases were 3.0% and 10.5%, respectively.
- Cash flow: Nine-month cash from operations was $120.5 million, compared with $97.9 million. Investing used $462.7 million, mainly reflecting acquisitions; financing provided $341.0 million. Cash and cash equivalents were $11.0 million at September 30.
- Debt and liquidity: Principal debt was $1.154 billion, versus $1.042 billion at December 31, 2016; weighted average interest rate was 3.44%. Secured debt was 5% of principal debt, weighted average duration was 4.8 years, and net debt to real estate cost basis was 38%. Immediate liquidity was approximately $360.1 million, including $349.1 million of available credit. The company reported compliance with debt covenants.
- Equity and distributions: STAG raised $339.6 million gross from common-stock sales during the nine months, primarily through its ATM program. The monthly common dividend was increased to $0.118333 per share for January–March 2018.
Material changes and unusual items
- STAG acquired 42 buildings totaling approximately 9.2 million square feet for $505.1 million during the first nine months. It sold nine buildings; net proceeds were $43.5 million and the recognized gain was $19.2 million.
- Q3 earnings included a $17.6 million property-sale gain. Nine-month earnings also included a $19.2 million property-sale gain; these gains are excluded from FFO.
- Three mortgage notes were repaid in August 2017. A new $150 million delayed-draw term loan agreement was entered into in July; no amount had been drawn as of quarter-end. The unsecured credit facility balance increased to $245 million from $28 million at year-end.
- During the nine months, STAG revised prior-period financial statements for a nonmaterial depreciation useful-life error related to a building acquired in 2014. The revision increased prior-period net income and equity and did not affect cash.
- A building affected by an earlier involuntary conversion had a cumulative write-down of approximately $1.5 million by quarter-end; about $0.5 million of insurance proceeds remained receivable.
Outlook, risks, and contingencies
- Management described the outlook as positive but moderated, citing slow economic growth, policy uncertainty, and continued asset appreciation. It expected industrial demand to benefit from job and GDP growth, e-commerce, and supply-demand conditions, while noting that development activity was increasing.
- Management highlighted energy, retail, and automotive-sector credit concerns, and identified tenant defaults or non-renewals, vacancies, lower rents, acquisition execution, economic conditions, and interest rates as risks. Leases representing 8.4% of annualized base rent were scheduled to expire from October 2017 through September 2018; management expected new rents on this space generally to be lower than expiring rents.
- Most variable-rate debt was hedged, except the $245 million credit-facility balance. STAG estimated a 100-basis-point increase in rates, applied to that balance for the nine-month period, would have increased interest expense by approximately $1.8 million.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Letters of credit totaled approximately $5.9 million; no other material off-balance-sheet arrangements were reported. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects property-sale gains versus recurring property operations; compare GAAP net income with FFO and same-store NOI.
- Whether acquisitions earn adequate returns after financing costs, and how occupancy, rent growth, and same-store performance evolve.
- The leasing outcome for the 8.4% of annualized rent expiring over the next twelve months, given management’s expectation of lower replacement rents.
- Future debt-funding needs, credit-facility availability and covenant headroom, and sensitivity to interest rates on unhedged borrowings.
- The impact of continued ATM share issuance and the increased common dividend on per-share results and capital needs.