STAG Industrial, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017. STAG is a REIT focused on acquiring and operating single-tenant industrial properties across the United States. At quarter-end, it owned 324 buildings totaling approximately 63.2 million rentable square feet; portfolio occupancy was 94.8%, and its warehouse and light-manufacturing Operating Portfolio was 95.8% leased.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $69.5 million | $60.9 million; up 14.1% |
| Net income | $0.1 million | $12.3 million |
| Net income (loss) attributable to common stockholders | $(2.4) million; $(0.03) per share | $8.8 million; $0.13 per share |
| FFO attributable to common stockholders and unit holders | $33.2 million | $21.3 million |
| Net operating income (NOI) | $56.2 million | $48.2 million; up 16.6% |
| Cash from operating activities | $31.2 million | $25.2 million |
| Cash and cash equivalents | $7.1 million | $12.2 million at December 31, 2016 |
| Total debt principal outstanding | $1,073.2 million; weighted-average interest rate 3.68% | $1,042.3 million at December 31, 2016 |
| Total assets | $2,251.2 million | $2,186.2 million at December 31, 2016 |
NOI was approximately 80.8% of revenue, compared with 79.2% in Q1 2016; this is a simple ratio of the reported NOI to revenue, not a GAAP operating margin. Immediate liquidity was approximately $382.7 million, comprising $7.1 million of cash and $375.6 million of availability under the credit facility, subject to covenants and borrowing limits. Debt was 14% secured, 9% was scheduled to mature within 12 months, and net debt to real estate cost basis was 41%.
Material changes versus the prior comparable period
- Revenue grew 14.1%, and NOI grew 16.6%, supported largely by acquisitions. Same-store NOI was essentially flat, down 0.1%, while same-store occupancy declined to 95.7% from 96.1%.
- GAAP net income fell to $0.1 million from $12.3 million. A $17.7 million property-sale gain in Q1 2016 did not recur; Q1 2017 recorded a $0.3 million gain. Higher depreciation and amortization, up $6.2 million, also weighed on results.
- FFO increased to $33.2 million from $21.3 million. FFO is a non-GAAP measure and should be considered alongside GAAP results.
- Acquired 11 buildings totaling 2.3 million square feet for approximately $99.8 million; investing activities used $100.9 million. Sold one building for net proceeds of $3.9 million.
- Raised $68.5 million gross through its ATM common-stock program, issuing about 2.84 million shares. The company reported 83.4 million common shares outstanding at March 31, versus 80.4 million at December 31, 2016.
Outlook, management commentary, risks and unusual items
- 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 employment, e-commerce, and supply-demand conditions, while noting signs of caution and rising development activity in some markets. No numerical earnings or FFO guidance was provided in the filing text.
- Leases representing 12.2% of annualized base rental revenue were due to expire from April 1, 2017 through March 31, 2018. Management expected rents on replacement leases generally to be lower than the expiring rents. Q1 Operating Portfolio lease executions showed a 9.8% GAAP rent change and 4.1% cash rent change; tenant retention was 51.3%.
- Management identified tenant defaults or non-renewals, vacancies and rent declines, acquisition execution, financing and refinancing, interest rates, insurance, economic conditions, and maintaining REIT status among key risks. Of $521.0 million in variable-rate debt, all except the $71.0 million credit-facility balance was fixed with swaps. A 100-basis-point rate increase on that unhedged balance would have raised quarterly interest expense by approximately $0.2 million.
- Reported compliance with debt covenants. Management stated that ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
- A building useful-life error identified in connection with the 2016 financial statements was deemed immaterial to previously issued statements and revised; it overstated prior depreciation and understated property and equity, with no cash impact.
- Q1 included a $0.3 million loss on involuntary conversion. Approximately $0.8 million of insurance proceeds remained receivable at quarter-end. Certain lease termination fees were recognized in rental income.
- After quarter-end, the company launched a new ATM program of up to $300 million and sold shares for approximately $135.0 million gross ($133.4 million net), for acquisitions, debt repayment, and general corporate purposes. It also acquired three buildings for approximately $20.6 million.
Important facts for investors to verify
- Reconcile the sharp GAAP earnings decline with the prior-period property-sale gain and the substantial growth in FFO.
- Track same-store occupancy, leasing spreads, retention, and the expected rent impact from near-term lease expirations.
- Assess acquisition returns and funding needs alongside ATM issuance, share dilution, debt growth, and available credit-facility capacity.
- Review near-term secured debt maturities, covenant-based borrowing capacity, and exposure to unhedged interest rates and swap counterparties.
- Monitor the insurance recovery and property impact from the involuntary conversion, as well as the execution and accounting of post-quarter acquisitions.