STAG Industrial, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual filing, not a stand-alone fourth-quarter report. STAG is a REIT focused on owning and operating single-tenant U.S. industrial properties.
Business and portfolio
- At year-end, owned 314 buildings across 37 states, totaling 60.9 million rentable square feet, leased to 275 tenants. Total portfolio occupancy was 94.7%; the core warehouse and light-manufacturing operating portfolio was 95.7% occupied.
- Warehouse/distribution properties accounted for 87% of annualized base rent. No tenant represented more than 3.1% of annualized base rent; the largest industry exposure was automotive at 13.6%.
- Acquired 47 buildings (10.3 million square feet) for approximately $471.8 million and sold 24 buildings (about 4.2 million square feet) during 2016.
Financial and operating results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $250.2 million | $218.6 million |
| Net income (loss) | $35.6 million | ($29.3 million) |
| Net income (loss) attributable to common stockholders | $20.2 million; $0.29 per share | ($38.6 million); ($0.58) per share |
| Net operating income (NOI), non-GAAP | $201.1 million | $175.4 million |
| FFO attributable to common stockholders and unit holders, non-GAAP | $101.5 million | $93.9 million |
| Cash provided by operating activities | $135.4 million | $121.7 million |
| Cash used in investing activities | ($347.1 million) | ($372.0 million) |
| Cash provided by financing activities | $211.9 million | $238.5 million |
- Revenue increased 14.5%; same-store NOI increased 1.9%. Management reported 7.3% GAAP rent growth on new and renewal leases combined, while same-store occupancy declined to 95.3% from 96.4%.
- Net income turned positive mainly because the company recorded $61.8 million of net gains on property sales, versus $5.0 million in 2015. The result also reflected $16.8 million of impairment losses and $3.3 million of debt-extinguishment losses. Common-stockholder earnings should therefore be considered alongside recurring operating measures.
- Year-end total assets were $2.19 billion and total equity was $1.07 billion. Total debt principal was $1.04 billion, up from $986.7 million a year earlier; weighted-average interest rate was 3.75%. Secured debt was 15.8% of principal debt.
- Year-end cash was $12.2 million; reported immediate liquidity was approximately $430.7 million, including $418.5 million available under the unsecured credit facility and term loans. The company reported compliance with debt covenants.
- Net debt to real estate cost basis was 41.0%. Approximately $18.7 million of principal was due in 2017; 1.5% of debt was scheduled to mature within 12 months.
- Common dividends declared were approximately $1.39 per share for 2016, versus $1.365 in 2015. The board set a monthly common dividend of $0.116667 for the first half of 2017; distributions remain subject to board discretion.
Changes, outlook, and risks
- Growth reflected acquisitions and portfolio turnover; acquisitions completed after the start of 2015 contributed $46.4 million of NOI in 2016. Property sale proceeds were $152.1 million, and sales generated most of the year’s reported GAAP profit.
- Management described the outlook as positive but moderated, citing slow economic growth, policy uncertainty, and elevated asset values. It expected favorable industrial supply-demand conditions and potential rent growth, while noting that rising interest rates could accompany stronger economic conditions. No quantified earnings or acquisition guidance was provided.
- Management cited improving employment, consumer confidence and manufacturing indicators, e-commerce demand, and limited speculative development in many markets as supportive factors. It also flagged corporate defaults, weaker organic growth at some large companies, and increasing development activity as reasons for caution.
- Lease rollover is significant: about 44.8% of annualized base rent was due to expire by December 31, 2019, including 9.9% in 2017. Management expected 2017 replacement rents generally to be below expiring rents. Tenant retention was 69.5% in 2016.
- Key risks include tenant default or non-renewal at single-tenant properties, vacancy and re-leasing costs, local economic and industry concentration, acquisition execution, access to capital, debt refinancing and interest rates, covenant restrictions, and environmental or uninsured property losses. Most variable-rate debt was hedged; $28 million on the credit facility remained unhedged, and a 100-basis-point rate increase was estimated to add about $0.3 million of annual interest expense at the year-end balance.
- The company revised prior-period statements after identifying an error in the useful-life estimate for a building acquired in 2014. It said the error was not material to previously issued statements; the revision reduced 2015 depreciation by $2.1 million and 2014 depreciation by $0.4 million, with no cash impact. Management and the auditor reported effective internal control over financial reporting. No material legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of 2016 earnings and cash-generation capacity is repeatable without the $61.8 million property-sale gain; compare GAAP earnings with FFO and operating cash flow.
- Upcoming lease expirations, actual renewal and re-leasing rents, occupancy trends, and tenant-improvement and leasing-commission costs.
- Acquisition returns and financing needs relative to property-sale proceeds, including the effect of continued common-stock issuance: STAG sold 12.1 million shares through ATM programs for $278.7 million net proceeds in 2016.
- Debt maturities, borrowing availability under covenants, interest-rate hedging, and whether dividends remain covered by recurring cash flow after capital and leasing requirements.
- The impact of the depreciation-life revision and the timing and financial-statement effects of upcoming accounting-standard changes.