Business context and reporting period
STAG Industrial, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The REIT acquires and manages single-tenant industrial properties. At quarter-end it owned 221 buildings in 34 states, totaling approximately 41.2 million square feet, leased 94.5% to 202 tenants. No tenant represented more than 2.6% of annualized rent.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $41.7 million | $31.8 million | $81.4 million | $61.8 million |
| Consolidated net loss | $(2.7) million | $(0.2) million | $(2.6) million | $(0.6) million |
| Loss per common share, diluted | $(0.10) | $(0.06) | $(0.15) | $(0.10) |
| FFO attributable to common stockholders and unit holders | $15.3 million | $13.2 million | $32.3 million | $26.8 million |
| NOI, excluding discontinued operations | $32.9 million | $26.0 million | $64.5 million | $50.4 million |
Revenue increased 31% in Q2 and 32% for the six-month period, principally reflecting acquisitions. Same-store NOI declined 1.2% in Q2 and 2.4% for the six months; same-store occupancy was 92.9% and 92.4%, respectively, below the corresponding 2013 levels of 93.6% and 93.2%. The filing reports lease GAAP rent growth of 11.3% for leases signed in both the quarter and six-month period.
For the six months, operating cash flow was $40.8 million, investing cash outflow was $120.6 million, and financing cash inflow was $79.1 million. Cash and cash equivalents were $6.0 million at June 30, down from $6.7 million at year-end; restricted cash was $6.5 million.
Total debt was $558.8 million, compared with $556.1 million at December 31, 2013. Debt comprised $223.3 million of mortgages, $35.5 million drawn on the unsecured revolver, and $300.0 million of unsecured term loans. The reported weighted-average rate was 3.76%; $75.0 million of variable-rate debt remained unhedged. Combined revolver and term-loan borrowing capacity was $270.1 million, assuming current leverage. The company reported compliance with applicable financial covenants.
Total assets were $1.35 billion and total equity was $749.9 million at June 30. Common shares outstanding increased to 55.2 million from 44.8 million at year-end, in part from ATM stock sales and conversions of operating partnership units.
Material changes versus the prior comparable period
- Thirteen buildings totaling 3.1 million square feet were acquired in the first half for approximately $117.9 million. Acquisition-related growth drove much of the increase in reported revenue and NOI.
- Same-store rental income fell 1.2% for the first half, with vacancies and tenant space reductions cited as key factors. Same-store expenses rose 19.1%, including higher winter-related costs and expenses associated with a property where the company began paying taxes on a tenant’s behalf.
- General and administrative expense rose $3.8 million in Q2 and $4.8 million for the first half. The increase included an approximately $3.0 million charge associated with the former CFO’s departure and consulting arrangement. Depreciation and amortization also rose with the enlarged portfolio.
- Interest expense increased 20% in Q2 and 21% for the first half, reflecting higher average debt balances. Cash from operations increased 21% year over year for the first half.
Outlook, commentary, risks and unusual items
- Management described the industrial property outlook as positive, citing improving economic conditions, limited speculative development, and tenant demand to shorten supply chains. It expected acquisition activity to enhance results, but provided no quantified earnings or acquisition guidance.
- The board raised the common monthly dividend 5%, to $0.11 per share for July through September 2014. The company also pays cumulative preferred dividends at stated annual rates of 9.0% for Series A and 6.625% for Series B.
- Management warned that approximately 2.7% of annualized base rent was due to expire during the remainder of 2014 and expected replacement rents generally to be lower, assuming market conditions and downtime described in the filing. Tenant retention was 35.1% for Q2 and 55.7% for the first half.
- Interest-rate exposure, tenant defaults or nonrenewals, leasing and vacancy conditions, acquisition execution, refinancing, and REIT qualification are identified risks. A 100-basis-point increase in rates, under the company’s stated assumptions, would have increased first-half interest expense by $0.6 million.
- After quarter-end, the company issued $50 million of 12-year unsecured senior notes on July 1 at a fixed 4.98%; a further $50 million of 10-year notes was scheduled for October, subject to closing conditions. The former CFO resigned in April; the new CFO’s employment became effective July 1.
- The company early adopted revised discontinued-operations guidance. Its March 2014 Lexington, Virginia property sale was therefore reported outside discontinued operations and generated a $50,000 gain. No material legal proceeding or material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether occupancy, same-store NOI, tenant retention, and leasing spreads stabilize, particularly as near-term leases expire.
- Debt maturities, available borrowing capacity, covenant headroom, and exposure to unhedged floating rates.
- How acquisition spending and ATM equity issuance affect per-share performance, leverage, and future distributions.
- Whether operating cash flow supports dividends and recurring capital needs; reported FFO is a supplemental measure, not cash available for dividends.
- The impact of the one-time CFO-related charge and the subsequent financing and management changes on future periods.