STAG Industrial, Inc. annual report, FY2014

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STAG Industrial, Inc. — FY 2014 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. STAG is a REIT focused on acquiring and operating single-tenant U.S. industrial properties. At year-end, it owned 248 buildings across 36 states, totaling 47.0 million rentable square feet, and reported 94.9% leased occupancy across 227 tenants.

Financial and operating results

  • Revenue: $173.8 million, up 29.8% from $133.9 million in 2013. Rental income was $149.5 million and tenant recoveries were $23.6 million.
  • Profit: GAAP net loss was $5.0 million, versus net income of $4.9 million in 2013. Net loss attributable to common stockholders was $15.2 million, or $0.28 per share, compared with a $4.2 million loss, or $0.10 per share, in 2013. Depreciation and amortization was $88.1 million.
  • Funds from operations: NAREIT FFO was $82.9 million, up from $70.2 million. FFO attributable to common stockholders and unit holders was $71.7 million, compared with $60.4 million. FFO is a non-GAAP measure and is not a measure of liquidity or funds available for dividends.
  • NOI and margins: Non-GAAP net operating income was approximately $139.8 million, versus $109.0 million in 2013, excluding discontinued operations. This equates to approximately 80% of total revenue; it is not a GAAP operating margin. Same-store NOI fell 2.0% to $91.7 million, with same-store occupancy down to 92.7% from 94.7%.
  • Cash flow: Operating cash flow was $96.7 million, up 16.9%. Investing activities used $421.7 million, primarily reflecting acquisitions; financing activities provided $342.2 million. Cash and cash equivalents were $23.9 million at year-end.
  • Debt and liquidity: Total debt was $686.3 million, up from $556.1 million. The weighted-average interest rate was 4.04%, versus 3.64%; weighted-average duration increased to 6.9 years from 4.7. Net debt to real estate cost basis was 37%, and debt to enterprise value was 28%. Year-end immediate liquidity was $457.8 million, including $23.9 million cash and $433.9 million available under the unsecured credit facility and term loans. The company reported covenant compliance.
  • Dividends and equity: Common dividends declared totaled $1.29 per share for 2014, up from $1.20 in 2013. The monthly rate was raised to $0.1125 for 2015. About 34.1% of the 2014 common distribution was classified as return of capital for tax purposes. Common shares outstanding rose to 64.4 million from 44.8 million.

Material changes versus 2013

  • Portfolio expanded from 209 to 248 buildings and from 38.1 million to 47.0 million square feet. STAG acquired 43 buildings for $425.0 million, compared with 39 buildings for approximately $343.3 million in 2013.
  • Total revenue rose 29.8%, while same-store revenue was nearly flat and same-store NOI declined 2.0%. Management noted that acquisitions are generally made at full occupancy, so same-store results can be affected as occupancy normalizes toward market levels.
  • Debt increased by $130.3 million. The company completed a broad refinancing of unsecured facilities and issued $180 million of unsecured notes by year-end, extending debt duration and reducing the stated cost of fully committed unsecured debt from LIBOR plus 1.66% to LIBOR plus 1.41%.
  • Equity issuance funded growth: 14.4 million common shares were issued through public and at-the-market offerings, generating $316.7 million in proceeds before offering costs. The increase in share count is relevant when assessing per-share growth.
  • GAAP results moved from 2013 net income to a 2014 net loss. Higher depreciation and amortization from acquisitions, higher G&A and interest expense, and a $2.8 million impairment contributed to the change.

Outlook, commentary and risks

  • Management described the outlook as positive, citing improving economic conditions, low interest rates, tenant demand, e-commerce and supply-chain trends, and limited speculative industrial development in its markets. It provided no specific earnings or FFO guidance in the supplied filing text.
  • Management’s acquisition goal is to acquire at least 25% of the prior year’s real estate cost basis, subject to suitable opportunities. The year-end potential acquisition pipeline exceeded $1.1 billion across 85 buildings; it included opportunities under consideration and was not a committed acquisition amount.
  • Leasing rates on new and renewal leases increased 9.5% on a GAAP basis in 2014. However, approximately 37.1% of annualized rent was scheduled to expire before the end of 2017, and management expected 2015 replacement rents on affected space to be slightly lower under its assumptions. Available space was approximately 2.4 million square feet.
  • Unusual items included a $2.8 million impairment associated with a property sold in 2014, a $0.7 million loss on extinguishment of debt, and approximately $3.0 million of G&A expense related to the former CFO’s departure and consulting arrangement. The former General Counsel’s accelerated LTIP vesting added approximately $0.9 million of G&A expense.
  • At year-end, $56 million of variable-rate debt was not fixed by swaps. Subsequent to year-end, STAG entered into swaps covering variable-rate term loans, but the revolving credit facility remained floating-rate. Interest-rate increases, refinancing access, tenant defaults or non-renewals, acquisition execution, and the ability to maintain REIT status remain material risks.
  • Environmental liabilities, asbestos-containing materials at certain properties, insurance limitations, lease rollover and vacancy costs, and cross-collateralized secured loans are additional exposures. Management reported no legal proceedings expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  • Reconcile GAAP net loss, common-stockholder loss, FFO and cash available for dividends; assess the impact of preferred dividends, depreciation, and non-cash compensation.
  • Review the 2015–2017 lease expirations, tenant renewals and move-outs, and whether reported rent growth offsets same-store occupancy declines and leasing costs.
  • Confirm the availability and terms of reported liquidity, debt covenant headroom, scheduled maturities, and the effect of the post-year-end interest-rate swaps.
  • Assess whether acquisition growth and the stated pipeline can produce per-share cash-flow growth after equity issuance, acquisition costs and dilution.
  • Verify the sustainability and coverage of common and preferred dividends, including the return-of-capital portion of common distributions.
  • Review the impairment assumptions, environmental and insurance coverage limitations, and the costs associated with executive departures and incentive awards.