STAG Industrial, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
For the quarter ended June 30, 2011. STAG completed its IPO and formation transactions on April 20, 2011, so the company’s own results cover only April 20–June 30; earlier 2011 results are for the STAG Predecessor Group. Comparisons therefore combine different reporting entities and are not fully like-for-like.
At June 30, STAG owned 93 industrial properties across 26 states, totaling approximately 14.2 million rentable square feet. The portfolio was 91.0% leased to 74 tenants. No tenant represented more than 5.3% of annualized rent and no industry more than 14.1%.
Financial performance and position
- Revenue: The combined 2011 six-month total was $19.3 million, up 28% from $15.0 million in the predecessor’s first half of 2010. Combined Q2 revenue was $12.5 million versus $7.3 million; management cautioned this comparison is not meaningful because STAG did not exist before April 20. The company-only April 20–June 30 statement reports revenue of $11.0 million.
- Profit and per-share results: Combined six-month net loss was $6.1 million versus $2.0 million in 2010. For April 20–June 30, the company reported a $5.9 million net loss, of which $3.9 million was attributable to STAG; basic and diluted loss per share was $0.26. The company reported $0.547 million of FFO before noncontrolling interest for that period.
- Cash flow: Company-only cash flows for April 20–June 30 were $1.8 million provided by operations, $21.8 million used in investing, and $33.0 million provided by financing. Cash and cash equivalents ended at $13.3 million. Combined six-month operating cash flow was $4.1 million, compared with $4.7 million for the predecessor in 2010.
- Assets, debt and liquidity: Total assets were $531.6 million and total equity was $259.5 million at June 30. Mortgage debt was $255.9 million, with a reported weighted-average interest rate of 5.65%; debt was fixed-rate or covered by swaps. The $100 million secured revolving facility had no balance outstanding at quarter-end; approximately $19 million remained available under the CIGNA-2 acquisition facility. Cash, operating cash flow and borrowing capacity were identified as short-term liquidity sources.
- Margins and distributions: The filing does not provide a clear standalone operating-margin measure. STAG declared a prorated dividend of $0.2057 per share for its public-company portion of Q2; payment occurred July 15.
Material changes and unusual items
- The IPO and overallotment generated approximately $205.6 million of gross proceeds. Proceeds were used in part to repay debt; the company also paid down the $11 million drawn on its revolving facility. The balance was retained for acquisitions and general corporate needs.
- Formation-related costs included $3.7 million expensed in the post-IPO period; $17.0 million of offering costs reduced additional paid-in capital. Higher depreciation and amortization and corporate overhead also reflected the expanded portfolio and newly public-company operations.
- STAG acquired two fully leased facilities during Q2: a 231,000-square-foot Michigan property leased to JCIM for approximately $14.1 million and a 101,500-square-foot Texas property leased to Ecolab for approximately $3.6 million.
- Debt increased from $203.2 million at December 31, 2010 to $255.9 million at June 30, 2011, while the company also completed substantial debt repayments and assumed debt in formation transactions. Debt fair value was $255.4 million at quarter-end.
Outlook, risks and contingencies
Management expected measured economic improvement and limited speculative development to support occupancy and rents, and anticipated acquisitions could enhance performance. It described a strategy focused on acquiring single-tenant industrial properties, generally priced at $5 million to $25 million. No specific earnings or FFO guidance was provided.
Key risks include vacancies, lease expirations, tenant defaults or bankruptcies, weaker local or national economic conditions, acquisition performance, financing and refinancing availability, interest-rate changes, environmental exposure, and maintaining REIT qualification. Approximately 1.27 million square feet was available at June 30; leases covering 1.9% of portfolio square footage and 3.1% of annualized rent were scheduled to expire by year-end. Management reported compliance with debt covenants and no material off-balance-sheet arrangements. Ordinary-course legal matters were not expected to have a material adverse effect.
Subsequent events included a July 8 agreement for a $65 million CIGNA loan at 5.88%; a $13.5 million revolving-facility borrowing on July 18; and three acquisitions announced through August 4. A July 8 lease termination agreement for a Youngstown facility provided for a $1.95 million fee. These events occurred after quarter-end.
Important facts for investors to verify
- Reconcile company-only post-IPO results with predecessor results and the combined MD&A comparisons before interpreting year-over-year changes.
- Review occupancy, available space, scheduled expirations and tenant credit exposure, including the effect of the Youngstown lease termination.
- Confirm debt availability, covenant headroom, maturities and funding for post-quarter acquisitions, including the new CIGNA facility and revolving-facility draw.
- Assess recurring operating performance separately from formation costs, acquisition activity, swap valuation changes and noncash depreciation and amortization.
- Monitor the company’s progress in qualifying as a REIT beginning with the 2011 tax year and its ability to fund dividends and capital needs.