Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011, for STAG Industrial, Inc. (the "Company"). The financial statements presented are primarily for the STAG Predecessor Group, a collection of real estate entities owned by STAG Investments III, LLC, which were acquired by the Company in formation transactions concurrent with its Initial Public Offering (IPO) on April 20, 2011. The Company is a self-administered, self-managed Real Estate Investment Trust (REIT) focused on acquiring, owning, and managing single-tenant industrial properties across the United States.
Key Financial Metrics
All figures in thousands of dollars unless otherwise noted.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $6,742 | $7,683 |
| Net Loss | $(139) | $(1,106) |
| Net Cash Provided by Operating Activities | $1,986 | $1,575 |
| Total Assets (as of Mar 31, 2011) | $208,895 | - |
| Total Liabilities (as of Mar 31, 2011) | $219,014 | - |
| Mortgage Notes Payable (as of Mar 31, 2011) | $201,986 | - |
| Cash and Cash Equivalents (as of Mar 31, 2011) | $954 | - |
Liquidity and Debt: As of March 31, 2011, the Predecessor Group held $954,000 in cash and cash equivalents and $3,112,000 in restricted cash. Total mortgage debt outstanding was $201,986,000, primarily owed to Anglo Irish Bank. The group reported an owners' deficit of $(10,119,000).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by 12% ($941,000) compared to Q1 2010. Rental income dropped 9% due to terminated or expired leases at two properties, partially offset by new leases and escalations. Tenant recoveries fell 29% due to lower occupancy.
- Improved Net Loss: Net loss improved significantly by 87% (from $(1,106,000) to $(139,000)). This improvement was driven by a $1,175,000 swing in the gain/loss on interest rate swaps (from a loss of $(589,000) to a gain of $586,000) and reduced depreciation/amortization expenses.
- Expense Reductions: Total expenses decreased 12%. Property expenses fell 12% due to reduced utility usage from vacancies. General and administrative expenses dropped 28% due to lower legal fees. Depreciation and amortization decreased 15% as accelerated amortization recorded in the prior year was not repeated.
- Cash Flow: Net cash provided by operating activities increased 26% to $1,986,000, primarily due to an increase in prepaid rent received from tenants.
Guidance, Outlook, and Subsequent Events
Subsequent Events (Post-March 31, 2011):
- IPO Completion: On April 20, 2011, the Company completed its IPO, selling 13,750,000 shares at $13.00 per share for gross proceeds of approximately $179 million. On May 13, 2011, the underwriters exercised an option to purchase an additional 2,062,500 shares, bringing total gross proceeds to approximately $205 million.
- Debt Restructuring: Proceeds from the IPO were used to pay off the bridge loan in full and make a partial paydown of the master loan ($26.4 million). The maturity of the master loan was extended from January 2012 to October 2013.
- New Credit Facility: The Company closed a $100 million secured corporate revolving credit facility with Bank of America, N.A. Approximately $11.0 million was borrowed initially to pay down assumed indebtedness but was repaid on May 17, 2011, using proceeds from the overallotment option.
- Dividend Declaration: On May 2, 2011, the Board declared a second-quarter dividend of $0.26 per share, payable July 15, 2011. This will be pro-rated to $0.2057 per share for the portion of the quarter the Company was public.
Risks and Contingencies: The Company faces risks related to tenant defaults, lease expirations (2.5% of rentable square footage expiring before Dec 31, 2011), and interest rate fluctuations. One tenant, Stream International, Inc., represented 8% of base rental income in Q1 2011. The Company is in compliance with all financial covenants on its loan agreements.
Key Facts for Investor Verification
- Predecessor vs. Successor: Verify that financial performance metrics (revenue, loss) reflect the STAG Predecessor Group, not the public Company, which had no operating activity prior to the April 20, 2011 formation transactions.
- Debt Maturity: Confirm the extension of the Anglo Irish Bank master loan maturity to October 2013 and the full repayment of the bridge loan using IPO proceeds.
- Interest Rate Swap Impact: Note that the significant improvement in net loss was largely due to a non-cash gain on an interest rate swap ($586,000), which is a volatile line item dependent on LIBOR rates.
- Occupancy and Leases: Verify the impact of the two properties with terminated leases on future revenue projections and the 90.7% occupancy rate as of the IPO date.
- Related Party Transactions: Review the repayment of the $5,173,000 note payable to a related party (NED Credit, Inc.) and the accrued guarantee fees using IPO proceeds.