STAG Industrial, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. STAG is an industrial REIT focused on owning and operating single-tenant industrial properties across the United States. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. At quarter-end, STAG owned 561 buildings in 41 states, totaling approximately 111.6 million rentable square feet.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $173.6 million | $159.2 million | +9.0% |
| Net income | $50.6 million | $54.0 million | -6.3% |
| Net income attributable to common stockholders | $49.4 million | $52.8 million | -6.4% |
| Diluted earnings per share | $0.28 | $0.30 | Down $0.02 |
| FFO attributable to common stockholders and unit holders | $99.2 million | $97.2 million | +2.1% |
| Net operating income (NOI) | $137.7 million | $127.4 million | +8.0% |
| Net cash from operating activities | $86.4 million | $88.9 million | -2.8% |
- Rental income increased 9.2%. Same-store rental income rose 4.9%, while same-store NOI increased 4.9%; same-store occupancy improved to 98.1% from 97.5%.
- New and renewal leases covering 4.8 million square feet had a weighted-average cash rent change of 25.3% and straight-line rent change of 35.3%. These are lease commencement statistics, not realized portfolio-wide rent growth.
- Property expense rose 12.9% to $35.9 million; interest expense increased 31.0% to $22.6 million. The filing reports no separate operating margin; calculated NOI as a share of total revenue was approximately 79.3%, versus 80.0% in Q1 2022.
- Investing activities provided $9.8 million, versus $148.8 million used in Q1 2022. The company spent $27.7 million on property additions and received $36.3 million from property sales. Financing activities used $104.9 million, and cash and restricted cash ended at $18.2 million.
Debt and liquidity
- Principal debt outstanding was $2.468 billion at March 31, 2023; carrying value, net of financing costs and discounts, was $2.459 billion. The weighted-average interest rate was 3.49%, and weighted-average duration was 5.1 years.
- Net debt to real estate cost basis was 35.5%; secured debt was 0.3% of the debt capital structure. Approximately 0.1% of debt was scheduled to mature in the next 12 months.
- Immediate liquidity was approximately $778.9 million: $17.2 million of cash and $761.7 million of available credit-facility capacity. The $1.0 billion facility had $235.0 million drawn. STAG reported compliance with applicable debt covenants.
- STAG repaid $100 million of Series F notes at maturity in January. It reported $1.260 billion of variable-rate debt, with all outstanding variable-rate debt other than the credit facility fixed through swaps. A 100-basis-point increase in rates, assuming the quarter-end facility balance, would have added about $0.6 million to quarterly interest expense.
Material changes, outlook, risks, and unusual items
- Net income declined despite revenue and NOI growth, chiefly reflecting higher interest expense and a smaller gain on property sales. Gains on property sales were $20.1 million, down from $24.0 million.
- No properties were acquired in Q1 2023, compared with eight acquisitions for approximately $166.4 million in Q1 2022. STAG sold two buildings totaling approximately 0.4 million square feet, generating $36.3 million of net proceeds and a $20.1 million gain. One additional building classified as held for sale at quarter-end was sold in April 2023.
- Other expenses included approximately $2.5 million related primarily to a forfeited acquisition deposit after an acquisition contract was terminated in January 2023.
- Management cited inflation, higher interest rates, banking-sector disruption, geopolitical uncertainty, and recession concerns. Acquisition activity had slowed in 2022 and remained significantly below the company’s historical pace in early 2023. Management believes portfolio diversification, strong occupancy and liquidity, and limited unhedged rate exposure position the company to navigate uncertainty. No quantitative earnings or acquisition guidance was provided.
- Management expects rental rates on leases expiring from April 2023 through March 2024 to be above expiring rates, based on its renewal and re-leasing assumptions. Leases representing approximately 7.3% of annualized base rental revenue expire in that period.
- Key risks include weaker tenant demand or credit, vacancies and non-renewals, rising financing and operating costs, refinancing or credit-market constraints, reduced real estate values, and counterparty or hedge risks. The filing added detail on inflation, higher interest rates, and financial-services-sector instability. Ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether leasing spreads, high occupancy, and expected rent increases on near-term expirations translate into sustained same-store revenue and NOI growth.
- How the higher interest-rate and credit environment affects borrowing costs, refinancing, acquisition activity, and available liquidity, particularly the unhedged credit-facility balance.
- Whether the decline in GAAP net income and operating cash flow persists, and how FFO growth compares with cash available for dividends after capital spending and leasing costs.
- The timing and economics of future acquisitions and dispositions, including any further impact from the terminated acquisition contract and deposit.
- The company’s ability to maintain debt-covenant compliance and REIT qualification, and the effects of tenant credit deterioration or lease expirations on occupancy and collections.