STAG Industrial, Inc. — Q2 2023 Form 10-Q
Business and period. STAG is a U.S. industrial real estate REIT. For the quarter ended June 30, 2023, it owned 558 buildings across 41 states, totaling approximately 111.1 million rentable square feet. The filing reports second-quarter and six-month results compared with 2022.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $171.7 million | $161.5 million | $345.2 million | $320.7 million |
| Net income | $52.8 million | $33.1 million | $103.4 million | $87.1 million |
| Net income attributable to common stockholders per diluted share | $0.29 | $0.18 | $0.56 | $0.48 |
| Net operating income (NOI) | $139.0 million | $132.6 million | $276.7 million | $260.1 million |
| FFO attributable to common stockholders and unit holders | $103.6 million | $101.8 million | $202.8 million | $199.0 million |
| Operating cash flow | Not separately stated for the quarter | $196.2 million | $191.2 million |
- Q2 revenue rose 6.3%; net income increased 59.6%, while six-month revenue and net income rose 7.7% and 18.8%, respectively. Net income growth benefited materially from property-sale gains, not solely ongoing operations.
- Q2 same-store rental income increased 5.3%, but same-store property expenses rose 10.9%; same-store NOI grew 4.1%. Same-store occupancy was 97.9%, down from 98.6% a year earlier.
- Q2 interest expense increased 27.7% to $22.9 million; six-month interest expense increased 29.3% to $45.5 million. Management attributed the increase primarily to debt issued in 2022.
- Six-month capital investment included $37.4 million for property acquisitions and $55.4 million for additions and improvements. Investing activities used $25.6 million, compared with $334.9 million used in the prior-year period; sales proceeds were $69.3 million.
- The declared distributions recorded for Q2 were $0.37 per share/unit, unchanged from Q2 2022. Six-month distributions were $0.74 per share/unit versus $0.73.
Balance sheet, debt and liquidity
- At June 30, 2023, total assets were $6.11 billion, total liabilities $2.66 billion, and total equity $3.44 billion. Cash and cash equivalents were $13.5 million; restricted cash was $1.0 million.
- Debt principal outstanding was $2.449 billion, with a reported weighted-average interest rate of 3.59% and weighted-average duration of 4.9 years. Net debt to real estate cost basis was 35.1%; secured debt was 0.3% of debt.
- Immediate liquidity was approximately $794.2 million, including $13.5 million cash and $780.7 million available on the $1.0 billion unsecured credit facility. Including approximately $61.0 million of expected proceeds from unsettled forward equity sales, management reported total liquidity of approximately $855.2 million.
- All applicable debt covenants were in compliance. Twenty-one swaps hedged variable-rate loans; the $216 million credit-facility balance remained floating. Management estimated a 100-basis-point rate increase would add about $1.1 million to six-month interest expense at that balance.
Changes, outlook and risks
- Same-store operating performance remained positive, supported by lease commencements and renewals. For leases commencing during the first half, weighted-average cash rent change was 26.5% and straight-line rent change was 38.4%; these leasing statistics are not company-wide rent growth rates.
- During the first half, STAG acquired two buildings totaling 235,003 square feet for $40.7 million and sold seven buildings totaling 1.2 million square feet. The sales generated a $37.7 million gain, versus $24.3 million in the prior-year period. Acquisition activity was significantly slower than its historical pace, which management associated with market uncertainty.
- Six-month results included a $2.5 million relinquishment of an acquisition deposit following termination of an acquisition contract. The filing also identifies a $100 million unsecured note repaid at maturity in January 2023.
- Management cited inflation, rising interest rates, tighter credit conditions, geopolitical uncertainty and recession risk as potential headwinds to financing costs, tenant health, occupancy and property values. It expects industrial demand to benefit over the long term from e-commerce, domestic supply-chain resilience and U.S. manufacturing trends, while noting demand had moderated from recent peaks.
- Management expressed confidence in liquidity and debt-market access, but gave no specific numerical earnings, acquisition or occupancy guidance. It expects rents on leases expiring from July 2023 through June 2024 to exceed existing rents, based on its renewal and re-leasing assumptions; approximately 7.5% of annualized base rental revenue expires in that period.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. Letters of credit were approximately $3.3 million. The filing reports no material subsequent events.
Important facts for investors to verify
- Whether high leasing spreads translate into sustained same-store rent and NOI growth, given same-store occupancy declined and property costs rose faster than revenue.
- How much reported earnings growth reflects recurring property operations versus property-sale gains, and how FFO trends compare with GAAP net income.
- The effect of refinancing and floating-rate exposure on interest costs, especially the credit-facility balance and approaching debt maturities.
- Whether the unsettled forward equity sales are physically, cash or net-share settled, and the resulting proceeds or dilution; proceeds were not received when the shares were sold forward.
- Whether slower acquisition activity, upcoming lease expirations, tenant credit conditions and broader economic risks alter management’s outlook.