STAG Industrial, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. STAG is a U.S. REIT focused on single-tenant industrial properties. At quarter-end, it owned 409 buildings totaling 81.2 million rentable square feet across 38 states; the portfolio was 95.0% leased.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $96.6 million | $85.5 million | $192.3 million | $168.8 million |
| Net income | $14.2 million | $15.0 million | $21.6 million | $40.1 million |
| Net income attributable to common stockholders per diluted share | $0.10 | $0.09 | $0.15 | $0.31 |
| FFO attributable to common stockholders and unit holders | $56.9 million | $44.0 million | $109.0 million | $86.6 million |
| Net operating income (NOI) | $79.7 million | $69.4 million | $155.9 million | $135.1 million |
| Cash from operating activities | Not separately stated for the quarter | $110.6 million | $97.3 million |
Q2 revenue increased 13.1%, largely reflecting acquired properties; same-store NOI rose just 0.2%. For the first six months, revenue rose 14.0% and same-store NOI rose 1.2%. First-half net income fell 46.3%, primarily because the prior-year period included $29.0 million in property-sale gains, versus $1.6 million in 2019. Q2 property-sale gain was $0.3 million versus $6.3 million. FFO is a non-GAAP measure and should not be treated as cash available for dividends or as a substitute for GAAP income.
First-half property expenses increased 8.5%; depreciation and amortization increased 7.5%, reflecting portfolio growth. A $5.3 million impairment was recorded in Q1 on a Rapid City, South Dakota property following a change in the estimated holding period. Comprehensive income attributable to STAG was a loss of $1.3 million for the first half, including a $23.0 million loss on interest rate swaps in other comprehensive income.
Portfolio, capital and liquidity
- Operating Portfolio occupancy was 95.8%; same-store occupancy was 95.5%, down from 96.9% a year earlier.
- Same-store lease commencements generated weighted-average straight-line rent increases of 18.6% in Q2 and 21.4% for the first half. Cash rent increases were 8.7% and 11.7%, respectively.
- STAG acquired 24 buildings totaling 5.4 million square feet for approximately $445.5 million in the first half. It sold five buildings and two land parcels; net sale proceeds were $17.7 million.
- At June 30, principal debt outstanding was $1.360 billion, with a 3.55% weighted-average interest rate and 4.2-year weighted-average duration. Secured debt was 4%; net debt to real estate cost basis was 35%. The company reported compliance with debt covenants.
- Immediate liquidity was reported at approximately $545.1 million: $5.1 million cash and $540.0 million of undrawn availability under the credit facility and term loans. Actual borrowing capacity may be restricted by covenant compliance.
- First-half investing cash outflow was $444.5 million, mainly for acquisitions; financing cash inflow was $321.0 million, including common-stock proceeds. Common shares outstanding increased from 112.2 million at year-end to 126.4 million at June 30.
Outlook, risks and notable items
Management described the outlook as positive but moderated, citing economic and policy uncertainty and continued asset appreciation. It expected favorable industrial supply-demand conditions, rising rents and strong occupancy to support performance, while monitoring increased development activity and tenant labor availability. No quantified earnings or FFO guidance is provided in the filing.
Interest-rate exposure is partly hedged: all variable-rate debt other than the $129.0 million credit-facility balance was fixed with swaps at June 30. Management estimated that a 100-basis-point rate increase on that unhedged balance would add about $0.6 million of interest expense over six months. Swap liabilities were $18.9 million; the company estimated approximately $1.6 million would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
Subsequent to quarter-end, STAG funded the full $175 million capacity of Term Loan E on July 25, 2019, and entered into a separate $200 million unsecured term loan agreement on July 12, 2019. The latter matures in January 2025; swaps are intended to fix its rate beginning July 2020. The company also disclosed $6.0 million of letters of credit and a $3.1 million tenant-related expansion commitment. Ordinary-course legal matters were not expected to have a material adverse effect; management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth translates into durable same-store NOI growth, given modest same-store growth and lower same-store occupancy.
- The effect of the enlarged share count and ongoing equity financing on per-share results and dividend coverage.
- Debt capacity and refinancing needs after the post-quarter loan funding, including covenant headroom and exposure to unhedged floating rates.
- Lease rollover and tenant retention assumptions: 6.3% of annualized base rent was scheduled to expire from July 2019 through June 2020.
- How to interpret GAAP net income alongside FFO, sale gains, impairment charges and significant swap-related changes in other comprehensive income.