STAG Industrial, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. STAG is a U.S. industrial REIT focused on single-tenant properties. At quarter-end it owned 430 buildings across 37 states, with approximately 86.0 million rentable square feet.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $102.4 million | $88.9 million | $294.8 million | $257.7 million |
| Net income | $11.2 million | $8.9 million | $32.7 million | $49.0 million |
| Net income attributable to common stockholders | $9.5 million | $7.2 million | $27.7 million | $38.2 million |
| Diluted earnings per share | $0.07 | $0.07 | $0.23 | $0.38 |
| FFO attributable to common stockholders and unit holders | $59.3 million | $48.5 million | $168.3 million | $135.1 million |
| Net cash provided by operating activities | Not reported by quarter | $174.9 million | $148.6 million |
Q3 revenue rose 15.1% year over year, largely reflecting acquisitions. Net income increased 26.1% in the quarter, while nine-month net income fell 33.2%, principally because the comparable 2018 period included substantially larger property-sale gains ($32.3 million versus $3.3 million in 2019). Nine-month interest expense increased to $39.1 million from $35.6 million, and impairment losses increased to $9.8 million from $2.9 million. Q3 diluted EPS was unchanged despite higher common-stockholder income, alongside a larger weighted-average share count.
Same-store NOI increased 0.1% in Q3 and 0.9% for the first nine months. Same-store occupancy was 94.6% at September 30, down from 96.5% a year earlier. The broader Operating Portfolio was 95.6% leased. Combined new and renewal lease spreads, measured as straight-line rent change, were 16.5% for Q3 and 20.1% year to date.
Balance sheet, debt and liquidity
- Total assets were $3.75 billion and total equity was $2.10 billion at September 30, 2019.
- Total debt principal was approximately $1.484 billion, with a weighted-average interest rate of 3.58%. Net debt to real estate cost basis was 35%; 4% of debt was secured, weighted-average duration was 4.0 years, and 10% was due within 12 months.
- Immediate liquidity was approximately $622.5 million: $6.5 million cash and $616.0 million of available capacity under the unsecured credit facility and term loans. Actual borrowing capacity is subject to covenant limits.
- Management reported compliance with debt covenants. Most variable-rate debt was hedged through maturity; $78.0 million drawn on the credit facility was not fixed by swaps. A 100-basis-point rate increase on that balance was estimated to add about $0.6 million of interest expense over nine months.
- Interest-rate swaps had a net liability fair value of $24.8 million, compared with a net asset position at year-end 2018. The filing estimates $3.8 million of accumulated hedge losses will be reclassified to interest expense over the next 12 months.
Growth, capital and material changes
- STAG acquired 46 buildings totaling approximately 10.1 million square feet for $748.1 million during the first nine months. Acquisitions contributed to revenue and operating cash growth.
- Investing cash outflow was $765.7 million, versus $393.3 million in the prior-year period, reflecting higher acquisition spending and lower property-sale proceeds. Operating cash flow was $174.9 million; financing cash flow was $577.5 million.
- Financing included $568.4 million in net proceeds from common-stock sales. Shares outstanding increased from 112.2 million at December 31, 2018 to 133.0 million at September 30, 2019. The September offering included forward-sale shares; proceeds from those agreements were not all received at quarter-end.
- Debt principal rose from $1.333 billion at year-end 2018. STAG drew $175 million under Term Loan E in July and entered into a $200 million delayed-draw Term Loan F, with no Term Loan F borrowings outstanding at quarter-end.
Outlook, risks and unusual items
Management described the outlook as positive but moderated, citing continued economic growth and favorable industrial supply-demand conditions, while noting uncertainty about economic and policy developments and continued asset appreciation. It expects the existing portfolio to benefit from rental growth and strong occupancy, and highlighted e-commerce, manufacturing and distribution trends as demand drivers. It also noted rising development activity and tenant focus on labor availability. The filing provides no numerical earnings or FFO guidance.
- Q3 included a $4.4 million impairment for five flex/office buildings in Belfast, Maine; the nine-month impairment total also included a $5.3 million charge for a Rapid City, South Dakota property, which was subsequently sold.
- Approximately 6.6% of annualized base rental revenue was scheduled to expire from October 2019 through September 2020. Management assumed that rent on replacement leases would generally be similar to expiring rents.
- Risks include tenant defaults or non-renewals, vacancies and rental-rate pressure, acquisition execution, market supply, interest rates and refinancing, equity-raising terms, swap counterparty performance, and environmental or catastrophic-event liabilities.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements beyond $6.0 million of letters of credit and a $3.1 million tenant-related expansion commitment.
Investor facts to verify
- Timing and proceeds from physical settlement of the September forward-sale agreements, and the resulting share dilution.
- Leasing, occupancy and renewal outcomes for the near-term expiration schedule, including the weaker same-store occupancy trend.
- Acquisition returns and funding needs relative to operating cash flow, available credit and further equity issuance.
- Debt maturities, covenant headroom, unhedged exposure and the effect of swap liabilities or hedge-loss reclassifications.
- Assumptions and valuation sensitivity behind the impaired properties and any further portfolio impairments.