STAG Industrial, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; selected fourth-quarter results are included. Dollar amounts are in U.S. dollars.
Business context
STAG is a REIT focused on acquiring, owning and operating primarily single-tenant industrial properties across the United States. At year-end, it owned 390 buildings totaling approximately 76.8 million rentable square feet in 37 states, leased to 349 tenants. Its portfolio was 95.5% leased; the Operating Portfolio was 95.8% leased. No tenant represented more than 2.3% of annualized base rent.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $351.0 million | $301.1 million | +16.6% |
| Net income | $96.2 million | $32.2 million | +198.9% |
| Net income attributable to common stockholders | $82.4 million | $21.1 million | — |
| Diluted earnings per common share | $0.79 | $0.23 | — |
| FFO attributable to common stockholders and unit holders | $187.3 million | $150.6 million | +24.3% |
| Cash from operating activities | $197.8 million | $162.1 million | +22.0% |
| Net cash used in investing activities | $507.2 million | $571.6 million | — |
| Net cash from financing activities | $303.8 million | $415.9 million | — |
Fourth-quarter revenue was $93.3 million, net income was $47.3 million, net income attributable to common stockholders was $44.3 million, and basic and diluted EPS was $0.40.
Same-store rental income rose 1.8% to $207.5 million, while same-store property expenses increased 6.4% to $45.6 million. Same-store NOI grew 1.3% to $198.6 million. Same-store occupancy fell to 95.4% from 96.6% a year earlier. Across Operating Portfolio leases signed during 2018, cash rent change was 7.9% and straight-line rent change was 15.2%, compared with 2.9% and 10.8%, respectively, in 2017.
Declared common dividends totaled approximately $1.42 per share for 2018, versus $1.41 in 2017. The board subsequently declared monthly dividends of $0.119167 per share for January through March 2019.
Balance sheet, debt and liquidity
- Total assets were $3.10 billion and total equity was $1.67 billion at December 31, 2018.
- Debt carrying value was $1.326 billion; principal outstanding was $1.333 billion. The weighted-average interest rate was 3.56%, weighted-average debt duration was 4.7 years, secured debt was 4% of the capital structure, and net debt to real estate cost basis was 38%.
- Immediate liquidity was approximately $576.9 million: $8.0 million of cash and cash equivalents plus $568.9 million of available unsecured credit facility and term-loan commitments. Availability is subject to covenant compliance.
- Of $700.5 million of variable-rate debt, all but $100.5 million drawn on the credit facility was fixed through swaps. A 100-basis-point rate increase on that unhedged balance would have increased annual interest expense by approximately $1.0 million, all else equal.
- Operating cash flow was $197.8 million, while investing outflows reflected property acquisitions and improvements, partly offset by $207.9 million of net property-sale proceeds. Year-end cash and restricted cash together were $22.5 million.
Material changes and unusual items
- Net income rose sharply, but the increase was substantially affected by net gains on property sales of $72.2 million, up from $24.2 million in 2017. FFO, a non-GAAP measure, increased to $197.5 million from $160.4 million and excludes property-sale gains, impairments and real-estate depreciation and amortization.
- STAG acquired 53 buildings in 2018 for a reported purchase price of approximately $676.5 million and sold 19 buildings. Sales generated $207.9 million of net proceeds. Four buildings were impaired, with impairment charges totaling $6.2 million, compared with $1.9 million in 2017.
- Interest expense increased 14.9% to $48.8 million, primarily reflecting higher credit-facility borrowings and new debt. Total debt increased from $1.174 billion to $1.326 billion carrying value.
- The company issued 14.7 million common shares through its ATM program in 2018 for net proceeds of $386.4 million. It also issued $175 million of fixed-rate unsecured notes and drew $150 million under a term loan. The Series B preferred stock was redeemed for $70 million in July; Series C preferred stock remained outstanding at a 6.875% rate.
- Adoption of the revised business-combination accounting guidance shifted acquisition costs into asset cost for qualifying asset acquisitions; no property acquisition costs were expensed in 2018. Management said the new lease standard, adopted January 1, 2019, was expected to add approximately $16 million of right-of-use assets and $18 million of lease liabilities, without a material overall financial-statement impact.
Outlook, risks and contingencies
Management described the outlook as positive but moderated, citing the long period of economic growth, policy uncertainty and asset appreciation. It viewed industrial supply-demand conditions as favorable and identified e-commerce, domestic manufacturing and distribution demand as supportive trends. Management expected the existing portfolio to benefit from rising rents and acquisitions to benefit from higher yields, while noting increased industrial development as a trend to monitor. The filing provides no quantified earnings or FFO guidance.
Key risks include tenant default or nonrenewal, vacancies at single-tenant properties, acquisition pricing and execution, competition, interest-rate and refinancing exposure, covenant restrictions, capital-market access and REIT qualification. Approximately 38.8% of annualized base rental revenue was due to expire before December 31, 2021; weighted-average lease term was 4.9 years. Additional exposures include environmental liabilities, severe weather and insurance gaps, technology and supply-chain changes, and the transition away from LIBOR. Management reported compliance with debt covenants and no legal proceedings expected to have a material adverse effect. Letters of credit totaled approximately $5.6 million.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus the $72.2 million property-sale gain; compare GAAP net income with FFO and operating cash flow.
- Whether occupancy and same-store NOI stabilize, and whether rent gains persist despite higher same-store expenses and tenant space reductions or vacancies.
- The leasing and renewal outcomes for the substantial revenue share expiring through 2021, including required tenant improvements, concessions and downtime.
- Debt maturities, covenant headroom, available borrowing capacity and refinancing costs; review the $304.1 million of principal scheduled for 2020–2021 and the $551.5 million for 2022–2023.
- The effect of ATM share issuance and future capital raising on per-share growth, dividends and dilution, and whether operating cash flow supports distributions and acquisition plans.
- Management’s assumptions behind acquisition returns, property impairment valuations and environmental exposures, as well as the actual effects of lease-accounting adoption and LIBOR replacement.