Business context and reporting period
STAG Industrial, Inc. is a REIT focused on acquiring and operating single-tenant industrial properties across the United States. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. At quarter-end, the company owned 342 buildings totaling approximately 67.7 million rentable square feet; the portfolio was 94.0% leased, and its operating portfolio was 94.8% leased.
Financial and operating metrics
Amounts below are in millions except per-share data, percentages, and property counts.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $72.2 | $60.2 | $141.7 | $121.1 |
| Net income (loss) | $1.4 | $(9.9) | $1.4 | $2.4 |
| Net income (loss) attributable to common stockholders | $(1.1) | $(13.3) | $(3.5) | $(4.5) |
| Net loss per common share | $(0.01) | $(0.20) | $(0.04) | $(0.07) |
| Net operating income (NOI), non-GAAP | $58.5 | $48.4 | $114.7 | $96.6 |
| FFO attributable to common stockholders and unit holders, non-GAAP | $33.7 | $24.3 | $66.8 | $45.7 |
- Q2 total revenue increased 19.8%; six-month revenue increased 17.0%. Growth principally reflected acquisitions. Same-store NOI grew only 0.5% in Q2 and 0.4% for the six-month period.
- Operating cash flow for the first half was $76.4, versus $61.8 a year earlier. Investing used $368.1, mainly for acquisitions; financing provided $287.2. Cash and cash equivalents were $7.7 at June 30, down from $12.2 at year-end 2016.
- At June 30, debt principal was $1,127.3 and carrying value was $1,121.7; weighted average interest rate was 3.62%. Net debt to real estate cost basis was 39%, secured debt was 13% of debt, and 8% of debt was scheduled to mature in the next 12 months.
- Immediate liquidity was approximately $320.8, including $7.7 cash and $313.1 available on the unsecured credit facility. The facility had $130.0 drawn; stated undrawn nominal commitment, including letters of credit, was approximately $314.4. The company reported compliance with debt covenants.
- Six-month acquisitions comprised 32 buildings for $385.4; four buildings were sold for net proceeds of $10.3. Property operating expenses rose 10.2% year over year for the half, while depreciation and amortization rose 19.7%.
Material changes versus the prior comparable period
- Q2 GAAP net income improved from a $9.9 loss to $1.4 income, largely because the prior-year quarter included $11.2 of impairment losses. Q2 revenue and NOI increased with portfolio expansion, while same-store operating performance was nearly flat.
- For the first half, net income fell 39.9% to $1.4 despite higher revenue and NOI. The principal comparison was the prior-year $20.9 gain on property sales, versus $1.7 in the 2017 period. First-half FFO increased to $66.8.
- Common shares outstanding rose to 91.4 million from 80.4 million at year-end 2016. The company sold 10.76 million shares through ATM programs for $274.4 gross proceeds during the first half, supporting acquisition financing but increasing equity dilution.
- Same-store occupancy was 94.5% at June 30, down from 95.9% a year earlier for the Q2 comparison; six-month comparison was 94.4% versus 95.9%. GAAP rents on new and renewal leases together increased 6.4% in Q2 and 8.2% for the half, but cash rent change was negative 2.7% in Q2 and positive 0.9% for the half.
Outlook, management commentary, risks and unusual items
- Management described the outlook as positive but moderated, citing slow economic growth, policy uncertainty, asset appreciation and signs of increased industrial development. It expected industrial demand to benefit from job growth, e-commerce and favorable supply-demand conditions, while continuing to monitor market supply.
- The filing provides no specific earnings, FFO, acquisition-volume or occupancy guidance. Management cautioned that leases representing approximately 10.0% of annualized base rent expire from July 2017 through June 2018 and expected replacement rents on that space generally to be lower than expiring rents.
- Interest-rate exposure remains a risk: $580.0 of variable-rate debt was outstanding, with all but the $130.0 credit-facility balance fixed through swaps. A 100-basis-point rate increase on the unhedged facility balance would have added approximately $0.7 of interest expense over the six-month period.
- A one-time incentive fee payable to Columbus Nova was estimated at $0.9 and remained subject to final valuation through independent appraisals. The company also recorded a $0.3 first-half loss related to an involuntary property conversion; approximately $0.8 of insurance proceeds remained receivable.
- After quarter-end, the company entered into a $150.0 unsecured term-loan commitment, with no amount drawn at closing, and arranged swaps to fix the rate on the borrowing. Three mortgage notes totaling approximately $87.6 were paid off on August 1, 2017. The board declared a common dividend of $0.1175 per share monthly for October through December 2017.
- The company disclosed a prior-period depreciation useful-life error; it concluded the amounts were not material to previously issued statements and revised the comparative financial information. Management said the revision did not affect cash balances. Management reported effective disclosure controls; no material change in internal controls, material legal proceeding, or material change to previously disclosed risk factors was reported.
Investor verification points
- Verify acquisition economics and the effect of the rapid portfolio expansion on recurring cash flow, leverage, depreciation and per-share results.
- Assess same-store occupancy, tenant retention, cash rent trends and the upcoming lease expirations, including management’s expectation of lower replacement rents.
- Review debt availability and covenants, the near-term maturity profile, interest-rate swap terms and the effect of further borrowing or rate changes.
- Track dilution from ATM share issuance and the capacity of operating cash flow to support common and preferred dividends alongside acquisition spending.
- Confirm the final incentive-fee valuation, insurance recovery and disposition outcomes; compare non-GAAP NOI and FFO with GAAP results and the filing’s reconciliations.