STAG Industrial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. STAG is a U.S. industrial-property REIT. It owned 292 buildings totaling approximately 54.3 million rentable square feet across 38 states, leased 94.8% to 260 tenants.
Financial performance and position
- Revenue: $60.9 million, up 19.4% from $51.0 million. Rental income was $51.3 million; tenant recoveries were $9.4 million.
- Profit: Net income was $11.8 million versus a $1.4 million loss; net income attributable to common stockholders was $8.3 million, or $0.12 per diluted share, versus a $4.0 million loss, or $0.06 per share. Results included a $17.7 million gain on property sales.
- NOI and FFO: Total portfolio NOI, a non-GAAP measure, was $48.2 million versus $40.6 million. Same-store NOI declined 0.5% to $38.8 million. FFO attributable to common stockholders and unit holders was $21.3 million, down from $21.8 million.
- Cash flow: Operating activities provided $24.1 million, compared with $21.8 million. Investing activities provided $0.6 million, including $31.9 million of net property-sale proceeds; financing activities used $21.2 million. Cash and cash equivalents ended at $15.5 million. Dividends and distributions paid were $27.6 million.
- Debt and liquidity: Debt carrying value was $919.9 million, down from $986.1 million at year-end; weighted average interest rate was 4.24%. The company reported $476.5 million of immediate liquidity, including $15.5 million cash and $461.0 million available under credit and term facilities. It was in compliance with debt covenants.
- Other balance-sheet items: Total assets were $1.90 billion and total liabilities $994.4 million. Preferred equity increased by $75.0 million following issuance of Series C preferred stock.
Material changes versus Q1 2015
- Revenue rose 19.4%, mainly reflecting portfolio growth. Same-store operating revenue increased 1.3%, but same-store expenses rose 8.7%, contributing to the 0.5% decline in same-store NOI.
- Net income improved primarily because of the property-sale gain; the prior-year quarter had no such gain. Interest expense increased $2.8 million to $10.8 million, and the company recorded a $1.1 million loss on extinguishment of debt.
- General and administrative expense increased 46.3% to $11.0 million. Management attributed about $3.1 million of the increase to severance-related costs for a former executive, including accelerated LTIP compensation and cash and benefit costs.
- Operating cash flow increased 10.4%. Investing cash flow shifted from a $66.7 million use to a $0.6 million source, while financing cash flow shifted from a $32.7 million source to a $21.2 million use, reflecting different debt, equity, acquisition, disposition, and distribution activity.
- Same-store occupancy was 94.8%, down from 95.4% a year earlier. On renewal leases executed during the quarter, GAAP rent growth was 4.1%, while cash rent growth was negative 0.4%.
Outlook, risks, and unusual items
- No quantified earnings or FFO guidance was provided. Management expected industrial demand to benefit from economic and supply-demand conditions, e-commerce, and limited speculative development in many markets, while noting that new industrial supply can emerge quickly.
- Management described direct exposure to oil and gas tenants and the Chinese economy as limited, but cited possible weakness from industry defaults and economic uncertainty. It also identified tenant defaults, vacancies, rent declines, acquisition execution, financing and refinancing, interest rates, insurance, environmental matters, and REIT qualification among relevant risks.
- Approximately 8.6% of annualized base rental revenue was tied to leases expiring from April 2016 through March 2017. Management’s assumptions indicated that re-leasing vacated space could result in lower rental rates; one top-ten lease, International Paper’s 465,323-square-foot lease, was due to expire in March 2017 and was in preliminary renewal discussions.
- Four buildings were sold for $32.8 million, generating $31.9 million net proceeds and the $17.7 million gain. Five buildings were acquired for $27.9 million. Two additional properties classified as held for sale at quarter-end were sold in April 2016.
- Interest-rate swaps had a reported liability of $13.7 million, versus an asset position of $1.9 million and liability of $3.8 million at year-end; quarterly comprehensive income reflected a substantial swap-related loss. Nearly all variable-rate debt was swapped to fixed rates, except the $6.0 million credit-facility balance. Management estimated a 100-basis-point rate increase would add approximately $15,000 of quarterly interest expense on that balance.
- Management reported no material off-balance-sheet arrangements, no material legal proceedings, and no material changes to previously disclosed risk factors. It stated that disclosure controls were effective and that no significant subsequent events were identified.
Important facts for investors to verify
- Separate recurring property performance from the $17.7 million sale gain and $1.1 million debt-extinguishment loss; compare GAAP earnings with FFO and NOI.
- Review same-store operating costs, occupancy, rent growth, retention, and upcoming lease expirations, particularly the International Paper lease.
- Assess dividend coverage against operating cash flow and FFO, considering $27.6 million of distributions versus $24.1 million of operating cash flow.
- Confirm debt availability and refinancing needs, including near-term secured maturities, borrowing-base restrictions, and swap liabilities and counterparties.
- Evaluate the effect of the Series C preferred issuance and its cumulative dividend obligations on common-stockholder returns.