STAG Industrial, Inc. annual report, FY2015

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STAG Industrial, Inc. — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter results are noted where relevant. Financial figures are in U.S. dollars.

Business context

STAG is a REIT focused on acquiring and operating single-tenant industrial properties across the United States. At year-end it owned 291 buildings in 38 states, totaling 54.7 million rentable square feet, leased to 266 tenants. The portfolio was 95.6% leased; warehouse and distribution properties generated 86.8% of annualized base rent. No tenant contributed more than 3.3% of rent, and no industry more than 12.2%.

Financial and operating metrics

  • Revenue: $218.6 million, up 25.8% from $173.8 million in 2014. Rental income was $186.5 million; tenant recoveries were $31.7 million.
  • Profitability: GAAP net loss was $31.5 million, versus a $5.0 million loss in 2014. Net loss attributable to common stockholders was $40.6 million, or $0.61 per share, versus $15.2 million, or $0.28 per share. The larger loss reflected, among other items, $29.3 million in impairment charges and increased depreciation and interest expense.
  • Fourth quarter: Revenue was $58.9 million; net loss attributable to common stockholders was $21.8 million, or $0.32 per share. Fourth-quarter impairments were $20.9 million.
  • Operating measures: NOI, a non-GAAP measure, was $175.4 million, up 25.5%. Same-store NOI was $122.2 million, down 0.2%; same-store occupancy declined to 94.2% from 94.5%. FFO attributable to common stockholders and unit holders was $93.9 million, versus $71.7 million.
  • Leasing: Overall year-end occupancy was 95.6%; available space was 4.4% of rentable area, compared with 5.2% a year earlier. 2015 tenant retention was 69.8%. GAAP rent growth was 16.4% on new leases and 4.6% on renewals; renewal cash-basis rent growth was negative 1.0%.
  • Cash flow: Operating cash flow was $121.7 million, up 25.9%. Investing used $372.0 million, principally for acquisitions; financing provided $238.5 million. Cash and cash equivalents ended the year at $12.0 million, down from $23.9 million.
  • Debt and liquidity: Total debt was $987.2 million, up from $686.3 million; weighted average interest rate was 4.07%. Net debt to real estate cost basis rose to 45% from 37%, and debt to enterprise value to 40% from 28%. Immediate liquidity was reported at $421.6 million, including $12.0 million cash and $409.6 million available under facilities. Nominal undrawn commitments on the credit facility and term loans were $544.0 million, subject to borrowing limits and unencumbered assets.
  • Dividends and market performance: Common dividends declared were $1.365 per share for 2015, versus $1.29 in 2014. Total stockholder return for 2015 was negative 19.59%.

Material changes versus 2014

  • Portfolio expanded from 248 to 291 buildings and from 47.0 million to 54.7 million square feet. STAG acquired 49 buildings for approximately $427.3 million and sold six buildings totaling about 0.8 million square feet.
  • Revenue and total-portfolio NOI grew with acquisitions, while same-store NOI was nearly flat. The common-stockholder loss widened substantially, including impairment charges on 13 buildings, compared with one building impaired in 2014.
  • Debt increased by approximately $300.8 million. New financing included $220 million of unsecured notes and a $150 million term loan draw; the unsecured credit facility capacity increased to $450 million.
  • Common shares outstanding increased, and STAG raised $73.8 million net through at-the-market common stock sales during 2015.

Outlook, risks and unusual items

  • Management described its outlook as positive but moderated by equity-market volatility, mixed economic data and asset appreciation. It expected favorable industrial supply-demand conditions to support rent growth and acquisition yields, while noting the ISM manufacturing index had fallen below 50 and consumer confidence had weakened.
  • Management cited e-commerce, U.S. manufacturing and distribution demand, and limited speculative development as potential supports. It also noted risks from oil-sector distress, slower Chinese growth and possible increases in industrial development.
  • Approximately 42.6% of annualized base rent was scheduled to expire before the end of 2018; 11.3% was scheduled to expire in 2016. Management expected rents on some vacated and re-let space to be below existing rates. After year-end, STAG executed a five-year renewal of the Archway lease; discussions with Carefusion were preliminary.
  • Single-tenant properties can lose most property-level cash flow when vacant. Other disclosed risks include tenant defaults, economic or industry concentration, refinancing and interest-rate exposure, reliance on external capital, covenant restrictions, REIT qualification, and environmental and accessibility liabilities. The company reported $56 million of unhedged variable-rate debt; a 100-basis-point increase was estimated to add about $0.6 million of annual interest expense.
  • STAG recorded a $5.0 million gain on 2015 property sales. The board reviewed assets for potential dispositions; impairment testing used estimates of fair value and future cash flows. Management reported no material off-balance-sheet arrangements and no legal proceedings expected to have a material effect.
  • After year-end, CFO Geoffrey Jervis’s employment was to end February 25, 2016; STAG estimated approximately $3.2 million of first-quarter 2016 expense related to his departure and compensation. William Crooker was appointed CFO effective January 26, 2016.

Important facts for investors to verify

  • Reconcile the GAAP losses with FFO and NOI, and review the assumptions and property-level impacts behind the $29.3 million impairment charge.
  • Assess the timing and renewal prospects for lease expirations, particularly the 2016–2018 concentration, and the effect of vacancies on rents and leasing costs.
  • Review debt maturities, facility availability, covenant headroom and the increase in leverage; distinguish stated nominal commitments from actual borrowing capacity.
  • Evaluate dividend sustainability against recurring operating cash flow, FFO, preferred dividends and capital needs; note that 42.8% of the 2015 common distribution was classified as return of capital for tax purposes.
  • Track acquisition returns, same-store performance, disposition proceeds, tenant credit and sector/geographic concentrations, as well as the estimated CFO-transition expense.