STAG Industrial, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. STAG is a U.S. industrial REIT focused on acquiring and operating single-tenant properties. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and operating portfolio
At quarter-end, STAG owned 265 buildings in 37 states, totaling approximately 50.0 million square feet, and was 95.0% leased to 242 tenants. The company acquired 17 buildings totaling 3.1 million square feet during the first half for a stated purchase price of $180.9 million.
Financial and operating metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $52.8 million | $41.7 million | $103.8 million | $81.4 million |
| Net loss | $(5.2) million | $(2.7) million | $(6.7) million | $(2.6) million |
| Net loss attributable to common stockholders | $(7.6) million; $(0.12) per share | $(5.2) million; $(0.10) per share | $(11.7) million; $(0.18) per share | $(7.5) million; $(0.15) per share |
| Net operating income (NOI) | $42.6 million | $32.9 million | $83.2 million | $64.5 million |
| Funds from operations (FFO), attributable to common stockholders and unit holders | $21.8 million | $15.3 million | $43.7 million | $32.3 million |
For Q2, total-portfolio NOI was approximately 80.7% of operating revenue, compared with 79.0% a year earlier. Management-reported same-store NOI was essentially flat year over year in Q2 ($31.8 million versus $31.8 million); for the first half it decreased 0.2% to $61.8 million. Same-store occupancy declined 0.6 percentage point year over year to 93.8% in Q2 and 93.7% for the six-month comparison. On comparable new and renewal leases, GAAP rent growth was 8.5% in Q2 and 7.1% for the first half.
First-half operating cash flow was $53.9 million, versus $40.8 million in 2014. Investing activities used $146.4 million, primarily for acquisitions; financing activities provided $80.1 million. Cash and cash equivalents were $11.5 million at June 30, down from $23.9 million at year-end 2014. Management reported immediate liquidity of $374.5 million, including $363.0 million of available unsecured credit facility and term-loan capacity.
Total debt carrying value was $764.9 million, up from $686.3 million at December 31, 2014; the weighted-average interest rate was 4.42%, versus 4.04%. Debt included $537.0 million unsecured and $227.9 million mortgage debt. Net debt to real estate cost basis was 38%, and total debt to enterprise value was 33%. The company reported covenant compliance. Long-term variable-rate debt was hedged with swaps; the unsecured credit facility was excepted from the stated swap arrangements.
Material changes versus the prior comparable period
- Revenue rose 26.8% in Q2 and 27.5% for the first half, largely reflecting portfolio growth from acquisitions. Total buildings increased from 248 at year-end 2014 to 265 at June 30, 2015.
- Net loss attributable to common stockholders widened to $7.6 million in Q2 and $11.7 million for the first half. Higher depreciation and amortization, increased interest expense, and a $2.6 million impairment contributed; common shares outstanding also increased.
- Interest expense rose to $8.9 million in Q2 from $5.8 million and to $16.9 million for the first half from $11.5 million, reflecting higher debt balances and borrowing costs.
- First-half common-stock ATM issuances generated $70.8 million net proceeds from 3.3 million shares. In February, STAG issued $120 million of unsecured notes with stated coupons of 4.32% and 4.42%.
Outlook, commentary, risks and unusual items
- Management described its outlook as positive, citing capital availability, acquisition opportunities, favorable industrial supply-demand conditions, and potential rent growth. This is forward-looking commentary, not quantified earnings guidance; the filing provides no clear numerical full-year guidance.
- A $2.6 million impairment was recorded on a vacant Hazelwood, Missouri property after STAG entered a sale agreement. The contemplated sale was subject to contingencies, and the company gave no assurance it would close or when.
- A Bank of America lease amendment provides for termination of remaining space by November 30, 2015 and a $2.1 million termination fee. STAG had recognized $0.7 million of the fee in Q2 and $1.2 million in the first half. Approximately 8.2% of annualized base rental revenue was scheduled to expire from July 2015 through June 2016.
- Key risks include tenant defaults or non-renewals, vacancy and rent pressure, acquisition execution and financing, interest-rate movements, refinancing risk, derivative counterparty performance, real-estate market conditions, and maintaining REIT status. Management said no material changes had occurred to the risk factors in its 2014 Form 10-K. It reported no legal proceeding expected to have a material adverse effect.
- Common dividends were declared at $0.1125 per share per month for the first half; the board declared $0.1150 monthly for the remainder of 2015. Dividends are subject to cash needs and REIT distribution requirements.
Most important facts for investors to verify
- Whether acquisitions continue to add NOI and cash flow sufficient to offset higher depreciation, interest expense, and equity issuance.
- Lease expirations, tenant retention, occupancy trends, and realized rent growth—especially the Bank of America space and the next-12-month expiration schedule.
- Liquidity and dividend coverage using operating cash flow, debt service, acquisition spending, and preferred and common distributions; GAAP losses and FFO are not measures of cash available for dividends.
- Debt maturities, borrowing capacity, interest-rate hedging—including the credit facility exposure—and compliance with financing covenants.
- Whether the Hazelwood property sale closes and whether further property impairments or tenant credit losses arise.