STAG Industrial, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; financial statements are unaudited. STAG is a U.S. industrial REIT focused on acquiring and managing single-tenant properties. At quarter-end, it owned 238 buildings across 35 states, totaling approximately 44.5 million square feet, and was 94.8% leased to 212 tenants.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $42.4 million | $34.6 million | $123.8 million | $96.5 million |
| Net income (loss) | $0.3 million | $0.3 million | ($2.4 million) | ($0.3 million) |
| Net loss attributable to common stockholders | ($2.5 million); ($0.04) per share | ($2.1 million); ($0.05) per share | ($10.0 million); ($0.20) per share | ($6.3 million); ($0.15) per share |
| FFO attributable to common stockholders and unit holders | $17.2 million | $15.0 million | $49.5 million | $41.8 million |
| Net operating income (NOI), excluding discontinued operations | $34.5 million | $28.2 million | $99.0 million | $78.6 million |
Revenue growth reflected acquisitions; same-store operating revenue increased 0.6% for the first nine months, while same-store NOI declined 1.8%. Q3 same-store NOI declined 0.5%. General and administrative expense and depreciation and amortization rose with portfolio and staffing growth; nine-month G&A also included a roughly $3.0 million one-time charge related to the former CFO’s departure and consulting arrangement. The Bellevue, Ohio property sale generated a $2.1 million gain in Q3.
- Cash flow: Nine-month operating cash flow was $66.4 million, investing cash outflow was $288.2 million, and financing cash inflow was $220.4 million. Cash and cash equivalents were $5.3 million at September 30, 2014.
- Liquidity: The company reported $199.0 million of combined borrowing capacity under its unsecured credit facility and term loans, subject to leverage and other conditions. Restricted cash was $6.7 million.
- Debt: Total debt was $678.2 million, up from $556.1 million at December 31, 2013; weighted-average interest rate was 3.62%. Debt included $222.2 million of mortgage debt, $106.0 million drawn on the revolver, $300.0 million of term loans, and $50.0 million of unsecured notes. The company reported compliance with applicable financial covenants.
- Portfolio and leasing: The company acquired 31 buildings for $289.5 million during the first nine months and sold two buildings for $7.6 million. Nine-month lease retention was 69.0%; leases representing 9.1% of annualized base rent were scheduled to expire from October 2014 through September 2015.
Material changes versus comparable periods
- Revenue rose 22.3% in Q3 and 28.3% for the nine months year over year, driven substantially by acquisitions. Total portfolio occupancy was 94.8%; same-store occupancy was 93.3% for Q3 versus 93.5% a year earlier, and 92.6% for the nine-month comparison versus 92.9%.
- Nine-month common-stockholder loss widened to $10.0 million from $6.3 million. Higher depreciation, interest, and G&A—including the former CFO-related charge—offset revenue growth. Preferred dividends were $8.1 million for the nine months.
- Debt increased by $122.1 million from year-end 2013, while the company raised $164.1 million gross through at-the-market common-stock offerings during the nine months.
Outlook, risks, and unusual items
Management described the outlook as strong, citing low interest rates, attractively priced acquisition opportunities, improving tenant conditions, and favorable industrial-sector prospects. It also pointed to limited speculative development as potentially supportive of occupancy and rents. No numerical earnings or acquisition guidance was provided. Management expects near-term liquidity needs to be met through operations and financing, and longer-term needs through operating cash flow, borrowing, securities issuance, dispositions, joint ventures, or partnership units.
- Key risks include tenant defaults or non-renewals, vacancies and lower rents, acquisition execution and performance, local economic or property-market weakness, refinancing and financing availability, interest-rate increases, insurance and environmental exposure, and maintaining REIT qualification.
- At quarter-end, $106 million of revolver debt and $75 million of term-loan debt remained unhedged. Management estimated a 100-basis-point rate increase would have raised nine-month interest expense by $1.4 million, assuming the stated balances were outstanding throughout.
- After quarter-end, STAG issued $50 million of Series A unsecured notes and completed a common-stock offering generating $128.2 million net; it used the equity proceeds to repay the then-outstanding revolver balance. The board also declared a common dividend of $0.1125 per share monthly for January–March 2015.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Assess the quality and durability of acquisition-led revenue growth against softer same-store NOI and occupancy trends.
- Review debt maturities, variable-rate exposure, hedging, covenant headroom, and the use of post-quarter equity proceeds to reduce revolver borrowings.
- Evaluate dividend coverage using recurring cash flow and capital needs; GAAP common-stockholder losses include substantial depreciation and preferred dividends.
- Track upcoming lease expirations, renewals, tenant retention, and leasing spreads, especially the stated 9.1% of annualized base rent expiring over the next year.
- Distinguish reported FFO and NOI, which are non-GAAP measures, from GAAP earnings and cash available for distributions.