STAG Industrial, Inc. — Q2 2018 Form 10-Q
Business context and period. STAG is a U.S. REIT focused on single-tenant industrial properties. This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same 2017 periods. At quarter-end, the company owned 370 buildings totaling approximately 72.5 million rentable square feet; the portfolio was 95.6% leased.
Financial and operating performance
- Revenue: Q2 revenue was $85.5 million, up 18.4% from $72.2 million. Six-month revenue was $168.8 million, up 19.1% from $141.7 million.
- Profit and EPS: Q2 net income was $15.0 million versus $1.4 million; net income attributable to common stockholders was $9.3 million, or $0.09 per diluted share, versus a $1.1 million loss, or $(0.01) per share. Six-month net income was $40.1 million versus $1.4 million; common-stockholder net income was $31.0 million, or $0.31 per diluted share, versus a $3.5 million loss, or $(0.04) per share.
- Non-GAAP measures: FFO attributable to common stockholders and unit holders was $44.2 million in Q2 versus $33.7 million, and $87.0 million for six months versus $66.8 million. Total portfolio NOI was $69.4 million in Q2, up 18.4%, and $135.1 million for six months, up 17.8%. Same-store NOI increased 2.6% in Q2 and 1.5% for six months.
- Leasing and occupancy: Operating Portfolio occupancy was 96.6%. Straight-line rent change on new and renewal leases was 14.6% in Q2 and 15.6% for six months. Same-store occupancy was 96.3% in Q2, down from 96.4% a year earlier.
- Cash flow: For six months, operating cash flow was $97.3 million versus $76.4 million. Investing used $198.9 million versus $368.9 million; financing provided $91.5 million versus $287.2 million. Cash and restricted cash totaled $18.1 million at June 30.
- Debt and liquidity: Principal debt was $1.175 billion, with a weighted-average interest rate of 3.84%; 5% was secured, and no debt was scheduled to mature in the next 12 months. Net debt to real estate cost basis was 36%. Reported immediate liquidity was approximately $514.0 million: $11.9 million cash and $502.1 million of availability under the credit facility and term loans. The company reported compliance with debt covenants.
Material changes and notable items
- Growth in revenue and NOI reflected acquisitions and portfolio expansion as well as same-store performance. The company acquired 21 buildings for $264.1 million in the first half and sold seven buildings, generating $79.7 million in net proceeds.
- Gains on rental-property sales were $6.3 million in Q2 and $29.0 million for six months, compared with $1.3 million and $1.7 million, respectively, in 2017. These gains materially contributed to the improvement in reported net income. Six-month results also included a $2.9 million impairment charge on two properties.
- Interest expense rose 8.2% in Q2 and 8.5% for six months, mainly reflecting debt balances and new borrowings. Depreciation and amortization also increased with the larger property base.
- The company issued $175 million of unsecured notes in June and drew $75 million under a term loan in March. It raised $176.8 million gross through its ATM program, selling 6.82 million common shares at a weighted-average $25.92 per share.
- At June 30, $70 million of Series B preferred stock was classified as a liability after the company called it for redemption. It was redeemed on July 11, 2018, at $25 per share plus accrued dividends; the quarter included a $2.7 million deemed dividend related to the redemption.
- After quarter-end, the company drew the remaining $75 million on its existing term loan, entered a new $175 million term loan, and refinanced its credit facility. The refinancing extended maturity to January 2023, increased capacity to $500 million, and reduced the spread to LIBOR plus 1.05%.
Outlook, risks and contingencies
Management described the outlook as positive but moderated, citing economic uncertainty, asset appreciation, and rising development activity. It expects favorable industrial supply-demand conditions to support rents and acquisitions, while noting that new supply can emerge quickly and labor availability influences tenant decisions. Management said its interest-rate swaps fixed all outstanding variable-rate debt at June 30 and characterized the balance sheet as adequate; these are management assessments, not guarantees.
Management identified risks including vacancies, tenant defaults or non-renewals, rent and property-value changes, acquisition execution, market and economic conditions, interest rates, refinancing and capital access, counterparty performance, insurance, REIT qualification, litigation, and environmental liabilities. Leases representing approximately 9.0% of annualized base rental revenue were scheduled to expire from July 1, 2018 through June 30, 2019; management expected rents on replacement leases generally to be higher, subject to renewal and downtime assumptions. Ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
No quantified full-year earnings or operating guidance was provided. The company noted that interim results are not necessarily indicative of full-year results. It adopted several accounting standards in 2018; adoption of the standard clarifying the definition of a business means most acquisitions are expected to be treated as asset acquisitions, with different treatment of acquisition costs. The company was still evaluating the impact of the new leases standard expected to be adopted January 1, 2019.
Important facts for investors to verify
- How much of earnings and FFO growth reflects recurring property operations versus property-sale gains, acquisition timing, and the preferred-stock redemption charge.
- Whether same-store rent growth can persist given same-store occupancy was slightly lower and operating expenses grew faster than same-store revenue in the first half.
- The performance and lease-up progress of recent acquisitions and Value Add properties, including the effect of dispositions on future rental income.
- Post-quarter borrowing and credit-facility refinancing terms, including actual borrowing availability, interest-rate exposure, and covenant headroom.
- Capital needs and dilution following the ATM share issuance, preferred-stock redemption, dividends, and planned property investments.