STAG Industrial, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. STAG is a REIT focused on owning and operating single-tenant U.S. industrial properties. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Business context and operating performance
- At quarter-end, STAG owned 381 buildings totaling approximately 75.4 million rentable square feet in 37 states. The portfolio was 95.4% leased; the core Operating Portfolio was 96.0% leased.
- For the three months, same-store NOI increased 1.5% to $59.4 million; same-store occupancy was 96.1%, down from 96.4% a year earlier. For the nine months, same-store NOI increased 1.7% to $155.2 million.
- New and renewal Operating Portfolio leases produced a 10.6% straight-line rent increase in Q3 and 14.7% for the first nine months. Management reported that approximately 9.7% of annualized base rent was scheduled to expire in the 12 months from October 1, 2018.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $88.9 | $78.1 | $257.7 | $219.8 |
| Net income | $8.9 | $21.8 | $49.0 | $23.3 |
| Net income attributable to common stockholders | $7.2 | $18.5 | $38.2 | $15.0 |
| Diluted EPS | $0.07 | $0.20 | $0.38 | $0.17 |
| FFO attributable to common stockholders and unit holders | $48.6 | $39.9 | $135.7 | $106.8 |
- Revenue rose 13.8% in Q3 and 17.2% year to date. Q3 net income fell 59.4%, while nine-month net income more than doubled. Q3 NOI was $71.8 million versus $62.7 million; the filing does not present a specific margin measure.
- Q3 earnings were affected by a $14.3 million decrease in gains on property sales versus the prior-year quarter and higher interest expense. Year-to-date results benefited from a $32.3 million property-sale gain, compared with $19.2 million in 2017.
- Nine-month operating cash flow was $148.6 million, up from $120.0 million. Investing activities used $393.3 million, principally reflecting acquisitions; financing activities provided $227.8 million. Cash and restricted cash totaled $11.3 million at September 30.
- Debt principal was $1.327 billion, with a 3.69% weighted-average interest rate, 4.9-year weighted-average duration, 4% secured debt, and no debt maturities reported in the next 12 months. Net debt to real estate cost basis was 39%. STAG reported compliance with debt covenants.
- Management reported approximately $580.4 million of immediate liquidity: $6.0 million cash and $574.4 million of undrawn credit-facility and term-loan commitments, subject to covenant-based borrowing limits. Total assets were $2.989 billion.
Material changes, outlook, and risks
- STAG acquired 36 buildings totaling 7.1 million square feet for approximately $458.7 million during the first nine months, and sold 11 buildings totaling 2.0 million square feet for net proceeds of $89.4 million. It also issued 10.4 million common shares through its ATM program for gross proceeds of $276.5 million.
- The company redeemed all 2.8 million Series B preferred shares for $70.0 million in July and recorded a $2.7 million deemed dividend related to redemption and original issuance costs. Series C preferred shares remained outstanding.
- In July, STAG refinanced its credit facility, extending maturity to January 2023, increasing capacity to $500 million, and reducing the annual spread to LIBOR plus 1.05%. It also issued $175 million of unsecured notes at fixed rates of 4.10% and 4.27%; a new $175 million delayed-draw term loan facility was established, but was undrawn at quarter-end.
- Management described the outlook as positive but moderated, citing a favorable industrial supply-demand environment, e-commerce and manufacturing demand, and potential rental-rate growth. It also noted increased development activity and tenant labor availability as factors to monitor. Management believes hedging limits floating-rate exposure; $95 million drawn on the credit facility remained unhedged at quarter-end.
- Risks include tenant defaults or non-renewals, vacancies and rental-rate changes, acquisition execution, economic and market conditions, interest rates, refinancing and capital-market access, insurance and environmental exposures, and maintaining REIT status. The filing reported a $2.9 million impairment charge for the first nine months, ordinary-course legal matters not expected to be material, and approximately $5.6 million of letters of credit.
- STAG planned to adopt the new lease accounting standard, Topic 842, on January 1, 2019; it was still evaluating the financial-statement impact. No numerical full-year earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether reported rent growth and occupancy trends persist, particularly as leases expire and same-store occupancy has edged down.
- How much of reported earnings and cash generation reflects property-sale gains, acquisitions, and other non-recurring or non-cash items; compare GAAP results with FFO and NOI.
- Actual available borrowing capacity under covenants, future funding of acquisitions, and the impact of interest-rate changes on the unhedged credit-facility balance.
- The effect of share issuance and the preferred-stock redemption on per-share results, dividends, and capital structure.
- The eventual impact of Topic 842 adoption and the performance of recently acquired properties.