STAG Industrial, Inc. — 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012. STAG is a U.S. industrial-property REIT focused on single-tenant warehouse/distribution, light manufacturing and flex/office properties. At year-end, it owned 172 properties across 31 states, with 29.4 million rentable square feet and 156 tenants. The company completed its IPO in 2011; consequently, comparisons with 2011 include different reporting periods and predecessor operations, and management says they are not meaningful measures of comparable operating performance.
Financial and operating performance
- Revenue: $85.5 million, up 71.6% from the reported $49.8 million in 2011. Rental income was $75.4 million; tenant recoveries were $8.8 million.
- Profitability: Net loss was $10.2 million; net loss attributable to common stockholders was $12.8 million, or $0.51 per diluted share. Depreciation and amortization totaled $43.3 million. FFO was $37.6 million; FFO attributable to common stockholders and unit holders was $31.3 million. FFO is a non-GAAP measure and is not a substitute for cash flow or net income.
- Cash flow: Operating activities provided $48.0 million; investing activities used $417.2 million, primarily for acquisitions; financing activities provided $371.7 million. Year-end cash and cash equivalents were $19.0 million, with another $5.5 million in restricted cash.
- Portfolio and leasing: Properties were 95.1% leased. Annualized rent was $105.9 million, and weighted average remaining lease term was approximately 5.1 years. Available space was about 1.4 million square feet. Tenant retention for leases expiring in 2012 was 84%, versus 88% for 2011.
- Balance sheet and debt: Total assets were $1.005 billion, total liabilities $515.7 million and total equity $489.5 million. Debt was $479.2 million, with a weighted average interest rate of 3.69%. Approximately $149.3 million remained variable-rate after swaps; $100 million of the $150 million term loan was hedged. The company reported $40.4 million of available capacity under its unsecured revolving facility at year-end and compliance with debt covenants.
- Distributions: Common dividends declared were $1.07 per share for 2012; Series A preferred dividends were $2.25 per share. The preferred stock carries a 9% cumulative dividend and ranks senior to common stock.
Changes versus prior period and significant items
- Revenue rose 71.6% and expenses rose 73.2%; reported net loss increased to $10.2 million from $9.5 million. Growth largely reflects the formation transactions and acquisitions, including 70 properties acquired during 2012. Management cautions that the year-over-year comparison is not a like-for-like comparison.
- Assets expanded approximately 68% from year-end 2011. Acquisition investment was substantial; cash used in investing activities increased to $417.2 million.
- Common-stock offerings in May and August 2012 and the ATM program generated equity proceeds. A January 2013 offering generated $110.1 million net and was used to repay the year-end revolving-facility balance in full.
- Impairment losses totaled $4.6 million, including a $3.9 million write-down associated with the Great Bend, Kansas property before its sale and a $0.6 million impairment of lease intangibles at a property affected by a tenant space reduction. A $0.9 million debt-extinguishment loss also affected 2012 results.
- In October 2012, STAG acquired 32 properties from a related fund under common management. The filing describes independent-director and adviser involvement in the transaction process. The company also acquired six properties from Columbus Nova and issued common units as an acquisition fee.
Outlook, risks and contingencies
Management expected acquisition activity to support future performance and cited limited speculative development, improving tenant financing access and low interest rates as favorable conditions. It also stated that it was evaluating approximately $600 million of potential acquisitions. The filing provides no quantified earnings or FFO guidance.
- Lease rollover is a key exposure: 30.9% of annualized rent was scheduled to expire on or before December 31, 2015. Renewal rates, re-leasing costs and rent levels may affect cash flow.
- Industrial-sector concentration, tenant defaults or bankruptcies, market weakness, regional or industry concentrations, acquisition execution and access to capital could adversely affect results and distributions.
- Debt refinancing and interest-rate risk remain relevant. Debt covenants may restrict distributions after a default; a 100-basis-point rate increase was estimated to add $1.5 million of annual interest expense under the filing’s stated assumptions.
- Environmental and property-related exposures include asbestos-containing materials at some properties, potential contamination and ADA compliance costs. Insurance is subject to exclusions and limits. Management reported no material pending legal proceedings.
- REIT qualification requires ongoing compliance and distributions; failure to qualify could result in corporate-level taxation. Common distributions are discretionary and may include return of capital.
Most important facts for investors to verify
- Whether acquisition-driven revenue and FFO translate into sustainable per-share cash generation after recurring capital needs, leasing costs and preferred dividends.
- The maturity schedule, available liquidity, covenant headroom and the impact of subsequent financing activity, including the January 2013 revolver repayment and February 2013 term-loan borrowing.
- Lease expirations through 2015, tenant retention, current occupancy and the cost and timing of leasing available space.
- Returns and governance around related-party acquisitions, and whether acquired properties meet underwriting expectations.
- The assumptions and potential future consequences of recorded impairments, environmental exposures and distribution coverage, including the return-of-capital component of common dividends.