STAG Industrial, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 30, 2012; filed November 8, 2012. STAG owns and operates single-tenant industrial properties and is taxed as a REIT. At quarter-end it owned 134 properties across 31 states, totaling approximately 23.5 million rentable square feet, and was 96.3% leased to 116 tenants. The company’s ownership of its operating partnership was 83.92%.
Key financial metrics
| Metric | Q3 / September 30, 2012 | Comparable or additional detail |
|---|---|---|
| Revenue | $21.7 million | Up 43.4% from $15.2 million in Q3 2011, principally due to acquisitions. |
| GAAP net loss | $4.9 million | Compared with a $0.6 million loss in Q3 2011. Net loss attributable to STAG was $3.7 million; loss attributable to common stockholders was $5.3 million, or $0.18 per share. |
| Expenses | $22.1 million | Up 67.8% year over year; included $3.9 million of impairment expense and higher depreciation and acquisition costs. |
| FFO | $9.4 million | FFO attributable to common stockholders and unit holders was $7.8 million. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow. |
| Operating cash flow | Not presented separately for the quarter | Nine-month operating cash flow was $30.2 million, versus $12.9 million for the comparable 2011 periods, which include predecessor results. |
| Investing cash flow | Not presented separately for the quarter | Nine-month cash used was $211.3 million, primarily reflecting property acquisitions and related investment. |
| Cash and restricted cash | $10.7 million cash; $5.8 million restricted cash | Cash was $16.5 million at December 31, 2011. |
| Debt | $273.9 million principal outstanding | Weighted-average interest rate was 4.25%. Debt carrying amount was $273.9 million; estimated fair value was $286.9 million. |
| Dividends | $0.27 per common share for Q3 | Series A preferred stock pays a 9.0% annual dividend; the Q3 preferred dividend was $1.6 million. |
Material changes versus the prior comparable period
- Q3 revenue rose 43.4%, while total expenses rose 67.8%; acquisitions expanded the portfolio and increased depreciation, operating costs, and acquisition-related expenses.
- Q3 net loss attributable to STAG increased to $3.7 million from $0.4 million. The comparison is affected by a $3.9 million property impairment, $0.9 million of debt-extinguishment loss, and prior-year discontinued-operation income and swap gains.
- For the nine months, revenue was $59.7 million, up 74.6% from the combined 2011 comparison; expenses were $54.9 million, up 91.8%. Management cautions that the comparison is not meaningful as a like-for-like operating comparison because the company began operations after its April 2011 IPO and the 2011 figures include predecessor activity.
- During 2012, STAG issued common stock in two offerings, raising net proceeds of approximately $102.8 million in May and $124.6 million in August. Common shares outstanding increased to 34.9 million from 15.9 million at year-end 2011.
- In September, STAG replaced its secured corporate credit facility with a $200 million unsecured revolving facility and a $150 million unsecured term loan. It paid off the Wells Fargo master loan and terminated the former facility.
Outlook, risks, and unusual items
- Management said limited speculative development, low interest rates, available acquisition opportunities, and improving tenant financing conditions could support occupancy, rents, and acquisitions. It provided no numerical earnings or FFO guidance.
- Management reported 80% tenant retention on leases expiring during 2012 as of September 30. Approximately 0.9 million square feet was available; 1.5 million of 1.9 million square feet of 2012 expirations had been renewed.
- The Great Bend, Kansas property, occupied by a tenant in bankruptcy, was written down by $3.9 million in Q3. On October 31, STAG signed an agreement to sell the building for $4.0 million, subject to contingencies.
- After quarter-end, STAG acquired 31 properties for approximately $127.6 million, a Massachusetts facility for $8.3 million, and a Michigan facility for $5.0 million. It also reported $142.5 million of additional net revolver borrowings from October 1 through November 7, used for acquisitions. On November 8, subsidiaries entered into a $68.8 million secured loan maturing in 2022 at 4.31%.
- Interest-rate swaps covering $100 million of the term loan became effective October 10, converting that portion to fixed-rate exposure plus the applicable credit spread. The remaining $12 million revolver balance was variable-rate at quarter-end. Management estimated that a 100-basis-point rate increase, assuming quarter-end balances for the full nine months, would have increased interest expense by $0.8 million.
- Key risks include tenant defaults or non-renewals, vacancies and rent declines, acquisition and integration performance, real-estate values and local economic conditions, financing availability and interest rates, REIT qualification, and environmental or insurance liabilities. The filing reported compliance with debt covenants, no off-balance-sheet arrangements, and no legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether acquisition growth translates into stronger comparable-property revenue, occupancy, and cash generation after acquisition costs and depreciation.
- The timing, financing, and operating contribution of the post-quarter acquisitions, including revolver usage and remaining liquidity.
- The outcome and proceeds of the proposed Great Bend sale, and any further tenant-related impairment or leasing effects.
- Debt covenant headroom, future maturities, floating-rate exposure, and the impact of the new swaps and secured borrowing.
- Whether operating cash flow and funds available for distribution support common and preferred dividends; FFO is not a liquidity measure.