UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2012
OR
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-34907
STAG INDUSTRIAL, INC.
(Exact name of registrant as specified in its charter)
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Maryland |
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27-3099608 |
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(State or other jurisdiction |
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(IRS Employer |
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99 High Street, 28th Floor |
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02110 |
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(Address of principal executive offices) |
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(Zip Code) |
(617) 574-4777
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
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Class |
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Outstanding at August 6, 2012 |
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Common Stock ($0.01 par value) |
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25,077,106 |
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9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value) |
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2,760,000 |
STAG INDUSTRIAL, INC.
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Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 for STAG Industrial, Inc. |
3 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 | |
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33 | ||
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34 |
STAG Industrial, Inc.
(unaudited, in thousands, except share data)
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June 30, 2012 |
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December 31, 2011 |
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Assets |
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Rental Property: |
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Land |
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$ |
81,501 |
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$ |
70,870 |
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Buildings |
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461,617 |
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394,822 |
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Tenant improvements |
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29,703 |
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25,056 |
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Building and land improvements |
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13,305 |
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11,510 |
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Less: accumulated depreciation |
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(37,502 |
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(30,004 |
) | ||
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Total rental property, net |
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548,624 |
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472,254 |
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Cash and cash equivalents |
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5,113 |
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16,498 |
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Restricted cash |
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10,026 |
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6,611 |
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Tenant accounts receivable, net |
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6,210 |
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5,592 |
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Prepaid expenses and other assets |
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1,954 |
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1,355 |
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Deferred financing fees, net |
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2,506 |
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2,634 |
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Leasing commissions, net |
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1,203 |
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954 |
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Goodwill |
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4,923 |
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4,923 |
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Due from related parties |
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443 |
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400 |
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Deferred leasing intangibles, net |
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128,801 |
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113,293 |
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Total assets |
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$ |
709,803 |
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$ |
624,514 |
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Liabilities and Stockholders’ Equity |
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Liabilities: |
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Mortgage notes payable |
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$ |
287,314 |
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$ |
296,779 |
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Credit facility |
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5,000 |
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— |
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Accounts payable, accrued expenses and other liabilities |
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5,754 |
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6,044 |
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Interest rate swaps |
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— |
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215 |
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Tenant prepaid rent and security deposits |
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4,630 |
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3,478 |
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Dividends and distributions payable |
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10,287 |
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6,160 |
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Deferred leasing intangibles, net |
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4,450 |
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1,929 |
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Total liabilities |
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$ |
317,435 |
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$ |
314,605 |
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Commitments and contingencies |
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— |
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Stockholders’ Equity: |
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Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2012 and December 31, 2011 |
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69,000 |
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69,000 |
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Common stock $0.01 par value, 100,000,000 shares authorized, 24,958,258 and 15,901,560 shares outstanding at June 30, 2012 and December 31, 2011, respectively |
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249 |
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159 |
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Additional paid-in capital |
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282,669 |
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179,919 |
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Common stock dividends in excess of earnings |
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(33,424 |
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(18,385 |
) | ||
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Total stockholders’ equity |
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318,494 |
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230,693 |
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Noncontrolling interest |
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73,874 |
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79,216 |
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Total stockholders’ equity |
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392,368 |
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309,909 |
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Total liabilities and stockholders’ equity |
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$ |
709,803 |
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$ |
624,514 |
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The accompanying notes are an integral part of these financial statements.
STAG Industrial, Inc. and STAG Predecessor Group
Consolidated and Combined Statements of Operations
(unaudited, in thousands except per share data)
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STAG |
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STAG |
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STAG |
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STAG |
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STAG |
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STAG |
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Predecessor |
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Industrial, |
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Industrial, |
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Predecessor |
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Industrial, |
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Industrial, |
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Group |
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Inc. |
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Inc. |
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Group |
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Inc. |
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Inc. |
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Period from |
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Three Months |
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Period from April |
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Period from April 1 |
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Six Months |
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Period from April |
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January 1 to April |
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Revenue |
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Rental income |
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$ |
17,541 |
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$ |
9,569 |
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$ |
1,216 |
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$ |
33,186 |
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$ |
9,569 |
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$ |
6,866 |
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Tenant recoveries |
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2,091 |
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1,073 |
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258 |
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4,148 |
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1,073 |
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1,218 |
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Other income |
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330 |
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267 |
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— |
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650 |
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267 |
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— |
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Total revenue |
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19,962 |
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10,909 |
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1,474 |
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37,984 |
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10,909 |
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8,084 |
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Expenses |
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Property |
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1,353 |
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740 |
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200 |
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3,094 |
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740 |
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1,193 |
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General and administrative |
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3,308 |
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2,060 |
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183 |
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6,306 |
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2,060 |
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322 |
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Real estate taxes and insurance |
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1,705 |
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900 |
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144 |
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3,139 |
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900 |
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879 |
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Asset management fees |
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— |
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— |
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30 |
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— |
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— |
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170 |
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Property acquisition costs |
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1,149 |
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327 |
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— |
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1,441 |
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327 |
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— |
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Depreciation and amortization |
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9,272 |
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6,392 |
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428 |
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18,111 |
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6,392 |
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2,405 |
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Other expenses |
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9 |
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— |
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— |
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59 |
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— |
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— |
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Total expenses |
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16,796 |
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10,419 |
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985 |
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32,150 |
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10,419 |
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4,969 |
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Other income (expense) |
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Interest income |
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4 |
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9 |
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0 |
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8 |
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9 |
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1 |
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Interest expense |
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(4,167 |
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(3,116 |
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(763 |
) |
(8,309 |
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(3,116 |
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(3,954 |
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Gain on interest rate swaps |
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— |
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500 |
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177 |
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215 |
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500 |
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762 |
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Formation transaction costs |
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— |
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(3,728 |
) |
— |
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— |
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(3,728 |
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— |
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Offering costs |
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(68 |
) |
— |
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— |
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(68 |
) |
— |
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— |
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Loss on impairment |
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(622 |
) |
— |
|
— |
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(622 |
) |
— |
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— |
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Gain on extinguishment of debt |
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18 |
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— |
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— |
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18 |
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— |
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— |
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Total other income (expense) |
|
(4,835 |
) |
(6,335 |
) |
(586 |
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(8,758 |
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(6,335 |
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(3,191 |
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Net loss from continuing operations |
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$ |
(1,669 |
) |
$ |
(5,845 |
) |
$ |
(97 |
) |
$ |
(2,924 |
) |
$ |
(5,845 |
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$ |
(76 |
) |
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Discontinued operations |
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Income (loss) attributable to discontinued operations |
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(78 |
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(54 |
) |
8 |
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(184 |
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(54 |
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(153 |
) | ||||||
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Gain on sale of real estate |
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219 |
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— |
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— |
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219 |
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— |
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— |
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Total income (loss) attributable to discontinued operations |
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141 |
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(54 |
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8 |
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35 |
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(54 |
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(153 |
) | ||||||
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Net loss |
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$ |
(1,528 |
) |
$ |
(5,899 |
) |
$ |
(89 |
) |
$ |
(2,889 |
) |
$ |
(5,899 |
) |
$ |
(229 |
) |
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Less: loss attributable to noncontrolling interest |
|
|
(887 |
) |
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(1,996 |
) |
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(1,853 |
) |
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(1,996 |
) |
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Net loss attributable to STAG Industrial, Inc. |
|
$ |
(641 |
) |
$ |
(3,903 |
) |
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$ |
(1,036 |
) |
$ |
(3,903 |
) |
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Less: preferred stock dividends |
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|
1,553 |
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— |
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3,106 |
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— |
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Less: amount allocated to unvested restricted stockholders |
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41 |
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— |
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41 |
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— |
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Net loss attributable to common stockholders |
|
$ |
(2,235 |
) |
$ |
(3,903 |
) |
|
|
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$ |
(4,183 |
) |
$ |
(3,903 |
) |
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Weighted average common shares outstanding — basic and diluted |
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19,484,785 |
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15,153,646 |
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17,654,706 |
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15,153,646 |
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Income (loss) per share — basic and diluted |
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Loss from continuing operations attributable to the common stockholders |
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$ |
(0.12 |
) |
$ |
(0.26 |
) |
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$ |
(0.24 |
) |
$ |
(0.26 |
) |
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Discontinued operations |
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$ |
0.01 |
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$ |
(0.00 |
) |
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$ |
0.00 |
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$ |
(0.00 |
) |
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Loss per share — basic and diluted |
|
$ |
(0.11 |
) |
$ |
(0.26 |
) |
|
|
$ |
(0.24 |
) |
$ |
(0.26 |
) |
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Dividends declared per common share |
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$ |
0.27 |
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$ |
0.2057 |
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|
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$ |
0.53 |
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$ |
0.2057 |
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The accompanying notes are an integral part of these financial statements.
STAG Industrial, Inc. and STAG Predecessor Group
Consolidated and Combined Statements of Stockholders’ Equity
(unaudited, in thousands, except share data)
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Noncontrolling |
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Common Stock |
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Interest — Unit |
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Additional |
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Dividends |
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Total |
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Holders in |
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Common Stock |
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Paid in |
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in Excess of |
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Predecessor’s |
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Stockholder’s |
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Operating |
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Preferred Stock |
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Shares |
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Amount |
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Capital |
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Earnings |
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Owner’s Deficit |
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Equity |
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Partnership |
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Total Equity |
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Six Months Ended June 30, 2012 |
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Balance, December 31, 2011 |
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$ |
69,000 |
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15,901,560 |
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$ |
159 |
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$ |
179,919 |
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$ |
(18,385 |
) |
$ |
— |
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$ |
230,693 |
|
$ |
79,216 |
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$ |
309,909 |
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Proceeds from sale of common stock |
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— |
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8,337,500 |
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83 |
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107,304 |
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— |
|
— |
|
107,387 |
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— |
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107,387 |
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Offering costs |
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— |
|
— |
|
— |
|
(5,104 |
) |
— |
|
— |
|
(5,104 |
) |
— |
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(5,104 |
) | ||||||||
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Issuance of restricted stock |
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— |
|
87,025 |
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1 |
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(1 |
) |
— |
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— |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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8,241 |
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— |
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— |
|
— |
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— |
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— |
|
— |
|
— |
| ||||||||
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Dividends and distributions |
|
(3,106 |
) |
— |
|
— |
|
— |
|
(10,897 |
) |
— |
|
(14,003 |
) |
(4,133 |
) |
(18,136 |
) | ||||||||
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Stock-based compensation |
|
— |
|
— |
|
— |
|
502 |
|
— |
|
— |
|
502 |
|
474 |
|
976 |
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Issuance of units for acquisition fee |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
225 |
|
225 |
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Conversion of operating partnership units to common stock |
|
— |
|
623,932 |
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6 |
|
6,038 |
|
— |
|
— |
|
6,044 |
|
(6,044 |
) |
— |
| ||||||||
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Rebalancing of noncontrolling interest |
|
— |
|
— |
|
— |
|
(5,989 |
) |
— |
|
— |
|
(5,989 |
) |
5,989 |
|
— |
| ||||||||
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Net income (loss) |
|
3,106 |
|
— |
|
— |
|
— |
|
(4,142 |
) |
— |
|
(1,036 |
) |
(1,853 |
) |
(2,889 |
) | ||||||||
|
Balance, June 30, 2012 |
|
$ |
69,000 |
|
24,958,258 |
|
$ |
249 |
|
$ |
282,669 |
|
$ |
(33,424 |
) |
$ |
— |
|
$ |
318,494 |
|
$ |
73,874 |
|
$ |
392,368 |
|
|
|
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|
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|
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| ||||||||
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Period from January 1, 2011 to April 19, 2011 (STAG Predecessor Group) |
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| ||||||||
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Balance, December 31, 2010 |
|
$ |
— |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(8,336 |
) |
$ |
(8,336 |
) |
$ |
— |
|
$ |
(8,336 |
) |
|
Contributions |
|
— |
|
— |
|
— |
|
— |
|
— |
|
4,420 |
|
4,420 |
|
— |
|
4,420 |
| ||||||||
|
Distributions |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(9,900 |
) |
(9,900 |
) |
— |
|
(9,900 |
) | ||||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(229 |
) |
(229 |
) |
— |
|
(229 |
) | ||||||||
|
Balance, April 19, 2011 |
|
$ |
— |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(14,045 |
) |
$ |
(14,045 |
) |
$ |
— |
|
$ |
(14,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
Period from April 20, 2011 to June 30, 2011 (STAG Industrial, Inc.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
Balance, April 20, 2011 |
|
$ |
— |
|
110 |
|
$ |
— |
|
$ |
2 |
|
$ |
— |
|
$ |
(14,045 |
) |
$ |
(14,043 |
) |
$ |
— |
|
$ |
(14,043 |
) |
|
Proceeds from sale of common stock |
|
— |
|
15,812,500 |
|
158 |
|
205,405 |
|
— |
|
— |
|
205,563 |
|
— |
|
205,563 |
| ||||||||
|
Redemption of initial capitalization of STAG Industrial, Inc. |
|
— |
|
(110 |
) |
— |
|
(2 |
) |
— |
|
— |
|
(2 |
) |
— |
|
(2 |
) | ||||||||
|
Issuance of units for acquisition of properties |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
95,670 |
|
95,670 |
| ||||||||
|
Exchange of owners’ equity for units |
|
— |
|
— |
|
— |
|
— |
|
— |
|
14,045 |
|
14,045 |
|
(14,045 |
) |
— |
| ||||||||
|
Offering costs |
|
— |
|
— |
|
— |
|
(17,042 |
) |
— |
|
— |
|
(17,042 |
) |
— |
|
(17,042 |
) | ||||||||
|
Issuance of restricted stock |
|
— |
|
80,809 |
|
1 |
|
(1 |
) |
— |
|
— |
|
— |
|
— |
|
— |
| ||||||||
|
Dividends and distributions |
|
|
|
— |
|
— |
|
— |
|
(3,269 |
) |
— |
|
(3,269 |
) |
(1,602 |
) |
(4,871 |
) | ||||||||
|
Stock-based compensation |
|
— |
|
— |
|
— |
|
39 |
|
— |
|
— |
|
39 |
|
117 |
|
156 |
| ||||||||
|
Rebalancing of noncontrolling interest |
|
— |
|
— |
|
— |
|
(7,226 |
) |
— |
|
— |
|
(7,226 |
) |
7,226 |
|
— |
| ||||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(3,903 |
) |
— |
|
(3,903 |
) |
(1,996 |
) |
(5,899 |
) | ||||||||
|
Balance, June 30, 2011 |
|
$ |
— |
|
15,893,309 |
|
$ |
159 |
|
$ |
181,175 |
|
$ |
(7,172 |
) |
$ |
— |
|
$ |
174,162 |
|
$ |
85,370 |
|
$ |
259,532 |
|
The accompanying notes are an integral part of these financial statements.
STAG Industrial, Inc. and STAG Predecessor Group
Consolidated and Combined Statements of Cash Flows
(unaudited, in thousands)
|
|
|
|
|
|
|
STAG |
| |||
|
|
|
|
|
|
|
Predecessor |
| |||
|
|
|
|
|
STAG Industrial, Inc. |
|
Group |
| |||
|
|
|
STAG Industrial, Inc. |
|
Period from |
|
Period from January |
| |||
|
|
|
|
|
|
|
|
| |||
|
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
|
Net loss |
|
$ |
(2,889 |
) |
$ |
(5,899 |
) |
$ |
(229 |
) |
|
Adjustment to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
|
Depreciation and amortization |
|
18,132 |
|
6,446 |
|
2,459 |
| |||
|
Loss on impairment |
|
622 |
|
— |
|
— |
| |||
|
Non-cash portion of interest expense |
|
498 |
|
264 |
|
31 |
| |||
|
Intangible amortization in rental income, net |
|
2,258 |
|
869 |
|
(2 |
) | |||
|
Straight line adjustment, net |
|
(1,269 |
) |
(326 |
) |
(16 |
) | |||
|
Gain on interest rate swaps |
|
(215 |
) |
(500 |
) |
(762 |
) | |||
|
Gain on extinguishment of debt |
|
(18 |
) |
— |
|
— |
| |||
|
Gain on sale of real estate |
|
(219 |
) |
— |
|
— |
| |||
|
Stock-based compensation expense |
|
976 |
|
156 |
|
— |
| |||
|
Issuance of units for acquisition fee |
|
225 |
|
— |
|
— |
| |||
|
Change in assets and liabilities: |
|
|
|
|
|
|
| |||
|
Tenant accounts receivable, net |
|
101 |
|
(42 |
) |
88 |
| |||
|
Leasing commissions, net |
|
(359 |
) |
(25 |
) |
(24 |
) | |||
|
Restricted cash |
|
(689 |
) |
(171 |
) |
— |
| |||
|
Prepaid expenses and other assets |
|
(653 |
) |
450 |
|
(87 |
) | |||
|
Accounts payable, accrued expenses and other liabilities |
|
(35 |
) |
(429 |
) |
106 |
| |||
|
Tenant prepaid rent and security deposits |
|
1,152 |
|
843 |
|
169 |
| |||
|
Due from related parties |
|
(43 |
) |
746 |
|
767 |
| |||
|
Due to related parties |
|
— |
|
(596 |
) |
(141 |
) | |||
|
Total adjustments |
|
20,464 |
|
7,685 |
|
2,588 |
| |||
|
Net cash provided by operating activities |
|
17,575 |
|
1,786 |
|
2,359 |
| |||
|
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
|
Additions of land and building improvements |
|
(86,992 |
) |
(12,349 |
) |
(39 |
) | |||
|
Proceeds from sale of rental property, net |
|
3,216 |
|
— |
|
— |
| |||
|
Restricted cash |
|
(1,173 |
) |
(540 |
) |
(542 |
) | |||
|
Cash paid for contributed assets, net |
|
— |
|
(2,159 |
) |
— |
| |||
|
Cash received (paid) for deal deposits, net |
|
35 |
|
(1,065 |
) |
— |
| |||
|
Additions to lease intangibles |
|
(25,950 |
) |
(5,686 |
) |
— |
| |||
|
Net cash used in investing activities |
|
(110,864 |
) |
(21,799 |
) |
(581 |
) | |||
|
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
|
Proceeds from issuance of common stock |
|
107,387 |
|
205,563 |
|
— |
| |||
|
Offering costs related to issuance of common stock |
|
(5,104 |
) |
(17,042 |
) |
— |
| |||
|
Redemption of initial capitalization of STAG Industrial, Inc. shares |
|
— |
|
(2 |
) |
— |
| |||
|
Proceeds from notes payable to related parties |
|
— |
|
— |
|
789 |
| |||
|
Repayment of notes payable to related parties |
|
— |
|
(10,366 |
) |
— |
| |||
|
Proceeds from secured corporate credit facility |
|
87,300 |
|
11,000 |
|
— |
| |||
|
Repayment of secured corporate credit facility |
|
(82,300 |
) |
(11,000 |
) |
— |
| |||
|
Proceeds from mortgage notes payable |
|
9,252 |
|
11,400 |
|
— |
| |||
|
Repayment of mortgage notes payable |
|
(18,592 |
) |
(152,954 |
) |
(1,180 |
) | |||
|
Termination of swap contracts |
|
— |
|
(894 |
) |
— |
| |||
|
Payment of loan fees and costs |
|
(477 |
) |
(2,662 |
) |
— |
| |||
|
Dividends and distributions |
|
(14,009 |
) |
— |
|
(2,679 |
) | |||
|
Restricted cash - escrow for dividends |
|
(1,553 |
) |
— |
|
— |
| |||
|
Net cash provided by (used in) financing activities |
|
81,904 |
|
33,043 |
|
(3,070 |
) | |||
|
Increase (decrease) in cash and cash equivalents |
|
(11,385 |
) |
13,030 |
|
(1,292 |
) | |||
|
Cash and cash equivalents—beginning of period |
|
16,498 |
|
277 |
|
1,567 |
| |||
|
Cash and cash equivalents—end of period |
|
$ |
5,113 |
|
$ |
13,307 |
|
$ |
275 |
|
The accompanying notes are an integral part of these financial statements.
STAG Industrial, Inc. and STAG Predecessor Group
Notes to Consolidated and Combined Financial Statements
(unaudited)
1. Organization and Description of Business
STAG Industrial, Inc. (the “Company”) is a fully-integrated, self-administered and self-managed real estate company focused on the acquisition, ownership and management of single-tenant industrial properties throughout the United States. The Company was formed as a Maryland corporation on July 21, 2010 and has elected to be treated as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). As of June 30, 2012 and December 31, 2011, the Company owned a 77.15% and 67.12%, respectively, limited partnership interest in the Operating Partnership. As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries and partnerships except where context otherwise requires.
As of June 30, 2012, the Company owned 121 properties in 29 states with approximately 20.4 million rentable square feet, consisting of 71 warehouse/distribution properties, 30 manufacturing properties and 20 flex/office properties. The Company’s properties were 95.7% leased to 104 tenants as of June 30, 2012.
The Company’s “predecessor” for accounting purposes is STAG Predecessor Group (or “Predecessor”), which is not a legal entity, but a collection of the real estate entities that were owned by STAG Investments III, LLC prior to the Company’s initial public offering in April 2011 (the “IPO”). Prior to the IPO, STAG Predecessor Group also was engaged in the business of owning, leasing and operating real estate consisting primarily of industrial properties located throughout the United States. The financial information contained in this report that relates to the time periods on or prior to April 19, 2011 is the Predecessor’s financial information; the financial information contained in this report for any time period on or after April 20, 2011 is the Company’s financial information. The Company did not have any operating activity before April 20, 2011 and, as a result of the Company’s IPO and related formation transactions, is substantially different from STAG Predecessor Group.
2. Summary of Significant Accounting Policies
Interim Financial Information
The accompanying interim financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership and their subsidiaries. The equity interests of other limited partners in the Operating Partnership are reflected as noncontrolling interest. The combined financial statements of STAG Predecessor Group include the accounts of STAG Predecessor Group and all entities in which STAG Predecessor Group had a controlling interest. All significant intercompany balances and transactions have been eliminated in the combination of entities. The financial statements of the Company are presented on a consolidated basis, for all periods presented and comprise the consolidated historical financial statements of the transferred collection of real estate entities and holdings, upon the IPO. The combined financial information presented for periods on or prior to April 19, 2011 relate solely to STAG Predecessor Group. The financial statements for the periods after April 19, 2011 include the financial information of the Company, the Operating Partnership and their subsidiaries. Where the “Company” is referenced in comparisons of financial results for any date prior to
and including April 19, 2011, the financial information for such period relates solely to STAG Predecessor Group, notwithstanding “Company” being the reference.
Adoption of New Accounting Pronouncements
The Company adopted Accounting Standards Update No. 2011-04 issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. The adoption of this guidance did not affect the Company’s financial position, results of operations or cash flows but did result in additional disclosure pertaining to fair value measurements.
Consolidated and Combined Statements of Cash Flows—Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated and Combined Statements of Cash Flows (in thousands):
|
|
|
STAG |
|
STAG |
|
STAG |
| |||
|
Supplemental cash flow information |
|
|
|
|
|
|
| |||
|
Cash paid for interest |
|
$ |
7,895 |
|
$ |
2,927 |
|
$ |
2,433 |
|
|
Supplemental schedule of noncash investing and financing activities |
|
|
|
|
|
|
| |||
|
Acquisition of tangible assets |
|
$ |
— |
|
$ |
(204,116 |
) |
$ |
— |
|
|
Acquisition of goodwill upon formation transactions |
|
$ |
— |
|
$ |
(4,923 |
) |
$ |
— |
|
|
Acquisition of intangible assets upon formation transactions |
|
$ |
— |
|
$ |
(83,442 |
) |
$ |
— |
|
|
Assumption of mortgage notes payable |
|
$ |
— |
|
$ |
190,548 |
|
$ |
— |
|
|
Fair market value adjustment to mortgage notes payable acquired |
|
$ |
— |
|
$ |
141 |
|
$ |
— |
|
|
Assumption of related party notes payable upon formation transactions |
|
$ |
— |
|
$ |
4,466 |
|
$ |
— |
|
|
Acquisition of intangible liabilities upon formation transactions |
|
$ |
— |
|
$ |
1,066 |
|
$ |
— |
|
|
Acquisition of interest rate swaps upon formation transactions included in the purchase price allocation |
|
$ |
— |
|
$ |
420 |
|
$ |
— |
|
|
Acquisition of other liabilities upon formation transactions |
|
$ |
— |
|
$ |
171 |
|
$ |
— |
|
|
Issuance of units for acquisition of net assets upon formation transactions |
|
$ |
— |
|
$ |
95,670 |
|
$ |
— |
|
|
Disposition of accrued lender fees upon formation transactions |
|
$ |
— |
|
$ |
— |
|
$ |
4,420 |
|
|
Assumption of bridge loan for Option Properties upon formation transactions |
|
$ |
— |
|
$ |
— |
|
$ |
(4,750 |
) |
|
Assumption of note payable to related party for Option Properties upon formation transactions |
|
$ |
— |
|
$ |
— |
|
$ |
(727 |
) |
|
Assumption of interest rate swaps to related party for Option Properties upon formation transactions |
|
$ |
— |
|
$ |
— |
|
$ |
(352 |
) |
|
Noncash investing activities included in additions of land and building improvements |
|
$ |
(303 |
) |
$ |
— |
|
$ |
— |
|
|
Dividends and distributions declared but not paid |
|
$ |
10,287 |
|
$ |
— |
|
$ |
— |
|
|
Accrued distribution upon formation transactions |
|
$ |
— |
|
$ |
— |
|
$ |
(1,392 |
) |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash
Restricted cash may include security deposits and cash held in escrow for real estate taxes and capital improvements as required in various mortgage loan agreements. At June 30, 2012, restricted cash included $1.6 million that was held by the Company’s transfer agent for preferred stock dividends that were distributed subsequent to June 30, 2012.
Tenant Accounts Receivable, net
Tenant accounts receivable, net on the Consolidated Balance Sheets, includes both tenant accounts receivable, net and accrued rental income, net. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable that is estimated to be uncollectible. As of June 30, 2012 and December 31, 2011, the Company had an allowance for doubtful accounts of $0.7 million and $0.5 million, respectively.
The Company accrues rental revenue earned, but not yet receivable, in accordance with GAAP. As of June 30, 2012 and December 31, 2011, the Company had accrued rental revenue of $5.2 million and $4.5 million, respectively, which is reflected in tenant accounts receivable, net on the accompanying Consolidated Balance Sheets. The Company maintains an allowance for estimated losses that may result from those revenues. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and accrued rental revenue. As of June 30, 2012 and December 31, 2011, the Company had an allowance on accrued rental revenue of $0.2 million and $0.4 million, respectively.
As of June 30, 2012 and December 31, 2011, the Company had a total of approximately $3.3 million and $3.6 million, respectively, of total lease security deposits available in existing letters of credit; and $1.7 million and $1.2 million, respectively, of lease security deposits available in cash.
Deferred Costs
Deferred financing fees include costs incurred in obtaining mortgage notes payable that are capitalized. The deferred financing fees are amortized to interest expense over the life of the respective loans. Any unamortized amounts upon early repayment of mortgage notes payable are written off in the period of repayment. During the three and six months ended June 30, 2012 and the periods April 20, 2011 to June 30, 2011, April 1, 2011 to April 19, 2011 and January 1, 2011 to April 19, 2011 amortization of deferred financing fees included in interest expense was $0.3 million, $0.6 million, $0.3 million, $0, and $31 thousand, respectively. Fully amortized deferred charges are removed upon maturity of the underlying debt.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, tenant accounts receivable, interest rate swaps, accounts payable, other accrued expenses, credit facility and mortgage notes payable. The fair values of the cash and cash equivalents, tenant accounts receivable, accounts payable and other accrued expenses approximate their carrying or contract values because of the short term maturity of these instruments. See Note 5 for the fair values of the Company’s debt. See Note 6 for the fair values of the Company’s interest rate swaps.
Revenue Recognition
By the terms of their leases, certain tenants are obligated to pay directly the costs of their properties’ insurance, real estate taxes and certain other expenses and these costs are not reflected in the Company’s consolidated financial statements. To the extent any tenant responsible for these costs under its respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company would record a liability for such obligation. The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $1.6 million and $3.0 million for the three and six months ended June 30, 2012, and $1.0 million, $0.1 million and $0.5 million for the periods April 20, 2011 to June 30, 2011, April
1, 2011 to April 19, 2011, and January 1, 2011 to April 19, 2011, respectively, and this would have been the maximum liability of the Company had the tenants not met their contractual obligations. The Company does not recognize recovery revenue related to leases where the tenant has assumed the cost for real estate taxes, insurance and certain other expenses.
Income Taxes
Prior to the IPO, STAG Predecessor Group was comprised primarily of limited partnerships and limited liability companies. Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and limited liability companies was reportable in the income tax returns of the respective partners and members.
The Company elected to qualify as a REIT under the Code commencing with the taxable year ended December 31, 2011. To continue to qualify as a REIT, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, the Company is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders that it derives from its REIT qualifying activities. If the Company fails to qualify as a REIT in any taxable year, and is unable to avail itself of certain savings provisions set forth in the Code, all of the Company’s taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.
The Company will not be required to make distributions with respect to income derived from the activities conducted through subsidiaries that the Company elects to treat as taxable REIT subsidiaries (“TRS”) for federal income tax purposes. Certain activities that the Company undertakes must be conducted by a TRS, such as performing non-customary services for its tenants and holding assets that it cannot hold directly. A TRS is subject to federal and state income taxes. The Company’s TRS did not have any activity during the six months ended June 30, 2012 and period April 20, 2011 to December 31, 2011.
The Company and certain of its subsidiaries are subject to certain state and local income, excise and franchise taxes. Taxes in the amount of $9 thousand and $0.1 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2012, respectively.
The Company currently has no liabilities for uncertain tax positions.
3. Real Estate
As part of the IPO and the related formation transactions, STAG Investments IV, LLC and STAG GI Investments, LLC contributed 100% of their real estate entities and operations in exchange for 7,320,610 common limited partnership units in the Operating Partnership (“common units”) valued at $13.00 per common unit. The members of STAG Capital Partners, LLC and STAG Capital Partners III, LLC (referred to, together, as the “Management Company” in this report), contributed 100% of those entities’ assets and liabilities in exchange for 38,621 common units valued at $13.00 per common unit. The contribution of interests in the Management Company was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution. STAG Predecessor Group, which includes the entity that is considered the Company’s accounting acquirer, is part of the Company’s predecessor business and therefore the assets and liabilities of STAG Predecessor Group were accounted for at carryover basis.
The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by the Company’s management. Using information available at the time the acquisition closed, the Company allocated the total consideration to tangible assets and liabilities, identified intangible assets and liabilities, and goodwill.
On April 18, 2012, the Company entered into an agreement with affiliates of Columbus Nova Real Estate Acquisition Group, Inc. (“Columbus Nova”) to source sale leaseback transactions for potential acquisitions by the Company. The agreement called for various fees to be paid to Columbus Nova for their services including acquisition fees and a one-time incentive fee if certain performance thresholds are met. On June 15, 2012, the Company acquired six industrial properties representing approximately 750,000 square feet in total for an aggregate purchase price of $30 million from Columbus Nova. At the June 15, 2012 acquisition of the six industrial properties referenced above, the Company paid Columbus Nova an acquisition fee in the form of 15,789 Operating Partnership common units with a fair value of approximately $0.2 million, which is included in property acquisition costs on the accompanying Consolidated Statements of Operations. The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended. The Company relied on the exemption based on representations given by the holders of the common units. For further details on the one-time incentive fee, refer to Note 10.
The following table summarizes the acquisitions of the Company since the IPO:
Six Months Ended June 30, 2012
|
Property Location |
|
Date Acquired |
|
Square Feet |
|
Properties |
|
|
East Windsor, CT |
|
3/1/2012 |
|
145,000 |
|
1 |
|
|
South Bend, IN |
|
3/8/2012 |
|
225,000 |
|
1 |
|
|
Lansing, MI |
|
3/21/2012 |
|
129,325 |
|
1 |
|
|
Portland, ME |
|
3/27/2012 |
|
100,600 |
|
1 |
|
|
Portland, TN |
|
3/30/2012 |
|
414,043 |
|
1 |
|
|
Spartanburg, SC |
|
4/5/2012 |
|
409,600 |
|
4 |
|
|
Franklin, IN |
|
4/17/2012 |
|
703,496 |
|
1 |
|
|
Muhlenberg Township, PA |
|
5/24/2012 |
|
394,289 |
|
1 |
|
|
Avon, CT |
|
6/15/2012 |
|
78,400 |
|
1 |
|
|
Orlando, FL |
|
6/15/2012 |
|
155,000 |
|
1 |
|
|
Pineville, NC |
|
6/15/2012 |
|
75,400 |
|
1 |
|
|
Buffalo, NY |
|
6/15/2012 |
|
117,000 |
|
1 |
|
|
Edgefield, SC |
|
6/15/2012 |
|
126,190 |
|
1 |
|
|
Arlington, TX |
|
6/15/2012 |
|
196,000 |
|
1 |
|
Period from April 20, 2011 to December 31, 2011
|
Property Location |
|
Date Acquired |
|
Square Feet |
|
Properties |
|
|
Various - Formation Transaction |
|
4/20/2011 |
|
7,574,204 |
|
34 |
|
|
Lansing, MI |
|
5/26/2011 |
|
231,000 |
|
1 |
|
|
Fort Worth, TX |
|
6/30/2011 |
|
101,500 |
|
1 |
|
|
Gresham, OR |
|
7/19/2011 |
|
420,690 |
|
1 |
|
|
Berkeley, MO |
|
7/28/2011 |
|
305,550 |
|
1 |
|
|
Norton, MA |
|
8/4/2011 |
|
200,000 |
|
1 |
|
|
Conyers, GA |
|
9/2/2011 |
|
226,256 |
|
1 |
|
|
Louisville, KY |
|
9/22/2011 |
|
497,820 |
|
2 |
|
|
Gahanna, OH |
|
10/14/2011 |
|
383,000 |
|
1 |
|
|
Smithfield, NC |
|
11/16/2011 |
|
191,450 |
|
1 |
|
|
North Jackson, OH |
|
12/14/2011 |
|
307,315 |
|
1 |
|
|
Chippewa Falls, WI |
|
12/15/2011 |
|
97,400 |
|
2 |
|
|
Rogers, AR |
|
12/22/2011 |
|
400,000 |
|
1 |
|
|
Georgetown, KY |
|
12/29/2011 |
|
97,500 |
|
1 |
|
The following table summarizes the allocation of the consideration paid during the six months ended June 30, 2012 and the year ended December 31, 2011 for the acquired assets and liabilities in connection with the formation transactions and acquisitions of manufacturing and distribution facilities at the date of acquisition identified in the table above (in thousands):
|
|
|
Six Months |
|
Weighted |
|
Period from April |
|
Weighted |
| ||
|
Land |
|
$ |
10,770 |
|
N/A |
|
$ |
46,806 |
|
N/A |
|
|
Buildings and improvements |
|
69,870 |
|
N/A |
|
229,688 |
|
N/A |
| ||
|
Tenant improvements |
|
4,550 |
|
N/A |
|
15,982 |
|
N/A |
| ||
|
Cash escrow for capital additions |
|
750 |
|
N/A |
|
1,400 |
|
N/A |
| ||
|
Above market rents |
|
6,149 |
|
13.3 |
|
31,718 |
|
7.6 |
| ||
|
Below market rents |
|
(2,830 |
) |
9.2 |
|
(1,552 |
) |
7.6 |
| ||
|
In place lease intangibles |
|
16,581 |
|
8.1 |
|
54,801 |
|
6.5 |
| ||
|
Customer relationships |
|
6,050 |
|
9.7 |
|
32,327 |
|
8.3 |
| ||
|
Other liabilities |
|
— |
|
N/A |
|
(171 |
) |
N/A |
| ||
|
Interest rate swaps |
|
— |
|
N/A |
|
(420 |
) |
N/A |
| ||
|
Goodwill |
|
— |
|
N/A |
|
4,923 |
|
N/A |
| ||
|
Above/below market assumed debt adjustment |
|
— |
|
N/A |
|
(675 |
) |
N/A |
| ||
|
Total aggregate purchase price |
|
111,890 |
|
|
|
414,827 |
|
|
| ||
|
Less: Long-term liabilities assumed |
|
— |
|
|
|
(206,253 |
) |
|
| ||
|
Net assets acquired |
|
$ |
111,890 |
|
|
|
$ |
208,574 |
|
|
|
The Company has included the results of operations for each of these acquired properties in its Consolidated Statements of Operations from the date of acquisition. For the three and six months ended June 30, 2012 the entities acquired during the six months ended June 30, 2012 contributed $2.0 million and $2.1 million, respectively, to total revenue and $0.5 million and $0.7 million to net loss (including property acquisition costs of $1.3 million related to the acquisition of properties), respectively. The entities acquired during the period from April 20, 2011 to June 30, 2011 contributed $6.4 million to total revenue and $1.3 million to net loss (including property acquisition costs of $0.3 million related to the properties acquired in Lansing, MI and Fort Worth, TX) during the period from April 20, 2011 to June 30, 2011.
This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the above occurred, nor do they purport to predict the results of operations of future periods.
|
Pro Forma |
|
Six Months Ended June 30, 2012 |
| |
|
Total revenue |
|
$ |
41,809 |
|
|
Net income (loss) (2) |
|
$ |
264 |
|
|
Net income (loss) attributable to common stockholders |
|
$ |
(2,004 |
) |
|
Weighted average shares outstanding |
|
17,654,706 |
| |
|
Net loss per share attributable to common stockholders |
|
$ |
(0.11 |
) |
|
(1) |
The unaudited pro forma information for the six months ended June 30, 2012 is presented as if the properties acquired during the six months ended June 30, 2012 had occurred at January 1, 2011 |
|
Pro Forma |
|
Six Month Ended June 30, 2011 |
| |
|
Total revenue |
|
$ |
34,744 |
|
|
Net income (loss) (2) |
|
$ |
(479 |
) |
|
Net income (loss) attributable to common stockholders |
|
$ |
(317 |
) |
|
Weighted average shares outstanding |
|
15,153,646 |
| |
|
Net loss per share attributable to common stockholders |
|
$ |
(0.02 |
) |
|
(2) |
The Net income (loss) for the six months ended June 30, 2012 excludes $1.3 million of property acquisition costs related to the acquisition of properties that closed during the six months ended June 30, 2012. Net income (loss) for the six months ended June 30, 2011 excludes $0.3 million of property acquisition costs related to the acquisition of properties that closed during the period from April 20, 2011 to June 30, 2011. |
|
(3) |
The unaudited pro forma information for the six months ended June 30, 2011 is presented as if the properties acquired during the six months ended June 30, 2012 and the properties acquired during the period from April 20, 2011 to June 30, 2011 had occurred at January 1, 2011 and January 1, 2010, respectively. |
On April 20, 2012, the Company sold a vacant warehouse and distribution facility located in Youngstown, OH containing 153,708 net rentable square feet. The sales price was $3.4 million and the Company received net proceeds of $3.2 million. At closing, the Company recognized a gain on sale of real estate in the amount of $0.2 million under the full accrual method of gain recognition, which is included in income attributable to discontinued operations on the accompanying Consolidated Statements of Operations. In connection with the property sale, the Company paid down a portion of the master loan with Wells Fargo Bank, N.A. (“Wells Fargo”) for the related property debt.
On December 22, 2011, the Company sold a flex/office property located in Amesbury, MA containing approximately 78,000 net rentable square feet. The sales price was approximately $4.8 million and the Company received net proceeds of $4.5 million. In connection with the property sale, the Company paid down a portion of the master loan with Wells Fargo for the related property debt. The results of operations for this property are reflected in income attributable to discontinued operations on the accompanying Consolidated Statement of Operations.
4. Deferred Leasing Intangibles
Deferred leasing intangibles included in total assets consisted of the following (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
In-place leases |
|
$ |
72,089 |
|
$ |
56,221 |
|
|
Less: Accumulated amortization |
|
(19,779 |
) |
(13,741 |
) | ||
|
In-place leases, net |
|
52,310 |
|
42,480 |
| ||
|
Above market leases |
|
40,409 |
|
34,425 |
| ||
|
Less: Accumulated amortization |
|
(7,258 |
) |
(4,722 |
) | ||
|
Above market leases, net |
|
33,151 |
|
29,703 |
| ||
|
Tenant relationships |
|
41,164 |
|
35,373 |
| ||
|
Less: Accumulated amortization |
|
(7,609 |
) |
(4,673 |
) | ||
|
Tenant relationships, net |
|
33,555 |
|
30,700 |
| ||
|
Leasing commissions |
|
14,750 |
|
14,326 |
| ||
|
Less: Accumulated amortization |
|
(4,965 |
) |
(3,916 |
) | ||
|
Leasing commissions, net |
|
9,785 |
|
10,410 |
| ||
|
Total deferred leasing intangibles, net |
|
$ |
128,801 |
|
$ |
113,293 |
|
Deferred leasing intangibles included in total liabilities consisted of the following (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
Below market leases |
|
$ |
6,784 |
|
$ |
3,954 |
|
|
Less: Accumulated amortization |
|
(2,334 |
) |
(2,025 |
) | ||
|
Total deferred leasing intangibles, net |
|
$ |
4,450 |
|
$ |
1,929 |
|
Amortization expense related to in-place leases, lease commissions and tenant relationships of deferred leasing intangibles was $5.1 million and $10.1 million for the three and six months ended June 30, 2012, respectively, $3.7 million for the period April 20, 2011 to June 30, 2011, $0.1 million for the period April 1, 2011 to April 19, 2011, and $0.7 million for the period January 1, 2011 to April 19, 2011. Rental income related to net amortization of above (below) market leases increased (decreased) by $(1.1) million and $(2.3) million for the three and six months ended June 30, 2012, respectively, $(0.9) million for the period April 20, 2011 to June 30, 2011, $(2) thousand for the period April 1, 2011 to April 19, 2011, and $2 thousand for the period January 1, 2011 to April 19, 2011.
Amortization related to deferred leasing intangibles over the next five years is as follows (in thousands):
|
|
|
Estimated Net Amortization |
|
Net Decrease (Increase) to Rental |
| ||
|
Remainder of 2012 |
|
$ |
10,267 |
|
$ |
2,401 |
|
|
2013 |
|
17,003 |
|
4,499 |
| ||
|
2014 |
|
15,304 |
|
4,126 |
| ||
|
2015 |
|
13,279 |
|
3,953 |
| ||
|
2016 |
|
11,369 |
|
3,840 |
| ||
The Company assesses deferred leasing intangibles for impairments on a quarterly basis when certain triggering events are met. If events or changes in circumstances indicate that the carrying values of certain deferred lease intangibles may be impaired, a recovery analysis is performed based on undiscounted future cash flows expected to be generated from the tenant over the remaining lease term. If the recovery analysis indicates the carrying value of the tested lease intangibles are not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized. The fair value is determined based on the contractual lease rental payments over the remaining term discounted back to the current reporting period. On June 11, 2012, the Company received notice from a tenant that the tenant was exercising an option in their lease to downsize their space from approximately 190,000 to 60,000 rentable square feet effective March 31, 2013. After determining the undiscounted future cash flows were not recoverable, the Company calculated the fair value of the lease intangibles. Using the remaining contractual lease payments for the reduced space and discounting the cash flows at a risk adjusted return for a market participant of 11.4%, it was determined that the fair value of the lease intangibles was $0.4 million resulting in a noncash impairment loss of $0.6 million, which is reflected in the accompanying Consolidated Statements of Operations. The fair value calculation of the lease intangibles of $0.4 million was performed using Level 3 inputs, and this is a nonrecurring fair value measurement. The three-tier value hierarchy is explained in Note 6.
5. Debt
Payments on mortgage notes are generally due in monthly installments of principal amortization and interest. The following table sets forth a summary of the Company’s outstanding indebtedness, including mortgage notes payable and borrowings under the Company’s secured corporate revolving credit facility (the “Credit Facility”) as of June 30, 2012 and December 31, 2011 (dollars in thousands):
|
Loan |
|
Interest Rate(1) |
|
Principal |
|
Principal |
|
Current |
| ||
|
Wells Fargo Master Loan—Fixed Amount |
|
LIBOR + 3.00% |
|
$ |
124,808 |
|
$ |
134,066 |
|
Oct-31-2013 |
|
|
CIGNA-1 Facility |
|
6.50% |
|
60,013 |
|
60,369 |
|
Feb-1-2018 |
| ||
|
CIGNA-2 Facility |
|
5.75% |
|
61,282 |
|
59,186 |
|
Feb-1-2018 |
| ||
|
CIGNA-3 Facility |
|
5.88% |
|
17,150 |
|
17,150 |
|
Oct-1-2019 |
| ||
|
Bank of America, N.A |
|
7.05% |
|
— |
|
8,324 |
|
Aug-1-2027 |
| ||
|
Credit Facility |
|
LIBOR + 2.50% |
|
5,000 |
|
— |
|
Apr-20-2014 |
| ||
|
Union Fidelity Life Insurance Co.(2) |
|
5.81% |
|
7,064 |
|
7,227 |
|
Apr-30-2017 |
| ||
|
Webster Bank National Association |
|
4.22% |
|
6,056 |
|
6,128 |
|
Aug-4-2016 |
| ||
|
Webster Bank National Association(3) |
|
3.66% |
|
3,243 |
|
— |
|
May-29-2017 |
| ||
|
Webster Bank National Association(4) |
|
3.64% |
|
3,493 |
|
— |
|
May-31-2017 |
| ||
|
Sun Life Assurance Company of Canada (U.S.)(5) |
|
6.05% |
|
4,205 |
|
4,329 |
|
Jun-1-2016 |
| ||
|
|
|
|
|
$ |
292,314 |
|
$ |
296,779 |
|
|
|
(1) Current interest rate as of June 30, 2012. At June 30, 2012 and December 31, 2011, the one-month LIBOR rate was 0.246% and 0.295%, respectively.
(2) This loan was assumed at the acquisition of the Berkeley, MO property and the principal outstanding includes an unamortized fair market value premium of $0.2 million as of June 30, 2012.
(3) This loan was entered into on May 29, 2012 with an outstanding principal amount of $3.25 million. The loan is collateralized by a property located in Portland, ME.
(4) This loan was entered into on May 31, 2012 with an outstanding principal amount of $3.5 million. The loan is collateralized by a property located in East Windsor, CT.
(5) Principal outstanding includes an unamortized fair market value premium of $0.3 million as of June 30, 2012.
On June 27, 2012, the Company paid down the principal outstanding on the Bank of America, N.A. loan in the amount of $8.1 million. The early extinguishment of the loan resulted in a gain of $18 thousand as a result of the acceleration of an unamortized fair market value premium. There were no pre-payment penalties associated with the loan.
The Credit Facility was secured by equity interests and mortgages in the Company’s various indirect subsidiaries that own 31 properties at June 30, 2012. The Company pays an unused commitment fee equal to 0.50% of the unused portion of the Credit Facility if the usage is less than 50% of the capacity and 0.35% if usage is greater than 50%. During the three and six months ended June 30, 2012 and the period April 20, 2011 to June 30, 2011, the Company incurred $0.1 million, $0.2 million, and $0.1 million in unused fees, respectively, which is included in interest expense on the Consolidated Statements of Operations. At June 30, 2012, the outstanding balance on the Credit Facility was $5.0 million and the remaining availability was $95.0 million. The Credit Facility was utilized throughout the six months ended June 30, 2012 to fund the acquisitions of properties and general corporate purposes.
The Company was in compliance with all financial covenants as of June 30, 2012 and December 31, 2011.
The fair value of the Company’s debt was determined by discounting the future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities and similar loan-to-value ratios. The discount rate ranged from 2.746% to 5.88% and was applied to each individual debt instrument based on the debt’s collateral, remaining term and loan to value ratios. The fair value of the Company’s debt is based on Level 3 inputs. The three-tier value hierarchy is explained in Note 6. The following table presents the aggregate carrying value of the Company’s debt and the corresponding estimate of fair value as of June 30, 2012 and December 31, 2011 (in thousands):
|
|
|
June 30, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| ||||
|
Mortgage notes payable |
|
$ |
287,314 |
|
$ |
289,127 |
|
$ |
296,779 |
|
$ |
298,417 |
|
|
Credit facility |
|
$ |
5,000 |
|
$ |
5,000 |
|
$ |
— |
|
$ |
— |
|
6. Use of Derivative Financial Instruments
The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions.
STAG Predecessor Group entered into an interest rate swap (“Wells Fargo Master Loan Swap”) with a notional amount of $141.0 million to hedge against interest rate risk on its variable rate loan with Wells Fargo, which was part of the debt contributed to the Company in its formation transactions. The Wells Fargo Master Loan Swap was not designated as a hedge for accounting purposes and it expired on January 31, 2012. There were no derivative instruments at June 30, 2012. The fair value of the interest rate swap outstanding as of December 31, 2011 is as follows (in thousands):
|
|
|
Notional Amount |
|
Fair Value |
| ||
|
Wells Fargo Master Loan Swap |
|
$ |
141,000 |
|
$ |
(215 |
) |
The Company adopted the fair value measurement provisions for its interest rate swaps recorded at fair value. The guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate
curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. As of December 31, 2011, the Company applied the provisions of this standard to the valuation of its interest rate swap, which was previously the only financial instrument measured at fair value on a recurring basis.
The Company recognized gains relating to the change in fair market value of the interest rate swaps of $0 and $0.2 million for the three and six months ended June 30, 2012, respectively, and $0.5 million, $0.2 million and $0.8 million for the periods April 20, 2011 to June 30, 2011, April 1, 2011 to April 19, 2011 and January 1, 2011 to April 19, 2011, respectively.
The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of December 31, 2011 (in thousands):
|
|
|
|
|
Fair Market Measurements as of |
| ||||||
|
|
|
December 31, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||
|
Interest Rate Swap |
|
$ |
(215 |
) |
— |
|
$ |
(215 |
) |
— |
|
7. Stockholders’ Equity
Preferred Stock
Pursuant to its charter, the Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. On November 2, 2011, the Company completed an underwritten public offering of 2,760,000 shares (including 360,000 shares issued pursuant to the full exercise of the underwriters’ overallotment option) of 9.0% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”), at a price to the public of $25.00 per share for net proceeds of $66.3 million, after deducting the underwriting discount and other direct offering costs of $2.7 million and indirect offering costs of $0.1 million. Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the liquidation, dissolution or winding-up of the Company.
The Series A Preferred Stock has no stated maturity date and is not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to November 2, 2016, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control (as defined in the articles supplementary for the Series A Preferred Stock).
On April 2, 2012, the Company paid the first quarter dividend on the Series A Preferred Stock to all preferred stockholders of record on March 19, 2012 in the amount of $1.6 million. On May 15, 2012, the board of directors declared, and the Company accrued, the second quarter dividend on the Series A Preferred Stock to all preferred stockholders of record on June 15, 2012 in the amount of $1.6 million, which was paid on July 2, 2012.
Common Stock
On April 20, 2011, the Company completed the IPO of its common stock. The IPO resulted in the sale of 13,750,000 shares of the Company’s common stock at a price of $13.00 per share. The Company received net proceeds of $166.3 million, reflecting gross proceeds of $178.8 million, net of underwriting fees of $12.5 million. On May 13, 2011, the underwriters of the Company’s IPO exercised their option to purchase an additional 2,062,500 shares of common stock at $13.00 per share, generating an additional $26.8 million of gross proceeds and $24.9 million of net proceeds after the underwriters’ discount and offering costs. The total gross proceeds to the Company from the IPO and the exercise of the overallotment option were approximately $205.6 million. The Company incurred formation transaction costs and offering costs of $6.2 million, of which $3.7 million was expensed and the remaining $2.5 million was deducted from the gross proceeds of the IPO. Total underwriters’ discounts, commissions and offering costs of $16.9 million are reflected as a reduction to additional paid-in capital in the Consolidated Balance Sheets of the Company.
On May 29, 2012, the Company completed an underwritten public offering of 8,337,500 of shares common stock at a public offering price of $12.88 per share, inclusive of 1,087,500 shares issued pursuant to the full exercise of the underwriters’ overallotment option. The Company received net proceeds of $102.8 million, reflecting gross proceeds of $107.4 million, net of underwriting discounts of $4.6 million. The Company also incurred direct offering costs of $0.5 million. The underwriting fees of $4.6 million and $0.5 million of direct offering costs incurred are reflected as a reduction to additional paid-in capital in the Consolidated Balance Sheet of the Company. The Company also incurred $0.1 million of indirect offering costs, which are included in the accompanying Consolidated Statements of Operations.
On April 13, 2012, the Company paid the first quarter dividend of $0.26 per share to all stockholders of record on March 30, 2012. On May 15, 2012, the board of directors declared, and the Company accrued, the second quarter dividend of $0.27 per share to all stockholders of record on June 29, 2012, which was subsequently paid on July 13, 2012.
All of the Company’s independent directors elected to receive shares of common stock in lieu of cash for their fees for serving as members and/or chairmen of various committees during 2012. On April 13, 2012, the Company granted 3,776 shares of common stock with a fair value of $50 thousand, for director’s compensation for their services for the three months ended March 31, 2012. On July 13, 2012, the Company granted 3,108 shares of common stock with a fair value of $46 thousand for directors’ compensation for their services for the three months ended June 30, 2012 (pro-rating compensation for Edward F. Lange, Jr. as his term expired on May 7, 2012).
Restricted Stock-Based Compensation
Concurrently with the closing of the IPO, the Company granted a total of 80,809 restricted shares of common stock with a fair value of $1.0 million ($12.21 per share) to certain employees of the Company pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The shares of restricted common stock are subject to time-based vesting and will vest, subject to the recipient’s continued employment, in five equal installments on each anniversary of the date of grant. Holders of restricted stock have voting rights and rights to receive dividends. Restricted stock may not be sold, assigned, transferred, pledged or otherwise disposed of and is subject to a risk of forfeiture prior to the expiration of the applicable vesting period. The restricted stock fair value on the date of grant is amortized on a straight-line basis as stock-based compensation expense over the service period during which term the stock fully vests.
On January 3, 2012, the Company granted an additional 87,025 shares of time-based restricted common stock to certain employees of the Company pursuant to the 2011 Plan with a fair value of $1.0 million ($11.89 per share).
As of June 30, 2012, 16,161 shares of restricted common stock had vested. None of the shares of restricted common stock that are subject to time-based vesting were vested as of December 31, 2011. The Company recognizes non-cash compensation expense ratably over the vesting period, and accordingly, the Company recognized $0.1 million and $0.2 million in non-cash compensation expense for the three and six months ended June 30, 2012, respectively, and $39 thousand for the period April 20, 2011 to June 30, 2011. The Company recognized zero non-cash compensation expense for the period January 1, 2011 to April 19, 2011. Unrecognized compensation expense for the remaining life of the awards was $1.7 million and $0.8 million as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012 and December 31, 2011, there were no forfeitures of share of restricted common stock.
8. Noncontrolling Interest
Noncontrolling Common Units
Noncontrolling interests in the Operating Partnership are interests in the Operating Partnership that are not owned by the Company. As of June 30, 2012, noncontrolling interests consisted of 6,981,857 common units (the “noncontrolling common units”) and 408,206 LTIP units, which in total represented an approximately 22.85% limited partnership interest in the Operating Partnership. The noncontrolling common units were issued at fair value at the time of the formation transactions for an issuance price of $13.00 per common unit. Common units and shares of the Company’s common stock have essentially the same economic characteristics in that common units and shares of the Company’s common stock share equally in the total net income or loss distributions of the Operating Partnership. Investors who own common units have the right to cause the Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of the Company’s common stock, or, at the Company’s election, shares of common stock on a one-for-one basis. All common units will receive the same quarterly distribution as the per share dividends on common stock. During the three months ended June 30, 2012, 623,932 noncontrolling common units were redeemed for 623,932 shares of common stock.
On June 15, 2012, the Company acquired six industrial properties from Columbus Nova for which it paid an acquisition fee in the form of 15,789 common units in the Operating Partnership with a fair value of approximately $0.2 million, which is included in property acquisition costs on the accompanying Consolidated Statements of Operations. The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended. The Company relied on the exemption based on representations given by the holders of the common units.
The Company adjusts the carrying value of noncontrolling interest to reflect its share of the book value of the Operating Partnership when there has been a change in the Company’s ownership of the Operating Partnership. Such adjustments are recorded to additional paid in capital as a reallocation of noncontrolling interest in the accompanying Consolidated Statement of Stockholders’ Equity.
LTIP Units
Pursuant to the 2011 Plan, the Company may grant LTIP units in the Operating Partnership. LTIP units, which the Company grants either as free-standing awards or together with other awards under the 2011 Plan, are valued by reference to the value of the Company’s common stock, and are subject to such conditions and restrictions as the Company’s compensation committee may determine, including continued employment or service, computation of financial metrics and achievement of pre-established performance goals and objectives. Vested LTIP units can be converted to common units in the Operating Partnership on a one-for-one basis once a material equity transaction has occurred that results in the accretion of the member’s capital account to the economic equivalent of the common unit. All LTIP units, whether vested or not, will receive the same quarterly per unit distributions as common units, which equal per share dividends on common stock.
Concurrently with the closing of the IPO, pursuant to the 2011 Plan, the Company granted a total of 159,046 LTIP units to certain executive officers pursuant to the terms of their employment agreements and a total of 41,395 LTIP units to its non-employee independent directors. These LTIP units vest quarterly over five years, with the first vesting date having commenced on June 30, 2011. In addition, on January 3, 2012, the Company granted a total of 196,260 LTIP units to certain executive officers and 22,380 LTIP units to its non-employee, independent directors pursuant to the 2011 Plan. The total fair value of the LTIP units was approximately $4.8 million at the respective grant dates, which was determined by a lattice binomial option- pricing model based on a Monte Carlo simulation using a volatility factor of 55% and 50%, a risk-free interest rate of 2.10% and 3.40%, and terms of 10 years, respectively. As of June 30, 2012 and December 31, 2011, 71,339 and 30,066 LTIP units were vested, respectively. On May 7, 2012, the Company’s non-employee director, Edward F. Lange, did not stand for re-election. Consequently, he forfeited 10,875 unvested LTIP units and the Company expensed the dividends previously paid to Mr. Lange on the unvested LTIP units in the amount of $8 thousand. As of December 31, 2011, there were no forfeitures of LTIP units. The Company recognized $0.2 million and $0.5 million in non-cash compensation expense for the three and six months ended June 30, 2012, respectively, and $0.1 million for the period April 20, 2011 to June 30, 2011. The Company recognized zero non-cash compensation expense for the period January 1, 2011 to April 19, 2011. Unrecognized compensation expense was $3.9 million and $2.0 million at June 30, 2012 and December 31, 2011, respectively.
Upon a material equity transaction in the Operating Partnership that results in an accretion of the member’s capital account to the economic value equivalent of the common units, LTIP units can be converted to common units. As of June 30, 2012, all of the outstanding LTIP units have met the aforementioned criteria and holders have the ability to convert the LTIP units to common units.
9. Earnings Per Share
The Company uses the two-class method of computing earnings per common share, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period.
A participating security is defined by GAAP as an unvested stock-based payment award containing non-forfeitable rights to dividends and must be included in the computation of earnings per share pursuant to the two-class method. Non-vested restricted stock awards are considered participating securities as these stock-based awards contain non-forfeitable rights to dividends irrespective of whether the awards ultimately vest or expire. During the three and six months ended June 30, 2012, there were 155,047 and 160,484 unvested shares of restricted stock on a weighted average basis, respectively, that were considered participating securities, which were not dilutive.
For purposes of calculating basic and diluted earnings per share, awards under the Company’s 2011 Outperformance Program (the “OPP”) are considered contingently issuable shares. Because the OPP awards require the Company to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, the
Company excludes the awards from the basic and diluted earnings per share calculation. For the three and six months ended June 30, 2012 and the period April 20, 2011 to June 30, 2011, the absolute and relative return thresholds were not met and as a result the OPP awards have been excluded from the diluted earnings per share calculation.
The following tables set forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2012 and the period April 20, 2011 to June 30, 2011 (in thousands, except share data).
|
|
|
Three Months |
| |
|
Numerator |
|
|
| |
|
Net loss from continuing operations |
|
$ |
(1,669 |
) |
|
Less: preferred stock dividends |
|
1,553 |
| |
|
Less: Amount allocable to unvested restricted stockholders |
|
41 |
| |
|
Less: noncontrolling interest allocable to continuing operations |
|
(927 |
) | |
|
Loss from continuing operations available to common stockholders |
|
$ |
(2,336 |
) |
|
Income attributable to discontinued operations |
|
$ |
141 |
|
|
Less: noncontrolling interest allocable to discontinued operations |
|
40 |
| |
|
Income from discontinued operations available to common stockholders |
|
$ |
101 |
|
|
Denominator |
|
|
| |
|
Weighted average common shares outstanding—basic and diluted |
|
19,484,785 |
| |
|
Loss from continuing operations attributable to common stockholders |
|
$ |
(0.12 |
) |
|
Discontinued operations |
|
0.01 |
| |
|
Loss per common share—basic and diluted |
|
$ |
(0.11 |
) |
|
|
|
Six Months |
| |
|
Numerator |
|
|
| |
|
Net loss from continuing operations |
|
$ |
(2,924 |
) |
|
Less: preferred stock dividends |
|
3,106 |
| |
|
Less: Amount allocable to unvested restricted stockholders |
|
41 |
| |
|
Less: noncontrolling interest allocable to continuing operations |
|
(1,864 |
) | |
|
Loss from continuing operations available to common stockholders |
|
$ |
(4,207 |
) |
|
Income attributable to discontinued operations |
|
$ |
35 |
|
|
Less: noncontrolling interest allocable to discontinued operations |
|
11 |
| |
|
Income from discontinued operations available to common stockholders |
|
$ |
24 |
|
|
Denominator |
|
|
| |
|
Weighted average common shares outstanding—basic and diluted |
|
17,654,706 |
| |
|
Loss from continuing operations attributable to common stockholders |
|
$ |
(0.24 |
) |
|
Discontinued operations |
|
— |
| |
|
Loss per common share—basic and diluted |
|
$ |
(0.24 |
) |
|
|
|
Period from |
| |
|
Numerator |
|
|
| |
|
Net loss from continuing operations |
|
$ |
(5,845 |
) |
|
Less: preferred stock dividends |
|
— |
| |
|
Less: Amount allocable to unvested restricted stockholders |
|
— |
| |