UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2014
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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One Federal Street, 23rd 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 x |
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Accelerated filer o |
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Non-accelerated filer o |
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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 May 5, 2014 |
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Common Stock ($0.01 par value) |
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53,732,337 |
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9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value) |
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2,760,000 |
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6.625 % Series B Cumulative Redeemable Preferred Stock ($0.01 par value) |
|
2,800,000 |
STAG INDUSTRIAL, INC.
STAG Industrial, Inc.
(unaudited, in thousands, except share data)
|
|
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March 31, 2014 |
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December 31, 2013 |
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Assets |
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|
|
|
| ||
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Rental Property: |
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|
|
|
| ||
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Land |
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$ |
138,713 |
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$ |
134,399 |
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Buildings |
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894,120 |
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871,422 |
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Tenant improvements |
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37,504 |
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36,994 |
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Building and land improvements |
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39,418 |
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36,231 |
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Less: accumulated depreciation |
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(79,577 |
) |
(71,653 |
) | ||
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Total rental property, net |
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1,030,178 |
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1,007,393 |
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Cash and cash equivalents |
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28,726 |
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6,690 |
| ||
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Restricted cash |
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6,813 |
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6,806 |
| ||
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Tenant accounts receivable, net |
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13,978 |
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13,790 |
| ||
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Prepaid expenses and other assets |
|
4,987 |
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2,594 |
| ||
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Interest rate swaps |
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2,940 |
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3,924 |
| ||
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Deferred financing fees, net |
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6,439 |
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5,467 |
| ||
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Leasing commissions, net |
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3,588 |
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3,542 |
| ||
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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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187 |
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185 |
| ||
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Deferred leasing intangibles, net |
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210,181 |
|
214,967 |
| ||
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Total assets |
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$ |
1,312,940 |
|
$ |
1,270,281 |
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Liabilities and Equity |
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Liabilities: |
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| ||
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Mortgage notes payable |
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$ |
224,464 |
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$ |
225,591 |
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Unsecured credit facility |
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22,000 |
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80,500 |
| ||
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Unsecured term loans |
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300,000 |
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250,000 |
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Accounts payable, accrued expenses and other liabilities |
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12,819 |
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18,574 |
| ||
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Interest rate swaps |
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98 |
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— |
| ||
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Tenant prepaid rent and security deposits |
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9,070 |
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8,972 |
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Dividends and distributions payable |
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5,818 |
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5,166 |
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Deferred leasing intangibles, net |
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7,643 |
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6,914 |
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Total liabilities |
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581,912 |
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595,717 |
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Commitments and contingencies |
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Equity: |
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Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, |
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|
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Series A, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2014 and December 31, 2013 |
|
69,000 |
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69,000 |
| ||
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Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2014 and December 31, 2013 |
|
70,000 |
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70,000 |
| ||
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Common stock, par value $0.01 per share, 100,000,000 shares authorized, 48,300,314 and 44,764,377 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively |
|
482 |
|
447 |
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Additional paid-in capital |
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646,844 |
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577,039 |
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Common stock dividends in excess of earnings |
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(133,744 |
) |
(116,877 |
) | ||
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Accumulated other comprehensive income |
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2,504 |
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3,440 |
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Total stockholders’ equity |
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655,086 |
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603,049 |
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Noncontrolling interest |
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75,942 |
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71,515 |
| ||
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Total equity |
|
731,028 |
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674,564 |
| ||
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Total liabilities and equity |
|
$ |
1,312,940 |
|
$ |
1,270,281 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
|
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Three months ended |
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Three months ended |
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March 31, 2014 |
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March 31, 2013 |
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Revenue |
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Rental income |
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$ |
34,118 |
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$ |
25,934 |
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Tenant recoveries |
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5,416 |
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3,658 |
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Other income |
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209 |
|
396 |
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Total revenue |
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39,743 |
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29,988 |
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Expenses |
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Property |
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4,050 |
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2,696 |
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General and administrative |
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5,475 |
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4,506 |
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Real estate taxes and insurance |
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3,935 |
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2,628 |
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Property acquisition costs |
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559 |
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575 |
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Depreciation and amortization |
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19,854 |
|
15,398 |
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Other expenses |
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237 |
|
85 |
| ||
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Total expenses |
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34,110 |
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25,888 |
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Other income (expense) |
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|
|
|
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Interest income |
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4 |
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3 |
| ||
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Interest expense |
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(5,666 |
) |
(4,650 |
) | ||
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Total other income (expense) |
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(5,662 |
) |
(4,647 |
) | ||
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Net loss from continuing operations |
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$ |
(29 |
) |
$ |
(547 |
) |
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Discontinued operations |
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Income attributable to discontinued operations |
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— |
|
129 |
| ||
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Total income attributable to discontinued operations |
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$ |
— |
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$ |
129 |
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Gain on sale of real estate |
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$ |
50 |
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$ |
— |
|
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Net income (loss) |
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$ |
21 |
|
$ |
(418 |
) |
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Less: loss attributable to noncontrolling interest after preferred stock dividends |
|
(364 |
) |
(265 |
) | ||
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Net income (loss) attributable to STAG Industrial, Inc. |
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$ |
385 |
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$ |
(153 |
) |
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Less: preferred stock dividends |
|
2,712 |
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1,553 |
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Less: amount allocated to unvested restricted stockholders |
|
88 |
|
69 |
| ||
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Net loss attributable to common stockholders |
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$ |
(2,415 |
) |
$ |
(1,775 |
) |
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Weighted average common shares outstanding — basic and diluted |
|
45,139,481 |
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40,514,942 |
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Loss per share — basic and diluted |
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|
|
|
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Loss from continuing operations attributable to common stockholders |
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$ |
(0.05 |
) |
$ |
(0.04 |
) |
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Income from discontinued operations attributable to common stockholders |
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$ |
— |
|
$ |
0.00 |
|
|
Loss per share — basic and diluted |
|
$ |
(0.05 |
) |
$ |
(0.04 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
|
|
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Three months ended |
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Three months ended |
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March 31, 2014 |
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March 31, 2013 |
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|
|
|
|
|
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Net income (loss) |
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$ |
21 |
|
$ |
(418 |
) |
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Other comprehensive income (loss): |
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|
|
|
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Unrealized gain (loss) on interest rate swaps |
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(1,082 |
) |
11 |
| ||
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Other comprehensive income (loss) |
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(1,082 |
) |
11 |
| ||
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Comprehensive loss |
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(1,061 |
) |
(407 |
) | ||
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Net loss attributable to noncontrolling interest after preferred stock dividends |
|
364 |
|
265 |
| ||
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Other comprehensive (income) loss attributable to noncontrolling interest |
|
146 |
|
(1 |
) | ||
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Comprehensive loss attributable to STAG Industrial, Inc. |
|
$ |
(551 |
) |
$ |
(143 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
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|
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Three months ended |
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Three months ended |
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March 31, 2014 |
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March 31, 2013 |
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|
|
|
|
|
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Cash flows from operating activities: |
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|
|
|
| ||
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Net income (loss) |
|
$ |
21 |
|
$ |
(418 |
) |
|
Adjustment to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
| ||
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Depreciation and amortization |
|
19,854 |
|
15,610 |
| ||
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Non-cash portion of interest expense |
|
315 |
|
248 |
| ||
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Intangible amortization in rental income, net |
|
1,510 |
|
1,369 |
| ||
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Straight-line rent adjustments, net |
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(1,024 |
) |
(772 |
) | ||
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Gain on sale of real estate |
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(50 |
) |
— |
| ||
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Non-cash compensation expense |
|
1,090 |
|
745 |
| ||
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Change in assets and liabilities: |
|
|
|
|
| ||
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Tenant accounts receivable, net |
|
966 |
|
(243 |
) | ||
|
Leasing commissions, net |
|
(233 |
) |
(722 |
) | ||
|
Restricted cash |
|
(174 |
) |
(103 |
) | ||
|
Prepaid expenses and other assets |
|
(2,091 |
) |
(1,438 |
) | ||
|
Accounts payable, accrued expenses and other liabilities |
|
(5,752 |
) |
(3,325 |
) | ||
|
Tenant prepaid rent and security deposits |
|
98 |
|
1,122 |
| ||
|
Due from related parties |
|
(2 |
) |
506 |
| ||
|
Total adjustments |
|
14,507 |
|
12,997 |
| ||
|
Net cash provided by operating activities |
|
14,528 |
|
12,579 |
| ||
|
Cash flows from investing activities: |
|
|
|
|
| ||
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Additions of land and building improvements |
|
(31,600 |
) |
(47,801 |
) | ||
|
Proceeds from sales of rental property, net |
|
473 |
|
— |
| ||
|
Restricted cash |
|
167 |
|
(387 |
) | ||
|
Cash paid for deal deposits, net |
|
(340 |
) |
(670 |
) | ||
|
Additions to lease intangibles |
|
(7,540 |
) |
(13,477 |
) | ||
|
Net cash used in investing activities |
|
(38,840 |
) |
(62,335 |
) | ||
|
Cash flows from financing activities: |
|
|
|
|
| ||
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Redemption of operating partnership units for cash |
|
(342 |
) |
— |
| ||
|
Proceeds from unsecured credit facility |
|
38,000 |
|
20,000 |
| ||
|
Repayment of unsecured credit facility |
|
(96,500 |
) |
(99,300 |
) | ||
|
Proceeds from unsecured term loans |
|
50,000 |
|
25,000 |
| ||
|
Repayment of mortgage notes payable |
|
(1,101 |
) |
(1,045 |
) | ||
|
Payment of loan fees and costs |
|
(1,169 |
) |
(1,473 |
) | ||
|
Dividends and distributions |
|
(18,838 |
) |
(11,289 |
) | ||
|
Proceeds from sales of common stock |
|
77,568 |
|
117,539 |
| ||
|
Offering costs |
|
(1,270 |
) |
(5,149 |
) | ||
|
Restricted cash - escrow for dividends |
|
— |
|
(1,553 |
) | ||
|
Net cash provided by financing activities |
|
46,348 |
|
42,730 |
| ||
|
Increase (decrease) in cash and cash equivalents |
|
22,036 |
|
(7,026 |
) | ||
|
Cash and cash equivalents—beginning of period |
|
6,690 |
|
19,006 |
| ||
|
Cash and cash equivalents—end of period |
|
$ |
28,726 |
|
$ |
11,980 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business
STAG Industrial, Inc. (the “Company”) is an industrial operating company focused on the acquisition, ownership and management of single-tenant net-leased industrial buildings 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”), commencing with its 2011 tax year. 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”). The Company intends to continue to qualify as a REIT. As of March 31, 2014 and December 31, 2013, the Company owned an 87.17% and 86.65%, 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 March 31, 2014, the Company owned 212 buildings in 34 states with approximately 39.0 million square feet, consisting of 145 warehouse/distribution buildings, 47 light manufacturing buildings and 20 flex/office buildings. The Company also owned one vacant land parcel adjacent to one of the Company’s buildings. The Company’s buildings were 95.3% leased to 193 tenants as of March 31, 2014.
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 consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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 held in the form of common units (“Noncontrolling Common Units” or “Common Units”) are reflected as noncontrolling interest. All significant intercompany balances and transactions have been eliminated in the consolidation of entities. The financial statements of the Company are presented on a consolidated basis, for all periods presented.
Adoption of New Accounting Pronouncements
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which prospectively changed the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. While the new guidance is not effective until annual periods beginning December 15, 2014, and interim periods within those years, companies are permitted to early adopt the provision. The Company has elected to early adopt this standard effective with the interim period beginning January 1, 2014. Prior to January 1, 2014, properties identified as held for sale and/or disposed of were presented in discontinued operations for all periods presented.
Consolidated Statements of Cash Flows—Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):
|
|
|
Three months |
|
Three months |
| ||
|
Supplemental cash flow information |
|
|
|
|
| ||
|
Cash paid for interest |
|
$ |
5,420 |
|
$ |
4,380 |
|
|
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
| ||
|
Write-off of fully depreciated tenant improvements |
|
$ |
(79 |
) |
$ |
— |
|
|
Write-off of accumulated depreciation |
|
$ |
79 |
|
$ |
— |
|
|
Non-cash investing activities included in additions of land and building improvements |
|
$ |
308 |
|
$ |
(37 |
) |
|
Non-cash financing activities included in additions of deferred financing fees |
|
$ |
(144 |
) |
$ |
— |
|
|
Dividends and distributions declared but not paid |
|
$ |
5,818 |
|
$ |
16,122 |
|
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 March 31, 2014 and December 31, 2013, the Company had an allowance for doubtful accounts of $14 thousand and $19 thousand, respectively.
The Company accrues rental revenue earned, but not yet receivable, in accordance with GAAP. As of March 31, 2014 and December 31, 2013, the Company had accrued rental revenue of $10.5 million and $9.3 million, respectively. 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 March 31, 2014 and December 31, 2013, the Company had an allowance on accrued rental revenue of $0 and $0, respectively.
As of March 31, 2014 and December 31, 2013, the Company had a total of approximately $4.8 million and $4.9 million, respectively, of total lease security deposits available in existing letters of credit, which are not reflected on the Company’s Consolidated Balance Sheets; and $2.9 million and $3.0 million, respectively, of lease security deposits available in cash.
Deferred Costs
Deferred financing fees include costs incurred in obtaining debt that are capitalized. The deferred financing fees are amortized to interest expense over the life of the respective loans on a basis which approximates the effective interest method. Any unamortized amounts upon early repayment of debt are written off in the period of repayment. During the three months ended March 31, 2014 and March 31, 2013, amortization of deferred financing fees included in interest expense was $0.3 million and $0.3 million, respectively. Fully amortized deferred charges are removed upon maturity of the underlying debt.
Revenue Recognition
By the terms of their leases, certain tenants are obligated to pay directly the costs of their buildings’ insurance, real estate taxes, ground lease payments, and certain other expenses and these costs are not reflected on the Company’s Consolidated Financial Statements. To the extent any tenant responsible for these costs under its lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company will record a liability for such obligations. The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $2.5 million and $2.3 million for the three months ended March 31, 2014 and March 31, 2013, respectively. 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, ground lease payments and certain other expenses.
Income Taxes
The Company elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2011 and intends to continue to qualify as a REIT. 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. 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 three months ended March 31, 2014 and March 31, 2013.
The Company and certain of its subsidiaries are subject to certain state and local income, excise and franchise taxes. Taxes in the amount of $0.2 million and $0.1 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2014 and March 31, 2013, respectively.
The Company currently has no liabilities for uncertain tax positions.
3. Real Estate
The following table summarizes the acquisitions of the Company during the three months ended March 31, 2014 and the year ended December 31, 2013:
Three Months Ended March 31, 2014
|
Property Location |
|
Date Acquired |
|
Square Feet |
|
Buildings |
|
|
Allentown, PA |
|
2/27/2014 |
|
289,900 |
|
1 |
|
|
Nashua, NH |
|
2/28/2014 |
|
337,391 |
|
1 |
|
|
Strongsville, OH |
|
3/14/2014 |
|
161,984 |
|
1 |
|
|
Columbus, OH |
|
3/26/2014 |
|
186,000 |
|
1 |
|
|
Total |
|
|
|
975,275 |
|
4 |
|
Year Ended December 31, 2013
|
Property Location |
|
Date |
|
Square |
|
Buildings |
|
|
Orangeburg, SC |
|
2/7/2013 |
|
319,000 |
|
1 |
|
|
Golden, CO |
|
2/27/2013 |
|
227,500 |
|
1 |
|
|
Columbia, SC |
|
2/28/2013 |
|
273,280 |
|
1 |
|
|
DeKalb, IL |
|
3/15/2013 |
|
146,740 |
|
1 |
|
|
Ocala, FL |
|
3/26/2013 |
|
619,466 |
|
1 |
|
|
Londonderry, NH |
|
3/28/2013 |
|
125,060 |
|
1 |
|
|
Marion, IA |
|
3/28/2013 |
|
95,500 |
|
1 |
|
|
Mishawaka, IN |
|
4/5/2013 |
|
308,884 |
|
1 |
|
|
Southfield, MI(1) |
|
4/9/2013 |
|
113,000 |
|
1 |
|
|
Houston, TX |
|
4/9/2013 |
|
201,574 |
|
1 |
|
|
Idaho Falls, ID |
|
4/11/2013 |
|
90,300 |
|
1 |
|
|
Mt. Prospect, IL |
|
5/14/2013 |
|
87,380 |
|
1 |
|
|
Williamsport, PA |
|
5/31/2013 |
|
250,000 |
|
1 |
|
|
Belvidere, IL |
|
6/19/2013 |
|
1,006,960 |
|
8 |
|
|
Kentwood, MI |
|
6/26/2013 |
|
85,157 |
|
1 |
|
|
Marshall, MI |
|
6/26/2013 |
|
57,025 |
|
1 |
|
|
Nashville, TN |
|
7/18/2013 |
|
150,000 |
|
1 |
|
|
Catoosa, OK |
|
7/31/2013 |
|
100,100 |
|
1 |
|
|
New Berlin, WI |
|
8/16/2013 |
|
205,063 |
|
1 |
|
|
Hampstead, MD |
|
8/21/2013 |
|
1,035,249 |
|
1 |
|
|
New Hope, MN |
|
9/20/2013 |
|
107,348 |
|
1 |
|
|
Springfield, OH |
|
9/26/2013 |
|
350,500 |
|
1 |
|
|
Orlando, FL |
|
10/8/2013 |
|
215,900 |
|
1 |
|
|
North Jackson, OH |
|
11/6/2013 |
|
209,835 |
|
1 |
|
|
Mebane, NC |
|
11/14/2013 |
|
383,500 |
|
1 |
|
|
Shannon, GA |
|
11/26/2013 |
|
568,516 |
|
1 |
|
|
Lansing, MI |
|
12/11/2013 |
|
160,000 |
|
1 |
|
|
Harvard, IL |
|
12/17/2013 |
|
126,304 |
|
1 |
|
|
Sauk Village, IL |
|
12/17/2013 |
|
375,785 |
|
1 |
|
|
South Holland, IL |
|
12/17/2013 |
|
202,902 |
|
1 |
|
|
Mascot, TN |
|
12/19/2013 |
|
130,560 |
|
1 |
|
|
Janesville, WI |
|
12/27/2013 |
|
700,000 |
|
1 |
|
|
Total |
|
|
|
9,028,388 |
|
39 |
|
(1) The Company also owns a 5.4 acre vacant land parcel adjacent to this building.
The following table (in thousands) summarizes the allocation of the consideration paid during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively, for the acquired assets and liabilities in connection with the acquisitions of buildings at the date of acquisition identified in the tables above:
|
|
|
Three months |
|
Weighted Average |
|
Year Ended |
|
Weighted Average |
| ||
|
Land |
|
$ |
4,373 |
|
N/A |
|
$ |
31,310 |
|
N/A |
|
|
Buildings |
|
23,134 |
|
N/A |
|
223,420 |
|
N/A |
| ||
|
Tenant improvements |
|
599 |
|
N/A |
|
2,526 |
|
N/A |
| ||
|
Building and land improvements |
|
1,262 |
|
N/A |
|
9,133 |
|
N/A |
| ||
|
Above market leases |
|
590 |
|
6.2 |
|
8,219 |
|
5.8 |
| ||
|
Below market leases |
|
(1,309 |
) |
4.8 |
|
(2,538 |
) |
7.2 |
| ||
|
In-place leases |
|
5,648 |
|
5.0 |
|
50,005 |
|
5.8 |
| ||
|
Tenant relationships |
|
2,611 |
|
7.7 |
|
21,257 |
|
8.2 |
| ||
|
Net assets acquired |
|
$ |
36,908 |
|
|
|
$ |
343,332 |
|
|
|
As partial consideration for eight buildings acquired on June 19, 2013, the Company granted 555,758 Common Units in the Operating Partnership with a fair value of approximately $11.5 million based on the Company’s New York Stock Exchange (“NYSE”) closing stock price on June 19, 2013. 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 remaining purchase price of approximately $40.1 million was paid in cash.
The Company has included the results of operations for each of the four buildings acquired in its Consolidated Statements of Operations from the date of acquisition. The properties acquired during the three months ended March 31, 2014 contributed $0.3 million to total revenue and $(0.5) million to net income, including property acquisition costs of $0.4 million related to the acquisition of four buildings, during the three months ended March 31, 2014.
The following tables set forth pro forma information for the three months ended March 31, 2014 and March 31, 2013. The below pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisitions outlined above occurred on the first day of the applicable reporting period, nor do they purport to predict the results of operations of future periods. The pro forma information has not been adjusted for property sales.
|
Pro Forma |
|
Three months ended |
| |
|
Total revenue |
|
$ |
40,519 |
|
|
Net income (2) |
|
$ |
774 |
|
|
Net loss attributable to common stockholders |
|
$ |
(1,763 |
) |
|
Weighted average shares outstanding |
|
45,139,481 |
| |
|
Loss per share attributable to common stockholders |
|
$ |
(0.04 |
) |
|
Pro Forma |
|
Three months ended |
| |
|
Total revenue |
|
$ |
32,410 |
|
|
Net loss (2) |
|
$ |
(170 |
) |
|
Net loss attributable to common stockholders |
|
$ |
(1,560 |
) |
|
Weighted average shares outstanding |
|
40,514,942 |
| |
|
Loss per share attributable to common stockholders |
|
$ |
(0.04 |
) |
(1) The pro forma information for the three months ended March 31, 2014 is presented as if the acquisition of the buildings acquired during the three months ended March 31, 2014 had occurred at January 1, 2013, the beginning of the reporting period prior to acquisition.
(2) The net income for the three months ended March 31, 2014 excludes $0.4 million of property acquisition costs related to the acquisition of buildings that closed during the three months ended March 31, 2014, and the net loss for the three months ended March 31, 2013 was adjusted to include these acquisition costs. Net loss for the three months ended March 31, 2013 excludes $0.4 million of property acquisition costs related to the acquisition of buildings that closed during the three months ended March 31, 2013.
(3) The pro forma information for the three months ended March 31, 2013 is presented as if the acquisition of the buildings acquired during the three months ended March 31, 2014 and the buildings acquired during the three months ended March 31, 2013 had occurred at January 1, 2013 and January 1, 2012, respectively, the beginning of the reporting period prior to acquisition.
On March 25, 2014, the Company sold a 15,085 square feet warehouse/distribution building located in Lexington, VA. The carrying value of the building prior to sale was $0.4 million. The sales price was $0.5 million and the Company received net proceeds of $0.5 million. A gain on sale of real estate of $50 thousand was recognized at closing under the full accrual method of gain recognition. As the sale of this property did not represent a strategic shift by the Company, it has not been reflected as part of discontinued operations.
4. Deferred Leasing Intangibles
Deferred leasing intangibles included in total assets consisted of the following (in thousands):
|
|
|
March 31, |
|
December 31, |
| ||
|
In-place leases |
|
$ |
146,034 |
|
$ |
142,518 |
|
|
Less: Accumulated amortization |
|
(55,999 |
) |
(49,756 |
) | ||
|
In-place leases, net |
|
90,035 |
|
92,762 |
| ||
|
Above market leases |
|
57,635 |
|
57,283 |
| ||
|
Less: Accumulated amortization |
|
(19,085 |
) |
(17,232 |
) | ||
|
Above market leases, net |
|
38,550 |
|
40,051 |
| ||
|
Tenant relationships |
|
79,490 |
|
77,260 |
| ||
|
Less: Accumulated amortization |
|
(21,230 |
) |
(18,693 |
) | ||
|
Tenant relationships, net |
|
58,260 |
|
58,567 |
| ||
|
Leasing commissions |
|
33,997 |
|
33,107 |
| ||
|
Less: Accumulated amortization |
|
(10,661 |
) |
(9,520 |
) | ||
|
Leasing commissions, net |
|
23,336 |
|
23,587 |
| ||
|
Total deferred leasing intangibles, net |
|
$ |
210,181 |
|
$ |
214,967 |
|
Deferred leasing intangibles included in total liabilities consisted of the following (in thousands):
|
|
|
March 31, |
|
December 31, |
| ||
|
Below market leases |
|
$ |
12,400 |
|
$ |
11,434 |
|
|
Less: Accumulated amortization |
|
(4,757 |
) |
(4,520 |
) | ||
|
Total deferred leasing intangibles, net |
|
$ |
7,643 |
|
$ |
6,914 |
|
Amortization expense, inclusive of results from discontinued operations, related to in-place leases, leasing commissions and tenant relationships of deferred leasing intangibles was $11.5 million and $9.4 million for the three months ended March 31, 2014 and March 31, 2013, respectively. Rental income, inclusive of results from discontinued operations, related to net amortization of above and below market leases decreased by $1.5 million and $1.4 million for the three months ended March 31, 2014 and March 31, 2013, respectively.
Amortization related to deferred leasing intangibles over the next five years is as follows (in thousands):
|
|
|
Estimated Net Amortization |
|
Net Decrease to Rental |
| ||
|
Remainder of 2014 |
|
$ |
31,971 |
|
$ |
4,318 |
|
|
2015 |
|
34,580 |
|
6,013 |
| ||
|
2016 |
|
28,122 |
|
5,428 |
| ||
|
2017 |
|
22,073 |
|
4,074 |
| ||
|
2018 |
|
16,438 |
|
3,091 |
| ||
5. Debt
Payments on mortgage notes are generally due in monthly installments of principal amortization and interest. Payments on the Unsecured Term Loans and the Unsecured Credit Facility (each defined below) are generally due in monthly installments of interest.
The following table sets forth a summary of the Company’s outstanding indebtedness, including mortgage notes payable and borrowings under the Company’s Unsecured Term Loans and Unsecured Credit Facility as of March 31, 2014 and December 31, 2013 (dollars in thousands):
|
Loan |
|
Interest Rate (1) |
|
Principal |
|
Principal |
|
Current |
| ||
|
Sun Life (2) |
|
6.05% |
|
$ |
3,750 |
|
$ |
3,817 |
|
Jun-1-2016 |
|
|
Webster Bank (3) |
|
4.22% |
|
5,795 |
|
5,834 |
|
Aug-4-2016 |
| ||
|
Bank of America Unsecured Credit Facility (4) |
|
LIBOR + 1.45% |
|
22,000 |
|
80,500 |
|
Sept-10-2016 |
| ||
|
Union Fidelity (5) |
|
5.81% |
|
6,462 |
|
6,551 |
|
Apr-30-2017 |
| ||
|
Webster Bank (6) |
|
3.66% |
|
3,099 |
|
3,121 |
|
May-29-2017 |
| ||
|
Webster Bank (7) |
|
3.64% |
|
3,338 |
|
3,360 |
|
May-31-2017 |
| ||
|
Bank of America Unsecured Term Loan (8) |
|
LIBOR + 1.40% |
|
150,000 |
|
150,000 |
|
Sept-10-2017 |
| ||
|
CIGNA-1 Facility (9) |
|
6.50% |
|
58,673 |
|
58,874 |
|
Feb-1-2018 |
| ||
|
CIGNA-2 Facility (10) |
|
5.75% |
|
59,763 |
|
59,990 |
|
Feb-1-2018 |
| ||
|
CIGNA-3 Facility (11) |
|
5.88% |
|
16,822 |
|
16,879 |
|
Oct-1-2019 |
| ||
|
Wells Fargo Unsecured Term Loan A (12) |
|
LIBOR + 2.15% |
|
150,000 |
|
100,000 |
|
Feb-14-2020 |
| ||
|
Wells Fargo Unsecured Term Loan B (13) |
|
LIBOR +1.70% |
|
— |
|
— |
|
Mar-21-2021 |
| ||
|
Wells Fargo CMBS Loan (14) |
|
4.31% |
|
66,762 |
|
67,165 |
|
Dec-1-2022 |
| ||
|
|
|
|
|
$ |
546,464 |
|
$ |
556,091 |
|
|
|
(1) Current interest rate as of March 31, 2014. At March 31, 2014 and December 31, 2013, the one-month LIBOR rate was 0.1520% and 0.1677%, respectively.
(2) This loan with Sun Life Assurance Company of Canada (U.S.) (“Sun Life”) was assumed on October 14, 2011 in connection with the acquisition of the building located in Gahanna, OH. The property is collateral for this loan. The principal outstanding includes an unamortized fair market value premium of $0.2 million and $0.2 million as of March 31, 2014 and December 31, 2013, respectively.
(3) This loan with Webster Bank, National Association (“Webster Bank”) was entered into on August 4, 2011 in connection with the acquisition of the building located in Norton, MA. The property is collateral for this loan.
(4) The spread over LIBOR for this Bank of America, N.A. (“Bank of America”) unsecured revolving credit facility (“Unsecured Credit Facility”) is based on the Company’s consolidated leverage. The spread was 1.45% as of March 31, 2014 and December 31, 2013. The Company paid unused fees of $0.1 million and $0.2 million for the three months ended March 31, 2014 and March 31, 2013, respectively. The borrowing capacity as of March 31, 2014 was $178.0 million, assuming current leverage levels.
(5) This loan with Union Fidelity Life Insurance Co. (“Union Fidelity”) was assumed on July 28, 2011 in connection with the acquisition of the St. Louis, MO building. The property is collateral for this loan. The principal outstanding includes an unamortized fair market value premium of $0.1 million and $0.1 million as of March 31, 2014 and December 31, 2013, respectively.
(6) This loan with Webster Bank was entered into on May 29, 2012 in connection with the acquisition of the building located in Portland, ME. The property is collateral for this loan.
(7) This loan with Webster Bank was entered into on May 31, 2012 in connection with the acquisition of the building located in East Windsor, CT. The property is collateral for this loan.
(8) This Bank of America unsecured term loan (“Bank of America Unsecured Term Loan”) was entered into on September 10, 2012. The spread over LIBOR is based on the Company’s consolidated leverage ratio. The spread was 1.40% as of March 31, 2014 and December 31, 2013. The Company swapped the one-month LIBOR for a fixed rate for $100.0 million of the $150.0 million outstanding on the Bank of America Unsecured Term Loan. The net settlements of the swaps commenced on the effective date of the swaps, October 10, 2012 (see Note 6 for further details). There was no remaining borrowing capacity as of March 31, 2014.
(9) This Connecticut General Life Insurance Company (“CIGNA”) credit facility originally was entered into in July 2010 (the “CIGNA-1 Facility”), which loan has various buildings serving as collateral and has no remaining borrowing capacity as of March 31, 2014.
(10) This CIGNA credit facility originally was entered into in October 2010 (the “CIGNA-2 Facility”), which loan has various buildings serving as collateral and has a remaining borrowing capacity of approximately $2.9 million as of March 31, 2014, subject to customary terms and conditions, including underwriting.
(11) This CIGNA credit facility originally was entered into on July 8, 2011 (“CIGNA-3 Facility”), which loan has various buildings serving as collateral. The CIGNA-3 Facility has a remaining borrowing capacity of approximately $47.9 million as of March 31, 2014, subject to customary terms and conditions, including underwriting.
(12) This Wells Fargo Bank, National Association (“Wells Fargo”) unsecured term loan (“Wells Fargo Unsecured Term Loan A”) was entered into on February 14, 2013. The spread over LIBOR is based on the Company’s consolidated leverage. The spread was 2.15% as of March 31, 2014 and December 31, 2013. As of March 31, 2014, the Company swapped one-month LIBOR for a fixed rate on $125.0 million of the $150.0 million capacity on the unsecured term loan (see Note 6 for further details). There was no remaining borrowing capacity as of March 31, 2014 as the Company drew upon the remaining $50.0 million on January 31, 2014. During the three months ended March 31, 2014 and March 31, 2013, the Company incurred an unused commitment fee of $14 thousand and $56 thousand, respectively.
(13) This Wells Fargo unsecured term loan (“Wells Fargo Unsecured Term Loan B”) was entered into on March 21, 2014. The spread over LIBOR is based on the Company’s consolidated leverage. The spread was 1.70% as of March 31, 2014.
(14) This Wells Fargo loan (“CMBS Loan”) was entered into on November 8, 2012 and is a non-recourse loan with 28 buildings serving as collateral.
On March 21, 2014, the Company closed the Wells Fargo Unsecured Term Loan B, a $150.0 million unsecured term loan with Wells Fargo with a maturity date of March 21, 2021. Borrowings under the Wells Fargo Unsecured Term Loan B bear interest at a floating rate equal to the one-month LIBOR plus a spread that will range from 1.70% and 2.30%, based on the Company’s consolidated leverage ratio. The Wells Fargo Unsecured Term Loan B has an accordion feature that allows the Company to increase its borrowing capacity to $250.0 million, subject to the satisfaction of certain conditions. The Company incurred $1.2 million in deferred financing fees associated with the closing of the Wells Fargo Unsecured Term Loan B, which will be amortized over its seven year term. The Company also incurred an
annual fee of $50 thousand to be amortized over one year. The Company has one year from the closing date to draw the funds. As of March 31, 2014, the Company has not drawn funds on this unsecured term loan. The Wells Fargo Unsecured Term Loan B has an unused commitment fee equal to 0.225% of its unused portion, which is paid monthly in arrears. The unused commitment fee begins to accrue on May 21, 2014. During the period March 21, 2014 to March 31, 2014, the Company did not incur an unused commitment fee.
Financial Covenant Considerations
The Company’s ability to borrow under the Unsecured Credit Facility, the Bank of America Unsecured Term Loan, Wells Fargo Unsecured Term Loan A and the Wells Fargo Unsecured Term Loan B (collectively, the Bank of America Unsecured Term Loan, Wells Fargo Unsecured Term Loan A and the Wells Fargo Unsecured Term Loan B are the “Unsecured Term Loans”) is subject to its ongoing compliance with a number of customary financial covenants, including:
· a maximum consolidated leverage ratio of not greater than 0.60:1.00;
· a maximum secured leverage ratio of not greater than 0.45:1.00;
· a maximum unencumbered leverage ratio of not greater than 0.60:100;
· a maximum secured recourse debt ratio of not greater than 7.5%;
· a minimum fixed charge ratio of not less than 1.50 to 1.00;
· a minimum tangible net worth covenant test; and
· various thresholds on Company level investments.
The Credit Facility and Unsecured Term Loans contain financial and operating covenants and restrictions. The Company was in compliance with all such applicable restrictions and financial covenants as of March 31, 2014. In the event of a default under the Unsecured Credit Facility or Unsecured Term Loans, the Company’s dividend distributions are limited to the minimum amount necessary for the Company to maintain its status as a REIT.
Each of the Sun Life loan, the Webster Bank loans, the Union Fidelity loan, the CIGNA-1 Facility, the CIGNA-2 Facility, the CIGNA-3 Facility and the CMBS Loan have specific properties and assignments of rents from leases on the properties, that are collateral for these loans. The acquisition costs of these properties were financed by the loans and by collateral assignments of the specific leases and rents. These debt facilities contain certain financial and other covenants. The Company was in compliance with all financial covenants as of March 31, 2014 and December 31, 2013. The 21 properties held as collateral for the CIGNA-1, CIGNA-2, and CIGNA-3 facilities are cross-defaulted and cross-collateralized, among the respective facilities.
Fair Value of Debt
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, similar terms, and similar loan-to-value ratios. The discount rates ranged from 1.55% to 5.24% and 1.57% to 5.24% at March 31, 2014 and December 31, 2013, respectively, and were applied to each individual debt instrument. The fair value of the Company’s debt is based on Level 3 inputs. The following table presents the aggregate carrying value of the Company’s debt and the corresponding estimate of fair value as of March 31, 2014 and December 31, 2013 (in thousands):
|
|
|
March 31, 2014 |
|
December 31, 2013 |
| ||||||||
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| ||||
|
Mortgage notes payable |
|
$ |
224,464 |
|
$ |
228,989 |
|
$ |
225,591 |
|
$ |
228,996 |
|
|
Unsecured Credit Facility |
|
$ |
22,000 |
|
$ |
22,000 |
|
$ |
80,500 |
|
$ |
80,500 |
|
|
Bank of America Unsecured Term Loan |
|
$ |
150,000 |
|
$ |
148,907 |
|
$ |
150,000 |
|
$ |
148,781 |
|
|
Wells Fargo Unsecured Term Loan A |
|
$ |
150,000 |
|
$ |
148,778 |
|
$ |
100,000 |
|
$ |
97,302 |
|
6. Use of Derivative Financial Instruments
Risk Management Objective of Using Derivatives
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.
The following table details the Company’s outstanding interest rate swaps as of March 31, 2014 (collectively, the “Unsecured Term Loan Swaps”) (in thousands):
|
Interest Rate |
|
Trade Date |
|
Notional |
|
Fixed Interest Rate |
|
Variable Interest |
|
Maturity Date |
| |
|
Interest rate swap |
|
Sept-14-2012 |
|
$ |
10,000 |
(1) |
0.7945 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-14-2012 |
|
$ |
10,000 |
(1) |
0.7945 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-14-2012 |
|
$ |
10,000 |
(1) |
0.7945 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-14-2012 |
|
$ |
10,000 |
(1) |
0.7945 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-14-2012 |
|
$ |
10,000 |
(1) |
0.7975 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-20-2012 |
|
$ |
25,000 |
(1) |
0.7525 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
Sept-24-2012 |
|
$ |
25,000 |
(1) |
0.727 |
% |
One-month LIBOR |
|
September 10, 2017 |
|
|
Interest rate swap |
|
March-1-2013 |
|
$ |
25,000 |
(2) |
1.33 |
% |
One-month LIBOR |
|
February 14, 2020 |
|
|
Interest rate swap |
|
June-13-2013 |
|
$ |
25,000 |
(2) |
1.703 |
% |
One-month LIBOR |
|
February 14, 2020 |
|
|
Interest rate swap |
|
June-13-2013 |
|
$ |
50,000 |
(2) |
1.681 |
% |
One-month LIBOR |
|
February 14, 2020 |
|
|
Interest rate swap |
|
Sept-30-2013 |
|
$ |
25,000 |
(2) |
1.9925 |
% |
One-month LIBOR |
|
February 14, 2020 |
|
(1) Fixes the interest rate of the Bank of America Unsecured Term Loan
(2) Fixes the interest rate of the Wells Fargo Unsecured Term Loan A
The fair value of the interest rate swaps outstanding as of March 31, 2014 and December 31, 2013 was as follows (in thousands):
|
|
|
Balance Sheet |
|
Notional |
|
Fair Value |
|
Notional Amount |
|
Fair Value |
| ||||
|
Unsecured Term Loan Swaps |
|
Interest Rate Swaps-Asset |
|
$ |
200,000 |
|
$ |
2,940 |
|
$ |
225,000 |
|
$ |
3,924 |
|
|
Unsecured Term Loan Swaps |
|
Interest Rate Swaps-Liability |
|
$ |
25,000 |
|
$ |
(98 |
) |
$ |
— |
|
$ |
— |
|
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2014 and March 31, 2013, the Company did not record any hedge ineffectiveness related to the hedged derivatives.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that an additional $2.5 million will be reclassified from accumulated other comprehensive income (loss) as an increase to interest expense over the next 12 months.
The table below details the location in the financial statements of the gain or loss recognized on interest rate swaps designated as cash flow hedges for the three months ended March 31, 2014 and March 31, 2013, respectively:
|
|
|
STAG Industrial, Inc. |
| ||||
|
|
|
Three months |
|
Three months |
| ||
|
Amount of loss recognized in accumulated other comprehensive income (loss) on interest rate swaps (effective portion) |
|
$ |
1,666 |
|
$ |
154 |
|
|
Amount of loss reclassified from accumulated other comprehensive income (loss) into income (loss) as interest expense (effective portion) |
|
$ |
584 |
|
$ |
165 |
|
|
Amount of loss recognized in income on swaps (ineffective portion and amount excluded from effectiveness testing) |
|
$ |
— |
|
$ |
— |
|
The Company is exposed to credit risk in the event of non-performance by the counterparties to the interest rate swaps. The Company minimizes this risk exposure by limiting counterparties to major banks and investment brokers who meet established credit and capital guidelines.
Credit-risk-related Contingent Features
As of March 31, 2014, the fair values of ten of eleven of the Company’s interest rate swaps were in an asset position of $3.1 million and one interest rate swap was in a liability position of $0.1 million, excluding any adjustment for nonperformance risk related to these agreements. Accrued interest expense for all eleven swaps was $0.2 million as of March 31, 2014. As of March 31, 2014, the Company has not posted any collateral related to these agreements. The adjustment for nonperformance risk included in the fair value of the Company’s net asset position and net liability position was $0.1 million and $35 thousand, respectively, as of March 31, 2014. If the Company had breached any of its provisions at March 31, 2014, it could have been required to settle its obligations under the agreement of the interest rate swap in a liability position at its termination value of $0.1 million.
Fair Value of Interest Rate Swaps
The valuation of the interest rate swaps 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 by 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 March 31, 2014 and December 31, 2013, the Company applied the provisions of this standard to the valuation of its interest rate swaps.
The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 (in thousands):
|
|
|
|
|
Fair Value Measurements as of |
| ||||||||
|
|
|
March 31, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
|
Assets (liabilities): |
|
|
|
|
|
|
|
|
| ||||
|
Interest Rate Swaps |
|
$ |
2,940 |
|
$ |
— |
|
$ |
2,940 |
|
$ |
— |
|
|
Interest Rate Swaps |
|
$ |
(98 |
) |
$ |
— |
|
$ |
(98 |
) |
$ |
— |
|
|
|
|
|
|
Fair Value Measurements as of |
| ||||||||
|
|
|
December 31, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
|
Assets: |
|
|
|
|
|
|
|
|
| ||||
|
Interest Rate Swaps |
|
$ |
3,924 |
|
$ |
— |
|
$ |
3,924 |
|
$ |
— |
|
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’ 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. On April 16, 2013, the Company completed an underwritten public offering of 2,800,000 shares (including 300,000 shares issued pursuant to the full exercise of the underwriters’ option) of 6.625% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series B Preferred Stock”), at a price to the public of $25.00 per share. Dividends on the Series A Preferred Stock and Series B 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 B Preferred Stock ranks senior to the Company’s common stock and on parity with the Company’s Series A Preferred Stock with respect to dividend rights and rights upon the liquidation, dissolution or winding up of the Company. The Series A Preferred Stock and Series B Preferred Stock have no stated maturity date and are not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock and Series B Preferred Stock prior to November 2, 2016 and April 16, 2018, respectively, 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 and Series B Preferred Stock).
The table below sets forth the dividends attributable to the Series A Preferred Stock during the three months ended March 31, 2014 and the year ended December 31, 2013:
|
Amount Declared During Quarter Ended 2014 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
March 31 |
|
February 21, 2014 |
|
$ |
0.5625 |
|
March 31, 2014 |
|
|
Total 2014 |
|
|
|
$ |
0.5625 |
|
|
|
|
Amount Declared During Quarter Ended 2013 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
December 31 |
|
November 1, 2013 |
|
$ |
0.5625 |
|
December 31, 2013 |
|
|
September 30 |
|
August 2, 2013 |
|
0.5625 |
|
September 30, 2013 |
| |
|
June 30 |
|
May 6, 2013 |
|
0.5625 |
|
July 1, 2013 |
| |
|
March 31 |
|
March 1, 2013 |
|
0.5625 |
|
April 1, 2013 |
| |
|
Total 2013 |
|
|
|
$ |
2.25 |
|
|
|
The table below sets forth the dividends attributable to the Series B Preferred Stock during the three months ended March 31, 2014 and the year ended December 31, 2013:
|
Amount Declared During Quarter Ended 2014 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
March 31 |
|
February 21, 2014 |
|
$ |
0.4140625 |
|
March 31, 2014 |
|
|
Total 2014 |
|
|
|
$ |
0.4140625 |
|
|
|
|
Amount Declared During Quarter Ended 2013 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
December 31 |
|
November 1, 2013 |
|
$ |
0.4140625 |
|
December 31, 2013 |
|
|
September 30 |
|
August 2, 2013 |
|
0.4140625 |
|
September 30, 2013 |
| |
|
June 30 (prorated for April 16, 2013 to June 30, 2013) |
|
May 6, 2013 |
|
0.3450500 |
|
July 1, 2013 |
| |
|
Total 2013 |
|
|
|
$ |
1.1731750 |
|
|
|
Common Stock
During the three months ended March 31, 2014, the Company sold 472,195 shares of common stock, respectively, under its “at the market” stock offering program that commenced on December 14, 2012 (“2012 ATM”). During the three months ended March 31, 2014, the Company received net proceeds of $10.2 million, reflecting gross proceeds of $10.4 million, net of the sales agents’ fees of approximately $0.2 million. The Company used the net proceeds for acquisitions and general corporate purposes. As of March 31, 2014, there was approximately $4.5 million of common stock available to be sold under the 2012 ATM.
On March 10, 2014, the Company established a new “at the market” (“2014 ATM”) stock offering program through which it may sell from time to time up to an aggregate of $150.0 million of its common stock through sales agents. During the period March 10, 2014 through March 31, 2014, the Company sold 2,959,264 shares of common stock under its 2014 ATM resulting in net proceeds of $66.2 million, reflecting gross proceeds of $67.2 million, net of the sales agents’ fees of approximately $1.0 million. The Company used the net proceeds for acquisitions, repayment of debt, and general corporate purposes. As of March 31, 2014, there was approximately $82.8 million of common stock available to be sold under the 2014 ATM.
The table below sets forth the dividends attributable to the common stock during the three months ended March 31, 2014 and the year ended December 31, 2013:
|
Amount Declared During 2014 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
Month ended March 31 |
|
December 18, 2013 |
|
$ |
0.105 |
|
April 15, 2014 |
|
|
Month ended February 28 |
|
December 18, 2013 |
|
0.105 |
|
March 17, 2014 |
| |
|
Month ended January 31 |
|
December 18, 2013 |
|
0.105 |
|
February 17, 2014 |
| |
|
Total 2014 |
|
|
|
$ |
0.315 |
|
|
|
|
Amount Declared During 2013 |
|
Declaration Date |
|
Per Share |
|
Date Paid |
| |
|
Month ended December 31 |
|
September 24, 2013 |
|
$ |
0.10 |
|
January 15, 2014 |
|
|
Month ended November 30 |
|
September 24, 2013 |
|
0.10 |
|
December 16, 2013 |
| |
|
Month ended October 31 |
|
September 24, 2013 |
|
0.10 |
|
November 15, 2013 |
| |
|
Quarter ended September 30 |
|
August 2, 2013 |
|
0.30 |
|
October 15, 2013 |
| |
|
Quarter ended June 30 |
|
May 6, 2013 |
|
0.30 |
|
July 15, 2013 |
| |
|
Quarter ended March 31 |
|
March 1, 2013 |
|
0.30 |
|
April 15, 2013 |
| |
|
Total 2013 |
|
|
|
$ |
1.20 |
|
|
|
On February 21, 2014, the Company’s board of directors declared the common stock dividend for the months ended April, 30, May 31, 2014, and June 30, 2014 at a monthly rate of $0.105 per share.
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 of the board and/or chairmen of various committees during 2014 and 2013. The shares of common stock are issued to the independent directors pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended (the “2011 Plan”). The number of shares of common stock granted is calculated based on the trailing 10-day average common stock price ending on the third business day preceding the grant date. The fair value of the shares of the common stock granted is calculated based on the closing stock price per the NYSE on the grant date multiplied by the number of shares of common stock granted. The table below sets forth the grants of common stock for the members’ service during quarters ended in 2014 and 2013 as below:
|
Service During Quarter Ended 2014 |
|
Grant Date |
|
Shares |
|
Fair Value |
| |
|
March 31 |
|
April 15, 2014 |
|
3,471 |
|
$ |
83,000 |
|
|
Total 2014 |
|
|
|
3,471 |
|
$ |
83,000 |
|
|
Service During Quarter Ended 2013 |
|
Grant Date |
|
Shares |
|
Fair Value |
| |
|
December 31 |
|
January 15, 2014 |
|
2,554 |
|
$ |
52,000 |
|
|
September 30 |
|
October 15, 2013 |
|
2,607 |
|
53,000 |
| |
|
June 30 |
|
July 15, 2013 |
|
2,602 |
|
53,000 |
| |
|
March 31 |
|
April 15, 2013 |
|
2,418 |
|
52,000 |
| |
|
Total 2013 |
|
|
|
10,181 |
|
$ |
210,000 |
|
Restricted Stock-Based Compensation
On January 2, 2014, the Company granted 103,149 shares of time-based restricted common stock to certain employees of the Company pursuant to the 2011 Plan, with a fair value of $2.1 million (based on the Company’s NYSE closing stock price on January 2, 2014 of $20.13 per share).
During the three months ended March 31, 2014 and March 31, 2013, 37,228 and 17,205 shares of restricted common stock had vested with a fair value of $0.8 million and $0.3 million, respectively. The Company recognizes non-cash compensation expense ratably over the vesting period, and accordingly, the Company recognized $0.3 million and $0.2 million in non-cash compensation expense for the three months ended March 31, 2014 and March 31, 2013, respectively. Unrecognized compensation expense for the
remaining life of the awards was $4.3 million and $2.5 million as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014 and December 31, 2013, there were 12,755 and 11,540 forfeitures of shares of restricted common stock, respectively.
8. Noncontrolling Interest
Noncontrolling interests in the Operating Partnership are interests in the Operating Partnership that are not owned by the Company. As of March 31, 2014, noncontrolling interests consisted of 6,283,397 Common Units and 823,888 LTIP units, which in total represented an approximately 12.83% limited partnership interest in the Operating Partnership. As of December 31, 2013, noncontrolling interests consisted of 6,299,186 Common Units and 599,464 LTIP units, which in total represented an approximately 13.35% limited partnership interest in the Operating Partnership. 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 rebalancing of noncontrolling interest on the accompanying Consolidated Statements of Equity.
Common Units
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 monthly distribution as the per share dividends on common stock. During the three months ended March 31, 2014, 15,789 Common Units were redeemed for $0.3 million. During the three months ended March 31, 2013 there were no redemptions of Common Units.
As partial consideration for eight buildings acquired on June 19, 2013, the Company granted 555,758 Common Units in the Operating Partnership with a fair value of approximately $11.5 million based on the Company’s NYSE closing stock price on June 19, 2013. 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.
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 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 Noncontrolling 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 Noncontrolling Common Unit. As of March 31, 2014, all of the outstanding LTIP units have met the aforementioned criteria and holders have the ability to convert the LTIP units to Noncontrolling Common Units. All LTIP units, whether vested or not, will receive the same monthly per unit distributions as Noncontrolling Common Units, which equal per share dividends on common stock.
On January 2, 2014, the Company granted a total of 203,691 LTIP units to certain executive officers and 20,733 LTIP units to its non-employee, independent directors pursuant to the 2011 Plan. The fair value of the LTIP units was approximately $4.3 million, which was determined by a lattice binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 40%, a risk-free interest rate of 0.79%, an expected annual dividend yield of 6.0% and terms of ten years.
On January 3, 2013, the Company granted a total of 173,044 LTIP units to certain executive officers and 14,525 LTIP units to its non-employee, independent directors pursuant to the 2011 Plan. The fair value of the LTIP units was approximately $3.3 million, which was determined by a lattice binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 45%, a risk-free interest rate of 1.97%, an expected annual dividend yield of 6.0% and a term of ten years.
During the three months ended March 31, 2014 and March 31, 2013, there were no LTIP units redeemed for Noncontrolling Common Units. During the three months ended March 31, 2014 and March 31, 2013, 41,181 and 29,963 LTIP units had vested with fair values of $1.0 million and $0.6 million, respectively. The Company recognized $0.6 million and $0.4 million in non-cash compensation expense for the three months ended March 31, 2014 and March 31, 2013, respectively. Unrecognized compensation expense was $8.9 million and $5.2 million at March 31, 2014 and December 31, 2013, respectively, and is included in additional paid-in capital on the accompanying Consolidated Balance Sheets.
9. Earnings Per Share
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. Unvested 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 months ended March 31, 2014 and March 31, 2013, there were 279,659 and 229,368, respectively, unvested shares of restricted stock on a weighted average basis that were considered participating securities, which were not dilutive. For purposes of calculating basic and diluted earnings per share, awards under the 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. As of March 31, 2014 and March 31, 2013, the absolute and relative return thresholds were met; however, the OPP awards have been excluded from the diluted earnings per share calculation for the three months ended March 31, 2014 and March 31, 2013 as they were anti-dilutive. In no event will the 2011 OPP awards be earned and paid out unless the absolute and relative performance thresholds are met on September 20, 2014.
The following tables set forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2014 and March 31, 2013, respectively (in thousands, except share data).
|
|
|
Three months ended |
| |
|
Numerator |
|
|
| |
|
Net loss from continuing operations |
|
$ |
(29 |
) |
|
Add: gain on sale of real estate |
|
50 |
| |
|
Less: preferred stock dividends |
|
2,712 |
| |
|
Less: amount allocable to unvested restricted stockholders |
|
88 |
| |
|
Less: noncontrolling interest after preferred stock dividends allocable to continuing operations |
|
(364 |
) | |
|
Loss from continuing operations available to common stockholders |
|
$ |
(2,415 |
) |
|
Denominator |
|
|
| |
|
Weighted average common shares outstanding—basic and diluted |
|
45,139,481 |
| |
|
Loss per share—basic and diluted |
|
$ |
(0.05 |
) |
|
|
|
Three months ended |
| |
|
Numerator |
|
|
| |
|
Net loss from continuing operations |
|
$ |
(547 |
) |
|
Less: preferred stock dividends |
|
1,553 |
| |
|
Less: amount allocable to unvested restricted stockholders |
|
69 |
| |
|
Less: noncontrolling interest after preferred stock dividends allocable to continuing operations |
|
(283 |
) | |
|
Loss from continuing operations available to common stockholders |
|
$ |
(1,886 |
) |
|
Income attributable to discontinued operations |
|
$ |
129 |
|
|
Less: noncontrolling interest allocable to discontinued operations |
|
18 |
| |
|
Income from discontinued operations available to common stockholders |
|
$ |
111 |
|
|
Denominator |
|
|
| |
|
Weighted average common shares outstanding—basic and diluted |
|
40,514,942 |
| |
|
Loss from continuing operations attributable to common stockholders |
|
$ |
(0.04 |
) |
|
Income from discontinued operations attributable to common stockholders |
|
$ |
0.00 |
|
|
Loss per share—basic and diluted |
|
$ |
(0.04 |
) |
10. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance subject to deductible requirements. Management believes that the ultimate settlement of these actions will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company is subject to a one-time incentive fee based on aggregate performance thresholds of the acquired buildings sourced by Columbus Nova Real Estate Acquisition Group, LLC. At March 31, 2014 and December 31, 2013, the fair value of the incentive fee was zero.
11. Concentrations of Credit Risk
Concentrations of credit risk arise when a number of tenants related to the Company’s investments or rental operations are engaged in similar business activities, are located in the same geographic region, or have similar economic features that would cause their inability to meet contractual obligations, including those to the Company, to be similarly affected. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. Management believes the current credit risk portfolio is reasonably well diversified and does not contain any unusual concentration of credit risk. No single tenant accounted for more than 5% of rental income for the three months ended March 31, 2014 and March 31, 2013.
12. Subsequent Events
GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued (“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (“recognized subsequent events”). No significant recognized subsequent events were noted. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (“non-recognized subsequent events”).
The following non-recognized subsequent events are noted:
On April 16, 2014, the Company entered into a Note Purchase Agreement (“NPA”) for a new $100.0 million private placement by the Operating Partnership of senior unsecured notes consisting of $50.0 million with a 10 year term (“Series A 10 Year Unsecured Notes”) and $50.0 million with a 12 year term (“Series B 12 Year Unsecured Notes). Borrowings under the notes will bear interest at a fixed rate of 4.98% and are expected to be drawn on July 1, 2014 for the Series B 12 Year Unsecured Notes and October 1, 2014 for the Series A 10 Year Unsecured Notes, subject to customary closing conditions.
On February 7, 2014, Gregory W. Sullivan, Chief Financial Officer, Executive Vice President and Treasurer of the Company since its initial public offering in 2011, notified the Company of his intention not to renew his contract at its expiration on April 20, 2014 and he tendered his resignation from his position on April 21, 2014. On April 21, 2014, Mr. Sullivan and the Company executed a Consulting Agreement pursuant to which Mr. Sullivan will act as a Senior Financial Advisor to the Company for one year. The Company has reviewed the accounting for this transaction and will be incurring approximately $2.8 million of general and administrative expense on April 28, 2014 related to this transaction. This additional expense relates to the acceleration of Mr. Sullivan’s LTIP units and his share of the OPP. Additionally, this expense includes Mr. Sullivan’s salary, bonus and other benefits that will be provided to him during the term of his Consulting Agreement.
On May 5, 2014, the Company’s board of directors approved a 5% increase in the Company’s monthly common stock dividend from $0.105 per share to $0.11 per share commencing with the July 2014 dividend.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion with the financial statements and related notes included elsewhere in Item 1 of this report and the audited financial statements as of December 31, 2013, and related notes thereto included in our most recent Annual Report on Form 10-K.
As used herein, “Company,” “we,” “our” and “us,” refer to STAG Industrial, Inc. and our consolidated subsidiaries and partnerships, except where the context otherwise requires. The consolidated financial statements for the three months ended March 31, 2014 and March 31, 2013 include the financial information of the Company, STAG Industrial Operating Partnership, L.P. (“operating partnership”) and our subsidiaries.
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:
· the factors included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2014, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
· the competitive environment in which we operate;
· real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
· decreased rental rates or increasing vacancy rates;
· potential defaults on or non-renewal of leases by tenants;
· potential bankruptcy or insolvency of tenants;
· acquisition risks, including failure of such acquisitions to perform in accordance with projections;
· the timing of acquisitions and dispositions;
· potential natural disasters such as hurricanes;
· international, national, regional and local economic conditions;
· the general level of interest rates;
· potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or real estate investment trust (“REIT”) tax laws, and potential increases in real property tax rates;
· financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
· lack of or insufficient amounts of insurance;
· our failure to complete acquisitions;
· our failure to successfully integrate acquired buildings;
· our ability to maintain our qualification as a REIT;
· litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and
· possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of buildings presently owned or previously owned by us.
Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are an industrial operating company focused on the acquisition, ownership and management of single-tenant net-leased industrial buildings throughout the United States.
As of March 31, 2014, we owned 212 buildings in 34 states with approximately 39.0 million square feet, consisting of 145 warehouse/distribution buildings, 47 light manufacturing buildings and 20 flex/office buildings. We also owned one vacant land parcel adjacent to one of our buildings. Our buildings were 95.3% leased to 193 tenants, with no single tenant accounting for more than 2.7% of our total annualized rent and no single industry accounting for more than 12.8% of our total annualized rent. As used herein, the definition of annualized rent is the contractual monthly base rent as of March 31, 2014 multiplied by 12. If a tenant is in a free rent period as of March 31, 2014, the annualized rent is calculated based on the first contractual monthly base rent amount multiplied by 12.
We were formed as a Maryland corporation on July 21, 2010 and our operating partnership, of which we, through our wholly owned subsidiary, STAG Industrial GP, LLC, are the sole general partner, was formed as a Delaware limited partnership on December 21, 2009. On April 20, 2011, we completed our formation transactions and became a public company. At March 31, 2014, we owned an 87.17% limited partnership interest in our operating partnership. We are organized and conduct our operations to qualify as a REIT under the Code, and generally are not subject to federal income tax to the extent we distribute our income to our stockholders and maintain our qualification as a REIT.
Factors That May Influence Future Results of Operations
Outlook
The lack of speculative development in our markets may improve occupancy levels and rental rates in our owned portfolio. In addition, our acquisition activity is expected to enhance our overall financial performance. The continuation of low interest rates combined with the availability of attractively priced properties should allow us to deploy our capital on an attractive “spread investing” basis. In general, the economic environment for our tenants appears to be improving due in particular to the increasing availability of financing accessible by mid-sized companies. Additionally, based on various real estate publications, the outlook for the industrial real estate sector is positive as the United States economy continues to improve and as retailers and manufacturers have made the shortening of the supply chain their top priority for the foreseeable future.
Rental Revenue
We receive income primarily from rental revenue from our buildings. The amount of rental revenue generated by the buildings in our portfolio depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space. As of March 31, 2014, our buildings were approximately 95.3% leased. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our buildings. Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our buildings.
Certain leases entered into by us contain tenant concessions. Any such rental concessions are accounted for on a straight line basis over the term of the lease.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. As of March 31, 2014, we had approximately 1.8 million rentable square feet of currently available space in our buildings. Of the 0.9 million square feet of leases that have expired during the three months ended March 31, 2014, we have renewed 0.7 million square feet of leases, resulting in a 75.4% tenant retention rate as of March 31, 2014. As of March 31, 2014, for the period April 1, 2014 through March 31, 2015, two of our top ten leases based on March 31, 2014 annualized revenue will be expiring. The first tenant has two leases with one of the leases scheduled to expire on December 31, 2014. The other tenant has one lease that is scheduled to expire on December 31, 2014. As of March 31, 2014, our leasing team has been in preliminary discussions on possible renewals for these tenants.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets may affect our overall performance.
Rental Expenses
Our rental expenses generally consist of utilities, real estate taxes, management fees, insurance and site repair and maintenance costs. For the majority of our tenants, our rental expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance and maintenance costs. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all aspects of and costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through rental expenses to our tenants.
Results of Operations
The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying footnotes. We consider our same store (as defined below) portfolio to consist of only those buildings owned and operated at the beginning and at the end of both of the applicable periods presented. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions.
Comparison of three months ended March 31, 2014 to the three months ended March 31, 2013
Our results of operations are affected by the acquisition and disposition activity during the 2014 and 2013 periods as described below. On January 1, 2013, we owned 172 buildings including 112 warehouse/distribution buildings, 39 light manufacturing buildings and 21 flex/office buildings. Subsequent to January 1, 2013, we sold three buildings for which the results of operations are included in disposition or loss from discontinued operations and in the table below are not considered part of our same store portfolio. Therefore, there are 169 buildings which are considered our same store portfolio (“three month same store”) in the analysis below. Three month same store occupancy decreased 1.2% to 93.9% as of March 31, 2014 compared to 95.1% as of March 31, 2013. The results of operations from acquisitions relates to the 43 buildings acquired after January 1, 2013 for an aggregate cost of approximately $380.2 million.
The following table summarizes selected operating information for our three month same store portfolio and our total portfolio for the three months ended March 31, 2014 and March 31, 2013 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months ended March 31, 2014 and March 31, 2013 with respect to the buildings acquired and disposed of after January 1, 2013. In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which prospectively changed the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We early adopted the provision effective January 1, 2014. The Lexington, VA building that was sold on March 25, 2014 did not meet the definition of a discontinued operation under this new definition and is therefore included within dispositions in the table below. The results from buildings sold prior to January 1, 2014 are included in discontinued operations within the table below.
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