Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
STAG > SEC Filings for STAG > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for STAG INDUSTRIAL, INC.

Form 10-K for STAG INDUSTRIAL, INC.


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. The combined financial information presented for periods on or prior to April 19, 2011 relate solely to the STAG Predecessor Group. The consolidated financial statements for the period April 20, 2011 to December 31, 2011 and the years ended December 31, 2012 and December 31, 2013 include the financial information of our company, our operating partnership and our subsidiaries. Where the "company" is referenced in comparisons of financial results between the year ended December 31, 2012 and any quarter or period ended in 2011, the financial information for such quarter or period prior to April 19, 2011 relates solely to the STAG Predecessor Group, notwithstanding "company" being the reference.

Overview

We are a fully-integrated, full-service real estate company focused on the acquisition, ownership and management of single-tenant industrial properties throughout the United States.

As of December 31, 2013, we owned 209 buildings in 34 states with approximately 38.1 million rentable square feet, consisting of 142 warehouse/distribution properties, 47 light manufacturing properties and 20 flex/office properties. We also owned one vacant land parcel adjacent to one of our buildings. Our properties were 95.6% leased to 191 tenants, with no single tenant accounting for more than 2.8% of our total annualized rent and no single industry accounting for more than 12.6% of our total annualized rent.

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 the formation transactions and became a public company. At December 31, 2013, we owned an 86.65% 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 generally across the country and specifically 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 properties. The amount of rental revenue generated by the properties 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 December 31, 2013, our properties were approximately 95.6% leased. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our properties. Future economic


Table of Contents

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 properties.

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 December 31, 2013, we had approximately 1.7 million rentable square feet of currently available space in our buildings. Of the 2.8 million square feet of leases that have expired during the year ended December 31, 2013, we have renewed 1.6 million square feet of leases, resulting in a 59% tenant retention rate as of December 31, 2013. As of December 31, 2013, for the period January 1, 2014 through December 31, 2014, one of our top ten tenants based on December 31, 2013 annualized revenue had their only lease expire in 2014. The tenant signed a new lease for five years to retain 47% of the space effective at the existing lease expiration. The base rent will remain flat on a per square foot basis. Subsequent to December 31, 2013, the tenant executed the first amendment to the lease, which allows the tenant to holdover in the entire space through April 30, 2014.

Conditions in Our Markets

The properties 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 property 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 property portfolio. The terms of those leases vary and on some occasions we may absorb property related expenses of our tenants. In our modified gross leases, we are responsible for some property 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 property and its operation during the lease term. Our overall performance will be impacted by the extent to which we are able to pass-through rental expenses to our tenants.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.


Table of Contents

Real Estate and Deferred Lease Intangibles

Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of the property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized.

We evaluate the carrying value of all tangible and intangible real estate assets held for use for possible impairment when an event or change in circumstance has occurred that indicates their carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the asset and the ultimate sale of the asset. If such cash flows are less than the asset's carrying value, an impairment charge is recognized to the extent by which the asset's carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ from actual results.

For properties considered held for sale, we cease depreciating the properties and value the properties at the lower of depreciated cost or fair value, less costs to dispose. We classify properties as held for sale when all criteria within the FASB's Accounting Standard Codification ("ASC") 360, Property, Plant and Equipment are met.

We present qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as "held for sale," as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property's net income (loss) are reflected as discontinued operations include operating results, depreciation and interest expense (if the property is subject to a secured loan).

Expenditures for tenant improvements, leasehold improvements and leasing commissions are capitalized and amortized or depreciated over the shorter of their useful lives or the terms of each specific lease. Depreciation expense is computed using the straight-line method based on the following useful lives:

Buildings                        40 years
Building and land improvements   5 - 20 years
Tenant improvements              Shorter of useful life or terms of related lease

We evaluate acquisitions to determine if the acquisition represents an asset acquisition or business combination, and we account for all business combinations in accordance with ASC 805, Business Combinations. Upon acquisition of a property, we allocate the purchase price of the property based upon the fair value of the assets and liabilities acquired, which generally consist of land, buildings, tenant improvements and intangible assets including in-place leases, above market and below market leases and tenant relationships, as well as the fair value of debt assumed. We allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term of any below market fixed rate renewal options for below market leases that are considered bargain renewal options. The above market lease values are amortized as a reduction of rental income over the remaining term of the respective leases, and the below market lease values are amortized as an increase to rental income over the remaining initial terms plus the terms of any below market fixed rate renewal options that are considered bargain renewal options of the respective leases.


Table of Contents

The purchase price is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the respective tenant. The value of in-place lease intangibles and tenant relationships, which are included as components of deferred leasing intangibles, are amortized over the remaining lease term (and expected renewal periods of the respective lease for tenant relationships) as adjustments to depreciation and amortization expense. If a tenant terminates its lease, the unamortized portion of leasing commissions, above and below market leases, the in-place lease value and tenant relationships are immediately written off.

In determining the fair value of the debt assumed, we discount the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on a current market rate. The associated fair market value debt adjustment is amortized through interest expense over the life of the debt.

Using information available at the time of acquisition, we allocate the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. We may adjust the preliminary purchase price allocations after obtaining more information about asset valuations and liabilities assumed.

Use of Derivative Financial Instruments

We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or we elect not to apply hedge accounting

In accordance with the FASB's fair value measurement guidance, we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting arrangements on a net basis by counterparty portfolio. Credit risk is the risk of failure of the counterparty to perform under the terms of the contract. We minimize the credit risk in an interest rate swap by entering into transactions with high-quality counterparties. Our exposure to credit risk at any point is generally limited to amounts recorded as assets or liabilities on the Consolidated Balance Sheets.

Fair Value of Financial Instruments

We adopted the fair value measurement provisions for its financial instruments recorded at fair value. The guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.


Table of Contents

Revenue Recognition

All current leases are classified as operating leases and rental revenue is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured. Differences between rental revenue earned and amounts due under the lease are charged or credited, as applicable, to accrued rental revenue. Additional rents from expense reimbursements for insurance, real estate taxes and certain other expenses are recognized in the period in which the related expenses are incurred.

Early lease termination fees are recorded in rental income on a straight-line basis from the notification date of such termination to the then remaining (not the original) lease term, if any, or upon collection if collection is not reasonably assured.

We earn revenue from asset management fees, which are included in our Consolidated Statements of Operations in other income. We recognize revenue from asset management fees when the related fees are earned and are realized or realizable.

By the terms of their leases, certain tenants are obligated to pay directly the costs of their properties' insurance, real estate taxes and certain other expenses and these costs are not reflected in our Consolidated and Combined Financial Statements. To the extent any tenant responsible for these costs under its respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation. We do not recognize recovery revenue related to leases where the tenant will pay expenses directly for real estate taxes, insurance, ground lease payments, and certain other expenses.

Results of Operations

The following discussion of our results of operations should be read in conjunction with the Consolidated and Combined 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 the year ended December 31, 2013 to the year ended December 31, 2012

Our results of operations are affected by the acquisition and disposition activity during the 2013 and 2012 periods as described below. On January 1, 2012, we owned 105 buildings including 57 warehouse/distribution buildings, 28 light manufacturing buildings and 20 flex/office buildings. Subsequent to January 1, 2012, we sold five buildings for which the results of operations are included in income (loss) attributable to discontinued operations and are not considered part of our same store portfolio. Therefore, there are 100 buildings which are considered our same store portfolio in the analysis below. Same store occupancy decreased 0.7% to 93.0% as of December 31, 2013 compared to 93.7% as of December 31, 2012. The results of operations from acquisitions relates to the 109 buildings acquired after January 1, 2012 for an aggregate cost of approximately $767.2 million.

The following table summarizes selected operating information for our same store portfolio and our total portfolio for the years ended December 31, 2013 and December 31, 2012 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by


Table of Contents

also providing information for the years ended December 31, 2013 and December 31, 2012 with respect to the buildings acquired after January 1, 2012.

                                     Same Store Portfolio                  Acquisitions                     Total Portfolio
                              Year ended                                    Year ended             Year ended
                             December 31,                                  December 31,           December 31,
                            2013       2012      Change     % Change      2013       2012       2013        2012       Change    % Change
Revenue
Operating revenue
Rental income             $ 57,664   $ 59,270   $ (1,606 )       -2.7 % $ 58,680   $ 14,707   $ 116,344   $  73,977   $ 42,367        57.3 %
Tenant recoveries            9,354      7,419      1,935         26.1 %    6,995      1,344      16,349       8,763      7,586        86.6 %
Other income(1)                283         92        191        207.6 %       24         24         307         116        191       164.7 %


Total operating revenue     67,301     66,781        520          0.8 %   65,699     16,075     133,000      82,856     50,144        60.5 %


Expenses
Operating expenses
Property                     7,250      5,333      1,917         35.9 %    3,384        650      10,634       5,983      4,651        77.7 %
Real estate taxes and
insurance                    6,265      5,491        774         14.1 %    7,111      1,367      13,376       6,858      6,518        95.0 %


Total operating
expenses                    13,515     10,824      2,691         24.9 %   10,495      2,017      24,010      12,841     11,169        87.0 %


Net operating income(2)   $ 53,786   $ 55,957   $ (2,171 )       -3.9 % $ 55,204   $ 14,058   $ 108,990   $  70,015   $ 38,975        55.7 %
Other expenses (income)
General and
administrative                                                                                   17,840      14,549      3,291        22.6 %
Asset management fees
income                                                                                             (893 )    (1,196 )      303       -25.3 %
Property acquisition
costs                                                                                             3,427       4,218       (791 )     -18.8 %
Depreciation and
amortization                                                                                     67,556      42,427     25,129        59.2 %
Loss on impairment                                                                                    -         622       (622 )       0.0 %
Other expenses                                                                                      621         339        282        83.2 %


Total other expenses
(income)                                                                                         88,551      60,959     27,592        45.3 %


Total expenses                                                                                  112,561      73,800     38,761        52.5 %


Other income (expense)
Interest income                                                                                      13          19         (6 )     -31.6 %
Interest expense                                                                                (20,319 )   (16,110 )   (4,209 )      26.1 %
Gain on interest rate
swaps                                                                                                 -         215       (215 )       0.0 %
Offering costs                                                                                      (27 )       (68 )       41         0.0 %
Loss on extinguishment
of debt                                                                                               -        (929 )      929      -100.0 %


Total other income
(expense)                                                                                       (20,333 )   (16,873 )   (3,460 )      20.5 %


Discontinued operations
Income (loss)
attributable to
discontinued operations                                                                            (509 )     1,337     (1,846 )    -138.1 %
Loss on impairment
attributable to
discontinued
operations                                                                                            -      (3,941 )    3,941      -100.0 %
Gain on sales of real
estate                                                                                            5,305         222      5,083         0.0 %


Total income (loss)
attributable to
discontinued operations                                                                           4,796      (2,382 )    7,178      -301.3 %


Net income (loss)                                                                             $   4,902   $ (10,199 ) $ 15,101       148.1 %


Less: loss attributable
to noncontrolling
interest after
preferred stock
dividends                                                                                          (620 )    (3,720 )    3,100       -83.3 %


Net income (loss)
attributable to STAG
Industrial, Inc.                                                                              $   5,522   $  (6,479 ) $ 12,001      -185.2 %


(1)
Other income excludes asset management fee income, which is included below in Other expenses (income) for purposes of calculating net operating income.

(2)
Net operating income excludes the results of discontinued operations in the table above. For a detailed discussion of net operating income, including the reasons management believes net operating income is useful to investors, see "Non-GAAP Financial Measures" below.

Same Store Total Operating Revenue

Same store operating revenue consists primarily of rental income from our properties, lease termination fees and tenant reimbursements for insurance, real estate taxes and certain other expenses.


Table of Contents

Same store rental income consisting of base rent, termination income, straight-line rent, and above and below market lease amortization decreased by $1.6 million or 2.7% to $57.7 million for the year ended December 31, 2013 compared to $59.3 million for the year ended December 31, 2012. Same store rental income decreased primarily as a result of vacancies and downtime in between leases resulting in a decrease of revenue of approximately $2.5 million. This decrease was partially offset by approximately $1.0 million of lease expansions and renewals at higher rental rates. There was also a decrease in net above market lease amortization of $0.2 million. Additionally, during the year ended December 31, 2012, we had termination income of approximately $0.3 million and there was no termination income within income from continuing operations during the year ended December 31, 2013.

Same store tenant recoveries increased by $1.9 million or 26.1% to $9.4 million for the year ended December 31, 2013 compared to $7.4 million for the year ended December 31, 2012. The increase was primarily attributable to one of the properties where a single tenant occupied the building during the year ended December 31, 2012 and the tenant paid the utility expenses and real estate taxes directly to the third parties; therefore, the expenses were not directly paid by us. The tenant vacated during the fourth quarter of 2012 and the same building was occupied by multiple tenants during the year ended December 31, 2013 with leases that require us to pay the utility and real estate taxes expenses and to be reimbursed by the tenant, resulting in an increase of . . .

  Add STAG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for STAG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.