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STAG > SEC Filings for STAG > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for STAG INDUSTRIAL, INC.

Form 10-Q for STAG INDUSTRIAL, INC.


7-May-2014

Quarterly Report


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;


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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.


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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.


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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.

                                                          Same Store Portfolio                                 Acquisitions                           Dispositions                                     Total Portfolio
                                                Three months ended                                          Three months ended                     Three months ended                     Three months ended
                                         March 31, 2014    March 31, 2013     Change    % Change    March 31, 2014      March 31, 2013     March 31, 2014       March 31, 2013     March 31, 2014    March 31, 2013     Change    % Change

Revenue
Operating revenue
Rental income                           $         25,414   $        25,574   $   (160 )     -0.6 % $          8,688    $            342   $             16     $             18   $         34,118   $        25,934   $  8,184        31.6 %
Tenant recoveries                                  3,805             3,612        193        5.3 %            1,610                  46                  1                    -              5,416             3,658      1,758        48.1 %
Other income (1)                                      37               137       (100 )    -73.0 %                3                   -                  -                    -                 40               137        (97 )     -70.8 %
Total operating revenue                           29,256            29,323        (67 )     -0.2 %           10,301                 388                 17                   18             39,574            29,729      9,845        33.1 %
Expenses
Operating expenses
Property                                           3,321             2,684        637       23.7 %              720                  12                  9                    -              4,050             2,696      1,354        50.2 %
Real estate taxes and insurance                    2,739             2,584        155        6.0 %            1,195                  44                  1                    -              3,935             2,628      1,307        49.7 %
Total operating expenses                           6,060             5,268        792       15.0 %            1,915                  56                 10                    -              7,985             5,324      2,661        50.0 %
Net operating income (2)                $         23,196   $        24,055   $   (859 )     -3.6 % $          8,386    $            332   $              7     $             18   $         31,589   $        24,405   $  7,184        29.4 %
Other expenses (income)
General and administrative                                                                                                                                                                   5,475             4,506        969        21.5 %
Asset management fees income                                                                                                                                                                  (169 )            (259 )       90       -34.7 %
Property acquisition costs                                                                                                                                                                     559               575        (16 )      -2.8 %
Depreciation and amortization                                                                                                                                                               19,854            15,398      4,456        28.9 %
Other expenses                                                                                                                                                                                 237                85        152       178.8 %
Total other expenses (income)                                                                                                                                                               25,956            20,305      5,651        27.8 %
Total expenses                                                                                                                                                                              33,941            25,629      8,312        32.4 %

Other income (expense)
Interest income                                                                                                                                                                                  4                 3          1        33.3 %
Interest expense                                                                                                                                                                            (5,666 )          (4,650 )   (1,016 )      21.8 %
Total other income (expense)                                                                                                                                                                (5,662 )          (4,647 )   (1,015 )      21.8 %
Discontinued operations
Income attributable to discontinued
operations                                                                                                                                                                                       -               129       (129 )    -100.0 %
Total income attributable to
discontinued operations                                                                                                                                                           $              -   $           129   $   (129 )    -100.0 %
Gain on sale of real estate                                                                                                                                                       $             50   $             -   $     50       100.0 %
Net income (loss)                                                                                                                                                                 $             21   $          (418 ) $    439       105.0 %
Less: loss attributable to
noncontrolling interest after
preferred stock dividends                                                                                                                                                                     (364 )            (265 )      (99 )      37.4 %
Net income (loss) attributable to
STAG Industrial, Inc.                                                                                                                                                             $            385   $          (153 ) $    538      -351.6 %



(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.

Same store rental income consisting of base rent, termination income, straight-line rent and above and below market lease amortization decreased by $0.2 million or 0.6% to $25.4 million for the three months ended March 31, 2014 compared to $25.6 million for the three months ended March 31, 2013. Approximately $0.8 million of the change was primarily attributable to tenants downsizing their spaces and vacancies. These decreases were offset by $0.4 million of rental increases due to tenant expansions and new leases. There was also a net increase of $0.1 million primarily related to changes in rental rates on lease renewals. Same store rental income also increased $0.1 million related to a decrease in amortization of net above market leases.

Same store tenant recoveries increased by $0.2 million or 5.3% to $3.8 million for the three months ended March 31, 2014 compared to $3.6 million for the three months ended March 31, 2013. Approximately $0.3 million of the increase related to several properties that incurred increased utility usage and snow removal due to the harsh winter conditions in 2014. This was offset by approximately $0.1 million decrease primarily related to a real estate tax abatement.

Same store other income decreased by $0.1 million or 73.0% to $37 thousand for the three months ended March 31, 2014 compared to $0.1 million for the three months ended March 31, 2013. During the three months ended March 31, 2013, we received a reimbursement of $51 thousand for make ready repair costs from a tenant that previously vacated and $31 thousand related to a settlement received from a prior tenant for reimbursement of damages under the lease agreement, which resulted in a higher same store other income during the three months ended March 31, 2013.


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Same Store Operating Expenses

Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.

Total same store expenses increased by $0.8 million or 15.0% to $6.1 million for the three months ended March 31, 2014 compared to $5.3 million for the three months ended March 31, 2013. The increase was primarily attributable to an increase of $0.5 million related to the increased utility usage and snow removal costs due to the harsh winter conditions in 2014. There was also an increase of $0.1 million related to repair and maintenance expenses. Real estate taxes and insurance increased by $0.2 million across several properties primarily due to increases in real estate tax rates and increases in insurance expense related to properties that were previously under vacant property insurance policies and are now occupied.

Total Other Expenses (Income)

Total other expenses (income) consist of general and administrative expense, asset management fee income, property acquisition costs, depreciation and amortization, and other expenses.

Total other expenses (income) increased $5.7 million or 27.8% for the three months ended March 31, 2014 to $26.0 million compared to $20.3 million for the three months ended March 31, 2013. The increase was primarily related to an increase of $4.5 million in depreciation and amortization as a result of the buildings acquired which increased the depreciable asset base. The increase was also attributable to a $1.0 million increase in general and administrative expenses related to rental expense for our new principal executive offices that we began to occupy on January 27, 2014 as well as the increase in payroll and other costs related to an increased number of employees.

Total Other Income (Expense)

Total other income (expense) consists of interest income and interest expense. Interest expense includes interest paid and accrued during the period as well as adjustments related to amortization of financing fees and amortization of fair market value adjustments associated with the assumption of debt.

Total other expense increased $1.0 million, or 21.8%, to $5.7 million for the three months ended March 31, 2014 compared to $4.6 million for the three months ended March 31, 2013. The increase was attributable to a $1.0 million increase in interest expense primarily as a result of the Wells Fargo unsecured term loan A (as defined in Indebtedness Outstanding below) entered into on February 14, 2013, which was not outstanding nor fully drawn upon for approximately half of the three months ended March 31, 2013.

Total Loss Attributable to Discontinued Operations

The total loss attributable to discontinued operations decreased by $0.1 million, or 100%, to $0 for the three months ended March 31, 2014 compared to $0.1 million for the three months ended March 31, 2013. The loss attributable to discontinued operations reflects the results of operations during the three months ended March 31, 2013 related to two buildings located in Creedmoor, NC and Pittsburgh, PA that were sold during the year ended December 31, 2013. As previously mentioned, the only building sold in 2014 was not classified as a discontinued operation as a result of our early adopting ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.

Gain on sale of real estate

The total gain on sale of real estate increased by $0.1 million, or 100.0%, to $0.1 for the three months ended March 31, 2014 compared to $0 for the three months ended March 31, 2013. The gain on sale of real estate is related to the property located in Lexington, VA that was sold during the three months ended March 31, 2014 and the early adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, as referenced above.

Total Net Income (Loss)

The total net income (loss) increased by $0.4 million, or 105.0%, to net income of $21 thousand for the three months ended March 31, 2014 compared to a net loss of $0.4 million for the three months ended March 31, 2013. The increase is attributable to all of the aforementioned factors.

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