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Table of Contents

 

 

 

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 June 30, 2012

 

OR

 

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)

 


 

Maryland

 

27-3099608

(State or other jurisdiction
of incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

99 High Street, 28th Floor
Boston, Massachusetts

 

02110

(Address of principal executive offices)

 

(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:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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.

 

Class

 

Outstanding at August 6, 2012

Common Stock ($0.01 par value)

 

25,077,106

9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value)

 

2,760,000

 

 

 



Table of Contents

 

STAG INDUSTRIAL, INC.

Table of Contents

 

PART I.

 

Financial Information

3

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

3

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 for STAG Industrial, Inc.

3

 

 

 

 

 

 

Consolidated and Combined Statements of Operations for STAG Industrial, Inc. for the Three and Six Months Ended June 30, 2012 and for the Period from April 20, 2011 to June 30, 2011 and STAG Predecessor Group for the Periods from January 1, 2011 to April 19, 2011 and April 1, 2011 to April 19, 2011

4

 

 

 

 

 

 

Consolidated and Combined Statements of Stockholders’ Equity for STAG Industrial, Inc. for the Six Months Ended June 30, 2012 and for the Period from April 20, 2011 to June 30, 2011 and STAG Predecessor Group for the Period from January 1, 2011 to April 19, 2011

5

 

 

 

 

 

 

Consolidated and Combined Statements of Cash Flows for STAG Industrial, Inc. for the Six Months Ended June 30, 2012 and for the Period from April 20, 2011 to June 30, 2011 and STAG Predecessor Group for the Period from January 1, 2011 to April 19, 2011

6

 

 

 

 

 

 

Notes to Consolidated and Combined Financial Statements

7

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

 

Item 4.

 

Controls and Procedures

33

 

 

 

 

PART II.

 

Other Information

33

 

 

 

 

Item 1.

 

Legal Proceedings

33

 

 

 

 

Item 1A.

 

Risk Factors

34

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

34

 

 

 

 

Item 4.

 

Mine Safety Disclosures

34

 

 

 

 

Item 5.

 

Other Information

34

 

 

 

 

Item 6.

 

Exhibits

34

 

 

 

 

 

 

SIGNATURE

34

 

2



Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

STAG Industrial, Inc.

Consolidated Balance Sheets

(unaudited, in thousands, except share data)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Rental Property:

 

 

 

 

 

Land

 

$

81,501

 

$

70,870

 

Buildings

 

461,617

 

394,822

 

Tenant improvements

 

29,703

 

25,056

 

Building and land improvements

 

13,305

 

11,510

 

Less: accumulated depreciation

 

(37,502

)

(30,004

)

Total rental property, net

 

548,624

 

472,254

 

Cash and cash equivalents

 

5,113

 

16,498

 

Restricted cash

 

10,026

 

6,611

 

Tenant accounts receivable, net

 

6,210

 

5,592

 

Prepaid expenses and other assets

 

1,954

 

1,355

 

Deferred financing fees, net

 

2,506

 

2,634

 

Leasing commissions, net

 

1,203

 

954

 

Goodwill

 

4,923

 

4,923

 

Due from related parties

 

443

 

400

 

Deferred leasing intangibles, net

 

128,801

 

113,293

 

Total assets

 

$

709,803

 

$

624,514

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage notes payable

 

$

287,314

 

$

296,779

 

Credit facility

 

5,000

 

 

Accounts payable, accrued expenses and other liabilities

 

5,754

 

6,044

 

Interest rate swaps

 

 

215

 

Tenant prepaid rent and security deposits

 

4,630

 

3,478

 

Dividends and distributions payable

 

10,287

 

6,160

 

Deferred leasing intangibles, net

 

4,450

 

1,929

 

Total liabilities

 

$

317,435

 

$

314,605

 

Commitments and contingencies

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2012 and December 31, 2011

 

69,000

 

69,000

 

Common stock $0.01 par value, 100,000,000 shares authorized, 24,958,258 and 15,901,560 shares outstanding at June 30, 2012 and December 31, 2011, respectively

 

249

 

159

 

Additional paid-in capital

 

282,669

 

179,919

 

Common stock dividends in excess of earnings

 

(33,424

)

(18,385

)

Total stockholders’ equity

 

318,494

 

230,693

 

Noncontrolling interest

 

73,874

 

79,216

 

Total stockholders’ equity

 

392,368

 

309,909

 

Total liabilities and stockholders’ equity

 

$

709,803

 

$

624,514

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

STAG Industrial, Inc. and STAG Predecessor Group

 

Consolidated and Combined Statements of Operations

(unaudited, in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

STAG

 

 

 

STAG

 

STAG

 

STAG

 

STAG

 

STAG

 

Predecessor

 

 

 

Industrial,

 

Industrial,

 

Predecessor

 

Industrial,

 

Industrial,

 

Group

 

 

 

Inc.

 

Inc.

 

Group

 

Inc.

 

Inc.

 

Period from

 

 

 

Three Months
Ended June 30 2012

 

Period from April
20 to June 30 2011

 

Period from April 1
to April 19 2011

 

Six Months
Ended June 30 2012

 

Period from April
20 to June 30 2011

 

January 1 to April
19 2011

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

17,541

 

$

9,569

 

$

1,216

 

$

33,186

 

$

9,569

 

$

6,866

 

Tenant recoveries

 

2,091

 

1,073

 

258

 

4,148

 

1,073

 

1,218

 

Other income

 

330

 

267

 

 

650

 

267

 

 

Total revenue

 

19,962

 

10,909

 

1,474

 

37,984

 

10,909

 

8,084

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

1,353

 

740

 

200

 

3,094

 

740

 

1,193

 

General and administrative

 

3,308

 

2,060

 

183

 

6,306

 

2,060

 

322

 

Real estate taxes and insurance

 

1,705

 

900

 

144

 

3,139

 

900

 

879

 

Asset management fees

 

 

 

30

 

 

 

170

 

Property acquisition costs

 

1,149

 

327

 

 

1,441

 

327

 

 

Depreciation and amortization

 

9,272

 

6,392

 

428

 

18,111

 

6,392

 

2,405

 

Other expenses

 

9

 

 

 

59

 

 

 

Total expenses

 

16,796

 

10,419

 

985

 

32,150

 

10,419

 

4,969

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

4

 

9

 

0

 

8

 

9

 

1

 

Interest expense

 

(4,167

)

(3,116

)

(763

)

(8,309

)

(3,116

)

(3,954

)

Gain on interest rate swaps

 

 

500

 

177

 

215

 

500

 

762

 

Formation transaction costs

 

 

(3,728

)

 

 

(3,728

)

 

Offering costs

 

(68

)

 

 

(68

)

 

 

Loss on impairment

 

(622

)

 

 

(622

)

 

 

Gain on extinguishment of debt

 

18

 

 

 

18

 

 

 

Total other income (expense)

 

(4,835

)

(6,335

)

(586

)

(8,758

)

(6,335

)

(3,191

)

Net loss from continuing operations

 

$

(1,669

)

$

(5,845

)

$

(97

)

$

(2,924

)

$

(5,845

)

$

(76

)

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) attributable to discontinued operations

 

(78

)

(54

)

8

 

(184

)

(54

)

(153

)

Gain on sale of real estate

 

219

 

 

 

219

 

 

 

Total income (loss) attributable to discontinued operations

 

141

 

(54

)

8

 

35

 

(54

)

(153

)

Net loss

 

$

(1,528

)

$

(5,899

)

$

(89

)

$

(2,889

)

$

(5,899

)

$

(229

)

Less: loss attributable to noncontrolling interest

 

 

(887

)

 

(1,996

)

 

 

 

 

(1,853

)

 

(1,996

)

 

 

 

Net loss attributable to STAG Industrial, Inc.

 

$

(641

)

$

(3,903

)

 

 

 

$

(1,036

)

$

(3,903

)

 

 

 

Less: preferred stock dividends

 

 

1,553

 

 

 

 

 

 

 

3,106

 

 

 

 

 

 

Less: amount allocated to unvested restricted stockholders

 

 

41

 

 

 

 

 

 

 

41

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(2,235

)

$

(3,903

)

 

 

 

$

(4,183

)

$

(3,903

)

 

 

 

Weighted average common shares outstanding — basic and diluted

 

19,484,785

 

15,153,646

 

 

 

17,654,706

 

15,153,646

 

 

 

Income (loss) per share — basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to the common stockholders

 

$

(0.12

)

$

(0.26

)

 

 

$

(0.24

)

$

(0.26

)

 

 

Discontinued operations

 

$

0.01

 

$

(0.00

)

 

 

$

0.00

 

$

(0.00

)

 

 

Loss per share — basic and diluted

 

$

(0.11

)

$

(0.26

)

 

 

$

(0.24

)

$

(0.26

)

 

 

Dividends declared per common share

 

$

0.27

 

$

0.2057

 

 

 

$

0.53

 

$

0.2057

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

STAG Industrial, Inc. and STAG Predecessor Group

 

Consolidated and Combined Statements of Stockholders’ Equity

(unaudited, in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Interest — Unit

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

 

 

Total

 

Holders in

 

 

 

 

 

 

 

Common Stock

 

Paid in

 

in Excess of

 

Predecessor’s

 

Stockholder’s

 

Operating

 

 

 

 

 

Preferred Stock

 

Shares

 

Amount

 

Capital

 

Earnings

 

Owner’s Deficit

 

Equity

 

Partnership

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

69,000

 

15,901,560

 

$

159

 

$

179,919

 

$

(18,385

)

$

 

$

230,693

 

$

79,216

 

$

309,909

 

Proceeds from sale of common stock

 

 

8,337,500

 

83

 

107,304

 

 

 

107,387

 

 

107,387

 

Offering costs

 

 

 

 

(5,104

)

 

 

(5,104

)

 

(5,104

)

Issuance of restricted stock

 

 

87,025

 

1

 

(1

)

 

 

 

 

 

Issuance of common stock

 

 

8,241

 

 

 

 

 

 

 

 

Dividends and distributions

 

(3,106

)

 

 

 

(10,897

)

 

(14,003

)

(4,133

)

(18,136

)

Stock-based compensation

 

 

 

 

502

 

 

 

502

 

474

 

976

 

Issuance of units for acquisition fee

 

 

 

 

 

 

 

 

225

 

225

 

Conversion of operating partnership units to common stock

 

 

623,932

 

6

 

6,038

 

 

 

6,044

 

(6,044

)

 

Rebalancing of noncontrolling interest

 

 

 

 

(5,989

)

 

 

(5,989

)

5,989

 

 

Net income (loss)

 

3,106

 

 

 

 

(4,142

)

 

(1,036

)

(1,853

)

(2,889

)

Balance, June 30, 2012

 

$

69,000

 

24,958,258

 

$

249

 

$

282,669

 

$

(33,424

)

$

 

$

318,494

 

$

73,874

 

$

392,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period from January 1, 2011 to April 19, 2011 (STAG Predecessor Group)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

 

 

$

 

$

 

$

 

$

(8,336

)

$

(8,336

)

$

 

$

(8,336

)

Contributions

 

 

 

 

 

 

4,420

 

4,420

 

 

4,420

 

Distributions

 

 

 

 

 

 

(9,900

)

(9,900

)

 

(9,900

)

Net loss

 

 

 

 

 

 

(229

)

(229

)

 

(229

)

Balance, April 19, 2011

 

$

 

 

$

 

$

 

$

 

$

(14,045

)

$

(14,045

)

$

 

$

(14,045

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period from April 20, 2011 to June 30, 2011 (STAG Industrial, Inc.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 20, 2011

 

$

 

110

 

$

 

$

2

 

$

 

$

(14,045

)

$

(14,043

)

$

 

$

(14,043

)

Proceeds from sale of common stock

 

 

15,812,500

 

158

 

205,405

 

 

 

205,563

 

 

205,563

 

Redemption of initial capitalization of STAG Industrial, Inc.

 

 

(110

)

 

(2

)

 

 

(2

)

 

(2

)

Issuance of units for acquisition of properties

 

 

 

 

 

 

 

 

95,670

 

95,670

 

Exchange of owners’ equity for units

 

 

 

 

 

 

14,045

 

14,045

 

(14,045

)

 

Offering costs

 

 

 

 

(17,042

)

 

 

(17,042

)

 

(17,042

)

Issuance of restricted stock

 

 

80,809

 

1

 

(1

)

 

 

 

 

 

Dividends and distributions

 

 

 

 

 

 

(3,269

)

 

(3,269

)

(1,602

)

(4,871

)

Stock-based compensation

 

 

 

 

39

 

 

 

39

 

117

 

156

 

Rebalancing of noncontrolling interest

 

 

 

 

(7,226

)

 

 

(7,226

)

7,226

 

 

Net loss

 

 

 

 

 

(3,903

)

 

(3,903

)

(1,996

)

(5,899

)

Balance, June 30, 2011

 

$

 

15,893,309

 

$

159

 

$

181,175

 

$

(7,172

)

$

 

$

174,162

 

$

85,370

 

$

259,532

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

STAG Industrial, Inc. and STAG Predecessor Group

 

Consolidated and Combined Statements of Cash Flows

(unaudited, in thousands)

 

 

 

 

 

 

 

STAG

 

 

 

 

 

 

 

Predecessor

 

 

 

 

 

STAG Industrial, Inc.

 

Group

 

 

 

STAG Industrial, Inc.
Six Months Ended June
30, 2012

 

Period from
April 20, 2011 to June 30,
2011

 

Period from January
1, 2011 to April
19, 2011

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(2,889

)

$

(5,899

)

$

(229

)

Adjustment to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

18,132

 

6,446

 

2,459

 

Loss on impairment

 

622

 

 

 

Non-cash portion of interest expense

 

498

 

264

 

31

 

Intangible amortization in rental income, net

 

2,258

 

869

 

(2

)

Straight line adjustment, net

 

(1,269

)

(326

)

(16

)

Gain on interest rate swaps

 

(215

)

(500

)

(762

)

Gain on extinguishment of debt

 

(18

)

 

 

Gain on sale of real estate

 

(219

)

 

 

Stock-based compensation expense

 

976

 

156

 

 

Issuance of units for acquisition fee

 

225

 

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Tenant accounts receivable, net

 

101

 

(42

)

88

 

Leasing commissions, net

 

(359

)

(25

)

(24

)

Restricted cash

 

(689

)

(171

)

 

Prepaid expenses and other assets

 

(653

)

450

 

(87

)

Accounts payable, accrued expenses and other liabilities

 

(35

)

(429

)

106

 

Tenant prepaid rent and security deposits

 

1,152

 

843

 

169

 

Due from related parties

 

(43

)

746

 

767

 

Due to related parties

 

 

(596

)

(141

)

Total adjustments

 

20,464

 

7,685

 

2,588

 

Net cash provided by operating activities

 

17,575

 

1,786

 

2,359

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions of land and building improvements

 

(86,992

)

(12,349

)

(39

)

Proceeds from sale of rental property, net

 

3,216

 

 

 

Restricted cash

 

(1,173

)

(540

)

(542

)

Cash paid for contributed assets, net

 

 

(2,159

)

 

Cash received (paid) for deal deposits, net

 

35

 

(1,065

)

 

Additions to lease intangibles

 

(25,950

)

(5,686

)

 

Net cash used in investing activities

 

(110,864

)

(21,799

)

(581

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

107,387

 

205,563

 

 

Offering costs related to issuance of common stock

 

(5,104

)

(17,042

)

 

Redemption of initial capitalization of STAG Industrial, Inc. shares

 

 

(2

)

 

Proceeds from notes payable to related parties

 

 

 

789

 

Repayment of notes payable to related parties

 

 

(10,366

)

 

Proceeds from secured corporate credit facility

 

87,300

 

11,000

 

 

Repayment of secured corporate credit facility

 

(82,300

)

(11,000

)

 

Proceeds from mortgage notes payable

 

9,252

 

11,400

 

 

Repayment of mortgage notes payable

 

(18,592

)

(152,954

)

(1,180

)

Termination of swap contracts

 

 

(894

)

 

Payment of loan fees and costs

 

(477

)

(2,662

)

 

Dividends and distributions

 

(14,009

)

 

(2,679

)

Restricted cash - escrow for dividends

 

(1,553

)

 

 

Net cash provided by (used in) financing activities

 

81,904

 

33,043

 

(3,070

)

Increase (decrease) in cash and cash equivalents

 

(11,385

)

13,030

 

(1,292

)

Cash and cash equivalents—beginning of period

 

16,498

 

277

 

1,567

 

Cash and cash equivalents—end of period

 

$

5,113

 

$

13,307

 

$

275

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

STAG Industrial, Inc. and STAG Predecessor Group

 

Notes to Consolidated and Combined Financial Statements

 

(unaudited)

 

1. Organization and Description of Business

 

STAG Industrial, Inc. (the “Company”) is a fully-integrated, self-administered and self-managed real estate company focused on the acquisition, ownership and management of single-tenant industrial properties throughout the United States. The Company was formed as a Maryland corporation on July 21, 2010 and has elected to be treated as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). As of June 30, 2012 and December 31, 2011, the Company owned a 77.15% and 67.12%, respectively, limited partnership interest in the Operating Partnership. As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries and partnerships except where context otherwise requires.

 

As of June 30, 2012, the Company owned 121 properties in 29 states with approximately 20.4 million rentable square feet, consisting of 71 warehouse/distribution properties, 30 manufacturing properties and 20 flex/office properties. The Company’s properties were 95.7% leased to 104 tenants as of June 30, 2012.

 

The Company’s “predecessor” for accounting purposes is STAG Predecessor Group (or “Predecessor”), which is not a legal entity, but a collection of the real estate entities that were owned by STAG Investments III, LLC prior to the Company’s initial public offering in April 2011 (the “IPO”). Prior to the IPO, STAG Predecessor Group also was engaged in the business of owning, leasing and operating real estate consisting primarily of industrial properties located throughout the United States. The financial information contained in this report that relates to the time periods on or prior to April 19, 2011 is the Predecessor’s financial information; the financial information contained in this report for any time period on or after April 20, 2011 is the Company’s financial information.  The Company did not have any operating activity before April 20, 2011 and, as a result of the Company’s IPO and related formation transactions, is substantially different from STAG Predecessor Group.

 

2. Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying interim financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, the accompanying interim financial statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP.  Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Basis of Presentation

 

The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership and their subsidiaries. The equity interests of other limited partners in the Operating Partnership are reflected as noncontrolling interest. The combined financial statements of STAG Predecessor Group include the accounts of STAG Predecessor Group and all entities in which STAG Predecessor Group had a controlling interest.  All significant intercompany balances and transactions have been eliminated in the combination of entities. The financial statements of the Company are presented on a consolidated basis, for all periods presented and comprise the consolidated historical financial statements of the transferred collection of real estate entities and holdings, upon the IPO.  The combined financial information presented for periods on or prior to April 19, 2011 relate solely to STAG Predecessor Group. The financial statements for the periods after April 19, 2011 include the financial information of the Company, the Operating Partnership and their subsidiaries. Where the “Company” is referenced in comparisons of financial results for any date prior to

 

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Table of Contents

 

and including April 19, 2011, the financial information for such period relates solely to STAG Predecessor Group, notwithstanding “Company” being the reference.

 

Adoption of New Accounting Pronouncements

 

The Company adopted Accounting Standards Update No. 2011-04 issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. The adoption of this guidance did not affect the Company’s financial position, results of operations or cash flows but did result in additional disclosure pertaining to fair value measurements.

 

Consolidated and Combined Statements of Cash Flows—Supplemental Disclosures

 

The following table provides supplemental disclosures related to the Consolidated and Combined Statements of Cash Flows (in thousands):

 

 

 

STAG
Industrial, Inc.
(Six Months Ended
June 30, 2012)

 

STAG
Industrial, Inc.
(Period from
April 20, 2011
to
June 30, 2011)

 

STAG
Predecessor Group
(Period from
January 1, 2011
to
April 19, 2011)

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

7,895

 

$

2,927

 

$

2,433

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Acquisition of tangible assets

 

$

 

$

(204,116

)

$

 

Acquisition of goodwill upon formation transactions

 

$

 

$

(4,923

)

$

 

Acquisition of intangible assets upon formation transactions

 

$

 

$

(83,442

)

$

 

Assumption of mortgage notes payable

 

$

 

$

190,548

 

$

 

Fair market value adjustment to mortgage notes payable acquired

 

$

 

$

141

 

$

 

Assumption of related party notes payable upon formation transactions

 

$

 

$

4,466

 

$

 

Acquisition of intangible liabilities upon formation transactions

 

$

 

$

1,066

 

$

 

Acquisition of interest rate swaps upon formation transactions included in the purchase price allocation

 

$

 

$

420

 

$

 

Acquisition of other liabilities upon formation transactions

 

$

 

$

171

 

$

 

Issuance of units for acquisition of net assets upon formation transactions

 

$

 

$

95,670

 

$

 

Disposition of accrued lender fees upon formation transactions

 

$

 

$

 

$

4,420

 

Assumption of bridge loan for Option Properties upon formation transactions

 

$

 

$

 

$

(4,750

)

Assumption of note payable to related party for Option Properties upon formation transactions

 

$

 

$

 

$

(727

)

Assumption of interest rate swaps to related party for Option Properties upon formation transactions

 

$

 

$

 

$

(352

)

Noncash investing activities included in additions of land and building improvements

 

$

(303

)

$

 

$

 

Dividends and distributions declared but not paid

 

$

10,287

 

$

 

$

 

Accrued distribution upon formation transactions

 

$

 

$

 

$

(1,392

)

 

8



Table of Contents

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Restricted Cash

 

Restricted cash may include security deposits and cash held in escrow for real estate taxes and capital improvements as required in various mortgage loan agreements.  At June 30, 2012, restricted cash included $1.6 million that was held by the Company’s transfer agent for preferred stock dividends that were distributed subsequent to June 30, 2012.

 

Tenant Accounts Receivable, net

 

Tenant accounts receivable, net on the Consolidated Balance Sheets, includes both tenant accounts receivable, net and accrued rental income, net. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable that is estimated to be uncollectible. As of June 30, 2012 and December 31, 2011, the Company had an allowance for doubtful accounts of $0.7 million and $0.5 million, respectively.

 

The Company accrues rental revenue earned, but not yet receivable, in accordance with GAAP. As of June 30, 2012 and December 31, 2011, the Company had accrued rental revenue of $5.2 million and $4.5 million, respectively, which is reflected in tenant accounts receivable, net on the accompanying Consolidated Balance Sheets. The Company maintains an allowance for estimated losses that may result from those revenues. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and accrued rental revenue. As of June 30, 2012 and December 31, 2011, the Company had an allowance on accrued rental revenue of $0.2 million and $0.4 million, respectively.

 

As of June 30, 2012 and December 31, 2011, the Company had a total of approximately $3.3 million and $3.6 million, respectively, of total lease security deposits available in existing letters of credit; and $1.7 million and $1.2 million, respectively, of lease security deposits available in cash.

 

Deferred Costs

 

Deferred financing fees include costs incurred in obtaining mortgage notes payable that are capitalized. The deferred financing fees are amortized to interest expense over the life of the respective loans. Any unamortized amounts upon early repayment of mortgage notes payable are written off in the period of repayment.  During the three and six months ended June 30, 2012 and the periods April 20, 2011 to June 30, 2011, April 1, 2011 to April 19, 2011 and January 1, 2011 to April 19, 2011 amortization of deferred financing fees included in interest expense was $0.3 million, $0.6 million, $0.3 million, $0, and $31 thousand, respectively. Fully amortized deferred charges are removed upon maturity of the underlying debt.

 

Fair Value of Financial Instruments

 

Financial instruments include cash and cash equivalents, tenant accounts receivable, interest rate swaps, accounts payable, other accrued expenses, credit facility and mortgage notes payable. The fair values of the cash and cash equivalents, tenant accounts receivable, accounts payable and other accrued expenses approximate their carrying or contract values because of the short term maturity of these instruments. See Note 5 for the fair values of the Company’s debt. See Note 6 for the fair values of the Company’s interest rate swaps.

 

Revenue Recognition

 

By the terms of their leases, certain tenants are obligated to pay directly the costs of their properties’ insurance, real estate taxes and certain other expenses and these costs are not reflected in the Company’s consolidated financial statements. To the extent any tenant responsible for these costs under its respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company would record a liability for such obligation.  The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $1.6 million and $3.0 million for the three and six months ended June 30, 2012, and $1.0 million, $0.1 million and $0.5 million for the periods April 20, 2011 to June 30, 2011, April

 

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Table of Contents

 

1, 2011 to April 19, 2011, and January 1, 2011 to April 19, 2011, respectively, and this would have been the maximum liability of the Company had the tenants not met their contractual obligations.  The Company does not recognize recovery revenue related to leases where the tenant has assumed the cost for real estate taxes, insurance and certain other expenses.

 

Income Taxes

 

Prior to the IPO, STAG Predecessor Group was comprised primarily of limited partnerships and limited liability companies. Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and limited liability companies was reportable in the income tax returns of the respective partners and members.

 

The Company elected to qualify as a REIT under the Code commencing with the taxable year ended December 31, 2011. To continue to qualify as a REIT, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, the Company is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders that it derives from its REIT qualifying activities. If the Company fails to qualify as a REIT in any taxable year, and is unable to avail itself of certain savings provisions set forth in the Code, all of the Company’s taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

 

The Company will not be required to make distributions with respect to income derived from the activities conducted through subsidiaries that the Company elects to treat as taxable REIT subsidiaries (“TRS”) for federal income tax purposes. Certain activities that the Company undertakes must be conducted by a TRS, such as performing non-customary services for its tenants and holding assets that it cannot hold directly. A TRS is subject to federal and state income taxes.  The Company’s TRS did not have any activity during the six months ended June 30, 2012 and period April 20, 2011 to December 31, 2011.

 

The Company and certain of its subsidiaries are subject to certain state and local income, excise and franchise taxes. Taxes in the amount of $9 thousand and $0.1 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2012, respectively.

 

The Company currently has no liabilities for uncertain tax positions.

 

3. Real Estate

 

As part of the IPO and the related formation transactions, STAG Investments IV, LLC and STAG GI Investments, LLC contributed 100% of their real estate entities and operations in exchange for 7,320,610 common limited partnership units in the Operating Partnership (“common units”)  valued at $13.00 per common unit. The members of STAG Capital Partners, LLC and STAG Capital Partners III, LLC (referred to, together, as the “Management Company” in this report), contributed 100% of those entities’ assets and liabilities in exchange for 38,621 common units valued at $13.00 per common unit. The contribution of interests in the Management Company was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution. STAG Predecessor Group, which includes the entity that is considered the Company’s accounting acquirer, is part of the Company’s predecessor business and therefore the assets and liabilities of STAG Predecessor Group were accounted for at carryover basis.

 

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by the Company’s management. Using information available at the time the acquisition closed, the Company allocated the total consideration to tangible assets and liabilities, identified intangible assets and liabilities, and goodwill.

 

On April 18, 2012, the Company entered into an agreement with affiliates of Columbus Nova Real Estate Acquisition Group, Inc. (“Columbus Nova”) to source sale leaseback transactions for potential acquisitions by the Company.  The agreement called for various fees to be paid to Columbus Nova for their services including acquisition fees and a one-time incentive fee if certain performance thresholds are met.  On June 15, 2012, the Company acquired six industrial properties representing approximately 750,000 square feet in total for an aggregate purchase price of $30 million from Columbus Nova.   At the June 15, 2012 acquisition of the six industrial properties referenced above, the Company paid Columbus Nova an acquisition fee in the form of 15,789 Operating Partnership common units with a fair value of approximately $0.2 million, which is included in property acquisition costs on the accompanying Consolidated Statements of Operations.  The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended. The Company relied on the exemption based on representations given by the holders of the common units.  For further details on the one-time incentive fee, refer to Note 10.

 

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Table of Contents

 

The following table summarizes the acquisitions of the Company since the IPO:

 

Six Months Ended June 30, 2012

 

Property Location

 

Date Acquired

 

Square Feet

 

Properties

 

East Windsor, CT

 

3/1/2012

 

145,000

 

1

 

South Bend, IN

 

3/8/2012

 

225,000

 

1

 

Lansing, MI

 

3/21/2012

 

129,325

 

1

 

Portland, ME

 

3/27/2012

 

100,600

 

1

 

Portland, TN

 

3/30/2012

 

414,043

 

1

 

Spartanburg, SC

 

4/5/2012

 

409,600

 

4

 

Franklin, IN

 

4/17/2012

 

703,496

 

1

 

Muhlenberg Township, PA

 

5/24/2012

 

394,289

 

1

 

Avon, CT

 

6/15/2012

 

78,400

 

1

 

Orlando, FL

 

6/15/2012

 

155,000

 

1

 

Pineville, NC

 

6/15/2012

 

75,400

 

1

 

Buffalo, NY

 

6/15/2012

 

117,000

 

1

 

Edgefield, SC

 

6/15/2012

 

126,190

 

1

 

Arlington, TX

 

6/15/2012

 

196,000

 

1

 

 

Period from April 20, 2011 to December 31, 2011

 

Property Location

 

Date Acquired

 

Square Feet

 

Properties

 

Various - Formation Transaction

 

4/20/2011

 

7,574,204

 

34

 

Lansing, MI

 

5/26/2011

 

231,000

 

1

 

Fort Worth, TX

 

6/30/2011

 

101,500

 

1

 

Gresham, OR

 

7/19/2011

 

420,690

 

1

 

Berkeley, MO

 

7/28/2011

 

305,550

 

1

 

Norton, MA

 

8/4/2011

 

200,000

 

1

 

Conyers, GA

 

9/2/2011

 

226,256

 

1

 

Louisville, KY

 

9/22/2011

 

497,820

 

2

 

Gahanna, OH

 

10/14/2011

 

383,000

 

1

 

Smithfield, NC

 

11/16/2011

 

191,450

 

1

 

North Jackson, OH

 

12/14/2011

 

307,315

 

1

 

Chippewa Falls, WI

 

12/15/2011

 

97,400

 

2

 

Rogers, AR

 

12/22/2011

 

400,000

 

1

 

Georgetown, KY

 

12/29/2011

 

97,500

 

1

 

 

The following table summarizes the allocation of the consideration paid during the six months ended June 30, 2012 and the year ended December 31, 2011 for the acquired assets and liabilities in connection with the formation transactions and acquisitions of manufacturing and distribution facilities at the date of acquisition identified in the table above (in thousands):

 

11



Table of Contents

 

 

 

Six Months
Ended June 30, 2012

 

Weighted
Average
Amortization
Period (years)
Lease Intangibles

 

Period from April
20 to
December 31, 2011

 

Weighted
Average
Amortization
Period (years)
Lease Intangibles

 

Land

 

$

10,770

 

N/A

 

$

46,806

 

N/A

 

Buildings and improvements

 

69,870

 

N/A

 

229,688

 

N/A

 

Tenant improvements

 

4,550

 

N/A

 

15,982

 

N/A

 

Cash escrow for capital additions

 

750

 

N/A

 

1,400

 

N/A

 

Above market rents

 

6,149

 

13.3

 

31,718

 

7.6

 

Below market rents

 

(2,830

)

9.2

 

(1,552

)

7.6

 

In place lease intangibles

 

16,581

 

8.1

 

54,801

 

6.5

 

Customer relationships

 

6,050

 

9.7

 

32,327

 

8.3

 

Other liabilities

 

 

N/A

 

(171

)

N/A

 

Interest rate swaps

 

 

N/A

 

(420

)

N/A

 

Goodwill

 

 

N/A

 

4,923

 

N/A

 

Above/below market assumed debt adjustment

 

 

N/A

 

(675

)

N/A

 

Total aggregate purchase price

 

111,890

 

 

 

414,827

 

 

 

Less: Long-term liabilities assumed

 

 

 

 

(206,253

)

 

 

Net assets acquired

 

$

111,890

 

 

 

$

208,574

 

 

 

 

The Company has included the results of operations for each of these acquired properties in its Consolidated Statements of Operations from the date of acquisition. For the three and six months ended June 30, 2012 the entities acquired during the six months ended June 30, 2012 contributed $2.0 million and $2.1 million, respectively, to total revenue and $0.5 million and $0.7 million to net loss (including property acquisition costs of $1.3 million related to the acquisition of properties), respectively.  The entities acquired during the period from April 20, 2011 to June 30, 2011 contributed $6.4 million to total revenue and $1.3 million to net loss (including property acquisition costs of $0.3 million related to the properties acquired in Lansing, MI and Fort Worth, TX) during the period from April 20, 2011 to June 30, 2011.

 

This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the above occurred, nor do they purport to predict the results of operations of future periods.

 

Pro Forma

 

Six Months Ended June 30, 2012
(in thousands, except share data) (1)

 

Total revenue

 

$

41,809

 

Net income (loss) (2)

 

$

264

 

Net income (loss) attributable to common stockholders

 

$

(2,004

)

Weighted average shares outstanding

 

17,654,706

 

Net loss per share attributable to common stockholders

 

$

(0.11

)

 

(1)

The unaudited pro forma information for the six months ended June 30, 2012 is presented as if the properties acquired during the six months ended June 30, 2012 had occurred at January 1, 2011

 

12



Table of Contents

 

Pro Forma

 

Six Month Ended June 30, 2011
(in thousands, except share data) (3)

 

Total revenue

 

$

34,744

 

Net income (loss) (2)

 

$

(479

)

Net income (loss) attributable to common stockholders

 

$

(317

)

Weighted average shares outstanding

 

15,153,646

 

Net loss per share attributable to common stockholders

 

$

(0.02

)

 


(2)

The Net income (loss) for the six months ended June 30, 2012 excludes $1.3 million of property acquisition costs related to the acquisition of properties that closed during the six months ended June 30, 2012.  Net income (loss) for the six months ended June 30, 2011 excludes $0.3 million of property acquisition costs related to the acquisition of properties that closed during the period from April 20, 2011 to June 30, 2011.

(3)

The unaudited pro forma information for the six months ended June 30, 2011 is presented as if the properties acquired during the six months ended June 30, 2012 and the properties acquired during the period from April 20, 2011 to June 30, 2011 had occurred at January 1, 2011 and January 1, 2010, respectively.

 

On April 20, 2012, the Company sold a vacant warehouse and distribution facility located in Youngstown, OH containing 153,708 net rentable square feet.  The sales price was $3.4 million and the Company received net proceeds of $3.2 million.  At closing, the Company recognized a gain on sale of real estate in the amount of $0.2 million under the full accrual method of gain recognition, which is included in income attributable to discontinued operations on the accompanying Consolidated Statements of Operations.  In connection with the property sale, the Company paid down a portion of the master loan with Wells Fargo Bank, N.A. (“Wells Fargo”) for the related property debt.

 

On December 22, 2011, the Company sold a flex/office property located in Amesbury, MA containing approximately 78,000 net rentable square feet. The sales price was approximately $4.8 million and the Company received net proceeds of $4.5 million. In connection with the property sale, the Company paid down a portion of the master loan with Wells Fargo for the related property debt.  The results of operations for this property are reflected in income attributable to discontinued operations on the accompanying Consolidated Statement of Operations.

 

4. Deferred Leasing Intangibles

 

Deferred leasing intangibles included in total assets consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

In-place leases

 

$

72,089

 

$

56,221

 

Less: Accumulated amortization

 

(19,779

)

(13,741

)

In-place leases, net

 

52,310

 

42,480

 

Above market leases

 

40,409

 

34,425

 

Less: Accumulated amortization

 

(7,258

)

(4,722

)

Above market leases, net

 

33,151

 

29,703

 

Tenant relationships

 

41,164

 

35,373

 

Less: Accumulated amortization

 

(7,609

)

(4,673

)

Tenant relationships, net

 

33,555

 

30,700

 

Leasing commissions

 

14,750

 

14,326

 

Less: Accumulated amortization

 

(4,965

)

(3,916

)

Leasing commissions, net

 

9,785

 

10,410

 

Total deferred leasing intangibles, net

 

$

128,801

 

$

113,293

 

 

Deferred leasing intangibles included in total liabilities consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

Below market leases

 

$

6,784

 

$

3,954

 

Less: Accumulated amortization

 

(2,334

)

(2,025

)

Total deferred leasing intangibles, net

 

$

4,450

 

$

1,929

 

 

Amortization expense related to in-place leases, lease commissions and tenant relationships of deferred leasing intangibles was $5.1 million and $10.1 million for the three and six months ended June 30, 2012, respectively, $3.7 million for the period April 20, 2011 to June 30, 2011, $0.1 million for the period April 1, 2011 to April 19, 2011, and $0.7 million for the period January 1, 2011 to April 19, 2011. Rental income related to net amortization of above (below) market leases increased (decreased) by $(1.1) million and $(2.3) million for the three and six months ended June 30, 2012, respectively, $(0.9) million for the period April 20, 2011 to June 30, 2011, $(2) thousand for the period April 1, 2011 to April 19, 2011, and $2 thousand for the period January 1, 2011 to April 19, 2011.

 

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Amortization related to deferred leasing intangibles over the next five years is as follows (in thousands):

 

 

 

Estimated Net Amortization
of In-Place Leases,
Leasing Commissions and
Tenant Relationships

 

Net Decrease (Increase) to Rental
Income Related to Above and
Below Market Leases

 

Remainder of 2012

 

$

10,267

 

$

2,401

 

2013

 

17,003

 

4,499

 

2014

 

15,304

 

4,126

 

2015

 

13,279

 

3,953

 

2016

 

11,369

 

3,840

 

 

The Company assesses deferred leasing intangibles for impairments on a quarterly basis when certain triggering events are met.  If events or changes in circumstances indicate that the carrying values of certain deferred lease intangibles may be impaired, a recovery analysis is performed based on undiscounted future cash flows expected to be generated from the tenant over the remaining lease term.  If the recovery analysis indicates the carrying value of the tested lease intangibles are not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized.  The fair value is determined based on the contractual lease rental payments over the remaining term discounted back to the current reporting period.  On June 11, 2012, the Company received notice from a tenant that the tenant was exercising an option in their lease to downsize their space from approximately 190,000 to 60,000 rentable square feet effective March 31, 2013. After determining the undiscounted future cash flows were not recoverable, the Company calculated the fair value of the lease intangibles. Using the remaining contractual lease payments for the reduced space and discounting the cash flows at a risk adjusted return for a market participant of 11.4%, it was determined that the fair value of the lease intangibles was $0.4 million resulting in a noncash impairment loss of $0.6 million, which is reflected in the accompanying Consolidated Statements of Operations.  The fair value calculation of the lease intangibles of $0.4 million was performed using Level 3 inputs, and this is a nonrecurring fair value measurement.  The three-tier value hierarchy is explained in Note 6.

 

5. Debt

 

Payments on mortgage notes are generally due in monthly installments of principal amortization and interest. The following table sets forth a summary of the Company’s outstanding indebtedness, including mortgage notes payable and borrowings under the Company’s secured corporate revolving credit facility (the “Credit Facility”) as of June 30, 2012 and December 31, 2011 (dollars in thousands):

 

Loan

 

Interest Rate(1)

 

Principal
outstanding as
of
June 30,
2012

 

Principal
outstanding as
of
December 31,
2011

 

Current
Maturity

 

Wells Fargo Master Loan—Fixed Amount

 

LIBOR + 3.00%

 

$

124,808

 

$

134,066

 

Oct-31-2013

 

CIGNA-1 Facility

 

6.50%

 

60,013

 

60,369

 

Feb-1-2018

 

CIGNA-2 Facility

 

5.75%

 

61,282

 

59,186

 

Feb-1-2018

 

CIGNA-3 Facility

 

5.88%

 

17,150

 

17,150

 

Oct-1-2019

 

Bank of America, N.A

 

7.05%

 

 

8,324

 

Aug-1-2027

 

Credit Facility

 

LIBOR + 2.50%

 

5,000

 

 

Apr-20-2014

 

Union Fidelity Life Insurance Co.(2)

 

5.81%

 

7,064

 

7,227

 

Apr-30-2017

 

Webster Bank National Association

 

4.22%

 

6,056

 

6,128

 

Aug-4-2016

 

Webster Bank National Association(3)

 

3.66%

 

3,243

 

 

May-29-2017

 

Webster Bank National Association(4)

 

3.64%

 

3,493

 

 

May-31-2017

 

Sun Life Assurance Company of Canada (U.S.)(5)

 

6.05%

 

4,205

 

4,329

 

Jun-1-2016

 

 

 

 

 

$

292,314

 

$

296,779

 

 

 

 


(1)           Current interest rate as of June 30, 2012. At June 30, 2012 and December 31, 2011, the one-month LIBOR rate was 0.246% and 0.295%, respectively.

 

(2)           This loan was assumed at the acquisition of the Berkeley, MO property and the principal outstanding includes an unamortized fair market value premium of $0.2 million as of June 30, 2012.

 

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(3)           This loan was entered into on May 29, 2012 with an outstanding principal amount of $3.25 million. The loan is collateralized by a property located in Portland, ME.

 

(4)           This loan was entered into on May 31, 2012 with an outstanding principal amount of $3.5 million. The loan is collateralized by a property located in East Windsor, CT.

 

(5)           Principal outstanding includes an unamortized fair market value premium of $0.3 million as of June 30, 2012.

 

On June 27, 2012, the Company paid down the principal outstanding on the Bank of America, N.A. loan in the amount of $8.1 million.  The early extinguishment of the loan resulted in a gain of $18 thousand as a result of the acceleration of an unamortized fair market value premium.  There were no pre-payment penalties associated with the loan.

 

The Credit Facility was secured by equity interests and mortgages in the Company’s various indirect subsidiaries that own 31 properties at June 30, 2012.  The Company pays an unused commitment fee equal to 0.50% of the unused portion of the Credit Facility if the usage is less than 50% of the capacity and 0.35% if usage is greater than 50%.  During the three and six months ended June 30, 2012 and the period April 20, 2011 to June 30, 2011, the Company incurred $0.1 million, $0.2 million, and $0.1 million in unused fees, respectively, which is included in interest expense on the Consolidated Statements of Operations.  At June 30, 2012, the outstanding balance on the Credit Facility was $5.0 million and the remaining availability was $95.0 million. The Credit Facility was utilized throughout the six months ended June 30, 2012 to fund the acquisitions of properties and general corporate purposes.

 

The Company was in compliance with all financial covenants as of June 30, 2012 and December 31, 2011.

 

The fair value of the Company’s debt was determined by discounting the future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities and similar loan-to-value ratios. The discount rate ranged from 2.746% to 5.88% and was applied to each individual debt instrument based on the debt’s collateral, remaining term and loan to value ratios.  The fair value of the Company’s debt is based on Level 3 inputs.  The three-tier value hierarchy is explained in Note 6.  The following table presents the aggregate carrying value of the Company’s debt and the corresponding estimate of fair value as of June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Mortgage notes payable

 

$

287,314

 

$

289,127

 

$

296,779

 

$

298,417

 

Credit facility

 

$

5,000

 

$

5,000

 

$

 

$

 

 

6. Use of Derivative Financial Instruments

 

The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions.

 

STAG Predecessor Group entered into an interest rate swap (“Wells Fargo Master Loan Swap”) with a notional amount of $141.0 million to hedge against interest rate risk on its variable rate loan with Wells Fargo, which was part of the debt contributed to the Company in its formation transactions. The Wells Fargo Master Loan Swap was not designated as a hedge for accounting purposes and it expired on January 31, 2012.  There were no derivative instruments at June 30, 2012.  The fair value of the interest rate swap outstanding as of December 31, 2011 is as follows (in thousands):

 

 

 

Notional Amount
December 31,
2011

 

Fair Value
December 31,
2011

 

Wells Fargo Master Loan Swap

 

$

141,000

 

$

(215

)

 

The Company adopted the fair value measurement provisions for its interest rate swaps recorded at fair value. The guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate

 

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curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. As of December 31, 2011, the Company applied the provisions of this standard to the valuation of its interest rate swap, which was previously the only financial instrument measured at fair value on a recurring basis.

 

The Company recognized gains relating to the change in fair market value of the interest rate swaps of $0 and $0.2 million for the three and six months ended June 30, 2012, respectively, and $0.5 million, $0.2 million and $0.8 million for the periods April 20, 2011 to June 30, 2011, April 1, 2011 to April 19, 2011 and January 1, 2011 to April 19, 2011, respectively.

 

The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

 

 

 

 

Fair Market Measurements as of
December 31, 2011 Using:

 

 

 

December 31,
2011

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Unobservable
Inputs
(Level 3)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

$

(215

)

 

$

(215

)

 

 

7. Stockholders’ Equity

 

Preferred Stock

 

Pursuant to its charter, the Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. On November 2, 2011, the Company completed an underwritten public offering of 2,760,000 shares (including 360,000 shares issued pursuant to the full exercise of the underwriters’ overallotment option) of 9.0% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”), at a price to the public of $25.00 per share for net proceeds of $66.3 million, after deducting the underwriting discount and other direct offering costs of $2.7 million and indirect offering costs of $0.1 million.  Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the liquidation, dissolution or winding-up of the Company.

 

The Series A Preferred Stock has no stated maturity date and is not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to November 2, 2016, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of contro