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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
____________________________________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2024
OR
☐ 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 | | (IRS Employer Identification No.) |
| incorporation or organization) | | |
| | | |
One Federal Street | | |
| 23rd Floor | | |
| Boston, | Massachusetts | | 02110 |
| (Address of principal executive offices) | | (Zip code) |
(617) 574-4777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common stock, $0.01 par value per share | STAG | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding at July 29, 2024 was 182,110,351.
STAG Industrial, Inc.
Table of Contents | | | | | | | | |
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PART I. | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Part I. Financial Information
Item 1. Financial Statements
STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data) | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
| Assets | | | |
| Rental Property: | | | |
| Land | $ | 716,613 | | | $ | 698,633 | |
Buildings and improvements, net of accumulated depreciation of $998,633 and $921,846, respectively | 4,982,291 | | | 4,838,522 | |
Deferred leasing intangibles, net of accumulated amortization of $364,564 and $360,094, respectively | 421,560 | | | 435,722 | |
| Total rental property, net | 6,120,464 | | | 5,972,877 | |
| Cash and cash equivalents | 33,273 | | | 20,741 | |
| Restricted cash | 1,247 | | | 1,127 | |
| Tenant accounts receivable | 125,172 | | | 128,274 | |
| Prepaid expenses and other assets | 80,855 | | | 80,455 | |
| Interest rate swaps | 54,510 | | | 50,418 | |
| Operating lease right-of-use assets | 28,598 | | | 29,566 | |
| | | |
| Total assets | $ | 6,444,119 | | | $ | 6,283,458 | |
| Liabilities and Equity | | | |
| Liabilities: | | | |
| Unsecured credit facility | $ | 127,000 | | | $ | 402,000 | |
| Unsecured term loans, net | 1,021,175 | | | 1,021,773 | |
| Unsecured notes, net | 1,643,538 | | | 1,195,872 | |
| Mortgage notes, net | 4,299 | | | 4,401 | |
| Accounts payable, accrued expenses and other liabilities | 98,828 | | | 83,152 | |
| | | |
| Tenant prepaid rent and security deposits | 44,876 | | | 44,238 | |
| Dividends and distributions payable | 22,936 | | | 22,726 | |
Deferred leasing intangibles, net of accumulated amortization of $26,796 and $26,613, respectively | 33,454 | | | 29,908 | |
| Operating lease liabilities | 32,683 | | | 33,577 | |
| | | |
| Total liabilities | 3,028,789 | | | 2,837,647 | |
| Commitments and contingencies (Note 11) | | | |
| Equity: | | | |
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized at June 30, 2024 and December 31, 2023; none issued or outstanding | — | | | — | |
Common stock, par value $0.01 per share, 300,000,000 shares authorized at June 30, 2024 and December 31, 2023, 182,105,303 and 181,690,867 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | 1,821 | | | 1,817 | |
| Additional paid-in capital | 4,276,498 | | | 4,272,376 | |
| Cumulative dividends in excess of earnings | (987,218) | | | (948,720) | |
| Accumulated other comprehensive income | 53,228 | | | 49,207 | |
| Total stockholders’ equity | 3,344,329 | | | 3,374,680 | |
| Noncontrolling interest | 71,001 | | | 71,131 | |
| Total equity | 3,415,330 | | | 3,445,811 | |
| Total liabilities and equity | $ | 6,444,119 | | | $ | 6,283,458 | |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| Revenue | | | | | | | |
| Rental income | $ | 186,467 | | | $ | 171,439 | | | $ | 373,869 | | | $ | 344,707 | |
| Other income | 3,310 | | | 255 | | | 3,451 | | | 540 | |
| Total revenue | 189,777 | | | 171,694 | | | 377,320 | | | 345,247 | |
| Expenses | | | | | | | |
| Property | 37,478 | | | 32,675 | | | 76,549 | | | 68,556 | |
| General and administrative | 11,828 | | | 12,060 | | | 24,780 | | | 24,736 | |
| Depreciation and amortization | 75,280 | | | 68,494 | | | 146,707 | | | 137,438 | |
| Loss on impairment | 4,967 | | | — | | | 4,967 | | | — | |
| Other expenses | 595 | | | 357 | | | 1,158 | | | 3,336 | |
| Total expenses | 130,148 | | | 113,586 | | | 254,161 | | | 234,066 | |
| Other income (expense) | | | | | | | |
| Interest and other income | 14 | | | 17 | | | 25 | | | 36 | |
| Interest expense | (27,372) | | | (22,860) | | | (52,793) | | | (45,472) | |
| Debt extinguishment and modification expenses | — | | | — | | | (667) | | | — | |
| Gain on involuntary conversion | 5,717 | | | — | | | 5,717 | | | — | |
| Gain on the sales of rental property, net | 23,086 | | | 17,532 | | | 23,086 | | | 37,660 | |
| Total other income (expense) | 1,445 | | | (5,311) | | | (24,632) | | | (7,776) | |
| Net income | $ | 61,074 | | | $ | 52,797 | | | $ | 98,527 | | | $ | 103,405 | |
| Less: income attributable to noncontrolling interest | 1,291 | | | 1,191 | | | 2,117 | | | 2,333 | |
| Net income attributable to STAG Industrial, Inc. | $ | 59,783 | | | $ | 51,606 | | | $ | 96,410 | | | $ | 101,072 | |
| | | | | | | |
| | | | | | | |
| Less: amount allocated to participating securities | 46 | | | 53 | | | 93 | | | 106 | |
| Net income attributable to common stockholders | $ | 59,737 | | | $ | 51,553 | | | $ | 96,317 | | | $ | 100,966 | |
| Weighted average common shares outstanding — basic | 181,961 | | | 179,413 | | | 181,834 | | | 179,305 | |
| Weighted average common shares outstanding — diluted | 182,185 | | | 179,738 | | | 182,088 | | | 179,518 | |
| Net income per share — basic and diluted | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income per share attributable to common stockholders — basic | $ | 0.33 | | | $ | 0.29 | | | $ | 0.53 | | | $ | 0.56 | |
| Net income per share attributable to common stockholders — diluted | $ | 0.33 | | | $ | 0.29 | | | $ | 0.53 | | | $ | 0.56 | |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income
(unaudited, in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| Net income | $ | 61,074 | | | $ | 52,797 | | | $ | 98,527 | | | $ | 103,405 | |
| Other comprehensive income (loss): | | | | | | | |
| Income (loss) on interest rate swaps | (2,967) | | | 15,821 | | | 4,109 | | | (191) | |
| Other comprehensive income (loss) | (2,967) | | | 15,821 | | | 4,109 | | | (191) | |
| Comprehensive income | 58,107 | | | 68,618 | | | 102,636 | | | 103,214 | |
| Income attributable to noncontrolling interest | (1,291) | | | (1,191) | | | (2,117) | | | (2,333) | |
| Other comprehensive (income) loss attributable to noncontrolling interest | 68 | | | (357) | | | (88) | | | 4 | |
| Comprehensive income attributable to STAG Industrial, Inc. | $ | 56,884 | | | $ | 67,070 | | | $ | 100,431 | | | $ | 100,885 | |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Cumulative Dividends in Excess of Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Noncontrolling Interest - Unit Holders in Operating Partnership | | Total Equity |
| | | Shares | | Amount | | | | | | |
| Three months ended June 30, 2024 | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2024 | $ | — | | | 182,074,776 | | | $ | 1,821 | | | $ | 4,273,183 | | | $ | (979,629) | | | $ | 56,127 | | | $ | 3,351,502 | | | $ | 71,718 | | | $ | 3,423,220 | |
| Proceeds from sales of common stock, net | — | | | — | | | — | | | (89) | | | — | | | — | | | (89) | | | — | | | (89) | |
| | | | | | | | | | | | | | | | | |
Dividends and distributions, net ($0.37 per share/unit) | — | | | — | | | — | | | — | | | (67,372) | | | — | | | (67,372) | | | (1,543) | | | (68,915) | |
| Non-cash compensation activity, net | — | | | 527 | | | — | | | 2,085 | | | — | | | — | | | 2,085 | | | 922 | | | 3,007 | |
| Redemption of common units to common stock | — | | | 30,000 | | | — | | | 552 | | | — | | | — | | | 552 | | | (552) | | | — | |
| Rebalancing of noncontrolling interest | — | | | — | | | — | | | 767 | | | — | | | — | | | 767 | | | (767) | | | — | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (2,899) | | | (2,899) | | | (68) | | | (2,967) | |
| Net income | — | | | — | | | — | | | — | | | 59,783 | | | — | | | 59,783 | | | 1,291 | | | 61,074 | |
| Balance, June 30, 2024 | $ | — | | | 182,105,303 | | | $ | 1,821 | | | $ | 4,276,498 | | | $ | (987,218) | | | $ | 53,228 | | | $ | 3,344,329 | | | $ | 71,001 | | | $ | 3,415,330 | |
| Three months ended June 30, 2023 | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2023 | $ | — | | | 179,372,871 | | | $ | 1,794 | | | $ | 4,188,960 | | | $ | (892,676) | | | $ | 54,849 | | | $ | 3,352,927 | | | $ | 77,893 | | | $ | 3,430,820 | |
| Proceeds from sales of common stock, net | — | | | 249,016 | | | 3 | | | 8,644 | | | — | | | — | | | 8,647 | | | — | | | 8,647 | |
| | | | | | | | | | | | | | | | | |
Dividends and distributions, net ($0.37 per share/unit) | — | | | — | | | — | | | — | | | (65,991) | | | — | | | (65,991) | | | (1,564) | | | (67,555) | |
| Non-cash compensation activity, net | — | | | 3,884 | | | — | | | 1,896 | | | — | | | — | | | 1,896 | | | 1,433 | | | 3,329 | |
| Redemption of common units to common stock | — | | | 35,000 | | | — | | | 654 | | | — | | | — | | | 654 | | | (654) | | | — | |
| Rebalancing of noncontrolling interest | — | | | — | | | — | | | 1,397 | | | — | | | — | | | 1,397 | | | (1,397) | | | — | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 15,464 | | | 15,464 | | | 357 | | | 15,821 | |
| Net income | — | | | — | | | — | | | — | | | 51,606 | | | — | | | 51,606 | | | 1,191 | | | 52,797 | |
| Balance, June 30, 2023 | $ | — | | | 179,660,771 | | | $ | 1,797 | | | $ | 4,201,551 | | | $ | (907,061) | | | $ | 70,313 | | | $ | 3,366,600 | | | $ | 77,259 | | | $ | 3,443,859 | |
| | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2024 | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2023 | $ | — | | | $ | 181,690,867 | | | $ | 1,817 | | | $ | 4,272,376 | | | $ | (948,720) | | | $ | 49,207 | | | $ | 3,374,680 | | | $ | 71,131 | | | $ | 3,445,811 | |
| Proceeds from sales of common stock, net | — | | | — | | | — | | | (259) | | | — | | | — | | | (259) | | | — | | | (259) | |
| | | | | | | | | | | | | | | | | |
Dividends and distributions, net ($0.74 per share/unit) | — | | | — | | | — | | | — | | | (134,674) | | | — | | | (134,674) | | | (3,113) | | | (137,787) | |
| Non-cash compensation activity, net | — | | | 69,454 | | | 1 | | | (407) | | | (234) | | | — | | | (640) | | | 5,569 | | | 4,929 | |
| Redemption of common units to common stock | — | | | 344,982 | | | 3 | | | 6,402 | | | — | | | — | | | 6,405 | | | (6,405) | | | — | |
| | | | | | | | | | | | | | | | | |
| Rebalancing of noncontrolling interest | — | | | — | | | — | | | (1,614) | | | — | | | — | | | (1,614) | | | 1,614 | | | — | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 4,021 | | | 4,021 | | | 88 | | | 4,109 | |
| Net income | — | | | — | | | — | | | — | | | 96,410 | | | — | | | 96,410 | | | 2,117 | | | 98,527 | |
| Balance, June 30, 2024 | $ | — | | | 182,105,303 | | | $ | 1,821 | | | $ | 4,276,498 | | | $ | (987,218) | | | $ | 53,228 | | | $ | 3,344,329 | | | $ | 71,001 | | | $ | 3,415,330 | |
| Six months ended June 30, 2023 | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2022 | $ | — | | | 179,248,980 | | | $ | 1,792 | | | $ | 4,188,677 | | | $ | (876,145) | | | $ | 70,500 | | | $ | 3,384,824 | | | $ | 73,357 | | | $ | 3,458,181 | |
| | | | | | | | | | | | | | | | | |
| Proceeds from sales of common stock, net | — | | | 249,016 | | | 3 | | | 8,492 | | | — | | | — | | | 8,495 | | | — | | | 8,495 | |
| | | | | | | | | | | | | | | | | |
Dividends and distributions, net ($0.74 per share/unit) | — | | | — | | | — | | | — | | | (131,905) | | | — | | | (131,905) | | | 252 | | | (131,653) | |
| Non-cash compensation activity, net | — | | | 83,941 | | | 1 | | | (1,935) | | | (83) | | | — | | | (2,017) | | | 7,639 | | | 5,622 | |
| Redemption of common units to common stock | — | | | 78,834 | | | 1 | | | 1,482 | | | — | | | — | | | 1,483 | | | (1,483) | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Rebalancing of noncontrolling interest | — | | | — | | | — | | | 4,835 | | | — | | | — | | | 4,835 | | | (4,835) | | | — | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (187) | | | (187) | | | (4) | | | (191) | |
| Net income | — | | | — | | | — | | | — | | | 101,072 | | | — | | | 101,072 | | | 2,333 | | | 103,405 | |
| Balance, June 30, 2023 | $ | — | | | 179,660,771 | | | $ | 1,797 | | | $ | 4,201,551 | | | $ | (907,061) | | | $ | 70,313 | | | $ | 3,366,600 | | | $ | 77,259 | | | $ | 3,443,859 | |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Cash Flows (unaudited, in thousands) | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2024 | | 2023 |
| Cash flows from operating activities: | | | |
| Net income | $ | 98,527 | | | $ | 103,405 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 146,707 | | | 137,438 | |
| Loss on impairment | 4,967 | | | — | |
| Gain on involuntary conversion | (5,717) | | | — | |
| Non-cash portion of interest expense | 2,036 | | | 1,948 | |
| Amortization of above and below market leases, net | 532 | | | (192) | |
| Straight-line rent adjustments, net | (7,531) | | | (9,466) | |
| | | |
| | | |
| Gain on the sales of rental property, net | (23,086) | | | (37,660) | |
| Non-cash compensation expense | 5,871 | | | 6,404 | |
| | | |
| Change in assets and liabilities: | | | |
| Tenant accounts receivable | 9,232 | | | 10,719 | |
| | | |
| Prepaid expenses and other assets | (11,732) | | | (13,081) | |
| Accounts payable, accrued expenses and other liabilities | 6,953 | | | (6,288) | |
| Tenant prepaid rent and security deposits | 638 | | | 2,996 | |
| Total adjustments | 128,870 | | | 92,818 | |
| Net cash provided by operating activities | 227,397 | | | 196,223 | |
| Cash flows from investing activities: | | | |
| Additions of land and buildings and improvements | (41,857) | | | (55,382) | |
| Acquisitions of land and buildings and improvements | (250,202) | | | (37,425) | |
| Acquisitions of other assets | (196) | | | — | |
| Acquisitions of tenant prepaid rent | — | | | 511 | |
| | | |
| Proceeds from sales of rental property, net | 75,706 | | | 69,320 | |
| | | |
| Acquisition deposits, net | (400) | | | 1,120 | |
| Acquisitions of deferred leasing intangibles | (30,662) | | | (3,750) | |
| | | |
| Net cash used in investing activities | (247,611) | | | (25,606) | |
| Cash flows from financing activities: | | | |
| | | |
| Proceeds from unsecured credit facility | 630,000 | | | 337,000 | |
| Repayment of unsecured credit facility | (905,000) | | | (296,000) | |
| | | |
| | | |
| Proceeds from unsecured notes | 450,000 | | | — | |
| Repayment of unsecured notes | — | | | (100,000) | |
| | | |
| Repayment of mortgage notes | (107) | | | (172) | |
| Payment of loan fees and costs | (3,197) | | | — | |
| | | |
| Proceeds from sales of common stock, net | (244) | | | 8,532 | |
| | | |
| Dividends and distributions | (137,572) | | | (131,420) | |
| Repurchase and retirement of share-based compensation | (1,014) | | | (812) | |
| Net cash provided by (used in) financing activities | 32,866 | | | (182,872) | |
| Increase (decrease) in cash and cash equivalents and restricted cash | 12,652 | | | (12,255) | |
| Cash and cash equivalents and restricted cash—beginning of period | 21,868 | | | 26,789 | |
| Cash and cash equivalents and restricted cash—end of period | $ | 34,520 | | | $ | 14,534 | |
| Supplemental disclosure: | | | |
Cash paid for interest, net of amounts capitalized of $1,259 and $1,000 for 2024 and 2023, respectively | $ | 49,130 | | | $ | 44,842 | |
| Supplemental schedule of non-cash investing and financing activities | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Acquisitions of land and buildings and improvements | $ | (2,456) | | | $ | — | |
| Acquisitions of deferred leasing intangibles | $ | (357) | | | $ | — | |
| Additions to building and other capital improvements from involuntary conversion | $ | (8,685) | | | $ | — | |
| Investing other receivables due to involuntary conversion of building | $ | 2,968 | | | $ | — | |
| Change in additions of land, building, and improvements included in accounts payable, accrued expenses and other liabilities | $ | (6,499) | | | $ | (3,018) | |
| Additions to building and other capital improvements from non-cash compensation | $ | (80) | | | $ | (26) | |
| | | |
| | | |
| Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses and other liabilities | $ | (849) | | | $ | (37) | |
| | | |
| | | |
| Dividends and distributions accrued | $ | 22,936 | | | $ | 22,515 | |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business
STAG Industrial, Inc. (the “Company”) is an industrial real estate operating company focused on the acquisition and operation of industrial properties throughout the United States. The Company was formed as a Maryland corporation and has elected to be treated and intends to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns all of its properties 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, 2024 and December 31, 2023, the Company owned 97.9% and 97.9%, respectively, of the common units of the limited partnership interests in the Operating Partnership. The Company, through its wholly owned subsidiary, is the sole general partner of the Operating Partnership. As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries, including the Operating Partnership, except where context otherwise requires.
As of June 30, 2024, the Company owned 573 industrial buildings in 41 states with approximately 114.1 million rentable square feet.
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 and 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 statement in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership, and their consolidated subsidiaries. Interests in the Operating Partnership not owned by the Company are referred to as “Noncontrolling Common Units.” These Noncontrolling Common Units are held by other limited partners in the form of common units (“Other Common Units”) and long term incentive plan units (“LTIP units”) issued pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended and restated (the “2011 Plan”). All significant intercompany balances and transactions have been eliminated in the consolidation of entities. The financial statements of the Company are presented on a consolidated basis for all periods presented.
Restricted Cash
The following table presents a reconciliation of cash and cash equivalents and restricted cash reported on the accompanying Consolidated Balance Sheets to amounts reported on the accompanying Consolidated Statements of Cash Flows.
| | | | | | | | | | | | | | | | | | |
| Reconciliation of Cash and Cash Equivalents and Restricted Cash (in thousands) | | June 30, 2024 | | December 31, 2023 | | | | |
| Cash and cash equivalents | | $ | 33,273 | | | $ | 20,741 | | | | | |
| Restricted cash | | 1,247 | | | 1,127 | | | | | |
| Total cash and cash equivalents and restricted cash | | $ | 34,520 | | | $ | 21,868 | | | | | |
Uncertain Tax Positions
As of June 30, 2024 and December 31, 2023, there were no liabilities for uncertain tax positions.
Concentrations of Credit Risk
Management believes the current credit risk of the Company’s portfolio is reasonably well diversified and does not contain any unusual concentration of credit risk.
3. Rental Property
The following table summarizes the components of rental property, net as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | |
| Rental Property (in thousands) | | June 30, 2024 | | December 31, 2023 |
| Land | | $ | 716,613 | | | $ | 698,633 | |
Buildings, net of accumulated depreciation of $677,979 and $622,941, respectively | | 4,438,474 | | | 4,330,799 | |
Tenant improvements, net of accumulated depreciation of $38,127 and $36,920, respectively | | 41,210 | | | 39,145 | |
Building and land improvements, net of accumulated depreciation of $282,527 and $261,985, respectively | | 365,204 | | | 369,724 | |
| Construction in progress | | 137,403 | | | 98,854 | |
Deferred leasing intangibles, net of accumulated amortization of $364,564 and $360,094, respectively | | 421,560 | | | 435,722 | |
| Total rental property, net | | $ | 6,120,464 | | | $ | 5,972,877 | |
Acquisitions
The following table summarizes the Company’s acquisitions during the three and six months ended June 30, 2024. The Company accounted for all of its acquisitions as asset acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Market(1) | | Date Acquired | | Square Feet | | Number of Buildings | | Purchase Price (in thousands) |
| Cincinnati, OH | | March 18, 2024 | | 697,500 | | | 1 | | | $ | 50,073 | |
| Three months ended March 31, 2024 | | | | 697,500 | | | 1 | | | 50,073 | |
| Milwaukee, WI | | April 8, 2024 | | 150,002 | | | 1 | | | 16,062 | |
| Portland, OR | | April 15, 2024 | | 99,136 | | | 1 | | | 17,058 | |
| Louisville, IN | | April 16, 2024 | | 592,800 | | | 1 | | | 52,352 | |
Portland, OR(2) | | June 6, 2024 | | — | | | — | | | 8,178 | |
| El Paso, TX | | June 10, 2024 | | 254,103 | | | 1 | | | 32,182 | |
| Chicago, IL | | June 24, 2024 | | 947,436 | | | 5 | | | 87,560 | |
| Columbus, OH | | June 26, 2024 | | 150,207 | | | 1 | | | 20,408 | |
| Three Months ended June 30, 2024 | | | | 2,193,684 | | | 10 | | | 233,800 | |
| | | | | | | | |
| Six months ended June 30, 2024 | | | | 2,891,184 | | | 11 | | | $ | 283,873 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) As defined by CBRE-EA industrial market geographies. If the building is located outside of a CBRE-EA defined market, the city and state is reflected.
(2) The Company acquired a vacant land parcel.
The following table summarizes the allocation of the consideration paid at the date of acquisition during the six months ended June 30, 2024 for the acquired assets and liabilities in connection with the acquisitions identified in the table above.
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2024 |
| Acquired Assets and Liabilities | | Purchase Price (in thousands) | | Weighted Average Amortization Period (years) of Intangibles at Acquisition |
| Land | | $ | 25,628 | | | N/A |
| Buildings | | 211,995 | | | N/A |
| Tenant improvements | | 2,997 | | | N/A |
| Building and land improvements | | 10,255 | | | N/A |
| Construction in progress | | 1,783 | | | N/A |
| Other assets | | 196 | | | N/A |
| | | | |
| Deferred leasing intangibles - In-place leases | | 23,919 | | | 5.3 |
| Deferred leasing intangibles - Tenant relationships | | 14,934 | | | 9.2 |
| Deferred leasing intangibles - Above market leases | | 51 | | | 1.7 |
| Deferred leasing intangibles - Below market leases | | (7,885) | | | 6.1 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total purchase price | | $ | 283,873 | | | |
| | | | |
| | | | |
Dispositions
The following table summarizes the Company’s dispositions during the six months ended June 30, 2024. All of the dispositions were sold to third parties and were accounted for under the full accrual method.
| | | | | | | | | | | | | |
| Sales of rental property, net (dollars in thousands) | | Six months ended June 30, 2024 | | | | | |
| Number of buildings | | 7 | | | | | |
| | | | | | | |
| Building square feet (in millions) | | 1.1 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Proceeds from sales of rental property, net | | $ | 75,706 | | | | | | |
| Net book value | | $ | 52,620 | | | | | | |
Gain on the sales of rental property, net(1) | | $ | 23,086 | | | | | | |
(1) Inclusive of a loss on the sale of rental property, net, of approximately $2.0 million.
The following table summarizes the results of operations for the three and six months ended June 30, 2024 and 2023 for the buildings sold during the six months ended June 30, 2024, which are included in the Company’s Consolidated Statements of Operations prior to the date of sale.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, |
| Sales of rental property, net (dollars in thousands) | | 2024 | | 2023 | | 2024 | | 2023 |
Sold buildings contribution to net income (loss)(1) | | $ | (93) | | | $ | 1,111 | | | $ | 319 | | | $ | 1,664 | |
(1) Exclusive of gain on the sales of rental property, net.
Loss on Impairment
The following table summarizes the Company’s loss on impairment for assets held and used during the three and six months ended June 30, 2024. The Company did not recognize a loss on impairment during the three and six months ended June 30, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Market(1) | | Buildings | | Event or Change in Circumstance Leading to Impairment Evaluation(2) | | Valuation Technique Utilized to Estimate Fair Value | | Fair Value(3) | | Loss on Impairment |
| (in thousands) |
| Salt Lake City, UT | | 1 | | | Change in estimated hold period | | Discounted cash flows | (4) | $ | 21,827 | | | $ | 4,967 | |
| | | | | | |
| Three and six months ended June 30, 2024 | | | | | | $ | 4,967 | |
| | | | | | | | | | |
| | | | | | |
| | | | | | | | | | |
| | | | | | |
| | | | | | |
(1)As defined by CBRE-EA industrial market geographies. If the building is located outside of a CBRE-EA defined market, the city and state is reflected.
(2)The Company tested the asset group for impairment utilizing a probability weighted recovery analysis of certain scenarios, and it was determined that the carrying value of the property and intangibles were not recoverable from the estimated future undiscounted cash flows.
(3)The estimated fair value of the property is based on Level 3 inputs and is a non-recurring fair value measurement. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
(4)Level 3 inputs used to determine fair value for the property impaired: discount rate of 9.3% and exit capitalization rate of 6.3%.
Involuntary Conversion
During the six months ended June 30, 2024, the approximately $3.0 million receivable at December 31, 2023 from the insurance coverage related to the involuntary conversion event that occurred in December 2023 was relieved and exchanged for improvements made to the building and included as non-cash investing activity on the accompanying Consolidated Statements of Cash Flows. During the three and six months ended June 30, 2024, the Company recognized a gain on involuntary conversion of approximately $5.7 million.
Deferred Leasing Intangibles
The following table summarizes the deferred leasing intangibles, net on the accompanying Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
| Deferred Leasing Intangibles (in thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Above market leases | | $ | 76,670 | | | $ | (37,203) | | | $ | 39,467 | | | $ | 79,946 | | | $ | (35,698) | | | $ | 44,248 | |
| Other intangible lease assets | | 709,454 | | | (327,361) | | | 382,093 | | | 715,870 | | | (324,396) | | | 391,474 | |
| Total deferred leasing intangible assets | | $ | 786,124 | | | $ | (364,564) | | | $ | 421,560 | | | $ | 795,816 | | | $ | (360,094) | | | $ | 435,722 | |
| | | | | | | | | | | | |
| Below market leases | | $ | 60,250 | | | $ | (26,796) | | | $ | 33,454 | | | $ | 56,521 | | | $ | (26,613) | | | $ | 29,908 | |
| Total deferred leasing intangible liabilities | | $ | 60,250 | | | $ | (26,796) | | | $ | 33,454 | | | $ | 56,521 | | | $ | (26,613) | | | $ | 29,908 | |
The following table summarizes the net increase to rental income and amortization expense for the amortization of deferred leasing intangibles during the three and six months ended June 30, 2024 and 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, |
| Deferred Leasing Intangibles Amortization (in thousands) | | 2024 | | 2023 | | 2024 | | 2023 |
| Net increase (decrease) to rental income related to above and below market lease amortization | | $ | (840) | | | $ | 57 | | | $ | (543) | | | $ | 181 | |
| Amortization expense related to other intangible lease assets | | $ | 25,142 | | | $ | 21,858 | | | $ | 47,216 | | | $ | 44,303 | |
4. Debt
The following table summarizes the Company’s outstanding indebtedness, including borrowings under the Company’s unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indebtedness (dollars in thousands) | | June 30, 2024 | | December 31, 2023 | | Interest Rate(1)(2) | | Maturity Date | | Prepayment Terms(3) |
| Unsecured credit facility: | | | | | | | | | | |
Unsecured Credit Facility(4) | | $ | 127,000 | | | $ | 402,000 | | | Term SOFR + 0.875% | | October 23, 2026 | | i |
| Total unsecured credit facility | | 127,000 | | | 402,000 | | | | | | | |
| | | | | | | | | | |
| Unsecured term loans: | | | | | | | | | | |
| Unsecured Term Loan G | | 300,000 | | | 300,000 | | | 1.80 | % | | February 5, 2026 | | i |
| Unsecured Term Loan A | | 150,000 | | | 150,000 | | | 2.16 | % | | March 15, 2027 | | i |
| Unsecured Term Loan H | | 187,500 | | | 187,500 | | | 3.35 | % | | January 25, 2028 | | i |
| Unsecured Term Loan I | | 187,500 | | | 187,500 | | | 3.51 | % | | January 25, 2028 | | i |
Unsecured Term Loan F(5) | | 200,000 | | | 200,000 | | | 2.96 | % | | March 23, 2029 | | i |
| Total unsecured term loans | | 1,025,000 | | | 1,025,000 | | | | | | | |
| Total unamortized deferred financing fees and debt issuance costs | | (3,825) | | | (3,227) | | | | | | | |
| Total carrying value unsecured term loans, net | | 1,021,175 | | | 1,021,773 | | | | | | | |
| | | | | | | | | | |
| Unsecured notes: | | | | | | | | | | |
| Series A Unsecured Notes | | 50,000 | | | 50,000 | | | 4.98 | % | | October 1, 2024 | | ii |
| Series D Unsecured Notes | | 100,000 | | | 100,000 | | | 4.32 | % | | February 20, 2025 | | ii |
| Series G Unsecured Notes | | 75,000 | | | 75,000 | | | 4.10 | % | | June 13, 2025 | | ii |
| Series B Unsecured Notes | | 50,000 | | | 50,000 | | | 4.98 | % | | July 1, 2026 | | ii |
| Series C Unsecured Notes | | 80,000 | | | 80,000 | | | 4.42 | % | | December 30, 2026 | | ii |
| Series E Unsecured Notes | | 20,000 | | | 20,000 | | | 4.42 | % | | February 20, 2027 | | ii |
| Series H Unsecured Notes | | 100,000 | | | 100,000 | | | 4.27 | % | | June 13, 2028 | | ii |
| Series L Unsecured Notes | | 175,000 | | | — | | | 6.05 | % | | May 28, 2029 | | ii |
| Series M Unsecured Notes | | 125,000 | | | — | | | 6.17 | % | | May 28, 2031 | | ii |
| Series I Unsecured Notes | | 275,000 | | | 275,000 | | | 2.80 | % | | September 29, 2031 | | ii |
| Series K Unsecured Notes | | 400,000 | | | 400,000 | | | 4.12 | % | | June 28, 2032 | | ii |
| Series J Unsecured Notes | | 50,000 | | | 50,000 | | | 2.95 | % | | September 28, 2033 | | ii |
| Series N Unsecured Notes | | 150,000 | | | — | | | 6.30 | % | | May 28, 2034 | | ii |
| Total unsecured notes | | 1,650,000 | | | 1,200,000 | | | |
| | | |
| Total unamortized deferred financing fees and debt issuance costs | | (6,462) | | | (4,128) | | | |
| | | |
| Total carrying value unsecured notes, net | | 1,643,538 | | | 1,195,872 | | | |
| | | |
| | | | | | |
| | | |
| Mortgage notes (secured debt): | | | | | | |
| | | |
| United of Omaha Life Insurance Company | | 4,430 | | | 4,537 | | | 3.71 | % | | October 1, 2039 | | ii |
| Total mortgage notes | | 4,430 | | | 4,537 | | | | | | | |
| Net unamortized fair market value discount | | (131) | | | (136) | | | | | | | |
| | | | | | | | | | |
| Total carrying value mortgage notes, net | | 4,299 | | | 4,401 | | | | | | | |
Total / weighted average interest rate(6) | | $ | 2,796,012 | | | $ | 2,624,046 | | | 3.92 | % | | | | |
(1)Interest rate as of June 30, 2024. At June 30, 2024, the one-month Term Secured Overnight Financing Rate (“Term SOFR”) was 5.33717%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts. The spread over the applicable rate for the Company’s unsecured credit facility and unsecured term loans is based on the Company’s debt rating and leverage ratio, as defined in the respective loan agreements.
(2)The unsecured credit facility has a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.775%. The unsecured term loans have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%. As of June 30, 2024, one-month Term SOFR for the Unsecured Term Loans A, F, G, H, and I was swapped to a fixed rate of 1.31%, 2.11%, 0.95%, 2.50%, and 2.66%, respectively (which includes the 0.10% adjustment). The Unsecured Term Loan F provides for the election of Daily Simple Secured Overnight Financing Rate (“Daily SOFR”), and effective January 15, 2025, Daily SOFR will be swapped to a fixed rate of 3.98%.
(3)Prepayment terms consist of (i) pre-payable with no penalty; and (ii) pre-payable with penalty.
(4)The capacity of the unsecured credit facility is $1.0 billion. Deferred financing fees and debt issuance costs, net of accumulated amortization related to the unsecured credit facility of approximately $2.4 million and $3.3 million are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023, respectively. The initial maturity date is October 24, 2025, or such later date which may be extended pursuant to two six-month extension options exercisable by the Company in its discretion upon advance written notice. Exercise of each six-month option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension; (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if
made on the extension date; and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions. The Company is required to pay a facility fee on the aggregate commitment amount (currently $1.0 billion) at a rate per annum of 0.1% to 0.3%, depending on the Company’s debt rating, as defined in the credit agreement. The facility fee is due and payable quarterly.
(5)The initial maturity date is March 25, 2027, or such later date which may be extended pursuant to two one-year extension options exercisable by the Company in its discretion upon advance written notice. Exercise of each one-year option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension; (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date; and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions.
(6)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $1,025.0 million of debt and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts.
The aggregate undrawn nominal commitment on the unsecured credit facility as of June 30, 2024 was approximately $869.6 million, including issued letters of credit. The Company’s actual borrowing capacity at any given point in time may be restricted to a maximum amount based on the Company’s debt covenant compliance. Total accrued interest for the Company’s indebtedness was approximately $16.0 million and $14.6 million as of June 30, 2024 and December 31, 2023, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.
The following table summarizes the costs included in interest expense related to the Company’s debt arrangements on the accompanying Consolidated Statement of Operations for the three and six months ended June 30, 2024 and 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| Costs Included in Interest Expense (in thousands) | | 2024 | | 2023 | | 2024 | | 2023 |
| Amortization of deferred financing fees and debt issuance costs and fair market value discounts | | $ | 1,052 | | | $ | 972 | | | $ | 2,036 | | | $ | 1,948 | |
| Facility, unused, and other fees | | $ | 439 | | | $ | 437 | | | $ | 878 | | | $ | 872 | |
Debt Activity
On June 29, 2024, the sustainability-related interest rate reduction of 0.02% on the Company’s unsecured credit facility and each of the unsecured term loans ended in accordance with the respective loan agreements.
On March 25, 2024, the Company entered into a second amended and restated term loan agreement for the Unsecured Term Loan F to (i) extend the maturity date to March 25, 2027, with two one-year extension options, subject to certain conditions (discussed below), that would extend the maturity date to March 23, 2029 if both exercised, and (ii) provide that borrowings under the Unsecured Term Loan F will, at the Company’s election, bear interest based on a Base Rate, Adjusted Term SOFR, or Adjusted Daily Simple SOFR (each as defined in the loan agreement), which interest rate will be increased by 0.10% for any SOFR Loan (as defined in the loan agreement), plus an applicable spread based on the Company’s debt rating and leverage ratio (each as defined in the loan agreement), less a sustainability-related adjustment. As of March 25, 2024, the Unsecured Term Loan F had a stated annual interest rate equal to the one-month Term SOFR, which includes an adjustment of 0.10%, plus a spread of 0.85%, less a sustainability-related adjustment of 0.02%. Other than the maturity and interest rate provisions described above, the material terms remain unchanged.
The initial maturity date is March 25, 2027, or such later date which may be extended pursuant to two one-year extension options exercisable by the Company in its discretion upon advance written notice. Exercise of each one-year option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension; (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date; and (iii) payment of a fee equal to 0.125% of the outstanding amount on the effective day of each extension period. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions. Upon execution of the amended loan agreement for the Unsecured Term Loan F, the Company intended to exercise both extension options. In connection with the amended loan agreement, the Company incurred approximately $1.2 million in costs which are being deferred, including approximately $0.5 million of accrued extension fees, and are being amortized through the extended maturity date of March 23, 2029. The Company also incurred approximately $0.7 million of modification expenses which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations.
On March 13, 2024, the Company entered into a note purchase agreement (the “March 2024 NPA”) for the private placement by the Operating Partnership of $175.0 million senior unsecured notes maturing May 28, 2029, with a fixed annual interest rate of 6.05%, $125.0 million senior unsecured notes maturing May 28, 2031, with a fixed annual interest rate of 6.17%, and $150.0 million senior unsecured notes maturing May 28, 2034, with a fixed annual interest rate of 6.30%. The March 2024 NPA contains a number of financial covenants substantially similar to the financial covenants contained in the Company’s unsecured credit facility and other unsecured notes, plus a financial covenant that requires the Company to maintain a minimum interest coverage ratio of not less than 1.50:1.00. The Company and certain wholly owned subsidiaries of the Operating Partnership are guarantors of the unsecured notes. On May 28, 2024, the Operating Partnership issued all of the notes under the March 2024 NPA.
Financial Covenant Considerations
The Company was in compliance with all such applicable restrictions and financial and other covenants as of June 30, 2024 and December 31, 2023 related to its unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes. The real estate net book value of the properties that are collateral for the Company’s debt arrangements was approximately $7.4 million and $7.5 million at June 30, 2024 and December 31, 2023, respectively, and is limited to senior, property-level secured debt financing arrangements.
Fair Value of Debt
The following table summarizes the aggregate principal amount outstanding under the Company’s debt arrangements and the corresponding estimate of fair value as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2024 | | December 31, 2023 |
| Indebtedness (in thousands) | | Principal Outstanding | | Fair Value | | Principal Outstanding | | Fair Value |
| Unsecured credit facility | | $ | 127,000 | | | $ | 127,000 | | | $ | 402,000 | | | $ | 402,000 | |
| Unsecured term loans | | 1,025,000 | | | 1,025,000 | | | 1,025,000 | | | 1,025,000 | |
| Unsecured notes | | 1,650,000 | | | 1,524,610 | | | 1,200,000 | | | 1,074,003 | |
| Mortgage notes | | 4,430 | | | 3,290 | | | 4,537 | | | 3,535 | |
| Total principal amount | | 2,806,430 | | | $ | 2,679,900 | | | 2,631,537 | | | $ | 2,504,538 | |
| Net unamortized fair market value discount | | (131) | | | | | (136) | | | |
| Total unamortized deferred financing fees and debt issuance costs | | (10,287) | | | | | (7,355) | | | |
| Total carrying value | | $ | 2,796,012 | | | | | $ | 2,624,046 | | | |
The applicable fair value guidance establishes a three tier fair 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 fair value of the Company’s debt is based on Level 3 inputs.
5. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposure on existing and future liabilities and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and related costs associated with the Company’s operating and financial structure.
During the six months ended June 30, 2024, the Company entered into four interest rate swaps with an aggregate notional value of $200.0 million which fix Daily SOFR at 3.98%, effective January 15, 2025 and mature on March 25, 2027 and were designated as cash flow hedges.
As of June 30, 2024, the Company had 21 interest rate swaps, all of which are used to hedge the variable cash flows associated with unsecured loans. All of the Company’s interest rate swaps convert the related loans’ Term SOFR or Daily SOFR components, as applicable, to effectively fixed interest rates, and the Company has concluded that each of the hedging relationships are highly effective. The following table summarizes the fair value of the interest rate swaps as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Line Item (in thousands) | | Cuurent Notional Amount June 30, 2024 | | Fair Value June 30, 2024 | | Current Notional Amount December 31, 2023 | | Fair Value December 31, 2023 |
| Interest rate swaps-gross asset | | $ | 1,025,000 | | | $ | 54,510 | | | $ | 1,025,000 | | | $ | 50,418 | |
| | | | | | | | |
| | | | | | | | |
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified to interest expense in the same periods during which the hedged transaction affects earnings.
Amounts reported in accumulated other comprehensive income related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. The Company estimates that approximately $30.5 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense over the next 12 months.
The following table summarizes the effect of cash flow hedge accounting and the location of amounts related to Company’s derivatives in the consolidated financial statements for the three and six months ended June 30, 2024 and 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, |
| Effect of Cash Flow Hedge Accounting (in thousands) | | 2024 | | 2023 | | 2024 | | 2023 |
| Income recognized in accumulated other comprehensive income on interest rate swaps | | $ | 6,351 | | | $ | 24,168 | | | $ | 22,756 | | | $ | 15,626 | |
| Income reclassified from accumulated other comprehensive income into income as interest expense | | $ |