STAG Industrial: Top Industrial Assets At Compelling Price (NYSE:STAG)

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Today, we want to take an opportunity to look at a top-tier business which has struggled through the first quarter. STAG Industrial (NYSE:STAG) is a net lease REIT focused on the acquisitions and management of single-tenant industrial assets across the domestic United States. Net lease REITs come in a variety of shapes and sizes. From the biggest and most established operators such as Realty Income (O) to up and coming brands such as NETSTREIT (NTST), there is a variety of differentiating factors. While the pool is deep, there are few with as specialized of a focus as STAG

What is STAG Industrial?

STAG owns more than 100 million square feet of real estate across the United States with a portfolio of over 540 assets. When imagining the average asset in the portfolio, imagine large, tilt-walled warehouses with large footprints, usually in excess of 250,000 SF. Many of these are critical logistics facilities occupied by established, national tenants and most are located in strong secondary markets. STAG provides investors an opportunity to tap a high-quality portfolio of institutional quality assets in a liquid and efficient format.

The industrial asset class has become the center of attention as the world climbs out of the pandemic. As retail shutdowns plagued the economy, companies across industries recognize an urgent need to expand their logistics footprint. For the majority of companies, this meant dramatically expanding their existing warehouse footprint oftentimes in smaller markets providing greater accessibility to the end consumer. Luckily for STAG, these are oftentimes the markets and assets, but the firm has spent years acquiring. Below is a picture of a 331,845 square foot distribution center owned by STAG in Piedmont, SC.

Warehouse

STAG

Portfolio & Balance Sheet

STAG’s portfolio is primarily single tenant meaning the properties are occupied by a single user period. The firm owns real estate diversified across 40 states, and as mentioned, are mostly located in secondary markets. These include recognizable cities including Indianapolis, Houston, and Memphis. While these markets do not necessarily carry the same strength as the Inland Empire or other primary locations, they represent a crucial component of the nationwide logistics chain. STAG’s established footprint is strong and will benefit from organic growth drivers which have begun to materialize coming out of the pandemic.

The portfolio’s tenancy is well-diversified and strong in terms of quality. The majority of the portfolio is publicly rated, and a large portion is investment grade, indicating strong operators. Additionally, 54% of the portfolio is publicly rated, 83% of tenants have revenue over $100 million, and 59% of tenants have revenue in excess of 1 billion. In fact, the industrial landlord’s largest tenant is Amazon (AMZN) at 3.2% of the base rent.

STAG percent of tenants publicly rated

STAG

Also importantly, STAG’s portfolio is well situated to weather inflationary pressure. STAG’s bias towards triple-net leases protects by placing responsibility for maintenance on the tenant, property tax, and insurance. All of which are impacted by inflation. In contrast, STAG enjoys the benefit of rolling leases which will reset to elevated rents due to long-term market rent growth.

STAG has discipline in their use of leverage, reducing in the face of rising rates. As it stands today, the firm is conservatively capitalized. 80% is equity and the remaining 20% of the portfolio is financed by unsecured debt. There is no preferred equity in a very limited amount of secured debt. Additionally, the majority of the portfolio debt is fixed rate at approximately 85%. This means the short-term fluctuations in interest rates do not immediately affect STAG, but rather have an impact at the time of refinancing. With only 24% of debt maturing through 2024, the firm isn’t in a strong position to refinance in the face of rising interest rates.

Dividend

STAG pays a level monthly dividend of $0.1217 per share corresponding to a dividend yield of approximately 3.66% based on recent share prices. Like many REITs, STAG has elected to pay a level monthly dividend which entices shareholders on the proposition of dependable monthly income that should increase over time. STAG’s dividend income is ultimately backed by corporate tenants paying rental revenue in their portfolio properties. These long-term leases provide a format for strong long-term dividend growth and consistent rental revenue.

The company has been consistent with the dividend since its IPO more than 10 years ago. Since then, STAG has dependably increased its income year after year without fail. For shareholders, this has been crucial as the dividend accounts for a significant amount of the investment total return.

STAG total return and price % change
Data by YCharts

One point of criticism which is often levied on the company is the painfully slow dividend growth. Over the past five years, the dividend has grown slowly at less than 1% annually. STAG has opted for a single year-end dividend increase which for the past several years has been somewhat underwhelming. It’s important to understand why as many different REITs apply different strategies when it comes to their dividend.

STAG dividend
Data by YCharts

STAG is a relatively young company having celebrated its 10th birthday in 2021. As such, and with a portfolio of only 500 properties, STAG is still in a mode of portfolio growth and stabilization. While the firm has remained very disciplined in consistently increasing income and satisfying shareholders along the way, it clearly has not been the primary focus. STAG has historically maintained an aggressive posture as it comes to acquisitions. Consistently issuing debt and equity, STAG has been able to acquire new properties on a consistent annual basis since launch.

The second factor which has contributed to the slow dividend growth has been the historically slow performance of the industrial asset class. Prior to the introduction of e-commerce, industrial assets were limited in their desirability for a variety of reasons. First, logistics facilities are often very capital intensive meaning landlords must be heavily involved in staffing and managing individual properties. This limits economies of scale and is a challenge for industrial operators. The triple net lease structures and single-tenant facilities mitigate some of these difficulties for the company. Second, other industrial facilities are oftentimes highly specialized, meaning the opportunity to release the individual assets is oftentimes daunting. The result can be difficult and sometimes correlate to rent impairments or substantial capital investment needed to refit facilities for market use. Historically, the solution to this issue has been longer term leases banking on a tenant staying in these facilities for perpetual periods of time.

Market Outlook

The industrial asset class has been one of the strongest beneficiaries of the continued development of the Internet and online commerce. The need for bulk logistics space has expanded for retailers from incredibly large regional facilities which ship to end stores to smaller strategic assets which can deliver products directly. This shift has dramatically increased the demand for industrial assets across the board and shines a spotlight on the market today. The market has failed to keep up with the enormous demand and the trend is correlated to two primary things. First, there is record-setting industrial development taking place across the nation, much of which is speculative. Second, industrial rents are sharply rising across nearly every market in the United States. Specifically, JLL notes industrial rental rates grew 11.3% year over year across the nation. Keep in mind, this growth outpaces even the elevated inflation rate of the same time period. While certainly not a direct impact on STAG earnings, increased rents inevitably impact portfolio revenue in a positive way as the landlord re-tenants vacant assets.

Conclusion

As we mentioned, the start to the year has been difficult for the company. Share prices have declined more than 10% as geopolitical risks, rising interest rates, and other risk factors begin to materialize across the economy. However, significant value remains in STAG’s core business due to the benefits which have come over the past two years. Today, shares of STAG are trading below the midpoint of their 52-week range, well off the all-time high of over $48 a share. Current share prices correspond to a price/FFO ratio of 18.34x which is attractive compared to the past 12 months. For long-term shareholders, this presents an opportunity to take advantage of what could become stronger dividend growth. In any event, the company’s conservative management, investment-grade rating, and strong portfolio protect from short-term risks.

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