STAG: Top Tier Monthly Paying REIT Reinforced By Strong Earnings (NYSE:STAG)

Overview

STAG Industrial (NYSE:STAG) is a REIT primarily focused on the industrial sector. As a REIT, their core business involves owning, acquiring, and managing a diverse portfolio of industrial properties. STAG has 568 buildings spanning across 41 different states. These properties serve as facilities for various businesses engaged in manufacturing, warehousing, distribution, and e-commerce operations.

STAG’s real estate portfolio spans across the United States and includes a wide range of single tenant, multi-tenant, and industrial properties. Some of their top tenant are Amazon (AMZN), Soho Studio, and American Tire Distributors. Their top ten tenants only account for 10% of their ABR (annual base rent) which shows that their income is diversified across many tenants.

Their strategic approach revolves around providing modern, efficient, and flexible spaces to accommodate the evolving needs of industrial tenants in an era where e-commerce and supply chain logistics are huge parts of a business.

I plan to increase my dividend income by adding shares at these current price levels. STAG is one of those holdings that you can hold and sleep well at night with. They have a strong performance history, great management, and cash flow that covers the dividend. I do believe that STAG earns a spot in my portfolio for the income it provides as well as the price stability offered as we can see that it held up pretty well in comparison to all REITs YTD (year to date). Also, we will later analyze their latest earnings report and how their strong performance is likely to continue into the future.

We can see that STAG massively outperformed the Vanguard Real Estate ETF (VNQ) in terms of total return over the last decade. YTD, STAG is only down 0.7% in price which is great considering most REITs have taken a hit this year. For example, the popular REIT Realty Income (O) is down over 20% for the year. STAG historically offers price stability and low volatility. STAG’s dividend yield sits at 4.6% and offers a monthly dividend which is a nice bonus for those who are looking for a more frequent distribution.

One of the key advantages of an industrial warehouse REIT like STAG is its strong connection to the growing e-commerce industry. Even though e-commerce experienced a surge during the COVID-19 pandemic, it never returned to its pre-2020 levels. In fact, it continues to rise as a percentage of total retail sales, making it a favorable trend for STAG.

Monthly Dividend

The latest declared monthly dividend of $0.1225/share, brings the starting yield in at 4.6%. This is admittedly on the lower end of the historical spectrum. This is because you were able to start a position with a yield anywhere between 5% – 6% before the pandemic. A 4.6% yield isn’t anything to brag about but at the same time, this is one of the most secure dividends out there in the sector. The AFFO forward payout ratio comes in at 74.7% which indicates there is ample room for increased dividends. This payout ratio also comfortably aligns with the sector median of 74.2%.

This is because the company also achieved noteworthy results in its operational metrics. For the third quarter of 2023, STAG reported same store Cash Net Operating Income (NOI) of $126M, marking a substantial 5.3% rise compared to the year prior when it was $119M. Their Occupancy Rate was equally impressive, standing at 97.6% for the entire portfolio and 98.0% for the Operating Portfolio. There is strong demand for warehouse space and STAG is set to continue benefitting. In fact, 30% of their portfolio is within 60 miles of Megasite projects. We can see this directly benefit STAG as their cash from operations has steadily increased.

“Megasite projects” typically refer to large-scale industrial or business development initiatives that involve expansive industrial sites or business parks. These spaces are designed to accommodate multiple companies and various activities at once. These projects are characterized by their significant size and infrastructure, often spanning hundreds or even thousands of acres. Megasites are strategically planned to attract industries that require extensive space, advanced infrastructure, and access to transportation and logistics networks. They aim to stimulate economic growth, create jobs, and boost local and regional economies.

However, the dividend growth has been lackluster. Over the last 5 years, the dividend has increased at a CAGR of only 0.70%. When looking at industrial based REITs, we can see this is actually better than competitors as the sector average growth over the same time period is only 0.33%. These REITs offer as secure of a dividend but I wouldn’t expect any huge dividend raises in the future. Speaking of dividend raises, STAG has managed to raise their dividend payouts for over 10 consecutive years.

Forward Looking

In their most recent earnings report, STAG reported strong performance for the third quarter of 2023. Their Funds From Operations (FFO) came in at $0.59 per share, surpassing expectations by $0.02. Additionally, the company posted impressive revenue figures of $179.28 million, reflecting a 7.8% year-over-year increase, surpassing forecasts by $4.32 million.

The FFO for a nine month period ending Sept 30th, shows an FFO of $1.71 and this represents a slight 3% increase over the year prior. Historically, FFO has grown between 3 – 5% so this is expected given the current shape of the REIT market. I fully expect that as the market stabilizes, interest rates cool down, and more acquisitions are completed, for STAG to grow at a CAGR closer to the 5% mark.

In terms of leasing activity, the company commenced leases for 2.3 million square feet in the third quarter, resulting in remarkable Cash Rent Change and Straight-Line Rent Change percentages of 39.3% and 54.2%, respectively. Furthermore, STAG Industrial achieved a retention rate of 74.4% for 2.2 million square feet of leases set to expire in the quarter. These positive results highlight the company’s robust performance and ongoing growth in the industrial real estate sector.

STAG has managed to acquire 12 new buildings in Q3 alone. These acquisitions accounted for over 1.5M in sq ft and has a weighted average lease term of approximately 6 years. Cash capitalization rate of these new acquisitions average out to 6.2% so we can expect these new buildings to generate substantial revenue for STAG into the future.

With a Price / FFO of 14x, we do see that STAG trades at a premium valuation compared to the sector median of 10.7x. Although, we don’t see this as an inherent risk as the premium here is justified by the quality and stability STAG has offered shareholders over the last decade.

The current Wall St. price target averages out to $38.60/share which represents a potential upside of 20%. I do agree with this price target and expect STAG to eventually grow past this point when the REIT market stabilizes and interest rates cool off a bit. A potential 20% upside combined with a steady and secure 4.6% dividend yield means that we have annualized returns that could continue to outpace VNQ’s. This is why I believe STAG deserves a spot in my portfolio.

Interest Rates

Rising interest rates may cause slower earnings growth. If rates remain elevated for a longer period of time, we will most likely see the price struggle to gain that upward momentum we’d like. While STAG showed resilience as rates gradually increased in 2023, concerns arose when the overall market became more volatile. So far, the price has held up relatively well in comparison to (VNQ) but we remain cautious.

In addition, STAG has about 12% of their total debt maturity taking place within the next 2 years. While this isn’t a substantial risk, it’s worth mentioning as it does have the possibility of lowering overall earnings. In an imperfect world, if rates remain elevated by 2025, I would expect a very slow growth in price going forward.

Takeaway

STAG Industrial stands out as a robust player in the REIT sector with a sharp focus on the industrial landscape. Their extensive portfolio of 568 buildings across 41 states serves as essential facilities for a diverse range of businesses. What sets STAG apart is its commitment to providing modern, efficient, and adaptable spaces tailored to the evolving needs of industrial tenants in a dynamic business environment.

Despite the recent dip in the stock price, STAG remains a compelling choice for investors seeking a reliable income source. With strong historical performance, effective management, and dividend coverage, it’s a holding that offers stability and peace of mind.

However, there are headwinds to be mindful of, notably the potential impact of rising interest rates on earnings growth. While STAG has demonstrated resilience in the face of rate hikes, market volatility remains a concern. Additionally, a portion of their debt matures in the next two years, which may warrant careful monitoring, although it is not an immediate threat in my view.

STAG’s recent financial performance for the third quarter of 2023 paints a positive picture, with strong Funds From Operations (FFO) and revenue figures. This aligns with their historical growth patterns and sets the stage for continued success, especially as more acquisitions are completed.