2023-03-15 17:13:52 ET
Summary
- STAG Industrial has a great track record of growth, with sales, profits, and cash flows climbing nicely over the years.
- This has been driven by significant investments in new properties, plus the firm has succeeded in paying out distributions at the same time.
- The firm is a quality operator that's trading at a discount to many of its peers.
In these incredibly uncertain times, many investors engage in what's called a 'flight to safety'. Often, this can take the form of cashing out of investments entirely. It can also mean buying precious metals, short-dated government securities, short-dated bonds, etc., but for investors who want some stability, but without losing out on a nice potential upside, one avenue to explore can be to invest in REITs. Although every REIT is different, based not only on the specific assets that it owns but also on the market or markets that it might focus on, many of the companies that are set up in this way can offer steady and growing cash flows over an extended period of time. One prospect in this space that is certainly worth attention and that has the potential to generate attractive returns moving forward, is STAG Industrial ( STAG ), a player with its assets heavily invested in the industrial market.
A quality firm at a relatively low price
As I mentioned already, STAG Industrial is a REIT that focuses on the ownership and leasing out of industrial properties. As of this writing, the company has a massive portfolio. Its holdings include 562 different properties with a combined 111.7 million square feet spread across 41 different states. Such a large company is bound to be diverse in a number of ways. To demonstrate just how diverse STAG Industrial truly is, we need to look at the company through multiple lenses. For starters, we can look at the company through its market exposure. In this respect, the company has significant diversity. Its top 20 markets, for instance, comprise 64.6% of the annualized base rental revenue that the company is entitled to. Its largest exposure is to Chicago, where 7.7% of annualized base rental revenue comes from. This is followed closely by the 7.2% from Philadelphia.
Although the company describes itself as an industrial REIT, the industries that it serves are varied. 82.9% of its annualized base rent comes from its top 20 tenant industries. At the top of the list, you have the air freight and logistics space. This represents 10.9% of the annualized base rental revenue the firm is entitled to. This is followed by the 8.2% coming from containers and packaging, and then the 7.3% attributable to auto components. Other major industries include machinery, trading companies and distribution, Internet and direct market retail, media, food products, and more.
The company is even more diverse when you talk about individual tenants. This is incredibly important since it means that no one tenant can throw a wrench in the company's operations. Its top 20 tenants combined account for only 16.9% of its annualized base rental revenue. At the top of the list here is e-commerce giant Amazon ( AMZN ), which comprises only 3% of what the company brings in. In addition to being incredibly diverse, the company also has a staggered lease expiration schedule. It is worth noting that the industrial space tends to have shorter lease terms than many other REITs do. This makes sense when you consider how flexible the industrial market needs to be to changes in market conditions. This year, leases representing 7.7% of the firm's annualized base rental revenue are due to expire. That's followed up by 11.8% in 2024. Throwing the month-to-month leases into the equation, the company does not pass the 50% mark in aggregate lease expirations until 2027. With a weighted average lease term remaining on all of its properties of 4.7 years, it's also likely that the company can survive any near-term economic downturn with a minimal loss of tenants.
This diversity is great to see. It definitely should make the company more stable than if it weren't diversified. But that should not be the only measure of whether or not a company makes for an attractive opportunity. We also should be looking at the financial performance of the business and where that trend is headed. From 2018 through 2022, the company experienced consistent revenue growth, with sales climbing from $351 million to $657.3 million. The primary driver behind this increase was a surge in the number of properties owned. This number rose from 390 back in 2018 to 562 today. This increase allowed the company's square footage to climb from 76.8 million to the 111.7 million it stands at right now. In addition to that, the company also benefited from a rise in the percentage of properties that are leased out to tenants. This number grew from 95.5% to 98.5% over the same window of time.
On the bottom line, the picture has also improved. Operating cash flow, for instance, has increased in each of the past five years, rising from $197.8 million to $336.2 million. We should also be paying attention to other profitability metrics. One of these is the FFO, or funds from operations. This number also expanded over the past five years, climbing from $186.5 million to $400.8 million. NOI, or net operating income, grew from $282 million to $531.6 million, while EBITDA managed to climb from $250.8 million to $480 million.
All of the growth that STAG Industrial has achieved has been made possible by significant investments made by management. Over the past eight years, the company has averaged acquisition volume of around $750 million annually. That trend, while not as bullish, does look set to continue for 2023. Management is forecasting between $300 million and $700 million worth of purchases, with asset sales likely to come in between $50 million and $200 million. The firm should also benefit during this time from rent escalators. A weighted average rate of 2.5% across its portfolio should help to push same-store cash NOI up by between 4.5% and 5% compared to what the company achieved in 2022. That's significantly higher than the average annual increase over the past eight years of 2%.
If your goal is to own stock in a company that has a low amount of leverage, this is not the firm for you. Although certainly not high by REIT standards, the company does have a net leverage ratio of about 5.2 at the moment. Total net debt is $2.47 billion. And essentially all of that has come from the acquisitions the company has made over the years. But that hasn't been the only source for growth. Management has also used the issuance of stock to cover growth, as well as to pay out distributions. Total stock issuances over the past three years came out to $1.68 billion. $438.5 million of this came in 2022 alone. But this has not stopped the company from paying out $572.7 million in distributions over that time, with $224.3 million attributable to the 2022 fiscal year.
In essence here, what investors have is a perpetual growth machine. The high margins associated with property ownership, combined with an understanding by the investment community that the company can continue to grow at a nice clip, has empowered it to continue issuing stock at prices that fuel further growth into the future. But just because a company has an attractive mechanism for growth does not mean that it makes sense to invest in it. The stability and continuous growth of cash flows are nice, but we need to be mindful of how much is being paid for the stock in question. To figure this out, I decided to value the company based on four different metrics.
In the chart above, you can see what these metrics are for both the 2021 and 2022 fiscal years. Using the 2022 figures, the firm is trading at a price to operating cash flow multiple of 14.7. The price to FFO multiple is slightly lower at 14.3, while the price to NOI multiple is a super low 10.8. Meanwhile, the EV to EBITDA multiple comes in rather high at 17.2. These numbers are a bit higher than what I would normally like to see in a prospect. But it's important to keep in mind that a high-quality company with consistent growth and strong cash flows would warrant a premium over a company that lacks these. In addition to this, the company also looks cheap relative to similar players. In the table below, you can see how shares are priced relative to these five firms for two of the four metrics that I looked at. On a price to operating cash flow basis, these companies ranged from a low of 14.3 to a high of 32.1. Only one of the five was cheaper than STAG Industrial. When it comes to the EV to EBITDA approach, we get a range of between 17.7 and 29.5. In this case, our prospect is the cheapest of the group.
Company | Price/Operating Cash Flow | EV/EBITDA |
STAG Industrial | 14.7 | 17.2 |
Terreno Realty Corporation ( TRNO ) | 32.1 | 19.9 |
EastGroup Properties ( EGP ) | 21.6 | 23.0 |
First Industrial Realty Trust ( FR ) | 16.4 | 17.7 |
Americold Realty Trust ( COLD ) | 25.9 | 26.2 |
LXP Industrial Trust ( LXP ) | 14.3 | 29.5 |
Takeaway
Based on all the data provided, I must say that I am quite optimistic regarding STAG Industrial. Although shares of the company might be a bit lofty compared to what I normally look for, they are cheap relative to similar firms. The high-quality nature of the business and consistent revenue and cash flow data coming from it over the prior few years definitely justifies some sort of premium. Of course, current economic conditions could always change. But when you consider that the company continued to grow even throughout the COVID-19 pandemic and when you consider that the leases of its tenants are staggered rather attractively, I believe that the overall risk to shareholders is very low. Because of these reasons, I've decided to rate the business a solid 'buy' at this time.
For further details see:
STAG Industrial: A Premium REIT At A Discount Price