2023-11-30 11:37:16 ET
Summary
- STAG Industrial is a well-managed industrial real estate investment trust with over 100 million square feet of real estate.
- The trust has outsized exposure to the eCommerce sector, which supports strong rental growth.
- Despite high interest rates, STAG Industrial continues to acquire new properties and has a high occupancy rate of 98%.
STAG Industrial, Inc. (STAG) is an industrial properties-focused real estate investment trust that owns more than 100 million square feet of real estate.
The trust is well-managed and profits from strong fundamentals in the industrial real estate sector which experiences robust demand and high occupancies.
STAG Industrial has outsized exposure to the eCommerce sector, a growth sector that supports strong rental growth.
I think that the risk/reward relationship is positive for passive income investors and that the 4%+ dividend yield that STAG Industrial’s stock offers is sustainable.
My Rating History
In STAG Industrial: This 4.5%-Yielding REIT Is A Bargain I gave passive income investors a couple of reasons to consider buying STAG for their portfolios, including a dividend that was well-covered by the trust’s FFO and a moderate valuation based on FFO.
Taking into account that STAG Industrial profits from strong rental trends in the industrial market and has an investment focus on the fast-growing eCommerce industry, I think that STAG Industrial continues to be a rock-solid and dependable investment for passive income investors with potential for steady FFO growth.
A Well-Diversified, Industrial Trust With Acquisition Hunger
STAG Industrial’s real estate portfolio consisted of 568 industrial properties at the end of the third quarter that represented 112 million square feet. The real estate investment trust has grown quickly in the last decade, primarily throughout acquisitions, and even the presently prevailing high interest rates have not dampened STAG Industrial’s acquisition hunger.
The trust maintained high occupancy levels of 98% in its portfolio in the third quarter and has real estate investments in 41 states.
STAG Snapshot (STAG Industrial)
Many investors believe that higher interest rates are hurting real estate investment trusts, but this does not seem to be the case for STAG Industrial which continues to acquire a boatload of new properties even in a high-rate environment. The industrial trust did property deals worth $245 million YTD that included 1.76 million square feet.
In the same nine-months period in 2022, STAG Industrial acquired 25 buildings including 4.6 million square feet for $459 million.
2023 Acquisition Activity And Pipeline Detail (STAG Industrial)
The aggressive pursuit of acquisitions is the single-biggest catalyst for the trust’s portfolio growth and the primary driver of the trust’s FFO.
STAG Industrial’s pay-out is determined by FFO, a cash flow figure real estate investment trusts use and that makes adjustments for non-cash expenses, like depreciation, transaction gains and losses and impairment charges.
In 3Q-23, STAG Industrial’s real estate empire produced a total of $109.2 million in FFO, reflecting 6% YoY growth. This growth is driven, as I said, by property acquisition deals as well as same-store net operating income growth.
E-Commerce Anchored Portfolio With Growth Potential
I have written before about headwinds in the commercial real estate sector , particularly in the office niche which is suffering particularly hard from high interest rates and refinancing troubles for borrowers.
However, the dynamics in the industrial real estate market are quite a bit different because STAG Industrial invests heavily in real estate that is used by the eCommerce industry.
STAG Industrial provides real estate to companies that are used as distribution centers and warehouses, thereby filling vital needs for the online economy. STAG Industrial portfolio has 31% exposure to eCommerce-related businesses which makes the trust a bet on the overall eCommerce industry.
With eCommerce sales expected to rise moving forward, based on projections made by Oberlo , STAG Industrial’s real estate portfolio is anchored in a growth industry that could set the stage for many years of FFO growth.
Simultaneously, STAG Industrial has been able to grow its rents 10% quicker than the market since 2020 which attests to the trust’s underlying strength to grow its FFO.
Raised Guidance And FFO Valuation
STAG Industrial raised its guidance for 2023 and now sees $2.26-2.28 per share in FFO which is up $0.03 per share at the lower end and $0.01 per share higher on the top end of guidance.
Based on the new FFO guidance, the trust’s 4.1% dividend yield is valued at a 16x FFO multiple. In the last year, STAG Industrial’s stock has traded between $31-38 which reflects an FFO multiple trading range of 14-17, so STAG is selling for slightly more than its average P/FFO ratio.
Prologis, Inc. ( PLD ) which is a major, much larger player in the industrial REIT market, guided for $5.58 to $5.60 per share in FFO for 2023, reflecting a 20X P/FFO ratio.
What Should Investors Pay Special Attention To?
STAG Industrial’s weighted-average lease term was 4.5 years in the third quarter which is short relative to the retail industry where weighted-average lease terms can be 10 years or longer. This implies that industrial trusts tend to have higher cash flow and re-leasing risks in the event of a potential recession than retail REITs.
My Conclusion
STAG Industrial is an industrial trust whose real estate portfolio is anchored in the fast-growing eCommerce industry. The trust has managed to grow its rents faster than the market since 2020 and is seeing mid single digit FFO growth.
STAG Industrial also recently raised its guidance for 2023 FFO and the trust is not much more expensive than it was, on average, in the last year.
The 4.1% dividend is paid monthly and is probably set for ongoing growth as long as trust executes its acquisition-growth strategy.
For further details see:
STAG Industrial: An Acquisition-Hungry Industrial Powerhouse Set For Growth