STAG Industrial: Don’t Miss Out On Staggering Returns
Lately, the markets have been shaky as soaring inflation and interest rates caused some widespread selloffs. Volatility is high and although the NASDAQ entered bear market territory nothing really dramatic happened with the overall market unless you were invested into anything defined as a growth stock with low to no earnings. As always though the storm not only caught low-quality stocks but also high-quality stocks which to me is always the perfect time to strike and add to my holdings.
I am predominantly looking for dividend stocks and I am continuing to find attractive opportunities mostly in the REIT and BDC space. One of them is STAG Industrial (NYSE:STAG), which in my view is the best pure-play industrial REIT, whose stock dropped by almost a third on a YTD basis despite no real negative news.
The stock is deeply in the bear market territory and interestingly it also did not really benefit from the vicious rebound in the markets starting last Thursday. It’s very rare that such a high-quality stock is down that much without any specific news or concerning company performance. STAG is as strong as ever and offers staggering returns at this price for long-term investors.
What is going on at STAG Industrial?
STAG Industrial’s recent Q1/2022 earnings have been more than just solid featuring a comfortable double beat with FFO of $0.53 and revenue growth of 18.8% Y/Y. On a Y/Y basis, FFO is up a healthy $0.04 or 8% which represents very strong performance especially as we are just leaving the pandemic behind us. Similarly impressive is same-store cash NOI growth of 4.8% which shows STAG is well-equipped for inflation. It has just presented the highest level of initial guidance in terms of same-store cash NOI growth of 4% to 4.5% driven mostly by rental escalators and almost tripling the average same-store cash NOI growth of 1.6% over the last seven years!
Over the course of Q1/2022, STAG Industrial signed new leases of 3.1M square feet with an average cash rent rate that is 15.2% above the previous rate. Overall, STAG acquired eight new buildings with 1.8M square feet for $166.4M at the same time as its pipeline expanded to 174 buildings estimated at $3.7B.
I’m very impressed by STAG’s Q1/2022 operating portfolio leasing activity as it features outstanding cash rent change and straight-line rent change with a weighted average lease term of around 6.3 years which I consider a very healthy time horizon. These leases will reliably and sustainably add to STAG’s funds from operations and help continue its growth story.
STAG, which is a pure-play industrial REIT, owns 110.1M square feet of industrial real estate spread over 551 properties across 40 states with an enterprise value of $9.9B which by the way is significantly above STAG’s discounted market cap of $6.2B.
STAG is creating value for its customers and ultimately its shareholders through leasing and redevelopment. Anybody with a big purse can buy real estate but the key ingredients to a successful investment are to maximize the return by leveraging location and the asset itself. For instance in October 2020 STAG acquired a property in Northern, IN and made several building-specific upgrades for the tenant in exchange for a very long-term lease extension into the mid-2030s.
STAG is more than just an owner of industrial real estate but also an operator and sometimes even a developer with the ultimate goal to maximize the value of the asset for both the tenant and for STAG itself.
When you invest in real estate it is easy to generate a lot of cluster risk as assets are large and expensive and it takes a big portfolio to properly diversify across all relevant dimensions such as geography, tenancy, industry and lease maturity. Since its IPO in 2011 STAG’s portfolio more than quintupled from 93 properties to over 550 today. STAG expanded from 26 states to 40 states and has turned into one of the largest owners and operators of U.S. industrial real estate.
STAG’s tenant base is diverse and sophisticated with strong credit ratings and not overly reliant on a single tenant. In fact, STAG’s largest tenant is Amazon but it only makes up for 3.2% of annualized base rent and STAG’s second-largest tenant-only contributes 1.0%. In total the Top 10 tenants only account for 10.8% of total annualized base rent which essentially means that no single tenant or even a group of the biggest tenants represents a significant cluster risk to STAG’s business.
On a long-term basis, STAG is operating in a very attractive market which has received a huge boost from the pandemic with domestic warehouse space demand as high as ever. It is estimated that e-commerce penetration rate will essentially double over the next 9 years and with 40% of STAG’s portfolio tied to e-commerce activity this presents a strong and long-term secular growth driver. The best thing is that as of today, STAG’s portfolio is less than 1% of the total addressable industrial market which is estimated at $1T which leaves a long-term runway for growth.
Naturally, STAG is not the only company operating in that space and there are players far bigger than STAG, but from a valuation point of view, STAG remains the most attractive opportunity for me. STAG is currently trading at a 15.9x FFO multiple whereas peers like Duke Realty Corporation (DRE) with an FFO multiple of 27.9x, EastGroup Properties (EGP) with an FFO multiple of 24.5x, First Industrial Realty Trust (FR) with an FFO multiple of 24.6x and Prologis (PLD) with an FFO multiple of 24.3x boast significantly higher multiples.
What’s more, recently the biggest player in the industry Prologis made an offer worth $24B for Duke Realty Corporation thus demonstrating the attractiveness of the market for warehouses and industrial real estate in general in the post-pandemic era. STAG’s current market cap is only 1/4 of the $24B offer for DRE and although I am not rooting for it I wouldn’t be surprised if one-day consolidation in the sector will lead to an acquisition offer for STAG. Personally, I wouldn’t be in favor of that as STAG is the only industrial REIT which pays monthly dividends with decades of growth ahead but that only reinforces my commitment to purchase as many shares as possible before such a potential buyout may eventually take place. As seen with Preferred Apartment Communities (APTS) which got recently acquired by Blackstone (BX) such an offer could come sooner than one would expect and it pays off to load up on such acquisition targets ahead of time.
What’s in it for Dividend Investors?
STAG Industrial has a strong history of income generation and has become one of the very few stocks that pay monthly dividends. STAG changed its dividend payout calendar from quarterly to monthly in mid-2015 and has slowly grown its dividend ever since with the latest hikes being an anemic 0.7% in 2020, another 0.7% in early 2021 and yet another 0.7% hike in January 2022. None of that is really exciting but the reason for that paltry growth is to bring down STAG’s FFO payout rate.
I think that mission has been accomplished now given that STAG’s FFO payout ratio for the latest quarter now stands at a very healthy 69%. In fact, strong internal growth shown and forecast this year and the years to come coupled with a significantly improved payout ratio has been addressed in the most recent earnings call and the answer to that question is as follows:
We will continue to evaluate it, but we are getting close to the point where we think that we can begin growing the dividend distribution in line with our CAD per share growth. It may not be this year, but we are getting close to the moderation level that we had communicated.
Source: STAG Industrial Q1/2022 Earnings Call
To put it differently, we are getting very close to the point in time where dividend growth will be reaccelerated and similarly to W.P. Carey which has been growing its dividend by 0.2% every quarter for years now, investors should load up on the stock before that happens.
Source: Seeking Alpha STAG Industrial Dividend History
So far STAG Industrial is not a dividend growth machine, but it rewards dividend-hungry investors with regular and reliable monthly payments. Combined with STAG’s stock price appreciation investors can easily generate 10%+ total returns. It trades at an FFO multiple of around 15.9 and its dividend yield currently sits above 4%. The current yield is certainly significantly below inflation and with this year’s dividend growth of 0.7% the dividend alone also does not protect investors from inflation, at least not today. Looking into the future though I fully expect STAG to significantly boost its dividend growth rate and with the stock price being relatively cheap today this presents very attractive income and total return prospects.
It’s unclear if the U.S. economy and possibly the world economy will soon enter a recession but it’s clear to me that although I won’t be able to pick the bottom, I feel very confident about picking STAG Industrial as a long-term holding.
Industrial real estate is crucial to the U.S. economy and has decades of runway ahead. STAG Industrial mastered the pandemic almost unscathed with rent collections always comfortably remaining in the high 90% area and I have no reason to believe that it won’t successfully navigate through a period of sustained inflation with an economy potentially drifting into recession.
STAG’s balance sheet is strong, its payout is safe and overall I consider STAG far more likely to buy distressed assets during an upcoming recession than being forced to sell them.
The stock is down over 30% on a YTD basis and has retreated below its pre-pandemic highs with a yield of 4.5%. I have been busy snatching up shares in the low to mid-30s over the past couple of days and although that was probably too early I will continue to average down liquidity permitting. Long-term STAG remains a clear winner to me and buying the stock in doses at current levels should generate healthy returns in the future.
I have added STAG to my monthly investment plans and invest into this business on a biweekly basis. I enjoy monthly dividends and I am very confident about STAG’s future.