Summary
The pure industrial REIT is an all-around good business.
The REIT has managed to produce extraordinary returns for its shareholders since the initial listing back in 2011.
However, the growth story might be coming to an end, as valuations appear to be catching up with an otherwise brilliant business.
Management needs to find a way to start delivering substantial dividend hikes.
Tempura/E+ via Getty Images There are not many businesses in the REIT space that I am more fond of than STAG Industrial ( STAG ), but it is becoming increasingly more difficult to rate this pure industry play a buy.
The triple-net-lease monthly dividend-paying company has gone through a period of extraordinary growth, delivering a commendable 14% CAGR since its listing back in 2011, excluding the dividends.
STAG has been on an almost never-ending drive to the top, more than doubling its market price in less than two years from its pandemic era low. However, it seems that valuations are finally catching up. Overview of the company
STAG Industrial is a real estate investment trust focused on the acquisition and operation of single-tenant, triple-net leased industrial properties located in the United States. By utilizing this business model, STAG has developed an investment strategy that helps investors find an interesting balance of income plus growth. source: 2021 Investor Presentation
STAG has gone a long way from the early days of it being a publicly listed company. They have grown from operating a small portfolio of 93 properties and 14.2 million square feet of mixed office and industrial space to operating one of the largest triple-net-leased portfolios in the industry. As per their latest Q3 report, they own 517 properties across 40 US states consisting of a total of 103.4 million square feet of warehouses and small manufacturing operations.
The REIT is coming off the back of an extraordinary successful decade of doing business. Shares of the REIT were selling for only $12.14 during the IPO, marking a 272% increase to today’s price of $45.23. An early investment into the REIT would have almost quadrupled your money, that is not counting the dividends. Another brilliant chance to acquire a good position in the REIT presented itself during the 2020 pandemic when the company briefly traded for $21.44 per share again. However, things seem to be are different with today’s prices in mind. A rock-solid business
Now let us take a look at why exactly STAG Industrial is a great business that is beloved by many investors. First, the “industrial” part of the REIT comes down to mostly warehouses and distribution centers, making up more than 90% of the portfolio. It means that the rise of e-commerce has greatly benefited the company and well as the entire subsector.
In fact, an investment into STAG is by part an investment into e-commerce. Interestingly enough, this is why the pandemic era price crash made very little sense. The REIT has in fact significantly benefited from the entire situation, alongside investors wise enough to buy the dip during the time. source: 2021 Investor Presentation
The REIT carries a very strong balance sheet. Its total debt as of Q3 of 2021 amounts to $2.02 billion. The interest rate on which the debt was acquired was roughly in the 3% range. For the last twelve months, the entire interest expense accounted for $62.34 million.
An interesting thing is that by 2023, only $254 million or about 3.32% of the debt is maturing. The net debt to adjusted EBITDA is just x4.8, while the net debt to FFO is x6.12. The REIT also carries an investment-grade rating by both Moody’s and Fitch, that is a “Baa3” and “BBB” respectively. Another good thing that is worth pointing out about STAG Industrial is the lease expiration timeline. The entire portfolio is not expected to come under a lot of pressure over the next couple of years.
All the way until 2023, less than 22.3% of the total leased SF is expiring or only 21.5% of the REITs ABR. From that point on, we can expect the lease schedule to come under a couple of years of pressure.
source: Q3 Report – Supplemental
And one of the best things about STAG Industrial is its broad portfolio client diversification. The portfolio is well-diversified both in terms of geography, industry, and tenants.
The top 5 geographic regions with the largest presence make up only about 27.6% of the REITs ABR. When we take a look at the industry diversification, Air Freight and Logistics does make slightly more than 10%, but the […]
source STAG Industrial: Valuations Have Caught Up With An Otherwise Brilliant Business
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