STAG Industrial: Company Growth Does Not Equate To Growth In Distributions To Investors

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Fundamentals

STAG Industrial (NYSE: STAG), a company in the industrial REIT sector with a market capitalization of $1.4 billion (categorized as a small capitalization stock), has benefited from a rebounding US economy. This is evidenced by:

  • The US has become an increasingly attractive country for manufacturing and distribution due to the size and buying power of the consumer market.
  • Overseas labor costs have been steadily rising.
  • Since 2004, industrial production and inventory levels are at all time highs.
  • Industrial demand continues to outpace supply.
  • The continued increase in E-commerce volume, as opposed to brick and mortar retailers, requires efficient warehouse solutions that can quickly fulfill and ship orders.

STAG Industrial has 253 buildings in 36 states with the majority of those being warehouse facilities. The company focuses on single-tenant industrial properties, a market estimated to be worth $250 billion. The industrial market is fragmented with no single dominant player. STAG’s market share is less than 1% in its niche and approximately 65% of their annualized base rent comes from the secondary market.

The primary market typically experiences an increase in occupancy and rental performance at least 6 months sooner than the secondary market. This should provide a favorable scenario for STAG due to their strong position and high concentration in the secondary market.

Acquisitions

Since their IPO in April 2011, STAG’s growth strategy has primarily been through aggressively seeking acquisitions. Fueled by debt and its ATM program, STAG has tripled in size from 18.3 to 48.5 million square feet in the last three years.

However, the results for investors in STAG have been less than stellar. Over the past three years, AFFO and dividend growth were 23 and 30 percent respectively, significantly lagging the increase in square footage. Same store revenue and cash net operating income has experience meager growth with the vast majority of additional revenue coming from the addition of new properties.

Financials

The positive aspect of STAG’s performance is they have maintained and, in some cases, improved their financial metrics including total debt to enterprise value and net debt to adjusted EBITDA. The average debt maturity has increased from 4 to 7.4 years and STAG has no major payments due in the coming 12 months. In addition, Fitch Ratings has upgraded the company’s credit rating from BBB- to BBB.

The Price-to-FFO multiple has remained below its historical average and STAG has been paying 90 percent of AFFO at a solid dividend yield of 6.5%.

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Summary

STAG has been issuing debt and equity to drive its aggressive growth strategy while maintaining a prudent eye on the debt metrics. Same store metrics have shown little growth. As a result of STAG’s equity dilution, growth in AFFO and dividend share has lagged the increases in square footage and revenue. Given the current share price, dividend yield has been attractive making STAG a potentially good option for an income oriented portfolio.

 Metrics 2012 2013 2014 2015
Square feet – Q1 18,272,568 31,160,765 39,046,566 48,533,893
Revenues – Q1, $000s 17,539 29,988 39,743 50,989
Revenues – Q1, in percent 71.0 32.5 28.3
Cash NOI – Q1, ‘000s 14,975 25,343 31,908 41,349
Cash NOI – Q1, in percent 69.2 25.9 29.6
Dividend per share, Q1, $ 0.2600 0.3000 0.3150 0.3375
Dividend payout ratio – Q1, in percent 87 91 88 91
Dividend yield – Q1, in percent 7.4 5.6 5.2 5.7
Alternate FFO per share – Q1, $ 0.30 0.33 0.36 0.35
AFFO per share – Q1, $ 0.30 0.33 0.36 0.37
Net Debt to adjusted EBITDA – Q1 6.2 4.7 4.7 5.3
Total debt to total enterprise value – Q1, in percent 46 27.8 27.0 29.9
Weighted average interest rate – Q1, in percent 4.55 4.01 3.82 4.47
Weighted average debt maturity – Q1, years 4.0 5.5 4.8 7.4
Revenue – Same Store – Q1, in percent (0.8) 4.6 (1.4) 1.6
Cash NOI – Same Store – Q1, in percent 3.8 2.3 (4.9) 1.5
Occupancy – Net leased – Q1, in percent 94.2 95.4 95.3 94.4
Average Lease Term – Q1, years 5.5 5.0 4.7 4.2
Share Price on 31 March, $ 13.96 21.27 24.1 23.52
P/FFO on 31 March 11.6 16.1 16.7 16.8

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​