STAG Industrial’s Strategy Under Scrutiny

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Rapidly-expanding STAG Industrial (NYSE: STAG) released its second-quarter results and is on target to meet or exceed its goal to increase asset base by 25 percent/year. Revenues grew by 27 percent year over year and cash NOI by 29 percent, and STAG acquired 12 industrial buildings at an 8.4 percent capitalization rate. Another 26 properties have been lined up for purchase. The other side of this strategy, as we have previously seen, is same-store cash NOI growth of a meager 1.1 percent as not-so-fast-growing peers like Prologis (NYSE: PLD) and EastGroup Properties (NYSE: EGP) have managed better, with 5 percent growth.

During the earnings call this Friday, management spent a good amount of time discussing their investment thesis and model. One important aspect is their prioritization of acquisitions over development, especially because leveraged acquisition can get them two-digit cap rates. Also, STAG usually buys properties in their full potential in terms of occupancy. The disadvantage is that occupancy can always decrease to near market rates, and such has happened to some of the “vintages” described in their financial supplemental reports. To be fair, STAG has been receiving some positive same-store cash NOI growth because of good leasing spreads — especially for new leases, this growth has been 35 percent on a cash basis.

FFO and the number of shares have both increased 22 percent, accounting for the FFO dilution. FFO-per-diluted-share has been maintained at $0.36, positioning dividend payout close to 95 percent. Since STAG’s stock has already been remunerating at a 7.1 percent dividend yield — among the highest in this sector — no more dividend increases are expected this year.

The more I examine STAG, the more I consider it an aggregator of fully-utilized assets in secondary markets that is growing rapidly by exploiting the sector’s good fundamentals. This strategy is more conservative than development, but the upside for shareholders appears limited.

Although more second-quarter results are still needed to complete the industrial REIT ranking, STAG should not be leading the charts for Q2 2015 because of high dividend payout and poor growth in same-center cash NOI and FFO-per-share. With high dividend yield and below-peer-median price-to-FFO, STAG has a very attractive entry point. The question is whether this REIT is worth the risk.

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Source: STAG Industrial, Fast Graphs


Written by Heli Brecailo

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