When you hear that a company has set a goal to grow at 25% a year, you will go closer and listen to them. Why is it that you will react differently when you find out that a REIT like STAG Industrial has set a goal of growing assets at 25% for the next years?
What you are supposed to know is that REITs distribute most profits that they make. Now, the fundamental question that you should ask is that, how are they going to fund that growth? What will likely steer STAG into achieving that goal is their capitalization structure that is composed of equity 63% and debt 37%.
In the REIT space, raising equity has always been a recurrent option and despite the powerful practical grounds that exist, REIT stocks have not been lately a fertile ground where new equity could be readily issued. The selloff of REIT stocks (including STAG) this August has significantly impacted on the secondary market decreasing issuances of common shares. Not surprisingly, STAG preached equity discipline on the third quarter call and said that they are going to look for capital raising alternatives such as joint ventures. But not even this strategy will eliminate equity issuance completely.
STAG is the cheapest stock among Industrial REITs, and this is what is holding them back. They have an AFFO multiple that is about to 12×. When we compare this with the peer median of 23×, we will find that their multiple is way lower. Another indication they are devalued is that dividend yield is higher than its peers’. They are trading close to 8%.
An alternative way to help STAG out of this problem is to increase the leverage level. Which I believe STAG will not do. The investment grade status the company enjoys provides access to cheaper financing in the industry. Fitch Ratings has assigned a ‘BBB’ rating to STAG’s rating of $100 million unsecured notes (fixed rate of 3.98%) through a private placement in the middle of December. The warranting of lower interest rates in a rising interest rate environment is of prime importance.
We’ll post 2nd part tomorrow.
Source: STAG Industrial (NYSE:STAG), REIT.com, Fast Graphs
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