Excitement and disappointment can certainly help explain the ups and downs of STAG Industrial, a small cap industrial REIT. Since reaching its 52-week low on 11 February, STAG Industrial has rallied by 26%, exciting investors again and making them wonder if the company will eventually realize its full net asset value. This is not STAG’s first boom in recent months. Will it lose steam again like it did last December?
Despite releasing solid Q4 results this February, STAG did not demonstrate something significant enough to justify this rally. Core FFO increased by 8% and occupancy advanced by 70 basis points reaching 95.6%. Some good metrics remained, such as total debt to total enterprise value around 40% and AFFO dividend payout below ratio 90%. Rent change and retention percentages decreased, although it held up well throughout 2015.
The truth most definitely hurts – STAG is not in the same class as Terreno Realty or Rexford Industrial. STAG’s AFFO multiple has been averaging 12x, while Terreno has enjoyed a 27x, and Rexford is at 18x. In comparison, STAG is relatively cheap. That being said, I would be completely surprised if STAG ever reaches that high level of AFFO multiple.
What bothers me the most is that many investors tend to paint a stock into something that it is not. As a matter of fact, whenever STAG is mentioned, the very first thing that I think about is the word “risk.”
Although it may sound good when the company states that they invest in unexplored secondary and tertiary markets, they simply are not as robust as the primary markets. Also, some investors argue that STAG has a diversified portfolio; however, their properties are still contained within those same secondary and tertiary markets. They are certainly riskier, and do not have the same level of liquidity.
As a potential investor, you need to ask yourself why STAG mostly invests in one hundred percent occupied assets. The management knows that their investment strategy is risky. Their attempt to reduce that risk is to invest in one hundred percent vetted properties, especially single-tenant properties (that can be either 0% or 100% occupied). STAG is paying the extra money to invest in fully occupied units as a measure to ensure the attractiveness of the properties. In addition, this investment strategy explains why the company does not develop properties from scratch.
From my point of view, STAG’s investment strategy is the exact opposite of a famous real estate adage that states “buy the worst homes in the best neighborhoods.” Technically speaking, there is nothing wrong with buying the best properties in underdeveloped markets, it is simply a method to flee away from overcrowded markets and avoid fighting other investors over a few good deals. However, this means that they need to take additional precautions, which have certainly been visible in their strategy.
Although the company has a good dividend yield, they don’t have enough history of similar or increasing dividends to rate it as a consistent dividend stock (for us, at least five-year history). After periods of boom and bust and a slowdown in the company’s growth, I placed it as speculative.
Source: STAG Industrial, Inc.(NYSE:STAG), Terreno Realty Corp.(NYSE:TRNO), Rexford Industrial Realty, Inc(NYSE:REXR)
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