Despite a robust 5.3% yield, Stag Industrial, Inc. (NYSE:STAG) is hardly a household name. However, this real estate investment trust, or REIT, has managed to grow its dividend, paid monthly, every year since its IPO in 2011. And while it has a somewhat unique focus (more on that below), investors looking for a solid and growing dividend should take a close look. Here’s why you might be interested in buying Stag Industrial today.
Not interested in headlines
When it comes to investing in physical property, different markets have vastly different levels of desirability. For better or worse, the top markets get all the attention, while secondary markets are usually overlooked, even if they are key players in regions that serve top-tier markets. For example, the sale or construction of a high-end apartment building in Westchester, which would likely house people who commute to New York City, would hardly merit any attention compared to a similar apartment building actually within New York City.
Stag is looking to take advantage of this inherent disconnect in the industrial property space. It purposely avoids premium markets where assets often trade hands at premium prices so it can focus on secondary markets where bargains can be found. Lower purchase prices translate into higher long-term returns (capitalization rates) on a property investment. Rent growth, meanwhile, has been similar between top markets and secondary ones. And while occupancy rates tend to be a little higher in the most sought-after markets, careful property selection and portfolio management can offset that negative when operating below the top tier. All in, Stag believes it can be more profitable to invest outside of the top tier.
Looking long term, Stag believes it has just a 1% share of a $250 billion target market. That means there’s plenty of room to expand, despite the company’s somewhat discerning taste. Although management will look at any industrial asset offered, it favors single-tenant properties that are key distribution, warehouse, or light manufacturing assets for its lessees. Effectively, it wants to make sure that a tenant would feel a little pain if it vacated a property.
The current state of affairs
Stag currently has a portfolio of around 380 properties spread across 10 main markets, including assets in and around cities like Pittsburgh, Philadelphia, Chicago, Cincinnati, and Milwaukee. No region makes up more than 10% of Stag’s rent roll. With regard to industry, it has exposure to 10 broad categories, spanning from autos to food, with no single industry representing more than 15% of rents. Lease expirations will tick higher in 2019, but they are fairly well distributed over the next decade.
That said, Stag is fairly active with its properties, buying, selling, and upgradings assets to fine-tune its portfolio. For example, in the third quarter of 2018, it sold four buildings and acquired 15. Occupancy was 95.4%, up from 94.6% a year earlier. Rent increases, meanwhile, led to a 1.4% year-over-year increase in same-store net operating income in the quarter. Funds from operations, or FFO, advanced 4.7% in the quarter and was up 5.6% through the first nine months of 2018. Staying active is clearly having a desirable impact on the portfolio.
Stag’s FFO payout ratio is roughly 80%, which is reasonable. The company’s debt is investment grade (BBB), with debt making up a little under 50% of the capital structure. It covered interest expenses seven times over in the third quarter. The REIT looks fairly strong financially.
That said, one small issue to keep an eye on is the share count, since much of the REIT’s growth has been financed by selling new shares. To put a number on this issue, Stag’s share count has nearly quadrupled since it came public in 2011 with a portfolio of little under 100 properties. Since Stag now has a highly occupied portfolio of nearly 400 properties (backing a dividend that’s been increased every year), it’s clear that the share sales have been desirable so far. But too many new shares could lead to shareholder dilution if acquisitions don’t pan out as planned.
The share dilution issue is not a huge concern (this is a normal approach to growth in the REIT space), but it’s worth keeping in the back of your mind. That’s because Stag had an acquisition pipeline of 156 properties it was considering buying at the end of the third quarter. Acquiring all of those buildings, which isn’t likely to happen, would cost roughly $2.2 billion. However, the big takeaway here is that growth is still a key focus, and that share sales will be a vital funding source.
Holding up in a storm
During the difficult 2007 to 2009 recession, top-tier markets underperformed relative to the markets Stag focuses on. That’s largely because secondary markets don’t get the same kind of attention as top-tier regions, which often pushes top-tier markets into overvalued territory. That, in the end, is the big story underpinning Stag’s business. The REIT offers a generous yield and has a strong financial position, well-diversified portfolio, and significant opportunities to continue its growth. If you are worried about the economy and stock market but still need to generate income from your portfolio, Stag could be a worthwhile addition to your dividend portfolio today.