STAG Industrial: The Discount Is Now Attractive (Rating Upgrade)

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STAG Industrial owns and operates industrial properties in the U.S.The REIT has a diversified portfolio and impressive operating performance.Most importantly, it offers a monthly dividend and is ...

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Justin Paget STAG Industrial, Inc. (NYSE:STAG), incorporated in 2010 and headquartered in Boston, MA, acquires, owns, and operates industrial properties in the U.S. I covered STAG for the first time back in January and, since then, the price has dropped by 8.32%. But that's not the only thing that made the shares more attractive; I also realized that the dividend profile is better than I initially thought and that even a small discount to NAV doesn't make sense for this high-quality REIT; and the discount here is anything but small now. Portfolio & Performance As of the first quarter of 2024, STAG Industrial owned and operated 570 industrial buildings that covered 113 million sq ft and were located across 41 states. With Chicago being the biggest contributor to STAG's income and responsible for 6.8% of the REIT's ABR as of March 31, it's far from managing a concentrated portfolio. STAG also sports a diversified tenant base, as it was only 11.5% ABR-reliant on the Air Freight & Logistics industry and 2.9% on Amazon by the end of the first quarter (its largest industry and tenant exposure). As I said in my previous article on STAG, the long-term operating performance of the REIT is impressive, as well as its more recent results when compared to the average figures for 2020, 2021, and 2022. Since the 10-K was released after I wrote my article, I now captured 2023 and excluded 2020 and based on the last quarterly figures annualized, the current rental revenue, same-store NOI, and AFFO suggest increases of 17.19%, 20.7%, and 12.72% from the 3-year average figures, respectively, which don't look as impressive, but they are still very attractive nonetheless. Higher same-store NOI on an annualized basis is primarily a result of high leasing spreads that STAG enjoys because of its relatively low WALT of 4.3 years. Last, same-store occupancy decreased by 30 bps to 97.8% in the last quarter on a YoY basis. However, it's still quite high relative to the ~95% average for industrial properties. Leverage & Liquidity STAG has almost the same attractive solvency profile since the last coverage. Based on the last 10-Q, 42.7% of its assets were funded by a credit facility, term loans, notes, and mortgages which averaged a 3.79% interest rate. Its debt/EBITDA ratio was 5x and interest coverage was at 2.5x, also demonstrating the REIT's strong liquidity level. As for its upcoming maturities, only 1.88% of its debt comes due this year and 6.58% in 2025, but 32.56% of the debt matures in 2026. However, we should note that half of the 2026 maturity relates to its revolver debt, so the company may be able to refinance at a lower rate then, lowering the already low credit cost. Dividend & Valuation STAG currently pays a monthly dividend of $0.12 per share, resulting in a forward yield of 4.1%. While the yield is definitely not as high as investors would generally demand these days, it is still higher than the 3.73% yield it offered when I covered it in January because the price was higher back then. Back then, I indicated that the STAG's payment record in the last 10 years isn't reflective of a dividend growing at an attractive pace:   Seeking Alpha And it isn't. But I think that the CAD payout ratio of 69.9% is sufficiently low to leave enough margin for growth and help investors realize a more attractive yield on cost down the road. Additionally, the payment frequency and the underlying business can make a case for a stable income, which is difficult for many REITs out there right now. Long-term income investors can benefit from the ever-increasing rent prices and the REIT's position to renew leases at market prices relatively frequently. As a result of the price drop since the beginning of the year, STAG is now trading at a 6.22% implied cap rate, which is very high considering the average cap rate of 5.39% forecast for industrial properties this year. Using the 2024 average as the conservative assumption and the 2025 forecast rate of 5.12% as the more optimistic one, we arrive at a NAV range of $42.63 - $45.63, suggesting a 17.75% to 23.16% discount and 21.58% to 30.15% upside. The suggested discount is lower than what I had in mind back in January, but I admit to having underestimated the dividend profile just because of the past payment record and the low yield by not accounting for the prospects for growth. As it's evident, this REIT's performance keeps being excellent, and even a lower NAV discount than the one suggested here would make no sense. Risks The primary risk that I find most applicable to STAG is that of persisting inflation, which can keep rates high for longer than anticipated by the market. A subsequent change in the forecasts for cap rates may reveal a more efficient valuation for the REIT. Verdict However, the potential here outweighs this risk for those who buy STAG for the long term and can suffer through some temporary increased volatility. For this reason, I am upgrading STAG to a buy and looking forward to what the future brings for this business.  Let me know what you think. Do you own shares or intend to? Also, if this article helped you in any way, leave a comment; it means a lot. Thank you for reading.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2440598122"}