STAG Industrial: Benefits Haven't Accrued To Investors

seekingalpha09-24

STAG's investment spread has improved, with a positive spread of 39 basis points, but it's not sufficient for a buy recommendation.Their cost of equity is 6.09%, but the total return for investors is ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2469172264?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1521289911/image_1521289911.jpg","is_english":true,"pubTime":"2024-09-24 04:38","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2469172264","market":"sg","top_or_hot":-1,"title":"STAG Industrial: Benefits Haven't Accrued To Investors","media":"seekingalpha","content":"<div>\n<p>STAG's investment spread has improved, with a positive spread of 39 basis points, but it's not sufficient for a buy recommendation.Their cost of equity is 6.09%, but the total return for investors is ...</p>\n\n<a href=\"https://seekingalpha.com/article/4722809-stag-industrial-benefits-havent-accrued-to-investors\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>STAG Industrial: Benefits Haven't Accrued To Investors</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSTAG Industrial: Benefits Haven't Accrued To Investors\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-24 04:38 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4722809-stag-industrial-benefits-havent-accrued-to-investors><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>STAG's investment spread has improved, with a positive spread of 39 basis points, but it's not sufficient for a buy recommendation.Their cost of equity is 6.09%, but the total return for investors is ...</p>\n\n<a href=\"https://seekingalpha.com/article/4722809-stag-industrial-benefits-havent-accrued-to-investors\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4585","symbol_name":"ETF&股票定投概念","start_time":0,"source_url":"https://seekingalpha.com/article/4722809-stag-industrial-benefits-havent-accrued-to-investors","article_id":"2469172264","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1521289911/image_1521289911.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2469172264","pubTimestamp":1727123918,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"STAG's investment spread has improved, with a positive spread of 39 basis points, but it's not sufficient for a buy recommendation.Their cost of equity is 6.09%, but the total return for investors is ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","BK4224":"工业房地产信托","STAG":"STAG Industrial","BK4588":"碎股","BK4171":"工业房地产投资信托"},"translate_title":"STAG Industrial：投资者尚未受益","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"STAG":0.9},"content_text":"STAG's investment spread has improved, with a positive spread of 39 basis points, but it's not sufficient for a buy recommendation.Their cost of equity is 6.09%, but the total return for investors is only 4.48%, indicating that accretion is lacking at the shareholder level.Dividend growth may accelerate due to a reduction in the payout ratio, suggesting more secure and potentially higher future dividends.We recommend a hold rating for STAG due to positive investment spreads and dividend coverage, but caution on the underwhelming total return picture.1933bkk Introduction and Previous Coverage We previously published an article on STAG Industrial, Inc. (NYSE:STAG) on August 25th, 2023. In the article, we justified our sell recommendation based on the capitalization rate being below the cost of capital implying a negative investment spread and dilutive acquisition activity. In this article, we update our thesis incorporating current market conditions. Specifically, we look at their estimated capitalization rate for acquisitions in 2024 and compare that with their current cost of capital. In estimating the cost of capital, we will form a view of their cost of equity capital and offer two interpretations of their cost of equity. These items form the basis of our opinion in which we have ruled out a buy recommendation for the stock but do see some evidence to support a change in recommendation to a hold. Business Model & Spread Investor STAG is a REIT that is focused on the acquisition and ownership of single-tenant industrial properties which it then leases out to manufacturers and distributors. STAG's business is buoyed by the continued growth of e-commerce and the accompanying demand by industry participants for well-located and functional distribution space. STAG focuses on CBRE-EA Tier 1 markets which are highly correlated with dense population centers and established industrial markets. In general, STAG acquires a property and then leases it out to their tenants on a triple-net basis. A triple-net lease is one in which the tenant is responsible for all costs related to the building and its operations during the lease term. These costs include utilities, taxes, insurance, and maintenance costs. In a sense, for the majority of their leases, STAG operates as a spread investor. They access debt and equity capital to acquire real estate and then lease it out on a triple-net basis. STAG's economic profit is the difference between the rental income earned and the cost to acquire the property for which rental income is earned. In order to measure the health of STAG's business, we should measure the width of the spread. In this article, we measure the spread as the difference between the capitalization rate and the cost of capital. The capitalization rate, or cap rate, is the net operating income (NOI) divided by a measure of asset value. The cost of capital is the cost of equity financing and the cost of debt financing in proportion to how much of each source is used in their business. Let us now evaluate the spread in some detail. Source: STAG Industrial 10-K for 2023, CBRE Capitalization Rate For the full year 2024, STAG has guided a range of $350 million to $650 million in acquisition activity at a cap rate of 6.25% to 6.50%. If we take the higher end of the cap rate range, for STAG to engage in accretive transactions in today's economic climate, their cost of acquisition must be less than 6.50%. Source: STAG Industrial Business Update - Fall 2024 Cost of Debt In May, STAG funded $450 million of fixed-rate senior unsecured notes at a weighted fixed rate of 6.17%. In addition, the CFO remarked: \"In terms of cost of capital, if we were to go out and raise long-term debt to be in the private placement market, looking back to the transaction that we did in March that closed in May, if we were to use the same tenors, we would likely be able to raise, that $450 million in the high 5% to the 6% area.\" Please look at Table 1 for the cost of debt particulars.      Table 1: Cost of Debt Particulars  Moody's Baa3/Positive   Fitch BBB/Stable   Debt Issuance, May 2024 6.17%   Click to enlarge Source: STAG Industrial Q2 2024 Earnings Call, STAG Industrial Fall 2024 Investor Presentation, Moody's, Fitch Cost of Equity There are different philosophies and methodologies for estimating the cost of equity. For the full year 2024, STAG has indicated a core FFO figure of $2.36 to $2.40 per share. Using today's share price, that translates to a cost of equity of 6.09%. Please see Table 2.   Table 2: Cost of Equity  Core FFO 2024 (midpoint) $2.38   Share price at the close on 9/20/24 $39.09   Cost of equity 6.09%   Click to enlarge Source: STAG Industrial Q4 2023 Earnings Call Capital Structure and WACC Now that we have the cost of debt capital and the cost of equity capital, we are closer to having an idea of what STAG's cost of acquisition would be. STAG's equity market capitalization is 70.5% of its capital structure and 29.5% of their capital structure is made up of debt. In an acquisition, they would probably seek financing in the same proportion or thereabouts. Please see Table 3 for STAG's weighted average cost of capital.   Table 3: Weighted Average Cost of Capital ('WACC')  Weight of Debt 29.5%   Cost of Debt 6.17%   Weight of Equity 70.5%   Cost of Equity 6.09%   WACC 6.11%   Click to enlarge In the next Table, we compare STAG's cap rate and their cost of capital.   Table 4: Cap rate - WACC  Cap Rate 6.50%   WACC 6.11%   Difference 0.39%   Click to enlarge According to this model and based on our inputs, STAG's acquisition activity would be accretive. Ideally, we would like to see the spread closer to a hundred basis points which would provide some cushion, but the spread is positive which is an improvement as compared to the previous article*. Generating a positive investment spread of 39 basis points is a necessary but not a sufficient condition for investing in the stock. A positive investment spread is a welcome development for the business, but does not necessarily speak to the worthiness of an investment in the stock of the business. Let us parse this out further. *In the previous article, we employed the capital asset pricing model (CAPM) to estimate the cost of equity which is a more statistical approach. Using the current price and the expected core FFO as an estimate of the cost of equity is less subjective but doesn't capture the volatility of the stock. Total Return Recall that we measured the cost of equity using the estimated 2024 core FFO together with today's share price and arrived at a cost of equity of 6.09%. Cost of equity is the terminology used from the company's perspective. It is their cost to obtain equity capital. From the investor's point of view, the cost of equity would have to match the minimum rate of return for the investment to be worthwhile. And for many investors, particularly REIT investors, when we think of the rate of return, we typically look at the dividend yield and the dividend growth record. Please look at Table 5 in which we consider STAG's total return as the current dividend yield and their 5-year dividend growth rate as provided by Seeking Alpha.   Table 5: Dividend Yield and Growth Rate  Dividend Yield 3.79%   5-year growth rate 0.69%   Total return 4.48%   Click to enlarge We have a total return of 4.48%. How do we reconcile a cost of equity of 6.09% and a total return figure of 4.48%? One interpretation is that while a 6.09% return should be enough to entice investors to invest in the stock from the company's point of view, dividend-oriented investors are actually getting less than what they should from their point of view. This is the opposite of what you want to see as an investor. You want to see a total return figure exceeding a cost of equity estimate because that would imply that the investor is getting more than they bargained for. For context, there are four other industrial REITs that have a long-term issuer rating of investment grade. Let us compare. Please see Table 6.      Table 6: Total Return Minus Cost of Equity  Company Total Return Cost of Equity Difference   First Industrial Realty Trust 11.72% 4.70% 7.02%   LXP Industrial Trust 3.48% 6.23% -2.75%   Prologis 15.68% 4.32% 11.36%   Rexford Industrial Realty 21.51% 4.62% 16.89%   STAG Industrial 4.48% 6.09% -1.61%   Click to enlarge LXP Industrial Trust and STAG Industrial both have a total return below their cost of equity. Source: REITWatch August 2024, and author's calculation. Glass Half Full There is some evidence to suggest that dividend growth may accelerate in the future for STAG and this would improve the total return picture. Please look at Table 7.       Table 7: Payout Ratio       Year FFO per share Dividends per share Payout ratio   2019 $1.85 $1.43 77%   2020 $1.91 $1.44 75%   2021 $2.02 $1.45 72%   2022 $2.24 $1.46 65%   2023 $2.33 $1.47 63%   Click to enlarge Source: Seeking Alpha and Author's calculation There is a trend towards a reduction in the payout ratio which suggests that dividends are more secure today than in previous years. Given that REITs are, by design, required to pay out at least 90% of their otherwise taxable income and the favorable position that STAG has as a partner to e-commerce industry participants, it would not be unreasonable to project that dividend growth in the next five years would be at a higher clip than the last five years. Risks Triple-net REITs such as STAG are frequently touted as bond-like investments because of the stability of their cash flows which is backed by contractual leases. Similar to fixed-income instruments, a decrease in interest rates will likely increase the value of the investment. Therefore, it is quite possible that, in a declining interest rate environment, the value of the investment in STAG will increase regardless of the underlying fundamental thesis, at least in the short run. Investor Takeaway  We justify our hold recommendation for STAG because, on the one hand, the investment spreads are positive, and the dividends are increasingly well covered, both of which are positive indicators. On the other hand, the realized total return does not compare favorably with the cost of equity, which implies that while the business may engage in accretive transactions, the benefits have not commensurately benefited investors. The net effect, in our view, is that the increased dividend coverage is providing management a cushion to operate with a degree of financial flexibility at the expense of investor returns. Until the dividend growth record improves, we suggest investors carefully consider their rationale for this security.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","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":"4.29.1","shortVersion":"4.29.1","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/2469172264"}