Industrial real estate investment trust STAG Industrial (STAG 0.70%) has been extremely profitable over the years by focusing on acquiring and managing industrial properties that it can leases out to individual tenants for long-term contracts. The commercial real estate environment has been solid for a long time now, and coming into Thursday's third-quarter financial report, STAG investors had hoped that the company would be able to continue growing in a healthy way. STAG's results were encouraging, and the REIT appears to be in a good place to keep performing well going forward. Let's take a closer look at how STAG Industrial has done and what's ahead for the company in the future.
Warehouses can make great single-tenant leasing opportunities. Image source: STAG Industrial.
STAG stays steady with its growth
STAG Industrial's third-quarter results continued the positive trends we've seen in recent quarters. Total revenue climbed 12% to $62.6 million, which was slightly better than the 11% growth rate that most investors were expecting to see from the company. The company suffered a GAAP net loss attributable to common shareholders of $4.3 million. But looking at the more accepted core funds from operations (FFO), STAG managed to grow by 9%, and that produced core FFO of $0.40 per share, beating the consensus forecast among investors by $0.02 per share.
Operationally, STAG saw its acquisition activity pick up compared to earlier in 2016. The company acquired 13 buildings during the quarter, spending $166 million for properties with a total of nearly 3.7 million square feet. Occupancy on the buildings when purchased was 100%, and STAG purchased them at an implied capitalization rate of 7.9%, which is reasonably favorable from a buyer's perspective right now. STAG also purchased nine more buildings after the quarter ended, spending another $101.7 million and adding 1.9 million square feet to its total. The current pipeline of potential property acquisitions that STAG has includes 170 properties totaling 38.1 million square feet and having a total value of $1.85 billion, all of which are up from where they were in the second quarter of 2016.
STAG also made some dispositions of properties. The company sold 14 buildings with a total of 1.96 million square feet, and it received $51.4 million in proceeds from the sales. STAG agreed to sell another portfolio of buildings after the quarter ended, including six properties. That sale is expected to bring in about $80 million.
STAG's leasing activity was less robust than in recent quarters. The REIT executed 11 leases for 1.1 million square feet, and most of them covered properties where existing contracts were being renewed. Retention rate of 92.4% for the quarter was extremely strong, continuing an upward trend, but increases in cash rents slowed from past periods.
CEO Ben Butcher didn't waste words in describing STAG's success. "We are pleased with our performance this year," Butcher said, "and with our expectations for the fourth quarter and beyond. We will continue to focus on growing the bottom line and delivering the best risk adjusted returns to our shareholders."
What's ahead for STAG?
STAG's strategy requires constant access to capital, and the REIT did well in ensuring that new investment keeps coming in. STAG has an at-the-market offering program for stock, and that program raised more than $100 million during the third quarter and another $71 million following the quarter's end. With part of that money, STAG redeemed about $69 million in preferred stock, which carried a relatively high coupon rate of 9%.
STAG also gave dividend investors another slight increase, pushing its monthly dividend up to $0.116667 per share beginning in January. That works out to annual payouts of $1.40 per share, giving STAG a current dividend yield of well over 6%.
STAG investors were reasonably happy with the news, sending the stock price up almost 1% in midday trading following the announcement. In the long run, STAG will need for the commercial real estate market to hold up in order to support its business model, but at least for now, everything seems to be working in STAG's favor.
