In real estate, acquiring new property is the key to growth. STAG Industrial (STAG +0.67%) depends on a constant flow of new deals in order to keep expanding, and it has historically done a good job of identifying lucrative opportunities in the industrial real estate market to acquire and lease out to single tenants. This business model has served the real estate investment trust well, and investors are generally happy when things go well for STAG on this front.
Coming into Tuesday's second-quarter financial report, STAG investors wanted to see the REIT show continued success in taking advantage of favorable conditions in the commercial real estate market. STAG reported greater acquisition volume than ever before, but what was especially impressive was that the company did so while reducing the amount of leverage on its balance sheet. Let's take a closer look at STAG Industrial and what its latest results say about the REIT's future.
Image source: STAG Industrial.
STAG keeps getting bigger
STAG Industrial's second-quarter results were extremely good. Revenue jumped almost 20% to $72.2 million, which was slightly faster than the growth rate that those following the stock had expected to see. As often happens with REITs, STAG reported a net loss attributable to common shareholders. But the size of that loss was much smaller than in the past, and core funds from operations jumped 40% to $38.1 million, or $0.41 per share, climbing by $0.03 per share from the year-earlier quarter.
Looking more closely at the report, STAG was pleased with how it managed to find so many promising properties. The REIT bought 21 buildings in the second quarter, spending more than $285 million to get about 4.6 million square feet of space. The properties were scattered across the country; an impressive seven deals involving nine buildings were done in the last five days of June. The buildings are 95% occupied, which should ensure solid cash flow without many temporary revenue blips. STAG also sold three buildings, collecting $6.5 million, and giving up about 135,000 square feet of space in the process.
STAG also continued to do an effective job with its leasing activity. The real estate investment trust executed 22 leases covering 3.3 million square feet, the bulk of which came from renewals. Retention rates improved slightly from the first quarter, rising to 60%, but changes in rental income were far less favorable than in previous quarters. Occupancy rates also fell by about a percentage point, to just below 95%.
What's ahead for STAG?
CEO Ben Butcher was pleased with how things went and what lies in STAG's future. "The second quarter represented the largest acquisition volume in STAG's history," Butcher said; "this acquisition volume, coupled with our 8% per share growth while simultaneously deleveraging the balance sheet, has positioned the company very well heading into the second half of 2017."
The capital moves that STAG made were particularly impressive. Gross proceeds from selling shares brought in more than $205 million, which clearly helped fund the greater-than-usual level of acquisitions. The REIT also opened a new term loan with a five-and-a-half-year maturity, obtaining $150 million and using part of the proceeds to pay down $88 million in secured debt.
STAG investors didn't have an immediate response to the report, with the stock not moving in after-hours trading following the announcement. Yet with a solid yield of more than 5%, STAG is keeping its shareholders happy. Good business conditions should continue to help STAG grow its fundamental business into the future.
