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STAG Industrial Keeps Riding the Real Estate Wave

By Dan Caplinger - Feb 16, 2018 at 10:11AM

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Will rising interest rates keep hitting the industrial property REIT's share price?

The real estate market has benefited for years from the favorable environment in interest rates. Low rates have helped make it easier for companies like STAG Industrial (STAG 1.81%) to purchase properties and rent them to tenants, and the flows of income that the real estate investment trust has received from its investments have made its shares more attractive to investors without many good alternatives for generating consistent and reliable cash from their portfolios. 2016 was a great year for STAG, and the same conditions prevailed throughout 2017 as well.

Coming into Thursday's fourth-quarter financial report, STAG investors expected that the REIT would stay on track with its successful business model. STAG's results showed once again a somewhat slow rate of new investments in properties, but its financial results nevertheless looked encouraging. Let's take a closer look at STAG Industrial and what its latest performance can tell us about its prospects.

An aisle in a warehouse with metal shelves holding pallets going up to the open metal ceiling.

Image source: STAG Industrial.

STAG finishes 2017 strong

STAG Industrial's fourth-quarter results finished a good year for the REIT. Total revenue was higher by 22% to $81.3 million. GAAP net income was down substantially from year-ago levels due to reduced sales of properties from its portfolio, but the more reliable core funds from operations metric jumped by 33% to $44 million, and that worked out to per-share amounts of $0.44, topping the consensus forecast among investors by $0.01 per share.

As we saw last quarter, STAG remained in what appeared to be a temporary lull in purchasing activity. The REIT purchased 11 buildings during the period for $107.4 million. The properties were scattered across the country, adding about 1.9 million square feet to STAG's portfolio. Most of the purchases were in smaller-sized cities such as Omaha, El Paso, and Providence, and the buildings collectively had an occupancy rate of 92% and average lease terms of 7.3 years.

On the selling side, the company disposed of just two properties during the quarter. That raised $22.1 million, with the two buildings together having about 880,000 square feet.

Leasing activity also continued apace. STAG reported new leases covering 1.27 million square feet and renewals of 1.1 million square feet, but retention rates of about 53% weren't as good as they'd been in past periods. Cash rents were higher by 4.4%, helping to boost STAG's bottom line as well. Overall occupancy rates for the entire portfolio remained above 95%.

What's ahead for STAG?

CEO Ben Butcher explained how the REIT kept moving forward. "The fourth quarter was another successful quarter for STAG," Butcher said, "and a great way to close 2017. Continued strength in the industrial sector, record acquisition volume, robust portfolio operating metrics, and a defensively positioned balance sheet set STAG up well for another strong year ahead."

Yet of some concern is the fact that rising interest rates have caused STAG's share price to fall substantially. Those downward moves didn't affect the REIT's capital raising activity in the fourth quarter, as STAG managed to sell about 3.1 million shares for the best average price in the year, raising net proceeds of about $87 million. Now, though, prices have fallen from an average of $28.39 per share during the quarter all the way to between $23 and $24 per share. That could hurt STAG, especially if it wants to boost its acquisition activity levels heading into what traditionally is a strong period for the real estate market.

STAG investors seemed to be content with the report, and the stock looked poised to open at least slightly higher Friday morning after the Thursday evening announcement. In the long run, though, rate-sensitive investments like STAG could well see continued volatility if the recent rise in longer-term interest rates doesn't reverse itself in due course.

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STAG Industrial, Inc. Stock Quote
STAG Industrial, Inc.
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