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Forget Rising Rates. STAG Industrial's Still Strong

By Dan Caplinger - May 2, 2018 at 3:34PM

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Some investors had fears about the industrial REIT's prospects. Find out whether they're justified.

Investors in real estate investment trusts are used to having to look at a wide range of macroeconomic factors. Although the value of the properties they own are generally tied to the health of the particular real-estate markets in which they concentrate, REITs like industrial landlord STAG Industrial (STAG -2.21%) also have exposure to changes in interest rates. Higher rates can boost financing costs and also lead investors to demand higher yields on their investment, hurting share prices.

Coming into Tuesday's first-quarter financial report, STAG investors were hoping that the industrial REIT would keep growing at a reasonable pace. STAG's results defied any concern about rising rates, and many are optimistic that the REIT can continue to grow no matter what happens with interest rates in the near future.

Aisle of a high-ceilinged industrial warehouse with pallets of various boxes on the shelves.

Image source: STAG Industrial.

How STAG started the year

STAG Industrial's first-quarter results generally continued along the same path that the REIT followed in 2017. Total revenue of $83.3 million was up 20% from year-ago levels, rising at a pace consistent with what most of those following the stock had expected. GAAP net income soared from roughly break-even results in the year-ago period, and core funds from operations rose by nearly a quarter to $44 million, producing per-share core FFO of $0.43.

One trend that continued during the first quarter was a slowdown in the number of properties that STAG acquired on the open market. The REIT said it bought just six buildings in the first quarter, down from 11 in the fourth quarter of 2017, and spent $78.8 million in the process. The buildings purchased have about 1.1 million square feet of space. Two properties were in South Carolina, while others in Minnesota, Pennsylvania, and Texas rounded out the list.

STAG also didn't do much in the way of selling real-estate assets. Just two sales showed up on the distribution side of the ledger, raising $50.4 million in exchange for buildings having a total of about 650,000 square feet.

Where things picked up for STAG was in the leasing of its existing portfolio. The company executed new leases for about 910,000 square feet, but renewal activity more than doubled from last quarter's numbers to 2.4 million square feet. Overall retention bounced back to 83%, and cash rents rose at a healthy 8.7% pace. Occupancy rates of almost 95% for the entire portfolio remained solid.

Can STAG do even better?

CEO Ben Butcher was happy with STAG's performance. "The first quarter reflected the strength of the platform," Butcher said, "with a record level of leasing activity and the continued pursuit of our very attractive acquisitions opportunity set." The CEO also pointed to new director Michelle Dilley, who just joined the board, as a great asset for knowledge about supply chain management and logistical operations.

Access to capital is always of primary importance for real estate investment trusts, and STAG got a vote of confidence on that front. Bond rating agency Fitch Ratings affirmed its rating on STAG's debt, giving it a BBB rating with a stable outlook. That qualifies STAG debt as investment grade, and it will be vitally important for the REIT to do whatever it can to sustain its financial health in order to avoid having to pay the extra interest that non-investment grade high-yield bonds typically incur. STAG took advantage of its strong credit to tap the capital markets in April, with $175 million in seven- and 10-year notes carrying average yields of about 4.2%.

STAG investors were generally good with the report, and the stock climbed 3% on Wednesday following the Tuesday afternoon announcement. It's likely that many investors in STAG will remain sensitive to interest rate trends, but it's reassuring to hear that the rising rate environment isn't posing a big problem in STAG's intent to expand its business over the long haul.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Stag Industrial. The Motley Fool has a disclosure policy.

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