Up 17% in the past 12 months, the S&P 500 index has roared back on hopes that a recession can be avoided. Some stocks have fared even better than the index in recent months: Shares of Stag Industrial (STAG -0.35%) have surged 18% higher over the last 12 months.
But is the real estate investment trust (REIT) still a buy for income investors? Let's jump into its fundamentals and valuation to get an answer.
Robust demand for industrial real estate
Stag Industrial boasts an impressive industrial real estate portfolio. The company's 561 properties covering 111.6 million square feet are scattered throughout 41 U.S. states as of March 31. How has Stag Industrial grown from merely 93 properties in its initial public offering (IPO) era to its current size and scale?
The REIT focuses on purchasing single and multitenant industrial buildings from clients, often in sale-leaseback transactions. The appeal to clients is that they can leverage the capital received from Stag Industrial to repay debt or expand their businesses. In exchange for this capital, tenants agree to weighted-average lease terms around five years in length with lease escalators.
In recent years, industrial real estate has experienced a boom: This is in large part because e-commerce as a percentage of retail sales has more than doubled from 2014 to reach 14.7% in 2022. And as more consumers increasingly turn to e-commerce for their consumption habits, this is expected to double again to 30% by 2030. Because approximately one-third of Stag Industrial's real estate portfolio is geared toward e-commerce activity, this led same-store net-operating income (NOI) growth to accelerate from 0.6% in 2015 to a record of 5% today.
As same-store NOI growth has accelerated in recent years, this has led core funds from operations (FFO) per share to grow by 30.8% in the past five years from $1.69 in 2017 to $2.21 in 2022. That is why I anticipate that core FFO per-share growth should keep growing at a mid- single-digit annualized rate for the foreseeable future. Looking out over the long term, the $1 trillion-plus U.S. industrial real estate market should give Stag Industrial the ability to keep building out its portfolio moving forward.
The payout is well covered
Compared to the S&P 500 index's 1.6% dividend yield, Stag Industrial's 4% yield is quite enticing to income investors. Better yet, the company's dividend looks to be growing more secure over time.
As Stag Industrial has grown its business faster than its dividend obligation, its annualized cash available after dividend payments has grown from zero to $90 million today. For context, the latter was enough to cover about 20% of its $467.1 million in acquisition activity in 2022. Along with debt and equity issuances, this is how the company funded its acquisitions last year and how it will finance acquisitions in the future. This is why I would expect dividend growth to accelerate into the higher low- single-digits annually as the years unfold.
A great business at a discount
Stag Industrial is arguably underappreciated by the market. Based on its current midpoint core FFO per-share guidance of $2.25, the stock is currently trading at a current-year valuation multiple of 15.9. If this wasn't convincing enough, Stag Industrial's price-to-book (P/B) ratio of 1.9 is below its 10-year median P/B ratio of 2.1. Given that the company's fundamentals are as strong as they have ever been (evidenced by the record same-store NOI growth that is expected in 2023), this is an attractive valuation in my opinion. That is why I rate shares of Stag Industrial a buy for income investors at the current $36 share price.