Share prices of Stag Industrial (STAG -0.17%) have fallen nearly 25% from their early 2022 highs. That's not out of line with the broader real estate investment trust (REIT) sector or the industrial niche in which it operates, with both under pressure lately. But unlike the case with Stag's closest peers, this discounted price may actually be a compelling value play. Here are some facts to consider as you examine this REIT.
Stag Industrial is doing just fine
One of the big concerns for industrial REITs today is that the boom in demand related to the coronavirus pandemic is over. There's some logic to that view, as working from home and social distancing resulted in an increase in online shopping. That uptick meant more demand for industrial assets like warehouses. But now that the world is learning to live with the coronavirus, some prominent companies have announced plans to pull back on investments in industrial assets. Technology and retail giant Amazon is probably the most newsworthy name on the list, which instantly got investors scared given the scale of its warehouse needs.
Image source: Getty Images.
And yet, for the first quarter of 2023, Stag reported very strong financial results. For example, the REIT posted an occupancy rate of 97.6%, which is a solid figure that suggests demand remains strong. It was able to increase rents on expiring leases by a hefty 35.3%, which is another indicator of strong demand. It was able to raise rents so much because it is moving older leases, with below-market rates, up to current lease rates as they expire. That's a trend that should continue over the near term, a fact that suggests future strong results.
Meanwhile, the REIT's funds from operations (FFO) payout ratio was a solid 66% in the first quarter. That leaves a lot of room for adversity before the dividend would be at risk. In fact, there's likely room for more dividend growth there, too. The yield is 4.1%, which isn't huge, historically speaking, but it is a full percentage point above where it was at the start of 2022.
The key to the story
All told, even though the industrial REIT sector is experiencing a pullback on Wall Street, Stag seems to be holding up fairly well. Dividend investors might want to take a look. But here's the interesting thing: Stag looks cheap relative to some of the other prominent REITs in the industrial space even though it is still performing pretty well as a business.
At the end of the first quarter, Stag estimated that the average price-to-FFO ratio for industrial REITs was about 24.1. Stag's price-to-FFO ratio was closer to 15 at that point. That suggests that value-conscious investors looking at the industrial REIT space should find Stag pretty attractive.
Fundamental Chart data by YCharts
The discrepancy still exists, as the table above shows, using trailing-12-month FFO per share. The three comparison points are some of the largest and most noteworthy names in the sector, including industry bellwether Prologis (PLD 0.69%); First Industrial (FR -0.09%), which is likely the most similar REIT on the list; and Rexford Industrial (REXR 0.47%), which has a unique focus on the Southern California market. You can see that First Industrial and Stag are both trading at lower valuations than Prologis and Rexford, but even there Stag is still notably cheaper.
Time to jump in on Stag?
Investors interested in the industrial REIT sector should probably start their research with Prologis, given its size and global scale. However, Stag is performing well and is attractively priced relative to its giant peer. If you have a value bias, it might just be worth buying Stag if you don't mind owning a stock mired in negative sentiment. Indeed, sometimes Wall Street goes too far to the extremes and the risk/reward balance here seems to favor the buyers right now.
