Stag Industrial (STAG -0.17%) is a relatively young industrial real estate investment trust (REIT). It built its portfolio by focusing on second-tier markets where it has an advantage over the mostly smaller landlords that make up its competition.
Looking out longer-term, the management for this REIT thinks that e-commerce will be a key driver of the company's (and the stock's) success.
The big trends
Focusing on secondary markets has worked out fairly well for Stag Industrial. As a publicly traded REIT, it has both scale and access to capital that non-public, smaller operators lack. As such, it was able to buy properties profitably where competitors with higher costs couldn't. This helped Stag grow from a $290 million market cap company with 96 properties in 2011 to a roughly $6.8 billion market cap company with over 560 properties today, a little more than a decade later.
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As it grew, the REIT's business model shifted by necessity to include more exposure to larger markets. Still, the core of the business approach remains to add value using a granular acquisition strategy and via expansion and redevelopment efforts. And, at the same time, the world around Stag has been changing.
Lately, the REIT benefits from high occupancy rates and strong demand that pushed up leasing rates. Occupancy in the first quarter of 2023 was 97.6% and the company was able to increase lease rates by 30.6% on renewals. Basically, older leases are rising to market rates as they end, helping to support the company's financial results. Net operating income rose 7.8% year over year.
The long term
Another macroeconomic trend that management believes investors should be paying close attention to, however, is e-commerce. Right now there's some volatility, as a boom in e-commerce during the early days of the coronavirus pandemic eventually cooled off. However, first-quarter results among e-commerce companies show that the fundamentals as it relates to e-commerce are still pretty strong.
For perspective, e-commerce made up a little over 16% of retail sales in 2020 when consumers were working from home and practicing social distancing. That has fallen to around 14.7%. But the longer-term trend is what's important, noting that e-commerce sales were just 6.6% of retail sales in 2014. The pandemic jump was an anomaly, with the current rate looking more in line with historical growth.
Stag has benefited from this growth, as it notes that nearly a third of its portfolio handles e-commerce activity in some manner, based on customer surveys. But here's where things start to get more interesting. The REIT expects e-commerce sales to grow to 30% of retail sales by 2030. Tapping into that growth will allow the REIT to keep growing, likely offering vital last-mile connections to its customers.
Helping this trend is the move by businesses to bring their manufacturing facilities closer to home, or to locate them in the United States. This will basically lead to a need for more industrial and warehouse space. In a recent presentation, Stag highlighted its North Carolina and South Carolina properties, where 55% of its assets are near large reshoring projects. Once again, this is a trend that should allow the REIT to support long-term growth.
Better than it seems
Stag Industrial's stock price is down more than 20% since the start of 2022, largely driven by investors worried that industrial and warehouse demand is set to soften. This REIT's results don't show that, given the strong occupancy and rental increases it has posted. And things look strong long-term, as well, when you take into account the expected growth in e-commerce and, tightly related, reshoring. If you can think like a contrarian, it might be a good time to dig into this industrial REIT while Wall Street is still, perhaps unjustifiably, downbeat on the industrial REIT niche.
