Stag Industrial (STAG 0.70%) is a great passive income producer. The industrial REIT pays a high-yielding monthly dividend (currently 3.9%) that has steadily increased. That's more than double the dividend yield of the S&P 500 (currently 1.5%).
That attractive payout should continue rising in the future. A big factor driving that view is the robust demand for its properties, which was evident in its second-quarter financial results.
NYSE: STAG
Key Data Points
Robust rental growth
Stag Industrial posted solid second-quarter results. Net operating income across the industrial REIT's existing portfolio grew by 5.3%, driven by rising rents. The company's long-term leases feature escalation clauses that grow its rents by 2.5% annually, providing a nice base growth rate.
Meanwhile, strong demand for industrial real estate due to tailwinds like e-commerce growth and supply chain issues is driving market rental rates skyward. That's enabling the REIT to lock in much higher lease rates as existing contracts expire and reprice to the going market rate.
Rents on leases commencing in the quarter (new and renewals) were up 28% on a cash basis compared to the prior rates on the same space. That's a record leasing spread (the difference between the new rate and the prior one) for the company.
Robust tenant demand has enabled the company to address 94.2% of its expiring leases for the year. It has signed contracts covering 12.2 million square feet of space at an average rental change of 30.6% on a cash basis.
Given the long-term nature of its leases, net operating income should continue steadily rising in the future, driven by rental rate escalation clauses on existing leases and its ability to capture higher market rents as legacy leases expire. This embedded growth should enable Stag Industrial to continue increasing its monthly dividend.
Plenty of potential to reaccelerate its other growth driver
Rent growth is only half the story for Stag Industrial. The REIT's other big growth catalyst is acquisitions. It has a long history of expanding its portfolio through property purchases, which have helped power dividend growth.
However, this year has been a different story. The company didn't close any deals in the first quarter because real estate cap rates have lagged behind the rise in interest rates. That made potential acquisition opportunities less attractive, since they weren't as accretive.
Stag's acquisition growth engine has started to rev back up over the past few months. The REIT completed two deals in the second quarter for $40.7 million. The two fully occupied buildings have an average going-in cap rate of 6.2%, higher than the average 5.2% cap rate of acquisitions made last year.
Meanwhile, they have some value-add upside potential, since less than two years remain on the existing leases. With market rents rising, it should be able to lease these properties at higher rates when the existing contracts expire.
The company has agreed to acquire six more properties since the second quarter ended for $70.7 million. It has another 151 potential property acquisitions in the pipeline, representing $3.1 billion of investment opportunity. Stag won't close all those deals. It anticipates acquiring $300 million to $700 million of properties this year. This outlook suggests it will have a very busy second half as the transaction market stabilizes.
The company has lots of flexibility to fund acquisitions. It has sold $70 million of properties this year to recycle capital into higher-returning opportunities. It ended the second quarter with $794 million of liquidity and a reasonable leverage ratio of 4.9 times. That puts it in a strong position to capitalize on acquisition opportunities in its pipeline. Future deals will supply it with incremental cash flow to support its growing dividend.
Stag's attractive dividend should keep rising
Stag Industrial's high-yielding monthly dividend is on a very stable foundation thanks to the strong demand for its properties and its solid balance sheet. Meanwhile, it should continue rising, driven by rent growth and the reacceleration of its acquisition machine. These factors make it a great stock for passive income seekers to buy and hold long term.
