Since March of 2022, interest rates have risen at their fastest pace in over four decades as the Federal Reserve tries to put a lid on inflation. As a result, interest rate-sensitive businesses, including real estate investment trusts (REITs), have suffered.
One company that is well positioned compared to peers is Stag Industrial (STAG -0.17%), which focuses on industrial properties like warehouses and distribution centers. If you're considering buying Stag Industrial stock today, there are a few things you should know first.
Stag Industrial focuses on this rapidly growing industry
Stag Industrial owns and operates industrial properties across the United States. At the end of last year, the company's portfolio included 562 buildings across 41 states, most of which are warehouses or distribution centers, accounting for 86% of its total properties.
The REIT caters to industrial customers, and its top tenant is Amazon, which accounts for 3% of its annualized base rental revenue. Other top tenants include Soho Studio, Eastern Metal Supply, American Tire Distributors, and Tempur Sealy International.
Stag Industrial leases space and operates as a REIT for tax purposes, meaning it must pay out at least 90% of its income to shareholders, allowing it to avoid corporate taxes. Because of this tax treatment, REITs can be an excellent source of dividends. Stag Industrial's dividend is currently 3.7% and has averaged 4.9% over the past decade.
It has achieved rapid growth since its 2011 IPO
Stag's focus on industrial property, specifically warehouses and distribution centers, has put it at the forefront of a rapidly growing industry over the last decade. Since going public in 2011, Stag's property count has gone from 93 to 558, and it has become one of the largest owners/operators of industrial properties in the U.S.
The company has benefited from shifting consumer trends away from physical stores and toward e-commerce. Its funds from operations (FFO), which measures cash flow from operations, has grown from $12 million in 2011 to over $400 million last year, or 37% compounded annually.
Rising interest rates have put pressure on commercial real estate operators
One thing REIT investors must pay attention to is interest rates. REITs are particularly sensitive to rapidly rising interest rates because of their impact on financing costs, the economy, and property valuations. Since March of 2022, the Federal Reserve has raised its benchmark interest rate by 525 basis points (5.25%) -- the fastest rate-hiking campaign since the 1980s.
Rising interest rates have already significantly impacted REITs and commercial real estate in general. Since the start of 2022, Stag Industrial has fallen 25%, while the Vanguard Real Estate ETF, which invests in REITs across various industries, has fallen 31%.
The primary concern for commercial real estate investors is the refinancing cost in the high-interest-rate environment. Most commercial real estate loans are short-term, lasting around five or 10 years, with a large balloon payment at the end. Because of this debt structure, these loans are usually refinanced when they come due.
The good news for Stag Industrial is that most of its debt matures in 2026 or beyond. Of its nearly $2.5 billion in outstanding debt, only $53 million matures next year, with another $375 million maturing in 2025. As a result, Stag is well positioned, doesn't have an immediate need to refinance debt right away, and can wait and see where interest rates go from here.
Image source: Stag Industrial.
Industrial properties should hold up better than other pockets of commercial real estate
Stag Industrial is also well positioned because of its clientele. According to CBRE Group, one of the world's largest commercial real estate companies, industrial properties should hold their values better than more vulnerable commercial real estate sectors, such as office properties.
Stag also stands to benefit from longer-term trends in its favor. According to a report published by Allied Market Research, the global warehousing and distribution market is expected to grow at a compound annual growth rate of 7.7% through 2031.
Image source: Getty Images.
Is it a buy?
Stag Industrial has been an excellent stock for investors since its 2011 IPO. Ideally, interest rates will stabilize or come down, which should benefit Stag and other real estate companies and remove some of the refinancing pressures they face. However, it's well positioned to ride out the higher rates since it doesn't immediately need to refinance.
The company has benefited from tailwinds due to shifting consumer trends toward e-commerce and should continue to benefit from those trends in the coming years. While there is some ongoing risk in real estate today, Stag Industrial is one of the most appealing REITs you can invest in today -- making it a solid stock to buy a little today and add to over time as commercial real estate pressures subside.
