Stag Industrial (STAG -0.17%) can be a real yawner. The real estate investment trust (REIT) acquires and operates single-tenant industrial properties across the country. It signs long-term leases with tenants that generate very stable rental income, giving it the cash to pay a monthly dividend that currently yields around 4%.
While Stag Industrial has a relatively boring business model, the company is a pretty exciting investment opportunity these days. It sells at a bargain price, giving investors a nice entry point into what has been a magnificent wealth creator over the years.
A quiet wealth creator
Stag Industrial came public in 2011 with relatively little fanfare. At the time, the industrial REIT owned 91 properties with 13.9 million rentable square feet across 26 states. It has since grown into a much larger company, with 568 properties and 112 million square feet in 41 states.
Stag Industrial has primarily acquired income-producing industrial properties. However, a focus in recent years has been on making value-add acquisitions (acquiring properties it can add value to through expansion projects, redevelopment, or leasing). The company has also gotten more into ground-up development projects in recent years, which are higher-risk/higher-upside investments.
The REIT's growing portfolio has significantly increased its rental income. That has allowed the company to give its investors a slight pay bump each year, while enabling it to retain an increasing amount of free cash to fund new investments. Its dividend payout ratio had fallen from about 99% at its IPO to 73.9% this year, allowing it to retain about $95 million in annual excess free cash flow.
The company's steadily growing cash flow and dividend have combined to produce a pretty compelling total return over the years:
The chart shows that the company has produced a nearly 500% total return since its IPO, significantly outpacing the S&P 500. It would have grown a hypothetical $1,000 investment at its IPO into nearly $6,000 today. That's about $1,500 more than the same investment in an S&P 500 index fund.
A premier value creator at a bargain price
Companies with excellent track records of growing value for their shareholders typically trade at a premium valuation compared to their peers. However, that's not the case with Stag Industrial:
Data source: Stag Industrial.
As that slide shows, Stag Industrial trades at a higher implied real estate capitalization rate (cap rate) than its peers (meaning it has a lower valuation and higher income yield). It also trades at a lower funds from operations (FFO) multiple (including adjusted FFO). This lower valuation is a big reason why it has a higher dividend yield.
That higher yield enables investors to generate a higher-income return on a new investment. For example, a $1,000 investment in Stag Industrial would produce about $40 of annual dividend income, while that same investment would only produce roughly $30 of annual dividend income from its peers.
This income stream should grow as Stag's FFO increases, driven by rising rental income and continued acquisitions. The company's legacy portfolio has lots of built-in growth. Its current leases have escalators that will increase rents by a 2.6% annual rate.
Meanwhile, there's even more rental growth upside as its long-term leases expire, given the strong demand for industrial real estate. That has driven a more than 30% increase in rents this year as legacy leases expired and Stag Industrial signed new ones covering the same space at the much-higher going market rate.
Meanwhile, the company has lots of financial flexibility to continue acquiring new properties. It has an investment grade-rated balance sheet backed by a low leverage ratio (4.9 times at the end of the third quarter, down from 5.2 times at the end of last year). Add in its meaningful (and growing) post-dividend free cash flow, and Stag Industrial can continue buying properties as compelling investment opportunities arise.
A well-rounded investment opportunity
Stag Industrial has quietly done a magnificent job growing shareholder value over the years. Despite that, it trades at a bargain valuation these days. That makes it look like a very compelling investment opportunity right now. It's in an excellent position to continue expanding its portfolio and increasing its high-yielding dividend in the coming years, which should allow it to keep growing shareholder value.
