Many investors steer clear of real estate, failing to understand the investment opportunities available even in areas of the market that some might consider boring. For instance, real-estate investment trust STAG Industrial (NYSE:STAG) has watched its gains from earlier in the year evaporate as many begin to fear the coming tightening of interest rates from the Federal Reserve and its likely impact on real-estate prices and returns. Coming into Monday afternoon's first-quarter financial report, STAG had given up a fifth of its value in just a few months, and investors wanted to see solid growth to offset concerns about the long-range future. STAG posted healthy numbers in its report, thanks largely to even more aggressive acquisition activity than the company has historically had. Let's look more closely at how STAG did in the first quarter and what might be next for the REIT.
STAG marches on
Real estate investment trusts use slightly different metrics than many companies, and most of STAG's results were positive. Total revenue jumped 28% to $51 million, as rental income rose at a 27% clip. Adjusted net operating income climbed 30%, resulting in a 25% rise in core funds from operations and a 30% rise in adjusted funds from operation. Still, on a per-share basis, core FFO per share dropped a penny year-over-year to $0.35 per share.
Looking more closely at STAG's results, a number of things stand out. Occupancy rates fell slightly, dropping half a percentage point to 94.4%. Yet that didn't stop STAG from buying up new properties at a rapid pace. The company has closed on or committed to purchases totaling $257 million, which represents well over half of its $450 million target for buyouts throughout the 2015 year. Specifically, STAG acquired five industrial buildings with total area of 1.5 million square feet, spending $97 million. About a quarter of the payments for the buyouts came from newly issued Operating Partnership units, which offer equity exposure combined with favorable tax treatment. As we've seen in the past, STAG's new properties all had 100% occupancy rates, helping to raise overall occupancy for the REIT.
On the lease side of the business, STAG executed leases for about 550,000 square feet, reflecting the sluggish part of the year for the company's business. A dozen leases expired during the quarter, and retention rates of just 64% were a bit weak compared to past quarters.
CEO Ben Butcher was pleased with STAG's results. "The first quarer was unseasonably active for STAG," Butcher said, and "we are very bullish on all facets of our business and confident that we are well prepared to maintain our pace of accretive growth."
Good news for STAG's finances
With so much attention to acquisitions, STAG has to rely on being able to get financing when it needs it. So far in 2015, STAG has had great success in tapping various funding sources, including the issuance of $120 million in senior notes in February and $32 million in equity financing. The reward for STAG's prudent expansion has been favorable treatment from credit rating agencies, with Fitch upgrading the company's bond rating to BBB, firmly putting the REIT into investment-grade status. Being well clearly of junk bond status could save STAG millions in financing costs over the years to come.
Indeed, STAG decided to pass some of those gains on to investors. After the quarter ended, STAG boosted its monthly dividend by 2%, giving investors $0.115 per share in monthly income beginning in July.
From a broader perspective, STAG's mission of steadily growing appears to be on pace. As of the end of the quarter, STAG had more than 230 tenants in buildings totally more than 48.5 million square feet. With an average lease size that almost exactly matches its average building size, STAG concentrates on having a relatively small number of reliable clients and then making sure to keep them happy.
Looking forward, STAG will face the same concerns about interest rates that most REITs do, especially given the recent volatility in the bond market and its effect on most income investments, including REITs. With the company having taken steps to keep its borrowing costs under control, though, STAG has done just about everything it can to put itself in the best position to profit throughout the rest of 2015 and beyond.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Stag Industrial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.