Every now and then, a special stock comes along -- the kind that marries a big (and growing) dividend with huge growth opportunities. When I find one, I don't hesitate; and that's why, for the third time, I just bought shares in Stag Industrial (NYSE:STAG). Here are the major reasons why.
1. Big dividend. Stag is a real estate investment trust -- or REIT -- and is required by law to pay out 90% of its taxable income in dividends to its shareholders. REITs tend to be big income payers, and Stag is particularly juicy at a 7% annual dividend yield paid out monthly in $0.115 increments. Stag's monthly dividend is covered by its funds from operations, or FFO, per share.
The company had a dividend/FFO ratio of 94% last quarter. It's a high ratio, but not unreasonably so -- and Stag's growth plans tell me that the dividend should grow over time, along with the company. In fact, management recently hiked the dividend from $0.1125 per share, which emphasizes that upside.
2. High-growth mode. Stag is targeting 25% annual growth in assets each year. Here's how that's worked out since 2011:
|Year||Square Footage owned by Stag|
That's a 28% compound annual growth rate, by the way. Stag's growing like a weed in square footage, and its other metrics are mostly keeping up. EBITDA grew 26% last quarter, and cash net operating income was up 29% -- although, to be fair, core FFO per share was flat, in part because of growing G&A expenses, some refinancing work, and growing share count. With scale should come increased benefits -- like a bigger dividend (and better dividend coverage), better leverage, and more earnings.
3. Huge growth opportunity. Stag estimates that its target market is worth $250 billion, and that it has less than 1% market share. Fast growth + huge growth ramp? Count me in.
3. Improving credit profile. Fitch recently bumped Stag's credit rating from BBB- to BBB. This matters because, as CEO Ben Butcher noted, "Going forward, we believe that the upgrade will allow us to improve our cost of debt and gain access to a broader base of debt investors and products."
Access to cheap debt is a big deal for Stag, because it funds purchases with 60% equity and 40% debt. The name of the game with an acquisitive REIT like Stag is a big spread between cost of capital and cap rate -- essentially ROI, assuming you paid all cash for the property -- and cheaper debt makes a greater spread easier to achieve.
4. Share dilution. No, seriously. While it seems crazy to like dilution -- after all, whenever management issues more shares, it means you own a smaller piece of the pie -- Stag's management credibly argues that it's a good thing for current shareholders. After accounting for the equity/debt funding mix I described above, management argues that its new acquisitions are roughly 50% more accretive than dilutive.
Put a different way, CFO Geoffrey Jervis believes that "each new share we raise to capitalize our acquisition activity earns FFO of $2.15 per share... compared to our 2014 FFO per share results of $1.45." (This quote and all quotes following courtesy of S&P Capital IQ).) So they're minting money for current shareholders by issuing new shares -- an odd strategy, I'll grant, but one where the math appears to work out in favor of the shareholders.
5. Market diversification. Like many REITs, Stag invests in one primary property type; in Stag's case, it's industrial buildings. But unlike many other REITs, Stag is diversified in terms of the markets it pursues. While many REITs focus on so-called "primary" markets -- think Manhattan -- Stag's management believes there are opportunities in secondary markets -- think smaller markets, like Columbus, Ohio -- and tertiary markets -- think even smaller, perhaps Jeffersonville, Indiana. CEO Ben Butcher puts it plainly:
What tends to be very different between primary and secondary markets is pricing, the entry point for acquiring an asset. Two very similar investment opportunities, same lease term, building quality, age, tenant credit profile, both leased at current market rents, et cetera, will be priced vastly differently depending on whether they are located in a primary or secondary market even if the 5-year market rent growth prospects for the 2 markets are identical.
Stag works to take advantage of that spread between primary and secondary markets, which is worth as much as two percentage points, according to management. That's a pretty big number given that Stag acquired buildings at an 8.4% cap rate last quarter, and has broad exposure across all three market types.
|Market||Number of Buildings||Percent of Overall Square Footage|
Taken together, you've got a company that's expanded rapidly since its 2011 IPO, and is targeting robust growth in the future, as well. The dividend is aggressive from a payout standpoint, but is consistent and increasing. And the company's market strategy provides the opportunity both for outsized gains and also outsized risks -- after all, the standard way of doing things is usually the standard for a reason.
Stag is not for the faint of heart, nor, I think, for the traditional income investor; but for those seeking growth and income with a long-term investment horizon, I think it's a great stock to own.