Industrial real-estate investment trust STAG Industrial (NYSE:STAG) has a deceptively simple business model: buy up industrial properties and lease them out to single tenants for as long as possible. That business model has been extremely lucrative, but investors continue to worry that a potential cyclical downturn in commercial real estate could hurt the company. Coming into Tuesday's first-quarter financial report, STAG investors were confident that acquisition-led growth would boost both revenue and funds from operations, but even they were surprised by the extent to which STAG managed to expand. Let's look more closely at the latest from STAG Industrial to see what the latest quarter said about its performance and what lies ahead for the REIT.
STAG keeps growing
STAG Industrial's first-quarter results continued its long streak of strong performance. Total revenue was up 19% to $60.9 million, which was slightly faster than the REIT managed during the fourth quarter of 2015. STAG posted net income of $11.8 million, reversing a year-ago loss, and the key metric of core funds from operations was up 17% to $27.7 million. That produced core FFO of $0.39 per share, a penny more than the consensus forecast among investors.
STAG's operational strategy remained similar to that in past quarters, but the pace of growth wasn't identical in all respects. The REIT only acquired five buildings during the quarter, spending about $27.9 million for about 710,000 square feet of space. Occupancy in those buildings was just 63%, in large part because one building in Portland, Maine, is under redevelopment and is therefore unoccupied at present. Since the end of the quarter, STAG has bought another building, and it has four others under contract and six more with non-binding letters of intent. Overall, STAG's current pipeline of potential property acquisitions includes 167 properties totaling 37 million square feet and a total value of $1.7 billion.
STAG's leasing operations were somewhat mixed. The company executed 16 leases for 2 million square feet, with most of them being renewals. Retention rates for leases expiring during the quarter fell to 42%, but STAG said that it managed to find another tenant for the property with no downtime. Still, STAG's overall occupancy fell by almost a full percentage point to 94.8%.
CEO Ben Butcher was succinct in his comments about STAG's performance. "The first quarter demonstrated STAG's commitment to execution," Butcher said, and "the Company continues to execute across all facets of the business and is well positioned to take advantage of market opportunities."
Can STAG keep up the pace?
Getting financing is part of STAG's constant challenge, but the REIT did a good job of securing money from the equity markets during the quarter. In March, the company issued 3 million shares of cumulative redeemable preferred stock, pricing it at $25 per share to raise about $75 million. Net proceeds went toward paying down outstanding debt under STAG's unsecured credit facility, and that opened up available liquidity under the company's debt capacity. STAG will pay 6 7/8% on the preferred stock.
STAG also continued to treat dividend investors well, declaring dividends totaling $0.3475 per share for the third quarter. The payments will be divided into three equal amounts and paid monthly during the quarter, sustaining the payout rate STAG had during the second quarter.
For now, STAG appears to be doing everything it can to take advantage of continued strength in the commercial real-estate market. As long as favorable conditions persist, STAG should have the capacity to keep growing through acquisition and producing solid income with growth opportunities.
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.