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Where Will STAG Industrial Be in 5 Years?


Jun 04, 2020 by Dan Caplinger
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The coronavirus pandemic has had a big impact on the real estate market. Store closures and stay-at-home orders have forced many tenants to seek rent deferral or forgiveness from their landlords, and that's put real estate investment trusts (REITs) that hold those leases under pressure. In the industrial property sector, STAG Industrial (NYSE: STAG) saw its share price briefly lose almost half its value during the worst of the coronavirus-inspired stock market panic.

Looking ahead, though, there are some reasons to be optimistic about STAG's prospects. Although plenty of challenges lie ahead, the industrial REIT has a lot going for it. Below, we'll look in more detail at how STAG has fared and what it sees in its long-term future.

How STAG got here

STAG Industrial has a business model that's similar to what you'll see from many REITs in various sectors, but it also tries to keep things relatively simple. STAG's ideal candidate for its portfolio is an industrial property that it can lease out to a single corporate tenant with a long-term rental agreement with favorable escalation terms. That guarantees rising levels of revenue and avoids the hassles of dealing with multiple tenants within a single location.

STAG has gone on an aggressive expansion run over the years, and it's put together a large portfolio as a result. The industrial REIT owns more than 450 buildings in 38 different states, with a total of nearly 92 million square feet. STAG purchased nearly 70 of those properties in 2019 alone, spending $1.2 billion and adding almost 16 million square feet to its holdings. With a weighted average lease term of more than eight years on those newly acquired properties, STAG expects its tenants to stick with it for a long time.

Will STAG's growth slow down?

STAG's most recent quarterly results reflect the industrial REIT's attempt to keep to business as usual. CEO Ben Butcher noted in the quarterly press release that STAG's business model involves relatively low levels of leverage compared to other real estate investment trusts, and that's left it in a much better position than some of its REIT peers to continue following its long-term strategy.

Indeed, STAG kept making acquisitions, buying nine properties in the first quarter for $119 million. Occupancy rates of 96% to 97% reflect the strength of the single-tenant business model as well as STAG's discipline in choosing only the most financially stable tenants for its properties. That rate of purchases was slightly slower than in the past, although the winter months have historically been somewhat sluggish for STAG's niche of the real estate market.

STAG also kept raising cash, storing powder for future opportunistic purchases. A capital raise of $311 million in the first quarter was just the latest of many such secondary stock offerings, but investors have had a good appetite for the new STAG shares, minimizing any dilutive element to the moves for existing shareholders.

What will the future bring for STAG?

Investors in STAG can expect several things from the industrial REIT going forward. First, STAG will do whatever it can to keep up its track record of boosting its dividends. With increases in its monthly payout coming each year since 2011, STAG has been able to pass through rising rental income to its shareholders. The size of those increases may differ during good times and bad, but the general trend is likely to remain pointed upward.

There's some risk of a somewhat longer recession than normal resulting from the economic impacts of the coronavirus pandemic. With lockdowns having extended for such long periods of time, prospective industrial tenants might have difficulty considering expansion plans until they've been able to retrench. That could reduce the supply of high-quality tenants that STAG would willingly bring on to occupy properties. Nevertheless, STAG has seemed optimistic about the long-term health of the industrial real estate sector and its ability to keep making profitable deals.

STAG's stock has rebounded well since its bear market lows, and its prospects appear solid. With a dividend exceeding 5% and plenty of growth potential, STAG looks like a solid play in the industrial REIT sector for investors looking for an attractive combination of income and long-term share-price gains.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stag Industrial. The Motley Fool has a disclosure policy.