STAG Industrial: A 4% REIT Gem For A Growing Market (NYSE:STAG)

STAG Industrial, Inc. (NYSE:STAG) is the only industrial real estate investment trust, or REIT, that passive income investors need, in my view.

STAG Industrial comfortably covered its dividend with core funds from operations, or FFO, in the fourth quarter (as well as throughout 2023), and the U.S. economy is in great shape as well, potentially fueling rental growth rates of pro-cyclical REIT investment like STAG.

Recent economic data points indicate that the U.S. economy is still growing and adding a boatload of jobs, which means that economic growth prospects for REITs like STAG Industrial are very favorable indeed.

My Rating History

STAG Industrial was a Buy for me in November given that the REIT predominantly focused on industrial properties which profited from growing eCommerce transactions in the economy.

I also highlighted that STAG Industrial relies heavily on acquisitions to drive its FFO growth. Recent ADP payroll data suggests that the U.S. economy is doing quite well right now, which should be a tailwind for pro-cyclically positioned REITs.

Pro-Cyclical REITs Are Poised To See Rent Tailwinds

STAG Industrial is an industrial-focused REIT with a large real estate portfolio. As of December 31, 2023, STAG Industrial owned 112.3 million square feet of industrial real estate space that had a lease rate of 98.2%. Many of STAG Industrial’s tenants operate in the eCommerce industry, as I pointed out last time, and eCommerce growth trends are profoundly benefiting STAG Industrial.

What also benefits STAG Industrial, and supports its ability to grow its net operating income through rent increases, is a growing U.S. economy.

Based on this week’s ADP payroll data, U.S. employers added 184,000 jobs in March and wages rose 5.1% compared to last year. These figures attest to a strong U.S. economy and pro-cyclically positioned industrial real estate investment trusts should profit from an improved negotiating position as far as rents are concerned.

STAG Industrial’s real estate produced $127.0 million in cash NOI, based on its same-store portfolio, in the fourth quarter which reflected 7% YoY growth. The same trend could be seen in the trust’s full year figures: STAG Industrial had $496.7 million in full year same-store cash NOI, reflecting a growth rate of 6%.

In a growing U.S. economy, STAG Industrial can raise its rents more quickly than in a softer economy, which is why the industrial REIT anticipates same-store cash NOI growth of 4.75%-5.25% in 2024. This growth rate is above the long-term average same-store cash NOI growth rate of 2.5%. Put simply, a strong economic backdrop leads to faster NOI growth and, possibly, better dividend coverage for STAG Industrial.

STAG Industrial paid $1.47 per share in dividends in 2023 while earning $2.29 per share in core FFO. In the year before that, in 2022, core FFO of $2.21 compares against a cumulative dividend pay-out of $1.46 per share. The implied dividend pay-out ratios in 2023 and 2022 therefore were 64% and 66%.

Thus, STAG Industrial’s dividend pay-out ratio dropped 2 percentage points YoY, thanks to growing income from its industrial real estate portfolio. As a consequence, the dividend has a higher margin of safety as well.

Reasonable FFO Multiple

STAG Industrial sees $2.36 to $2.40 per share in core FFO in 2024 which is based on $350-650 million in acquisitions. This guidance implies a 15.7x core FFO multiple. STAG Industrial’s one year FFO valuation range was 13.3-16.6x.

Industrial REIT Prologis, Inc. (PLD) sees $5.42 to $5.56 per share in core FFO this year, reflecting a core FFO multiple of 23.0x. Prologis, however, is substantially larger (it has a 17x higher market value than STAG Industrial), is more diversified and the leading industrial REIT in the U.S. for which passive income investors are willing to pay a premium.

From a valuation angle, and taking into account STAG Industrial low and stable dividend payout ratio, I think that the trust is the only industrial REIT that passive income investors need.

Why The Investment Thesis Might Not Work Out

STAG Industrial is an industrial REIT that should perform well in a growing economy, but it may lose a lot of its appeal in a contracting economy when the trust’s pricing power erodes which in turn might lead to slower NOI growth.

Since the trust overly relies on acquisitions to grow its real estate portfolio and core FFO, there is the possibility that STAG Industrial overpays for the acquisition of industrial real estate or misses out on FFO growth if the market for industrial real estate transactions dries up in a recession.

My Conclusion

STAG Industrial is a high quality industrial REIT with sufficient FFO to support growth of its underlying real estate portfolio as well as dividend growth.

The trust should also profit handsomely from a strong outlook for the U.S. economy, which was implied by this week’s ADP Payroll data. In a growing economy, STAG Industrial has substantial pricing power which is reflected in the trust’s robust same-store cash NOI growth outlook for 2024.

I think that STAG Industrial’s valuation based on core FFO is very compelling, and since the trust is also growing its monthly dividend, STAG is a buy for passive income investors.