Demystifying The Mystery Behind STAG Industrial
- Part of the mystery of STAG has been the company’s underlying investment thesis.
- Although the company is considered an industrial REIT, the company is unique in that it focuses on properties in secondary markets.
- STAG is well-positioned to continue growing its platform and delivering investors with solid earnings and dividend growth.
Since my article in early August, shares in STAG Industrial (STAG) have declined by over 8% providing a better margin of safety for new buyers. However, before hitting the BUY button, investors should take a closer look at this uniquely-positioned industrial REIT to ascertain the risk and reward hypothesis.
It’s been almost seven years since my first STAG article (November 2011) in which I explained:
“In many instances a high “margin of safety” is correlated to a lower yielding alternative and a “riskier” investment is correlated to a more speculative one. However, the world is not black or white and STAG is a perfect example of a REIT with a sound investment platform AND a high dividend yield.”
STAG shares have returned just over 20% annually since my November 2011 article, and just over 200% in total. Over the years, I have maintained either a BUY or STRONG BUY on the company recognizing that the benefits of owning shares in this monthly-paying REIT is to deliver stress-free income and robust price appreciation.
As I reflect on STAG’s performance over the years, including my very first article, it’s interesting to see how the market has viewed the Boston-based REIT. At times, STAG has outperformed and at other times, shares have disappointed.
Part of the mystery of STAG has been the company’s underlying investment thesis. Although the company is considered an industrial REIT, the company is unique in that it focuses on properties in secondary markets.
For some pundits, that may suggest higher risk, but STAG has been successful in mitigating the secondary market risks by focusing on (1) selectivity, (2) diversification, and (3) retention.
I find STAG comparable to Realty Income (O) in a few ways.
First off, STAG and O pay monthly dividends.
Secondly, STAG can acquire properties in many markets that the larger industrial REITs can’t, so the investment pipeline for STAG is much larger (than the peers).
Third, STAG has a conservative balance sheet in which the company has more financial flexibility.
Fourth, STAG has been successful at growing its dividend and maintaining a healthy payout ratio.
Keep in mind, the biggest difference with STAG and O is that there is substantially higher retention risk with STAG. The STAG leases are shorter (that average 4.8 years) and most tenants are not investment grade. However, both REITs are benefitting from their scale and cost of capital advantages, and that’s why they continue to grow their dividends regularly and predictably. Bow ladies and gentlemen let me help you demystify the mystery behind STAG…