Updated on March 18th, 2019 by Josh Arnold
For investors seeking yield, the real estate industry is a great place to look.
Intuitively, this is not surprising. Real estate owners collect predictable income from their tenants. Thus, the real estate business is qualitatively geared for business owners that want to collect periodic income.
This characteristic extends to the stocks in the sector as well. One of the best ways for retail investors to gain exposure to the real estate industry is through real estate investment trusts – or REITs, for short. REITs are required by law to pass the majority of their income to shareholders as dividends.
STAG Industrial (STAG) is one example of a REIT that looks to be a very attractive investment right now. The company’s current dividend yield of 5% is nearly 3x as high as the average yield in the S&P 500. You can see the full list of 5%+ yield stocks here.
Further, STAG Industrial pays monthly dividends (rather than quarterly). This is highly beneficial for retirees and other investors who rely on their dividend income to cover life’s expenses.
There are currently around 40 monthly dividend stocks. You can download the full list of monthly dividend stocks from our database below (including relevant investing metrics like dividend yields):
Because of the trust’s high yield and monthly dividend payments, STAG Industrial has the potential to be a great investment for income-oriented investors.
In addition, we see moderate levels of growth in the future, combined with a reasonably-priced stock.
Business Overview
STAG Industrial is a REIT that specializes in industrial commercial real estate. The trust became publicly-traded in 2011 after spinning off from its predecessor, STAG Capital Partners (formed in 2004).
Since the IPO, STAG Industrial has grown substantially – from 105 buildings initially to its current asset base of 390 buildings in 37 states rented to 349 tenants.
The trust focuses on warehousing, distribution, and manufacturing facilities. This gives STAG a natural tailwind from the rise of e-commerce as retailers expand their warehousing and distribution operations to meet digital demand; STAG is there to lease these facilities.
More details about STAG Industrial’s current business model can be seen below.
Source: STAG Industrial Investor Presentation, slide 1
The trust specializes in owning and operating single-tenant industrial real estate properties.
Some REITs view single-tenant properties as risky because the properties are viewed as a binary proposition; they are either fully leased or empty.
However, this creates mispriced assets, which STAG can then add to their portfolio at attractive valuations. This is central to STAG’s strategy and is a key differentiator among competitors.
Source: STAG Industrial Investor Presentation, slide 3
STAG’s addressable market is in excess of $1 trillion, half of which is made up of single tenant properties. The sector is highly fragmented, meaning that no particular entity would have a significant scale advantage.
STAG finds this to be an attractive mix of assets and combined with relatively low capex and high retention rates, it has created a strong portfolio of industrial real estate.
Source: STAG Industrial Investor Presentation, slide 19
STAG’s tenant profile reflects the vast diversification it has built into its portfolio, which the trust believes diversifies away much of the risk of owning single tenant properties.
The trust counts 349 entities among its tenants and more than 60% of those tenants have at least a billion dollars in annual revenue.
These are very large companies that presumably would better weather economic downturns and thus, would have the ability to continue to pay their rent under most or all economic conditions.
STAG has done a nice job of taking a relatively risky sector of real estate – single tenant properties – and building a portfolio in such a way that it diversifies away much of that risk.
Growth Prospects
STAG Industrial’s growth since its IPO in 2011 has been impressive from both a fundamental and an investor return perspective.
Fortunately, this real estate trust still has a strong growth runway.
The trust reported 2018 earnings on February 13, 2019, and it showed funds-from-operations, or FFO, growth of 20%. However, this was offset by a 15% increase in the share count, leading to FFO-per-share growth of about 5%.
The trust continues to invest heavily in new properties as it continues to expand its portfolio, and much of that financing is done with new common stock.
However, it continues to grow its FFO more quickly than the share count, so the moves are still accretive to shareholders over time.
Looking ahead, STAG will likely continue to grow at a similar mid-single-digit rate. Indeed, we forecast 6% annual FFO-per-share growth in the coming years. The trust still has a very small market share in its target market of real estate assets, leaving plenty of room for expansion.
In addition, the trust has a very specific set of investment criteria it uses to find new properties, and it has shown both the willingness and ability to execute on its strategy.
Source: STAG Industrial Investor Presentation, slide 4
This slide shows the addressable market for STAG, and it is absolutely enormous. The trust currently has less than 1% market share in what is a highly fragmented segment of real estate.
Market fragmentation, along with a large addressable market, give STAG sizable opportunity to continue to grow for many years to come.
Source: STAG Industrial Investor Presentation, slide 5
The market dynamics of the sector the trust competes in are favorable as well, and have improved meaningfully in recent years. Warehouse occupancy continues to rise and is currently in the area of 92%.
Rising occupancy has coincided with rent growth of ~1% annually as well, creating two sizable tailwinds for those leasing properties as STAG does.
With continued adoption of digital selling channels from retailers, we expect these metrics to continue to move higher for the industry, and indeed STAG specifically. This will help support its growth case in the years to come.
Dividend Analysis
STAG’s dividend is obviously very important, as investors generally own REITs for their payouts. STAG’s payout has grown every year since its IPO, and stands today at $1.43 per share.
However, growth since 2015 has been very slight, as the payout was $1.36 in that year, and has grown by just seven cents in the years since.
We do not see material growth in the dividend moving forward because STAG’s payout ratio, which currently stands at 77% of FFO-per-share, is still fairly high.
That is well down from previous levels near 100% as STAG has made a concerted effort to reduce the vulnerability of its dividend. That effort is still underway, however, so we see meaningful payout growth as unlikely in the near term.
Source: STAG Industrial Investor Presentation, slide 10
One factor we believe enhances the trust’s dividend safety beyond FFO is its track record of dispositions. STAG has made moves on its properties opportunistically in the past, which has generated significant cash proceeds and gains in the process.
In 2018 alone, the trust generated $30 million of gains on disposition, which equates to about $0.26 per share.
It can use these proceeds to acquire more favorably-priced assets, which would presumably enhance its ability to generate FFO, or it can use the cash to pay down debt, which also improves its ability to pay the dividend.
Regardless, the gains made on dispositions help the trust cover all types of expenses, the dividend included. While we don’t see a lot of growth in the payout coming, we do believe the dividend is likely safe at its current level.
Final Thoughts
STAG Industrial has two characteristics that will immediately appeal to income investors: a 5% dividend yield and regular monthly dividend payments.
Despite the company’s impressive performance in recent history, this REIT is still an attractive value at today’s price and yield. In addition, we like the trust’s strategy for long-term growth in a sector of real estate that is sometimes ignored by investors because of its perceived riskiness.
Thus, STAG Industrial makes a good potential addition to a high-yield portfolio because of its high dividend yield, monthly dividend payments, and leadership in the single-tenant industrial real estate market.
