Avoid Overpriced Realty Income, Opt For STAG Industrial

| About: STAG Industrial, (STAG)
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REITs such as PSA, O, and HCN are currently a little overpriced.

STAG offers an alternative investment for a much cheaper initial investment.

The strong metrics, healthy dividend, and discounted price support that STAG is a great second choice to PSA, O, and HCN.

REITs such as Public Storage (NYSE:PSA), Realty Income Corp. (NYSE:O), and Welltower Inc. (HCN) are typically the most reviewed because they can offer a lot of growth and a steady stream of income for those who need it such as retired folks but when those choices seem to be all too expensive, where can dividend growth investors such as myself start looking for values? I feel that one of the many answers to this question is STAG Industrial Inc. (NYSE:STAG) REIT because the price is fair, the dividend is excellent, and the FFO continues to climb higher each year.

STAG Industrial Inc. is a REIT that specializes in single-tenant industrial properties in the United States. The company has numerous highlights. These include but are not limited to an average dividend higher than 5% which is paid monthly, a business that has 95.6% of their properties leased, and a current price of $20.56/share which helps investors big and small to be able to hold a piece of the company. As of December 31st, 2015, the company owned 291 buildings and as noted before it has 95.6% of them leased/filled. They consist of 223 warehouse/distribution centers, 47 light manufacturing buildings, and 21 flex/office buildings. By operating a REIT that sticks to single-tenant industrial buildings, the company may be seen as higher risk but there are advantages to the single-tenant system such as less capital expenditure for leasing and operating those properties.

If we move on to the quantitative analysis of the business, the benefits of investing in STAG Industrial Inc. become much more apparent. As I have noted before, the current share price is only $20.56/share which should be easy for most investors to find available at a moment's notice. This I believe provides a small barrier for entry and is a great bonus to the stock. In addition to the low price, the stock yields a very attractive 6.76% dividend yield. As a dividend growth investor, this yield is more than enough to get my attention. Even with the higher tax rate that REITs are subject to, the high percentage more than easily outweighs it.

When we speak of REITs, the most important metric that is weighed in at every turn are the funds from operation or FFO. STAG Industrial Inc. does not disappoint in this area. Over the last couple years since its IPO, the company has done very well for itself. Even though STAG Industrial Inc. only started with an FFO of 14,450 in 2011 (expressed in thousands), the company quickly ascended to a very respectable 93,949 FFO (expressed in thousands) in 2015. As you can see, the FFO that STAG Industrial Inc. shows over the years has quickly gained momentum. This is exactly what one should like to see in an investment opportunity as it shows no sign of slowing down anytime soon.

If we move on to the net asset value, we can see that the company is trading at a discount. Currently, STAG Industrial Inc. sits at an NAV of 27.95 which would suggest that the company is currently being traded at a very nice discount. With a share price of $20.56/share, it sits much lower than a fair value of $27.95/share that the NAV would suggest it should be trading at for the metrics. I would assume that this discount may be due to the high debt-to-equity ratio that the company currently holds. Currently, the company has a debt-to-equity ratio of 1.32 which could definitely be better but with such a healthy price in relation to the NAV, I would deem that the stock itself is worth the small risk.

What then do the analysts have to say about STAG Industrial Inc.? I'd be lying if I said that the analyst's views on the company were good. As of March 2016, Jaywalk Consensus rates the stock as a sell. As of February of 2016, Ford Equity Research rates it as a sell as well. The Street Ratings, however, says that the company is a hold. Although the analysts currently point towards a more negative outlook for the company, I believe that most good things come with a little bit of a gamble and this is a gamble that I feel comfortable making as the metrics point towards a very positive future for the company. My confidence comes from the metrics and the fact that the company seems to be doing exactly what their growth strategy has laid out for them. The business as a whole should continue to grow because they are seemingly always acquiring new properties through a 60/40 equity/debt purchase plan. This assures that the properties are mostly paid for and with only a small window of debt taken in.

Finally, let's review the risks of the REIT. Currently, STAG Industrial Inc. has a few risks. Mainly, as with most REITs, their risk stems from adverse economic conditions. If they occur, they could potentially harm their returns and affect their ability to remain profitable. If this occurs, the REIT may have a near impossible job of paying investors the normally high percentage yield that is typical for the company. Poor economic conditions could also thwart their tenants from paying their rent and therefore defaulting on their leases. Also, the company could feel pressure from the various industries that utilize their spaces such as air freight, automotive, industrial equipment, component and metals, food and beverage, and containers and packaging if those industries take a turn for the worst.

All in all, however, the business appears to be very solid. Their FFO is steadily increasing every year, their dividend supports a healthy payment to any developing portfolio, and their NAV would advocate that the company is underpriced for the metrics that it currently supports. This being the case, I feel that it is a very good choice when seeking alternatives to PSA, O, or HCN.

Disclosure: I am/we are long STAG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.