- STAG reported solid third quarter 2021 earnings recently, showing steady improvement in several key areas.
- Despite taking advantage of the current economic climate to make many acquisitions, STAG also has been moderating the increases in its share count and net debt.
- While I have some concerns about current valuation and inflationary pressures, I remain bullish on STAG.
I like to keep track of STAG Industrial, Inc. (NYSE:STAG) after each earnings report, as I did with my 29 July 2021 article "STAG's Great Second Quarter Earnings Lift It Higher." I keep a close eye on STAG because I want to make sure that it remains on track in what has become a very iffy economy.
STAG is one of my favorite plays in the REIT sector because it is a dynamic, growing company in a great subsector that has great prospects. However, any company can stumble, so it's good to keep an eye on your favorites as well as your laggards.
Below, I will go through both the bull case and the bear case for owning STAG. While I remain bullish on the stock, I do have a few concerns about current valuation and market factors.
A quick look at the chart shows that STAG hasn't done too badly for us over the past year.
As can be seen in the one-year chart above, STAG has resumed its march higher after its quick dip along with the rest of the market in September 2021. It remains well above its 200-day moving average, which means STAG remains in a bullish posture.
As usual, let's first look at STAG's updated financial performance.
STAG's Performance Remains On Track
The five-year numbers are always illuminating and give us a framework for our view of the stock.
|STAG Industrial||Total Revenues||Operating Income||Diluted EPS||AFFO/FFO||Shares Outstanding|
As usual, the company's financials tell a tale for those willing to make the effort to read it. Total Revenues, Operating Income, and AFFO/FFO are all up to new highs in the latest four-quarter (ttm) numbers. Nothing to worry about there, the company survived the 2020 stress test with flying colors and now is heading into the fourth quarter of 2021 at a good clip.
Diluted Earnings Per Share were down slightly in the most recent ttm period, but looking at the previous quarters puts that in proper context. It was still the second-highest figure in the past five years and three times the 2019 numbers, so that's another indication that the pandemic was just a blip on STAG's financial radar screen. The 2020 figure also includes a couple of pre-pandemic months.
Shares Outstanding, which is something that I track closely in my articles, show another increase. However, the pace of expansion has slowed significantly from previous years. If my calculations are correct, the ttm figure is "only" a 6% increase from the 2020 year-end number to now. Of course, we still have three months of 2021 to go, but the company is on track to keep the increase much lower than the 18.6% pace from 2019 to 2020.
I've always said that STAG's dilution of its shareholders is the aspect of the company that I find least appealing. It's good to see that the company hasn't been pumping out as much money from the shareholders as it had grown accustomed to doing. Once again, these are not full 2021 figures and they could change significantly by the end of the year. However, the share-count trend so far in 2021 at least is heading in the right direction.
Okay, let's look at the quarterly figures next to see if they add some color to our analysis.
|STAG||Total Revenues||Operating Income||Diluted EPS||Total Assets||Net Debt|
All Totals in $millions except Diluted EPS. Source: Seeking Alpha.
The quarterly data shows steady improvement during the pandemic. Total Revenue, Operating Income, and Total Assets all hit new highs in the most recent quarter. While Diluted Earnings Per Share did not, it was only beaten by the fourth quarter last year, and that's probably a peak quarter every year due to retailers making holiday sales.
The Net Debt figure is interesting. While it grew, it did so only slightly. This confirms my suspicion that the company may be making a conscious effort to reign in its debt. Perhaps we'll even see it decline at some point. Who knows, stranger things have happened. Either way, I would prefer to see either STAG's net debt or the share count decline to make the stock a little less speculative. That would be the sign of a mature company.
Whenever discussing a company's debt situation, I defer to the credit rating agencies whose opinion really matters. Fitch Ratings has STAG at BBB with a stable outlook, while Moody's Investors Service rates STAG at Baa3 with a stable outlook. These are considered medium credit quality investment-grade ratings, which means the agencies think that STAG is likely to be able to repay its debts.
STAG debt maturity schedule. Source: STAG Industrial Supplemental Information Unaudited Third Quarter 2021.
With its debt laddered out through 2026, and no debt at all due for the remainder of 2021, STAG doesn't face any kind of a debt crunch anytime soon.
Next, let's look closely at the past quarter's results and see what management thinks about the company's prospects.
STAG's Third Quarter 2021 Showed Steady Progress
STAG describes itself as "a real estate investment trust (REIT) focused on the acquisition and operation of single-tenant, industrial properties throughout the United States." Basically, it runs warehouses primarily around cities in the United States.
STAG Industrial overview. Source: STAG Industrial Supplemental Information Unaudited Third Quarter 2021.
Since e-commerce relies heavily on warehouses for the distribution of goods bought online, STAG has benefited as its warehouses have experienced strong and growing demand. At the same time, the goods move through the warehouses quickly and efficiently, resulting in a dramatically declining retail sales to inventory ratio.
E-commerce as a percentage of retail sales and its effect on STAG's retail inventory to sales ratio. Source: STAG Industrial Fall 2021 presentation.
STAG's management targets over 60 of the largest markets in the United States. Unlike its competitor Prologis, Inc., which I wrote about earlier this year in "Prologis Remains On Track After Solid Q2 Earnings," STAG has not (yet) embarked on major expansion overseas. It has great growth opportunities domestically, with its share of "target assets" in its markets standing at 0.5%.
STAG Industrial acquisition pipeline. Source: STAG Industrial Fall 2021 presentation.
So far in 2021, STAG has been on an acquisition spree. It has picked up $3.5 billion in properties, almost double the amount it acquired in 2020. This is a good time to pick up quality assets given record low interest rates. STAG has closed 39 transactions and underwritten 224.
In the current shaky economic environment ("Economic growth rate slows to 2% on a sharp slowdown in consumer spending", 29 October 2021), STAG can afford to be picky. It closed on just 3% of the transactions it has had under consideration. It pays to be in good economic shape when some other businesses are faltering.
STAG client base and exposure. Source: STAG Industrial Fall 2021 presentation.
STAG's tenant roster is sprinkled with household names such as FedEx and Ford Motor Company. Its revenue stream is well-diversified, with many moderately sized tenants rather than a few huge tenants. This spreads out the risk so that even if a major company tenant were to have issues, STAG would be just fine.
Careful to provide its clients what they want, STAG's CEO, Benjamin Butcher, discussed the results of a tenant survey that found strong interest in environmental, social, and governance (ESG) issues during the third-quarter conference call on 29 October 2021:
STAG continues to be a leader in ESG. We recently received our 2021 Gresb Public Disclosure letter grade rating of B. Our score remains above the read average and ranked second of the 10 industrial real estate companies scored by GRESB.
Macroeconomic issues also are helping STAG, with the highly-publicized supply chain issues affecting the economy proving to be of benefit to STAG:
Demand for industrial real estate continues to increase, driven by the acceleration of supply chain issues initiated by the COVID pandemic. Backlogs of ships at ports and other transportation bottlenecks, shipping cost increases, inventory mismatches, and labor constraints are driving demand for warehouse space as companies attempt to adjust their supply chain networks. Consumer adoption of e-commerce is permanent and reflecting our healthy portfolio operating results. core FFO was $0.53 for the quarter, an increase of 15.2% as compared to the third quarter of 2020.
Its strong position in secondary city markets helped STAG to withstand the 2020 stress test with ease:
Secondary markets have always been in our view, and I think the data supports this, less volatile than primary markets. And obviously, during a period of quickly rising rents, the primary markets to that volatility were to the benefit of landlords. We're seeing strong rent growth against the secondary -- across all the markets, the secondary and primary markets that we operate in.
All of this enables STAG to provide a very healthy dividend that currently yields 3.33%. While that might not sound impressive compared to some REITs, it is far more than double the average yield of the S&P 500, which as I write this sits at 1.29%.
The healthy yield is not all that you get with STAG. The dividend is growing at a five-year growth rate of 0.85% and has been growing for seven years, which also may not sound all that impressive. However, the yield growth is held back by the price growth of the stock - which is a nice problem to have!
STAG Industrial five-year yield on cost. Source: Seeking Alpha.
As the chart above shows, your five-year yield on cost for holding STAG is over 6%. You may be leery about basing your decision on yield-on-cost, but it is the best way to normalize the dividend for the exceptional price growth of the stock. You also could buy something today that yields 6% and see no price growth in five years, but STAG gives you a chance at continual dividend increases, meaning higher income down the road.
STAG also pays its dividend monthly. Many investors consider that a nice bonus, since our bill also arrive monthly. While I don't think a monthly dividend is the end-all-and-be-all of an investment, with STAG you don't sacrifice performance for those monthly deposits.
STAG Industrial total return 2020-2021. Source: Seeking Alpha.
Speaking of STAG's price action, that has enabled the stock to match the S&P 500 index over the past year, as shown in the chart above. STAG also roughly matches the index over the past decade, though it lags a bit over the past five years. The company has a good track record of rewarding investors, you are not trading total return for yield.
STAG Industrial price-to-tangible-book-value ratio. Source: Seeking Alpha.
By some valuation measures, STAG is a fairly good value right now. As the graph above shows, the stock is trading around its average price-to-tangible-book-value over the past decade. This is despite the strong price growth the stock has displayed. This suggests that STAG is getting good value for its investments and is not wasting corporate funds on unprofitable ventures.
STAG Industrial gross profit margin over the past decade. Source: Seeking Alpha.
The company's gross profit margin is a healthy 3% and sits toward the top of its ten-year range, as shown in the graph above. The trend over time appears to be higher, perhaps a reflection of the growing impact of e-commerce.
STAG Industrial return on equity over the past decade. Source: Seeking Alpha.
In addition, STAG's return on equity has been improving over the past decade. It now is right around its highest point during that time, as shown in the graph above. That's a sign of a healthy company giving shareholders good value.
Now, let's turn to the risks involved with STAG.
Why You Should Be Cautious With STAG
I always try to present both sides of stocks in my articles. I'm not a stock salesman, so I have the luxury of being objective. Usually, you will only hear one side of the story, with the downside carefully sterilized to seem not so bad. I just give it to you straight and let you decide which case is better.
My main gripe with STAG is that the company continually dilutes shareholders by issuing new shares. I already covered this above, so I won't belabor it here. It is a fast-growing company and STAG has to fund its expansion somehow.
While the company has gotten good value for its investments as discussed in the last section, that doesn't necessarily mean it always will. Increasing shares is often the tactic companies resort to when they are in trouble. I think I've shown that STAG is not in trouble. However, by over-using this tactic, if the company were to get into trouble, that's one less safety valve available to it.
Next, while STAG has survived the pandemic well and even prospered due to some of the dislocations it caused, it cannot escape the reality of being a large landlord. Inflation has been surging in 2021, and that affects landlords as well as ordinary shoppers.
During the conference call, the company addressed a question regarding average rent increases:
The average escalator in the portfolio today is still around 2.4. New and renewal leases, we're signing new leases around that 3% mark and renewals anywhere from 2.5% to 3%. So consistent of what we've seen this whole year.
As has been widely publicized, inflation is running between 5% and 6% and there is no indication that it is slowing down. Depending on how long this inflationary surge continues, that could begin to eat into STAG's real economic returns if new leases and renewals remain below 3% increases.
While I went through a bunch of graphs above that illustrate reasons why STAG is a good value, not all of the data supports that.
STAG Industrial price-to-sales ratio over the past decade. Source: Seeking Alpha.
For instance, STAG's rising price has also elevated its price-to-sales ratio. While I don't think this is the most important metric for a REIT, it's a sign that the stock value has raced ahead and could be due for a pullback to squeeze out the excesses.
STAG Industrial price-to-cash-flow ratio over the past decade. Source: Seeking Alpha.
Similarly, STAG's price-to-cash-flow ratio is at its highest level of the past decade. That's another indication that too many investors may be crowding onto the same side of the ship.
STAG five-year yield chart. Source: Seeking Alpha.
Finally, STAG's yield, while healthy as discussed above, also is at its lowest point in the past five years. That's generally not the best time to buy a stock. It's another sign that investors are waking up to STAG's value and squeezing a lot of the excess value out of it.
I think the data shows that STAG is a healthy company in a growing sector that is executing well. Over time, people that buy and hold usually do well by buying STAG. I have some concerns about its current valuation and also about the overall economy, and that tempers my enthusiasm about STAG at its current price level. Overall, I think that STAG is a good stock to own, though personally I would prefer to pick up some shares a little lower than where it currently trades.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of STAG either through stock ownership, options, or other derivatives. 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.
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