STAG Industrial Bulks Up With Aggressive Growth-Producing Investments

By Dan

Image: STAG Industrial.

Many investors were scared of the real-estate industry coming out of the financial crisis, as memories of the housing bust made those who weren't very familiar with the sector nervous about the potential for further declines. Yet real estate investment trust STAG Industrial was able to take advantage of some of the opportunities that more risk-averse investors turned down, and in recent years, the REIT has managed to reward shareholders both with regular dividend income and with rising long-term share prices. Worries about rising interest rates had hit the Vanguard REIT ETF with big losses in August and September, but coming into Tuesday's third-quarter financial report, STAG investors had seemed to decide that the company had survived a potential downturn unscathed, and the REIT's results highlighted its ability to jump on opportunistic deals to boost revenue and profit. Let's look more closely at STAG Industrial's results and figure out what they say about the real estate market more broadly.

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STAG isn't slowing down at all STAG Industrial managed to put together results in the third quarter that most investors will be pleased to see. Total revenue climbed 32% to $55.9 million, easily topping expectations based on a 30% rise in rental income. As we saw last quarter, extraordinary items like impairment charges caused STAG to lose money during the quarter, but cash net operating income climbed by a third to $47.2 million, and core funds from operations of $0.39 per share were $0.02 higher than the consensus forecast among those following the REIT.

STAG hasn't seen any slowdown in the number of profitable acquisition opportunities it has chosen to pursue. During the quarter, the company ramped up its buyout activity, spending $108.3 million on 18 different buildings covering more than 2.5 million square feet. All of those buildings were 100% occupied, and combined with executing leases covering 1.66 million square feet, the REIT's overall occupancy rate climbed to 95.7%.

Moreover, STAG did a good job of holding onto tenants it already has. Retention rates topped 90% despite having leases representing a record high square footage expiring during the quarter. The renewals included rent increases that amounted to 8.5% on a GAAP basis. All in all, STAG finished quarter with a 17% rise in square footage compared to the previous year.

CEO Ben Butcher was happy that STAG managed to get back to the operational success it had enjoyed in the past. "This quarter showed our return to solid per-share metrics growth," Butcher said, "as our investments in people, processes, and systems are being rewarded."

Is STAG ready to get even bigger?Despite the size of STAG's recent acquisitions, the REIT appears committed to continuing to expand its portfolio. The REIT successfully raised $300 million in additional debt capital during the quarter, increasing the size of its revolving credit facility by $150 million and also taking out a new $150 million five-year term loan. With that war chest available, STAG should be able to continue to finance additional purchases without necessarily having to increase its outstanding share count by as much as it has historically.

STAG's success has also led to a bigger payday for shareholders. Earlier in October, STAG announced that it would boost its monthly dividend to $0.115833 per share. That increase adds up to just an extra penny per share annually, but it continues a string of higher dividends that goes back to when STAG first started trading as a public company. Rising income levels are a big reason why investors choose income investments like the Vanguard REIT ETF, and STAG has done its part to contribute to the strong reputation that real estate investment trusts have among income investors.

In order to sustain its future growth, STAG Industrial will have to stay smart about choosing only the highest-quality assets in executing its acquisition strategy. Nevertheless, with conditions in the commercial real estate market remaining healthy, STAG seems to be in the right place at the right time, and shareholders can have some confidence that the REIT will hold up well even once long-awaited interest rate hikes finally start to happen in earnest.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Stag Industrial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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