STAG Industrial Grows Its Bottom Line Despite Slower Buying

STAG Industrial (NYSE: STAG) follows a very simple way of doing business: find good properties with attractive features and then find tenants that can lease out the entire property at one fell swoop. For years, STAG has been able turn this method into success for the real estate investment trust, and conditions in the real estate market have helped support STAG's efforts.

Coming into Thursday's third-quarter financial report, STAG investors were hoping that the REIT would continue to pick up steam. STAG's pace of new acquisitions slowed from its strong showing in the second quarter, but its key financial metrics still reflected how well the industry is doing. Let's look more closely at STAG Industrial to see how it did.

STAG moves ahead

STAG Industrial's third-quarter results showed how the REIT has continued to expand. Revenue growth accelerated to nearly 25%, with the REIT posting $78.1 million on its top line. Net income attributable to common shareholders soared to $18.5 million, reversing STAG's loss in the year-ago quarter. Core funds from operations climbed 39% to $42 million, producing core funds per share of $0.43.

Operationally, STAG saw its purchase activity slow considerably during the quarter, but it still found good properties to buy. The REIT acquired 10 buildings during the quarter, spending just under $120 million and picking up roughly 2.3 million square feet. The majority of the purchases occurred in the eastern part of the U.S., with particular emphasis on areas in Pennsylvania and the Midwest. Average lease terms on the buildings are at about six years and had 93% occupancy.

STAG also ramped up its disposition activity. The REIT sold five buildings, raising almost $35 million from the sales. The dispositions reduced STAG's total portfolio by nearly 800,000 square feet.

STAG's leasing moves also slowed from earlier in the year. The real estate player said it executed leases covering 2 million square feet. Cash rents were up double-digit percentages, reflecting strong conditions in the market. The REIT also boosted its retention rate on expiring leases up above the 70% mark, picking up 10 percentage points from the second quarter of 2017. Overall occupancy rates came in at about 95%.

Can STAG keep making progress?

CEO Ben Butcher kept things simple in his comments about STAG's performance. "The third quarter was very successful," Butcher said, "both from an operations and acquisitions standpoint." The CEO sees those favorable conditions continuing, helping to keep STAG on pace to reach its full-year 2017 goals.

STAG's financial health relies on good capital allocation and access to markets, and the real estate investment trust was able to do well during the quarter on both fronts. The company sold shares to raise about $65 million toward acquisitions, helping to fund its pipeline of deals. STAG's move to originate a $150 million term loan maturing in early 2023 also helped it pay down secured debt totaling about $88 million, as the REIT continued to manage its outstanding debt and take advantage of the favorable interest rate environment for borrowers.

STAG investors tend to take a long-term view of the REIT's performance, but even though the stock can see abrupt movements from time to time, its general trajectory over the past year has been upward even as shareholders have received monthly dividend distributions from the company. With signs pointing to continued favorable conditions for the real estate market, STAG simply needs to keep following its successful business strategy and keep locating the properties that can help it capitalize on growth opportunities in the years to come.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Stag Industrial. The Motley Fool has a disclosure policy.