STAG Industrial's Acquisition Spree Can't Lift Its Bottom Line

Source: STAG Industrial.

Real estate has been an extremely hot area of the market lately, and real-estate investment trusts have cashed in on investors' appetite for dividend income and positive performance from low interest rates. Industrial REIT STAG Industrial has benefited from the unexpectedly long period of low rates, and coming into Monday morning's fourth-quarter financial report, the REIT's investors had high expectations for growth from the company's ambitious acquisition strategy. STAG delivered greater revenue than many investors had expected, but slower bottom-line growth has some wondering whether further strategic buyouts will continue to lift shares. Let's take a closer look at STAG's fourth quarter and what it says about the REIT's prospects for 2015.

How STAG's fourth quarter faredSTAG continued to see solid growth in its revenue and funds from operations. Total revenue climbed by a third to more than $50 million, with a 35% jump in rental income to $43.4 million leading the way higher. Adjusted core funds from operations rose at a 26% pace. But because of a much larger number of shares outstanding, per-share figures were flat compared to last year's $0.37 per share adjusted FFO.

A deeper look at STAG's results reveals a number of highlights. Occupancy rates for STAG's properties reached 94.9%, and the company bought up 12 industrial buildings with a total of about 2.7 million square feet, spending $136.4 million. STAG's new properties all boasted 100% occupancy rates, helping to enhance the REIT's overall figures. For the most part, STAG has kept its occupancy rates relatively constant all year, doing a good job of integrating new purchases without suffering any rise in vacancies.

On the lease side of the business, renewals showed the health of the industry right now, with cash rents rising 4.7% during the quarter. STAG executed leases covering 2.8 million square feet of space, including 272,000 square feet of new leases. Temporarily leases made up just 186,000 square feet of STAG's portfolio, with the rest of the transaction volume for the quarter coming from 2.3 million square feet of renewals. Renewal retention rates of 71.7% fell from the third quarter's unusually high 98.5% rate, but they were consistent with the overall rate of 69.7% for the full 2014 year.

Source: STAG Industrial.

The quarter capped a year of continued growth for STAG. Over the course of 2014, the company expanded its real-estate portfolio by almost 9 million square feet to 47 million, and it brought on 36 new tenants, bringing its total number to 227.

How STAG is financing its future growthMost of the focus in STAG's quarterly report was on its efforts to restructure its balance sheet obligations, with a comprehensive refinancing and modification of all of its unsecured debt. In November, STAG priced $200 million in senior unsecured notes at interest rates less than 4.5%, taking full advantage of the low-rate environment for borrowing despite its barely investment-grade BBB- bond rating. In December, the REIT followed up with new loans and credit facilities as well as the payoff of one term loan and amendments to another. The result of the moves was to extend STAG's average debt maturity by four and a half years and to give it a weighted interest rate of just over 4%.

Source: STAG Industrial.

STAG has also used equity offerings to finance its growth. During the quarter, STAG's share issues slowed to just $18.2 million, but during the full 2014 year, STAG issued more than 8 million shares to raise about $180 million in net proceeds.

Yet STAG shows few signs of slowing down. As of today, STAG reports that it has 94 different industrial buildings in its pipeline of potential acquisitions, with a value of $1.2 billion. Already so far in 2015, STAG has closed or committed to close on $128 million in purchases, and it has targeted about $450 million in acquisitions for the full year.

STAG also continues to treat shareholders well. Last month, the company's latest dividend increase took effect, with shareholders receiving $0.1125 per share in monthly income. That equates to a yield of more than 5%, which looks increasingly attractive in an environment in which Treasury yields of around 2% have remained stubbornly low.

STAG has done a good job of capitalizing on the extended period of low interest rates by being smart about its borrowing strategy. If it really wants to build itself up into a much larger REIT, STAG will need to remain fortunate with a favorable rate environment. Otherwise, as financing gets more expensive, STAG could face greater difficulty finding properties at prices that offer it the profit potential that investors want to see.

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