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3 Things You Need to Know If You Buy Stag Industrial Today

Motley Fool - Fri Dec 29, 2023

The dividend yield that investors can collect from Stag Industrial(NYSE: STAG) is roughly 3.8% today. That's not huge on an absolute basis, but it is notably higher than industrial real estate investment trust (REIT) bellwether Prologis(NYSE: PLD), which is yielding 2.6%.

If you are a dividend investor looking for an industrial REIT, that yield advantage might have you leaning toward Stag. Here are three things you need to know before you buy it.

1. Stag is focused on secondary markets

Investors looking at Prologis will likely find its portfolio highly attractive, given that the REIT owns assets in key transportation hubs across the globe. Then there's an industrial landlord like Rexford Industrial(NYSE: REXR), which owns a highly concentrated portfolio in prime markets in California (this REIT's yield is 2.7%).

The common thread here is that these two prominent industrial REITs are focused on what might be called primary industrial markets. That's not what Stag does.

Two people in a logistics warehouse taking inventory.

Image source: Getty Images.

Stag explains that it is more geographically diversified, at least in the domestic market (it doesn't own foreign properties like Prologis). But what that really means is that the company owns a lot of properties in secondary markets. This isn't a bad thing.

Primary markets are highly competitive and often see the most construction. Secondary markets are the purview of smaller investors, often mom-and-pop owners with just a few properties. That gives Stag an advantage because, as a public REIT, it has easy access to capital via stock and debt sales. This helps it to make quick decisions and allows Stag to buy larger properties more easily.

In this way, Stag has a differentiated business model, but investors need to understand and believe in the approach here before buying the stock.

2. Stag is performing quite well today

At the end of the third quarter of 2023, occupancy was 98%. So demand is strong for Stag's properties, which is a good thing and currently a feature of most industrial space. The supply chain distributions left behind from the coronavirus pandemic have resulted in companies looking to bring manufacturing back to the U.S. market, and left other companies looking to strengthen their supply chains via a larger domestic footprint. The growth of e-commerce has also increased demand, often for "last-mile" locations that are closer to customers.

The high demand for industrial space benefits more than just occupancy. In the third quarter, Stag Industrial was able to increase rents on expiring leases by a lofty 54%. Through the first nine months of 2023, that figure was a still impressive 42%.

So not only is occupancy high, but Stag has material pricing strength today. There are clear reasons to like the company's prospects, at least in the near term.

3. Stag's good times won't last forever

Stag owns a portfolio of around 560 properties. The average remaining lease term of the portfolio is roughly 4.5 years. The negative takeaway from this is that, in around five years' time, Stag will have worked through its lease portfolio, pushing tenants with expiring leases up to higher rates (or releasing assets to different tenants at market rates).

That's a long time, but the truth is that the strong renewal market isn't new, so the outsized increases may not actually be as robust as the REIT moves to the end of that average lease term. In other words, the big rent bumps won't last forever, even though they are very pleasing to see right now and will likely continue for a bit longer.

But there's also the potential impact of a recession that investors need to consider. Normally, an economic downturn would depress demand and thus impact both occupancy and rent growth. That could bring a premature end to the strong results Stag is experiencing today.

There's no telling when a recession might come about, but there are concerns on Wall Street that the Federal Reserve's interest rate increases could bring one about in the near term. That said, the REIT's core funds from operations (FFO) payout ratio was roughly 62% in the third quarter, so there's ample room for adversity before the dividend would be at risk.

Still, investors need to recognize that Stag's strong business performance can't be extended indefinitely into the future.

A solid option for yield seekers

Stag Industrial is a differentiated industrial REIT, given its focus on secondary markets. It is performing well today and has a higher yield than bellwether industrial REITs like Prologis and Rexford, which will be attractive to income-focused investors looking at the industrial property market.

However, it is also important to remember that the good times can't go on forever, for company-specific reasons (rolling over leases to higher rates can only go on for so long) and market-wide risks (recessions happen, and they can be bad news for industrial REITs). As long as you go in with your eyes wide open to both the risks and rewards, Stag could be a good long-term addition to your portfolio.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Prologis, Rexford Industrial Realty, and Stag Industrial. The Motley Fool has a disclosure policy.

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