Stag Industrial(NYSE: STAG) is a serial acquirer. The real estate investment trust (REIT) has historically bought $750 million of income-producing industrial properties annually over the last eight years. Those deals have grown its portfolio and cash flow, enabling it to steadily increase its dividend.
Surging interest rates forced the industrial REIT to largely pause its acquisition growth strategy in recent quarters. However, the company significantly ramped up purchases in the third quarter. The reacceleration of dealmaking should give the company the fuel to continue growing its monthly dividend, which has risen to an attractive 4.6% yield.
Putting its foot back on the gas
Stag Industrial started slowing its acquisition pace late last year. It bought about eight properties per quarter through the first nine months of 2022, investing an average of over $150 million per quarter. However, its acquisition pace slowed to a crawl during the fourth quarter when it only bought one property for $8.1 million.
The company's acquisition engine stalled completely in the first quarter of this year when it didn't acquire a single property. Meanwhile, it only bought two properties for $40.7 million in the second quarter.
Stag Industrial's acquisition lull ended in the third quarter of this year. The REIT went on a shopping spree, buying a dozen properties for over $204 million. It bought three more properties for $67.4 million during the first few weeks of October.
The company could close a lot more deals in the coming quarters. It currently has over 151 potential property acquisitions, representing $3.1 billion of investment volume in its pipeline. While it won't close all these deals, the REIT is finally starting to find acquisition opportunities to its liking.
What changed?
Because the surge in interest rates over the past year has made it more expensive to finance acquisitions, Stag Industrial has gotten a lot more selective. It has focused on acquiring properties with higher real estate cap rates to help offset the rise in its cost of capital.
Through the first nine months of last year, the company acquired properties for cap rates in the low 5% range. With capital costs rising, real estate investors like Stag Industrial have started demanding higher returns through a higher going-in cap rate. Prospective sellers have been reluctant to lower their prices, which led to a lull in the market.
However, sellers are starting to adjust their expectations. That has allowed Stag Industrial to find more acquisition opportunities with higher cap rates. It has bought properties with an average cap rate of over 6.2% this year.
Another fuel source has pitched in
Despite the recent lack of acquisitions, Stag Industrial has been growing at a decent clip. The REIT's net operating income (NOI) rose 6.7% during the third quarter to $140.7 million. A big driver was the excellent performance of its existing portfolio, which delivered same-store NOI growth of 5.3% in the period, powered by strong rent growth. The company is capitalizing on robust demand for industrial real estate, which is driving up market rents. That's enabling the REIT to capture higher rates when existing leases expire. The company commenced leases covering 2.3 million square feet in its operating portfolio during the third quarter. Rates on these leases were up a record 39.9% compared to the prior rates on the same space.
The company anticipates market rent growth to remain strong. CEO Bill Crooker stated on the third-quarter call: "We expect market rent growth in our portfolio to be in the high single digits this year. We expect market rent growth in our portfolio for 2024 to be in the mid-single digits." Given the long-term nature of its leases, it will steadily capture the strong market rent growth over the next several years as more legacy leases expire and reprice at the much higher prevailing market rate. That will complement the reacceleration of its acquisition engine, positioning Stag to grow at a healthy pace in the coming quarters.
It's smart strategy continues to pay dividends
Stag Industrial has increased its dividend every year since going public in 2011. The company's smart acquisition strategy has been its main growth driver over the years. With its acquisition engine recently restarting after a brief pause, the company will have more fuel to grow its dividend in the future, especially since it's now getting a more meaningful added boost from rent growth. That makes it an even more attractive investment for those seeking a steadily rising income stream.
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Matthew DiLallo has positions in Stag Industrial. The Motley Fool has positions in and recommends Stag Industrial. The Motley Fool has a disclosure policy.
