One of the reasons I love REITs is that they offer solid and consistent dividends when you choose well, and sell off from time to time to create bargains. STAG Industrial, Inc. (NYSE:STAG) is a great example, and STAG stock is a buy worth considering.
They are also investments in real estate, one of the best investments you can make for the long term. In the case of STAG you are investing in various forms of industrial buildings, from which demand grows from retailers that need this space.
STAG stock is based on the back of almost 350 buildings across 37 states with almost 70 million square feet of rentable space. About 90% of the portfolio is straight-up warehouse-type buildings, with the remaining mostly devoted to light manufacturing, and a few office buildings.
It’s top ten renters only amount to 15% of its total asset base of renters.
Because industrials are cyclical, there is always risk in overbalancing the portfolio too much towards one sector. I’m not crazy about the 14% exposure to the automotive sector, as the auto sector is struggling and will continue to have difficulties.
Nevertheless, STAG stock is fairly well diversified across make and over the long term, these are all massive auto manufacturing tenants that will need the space.
I do like the 12% allocation to freight and logistics, as the economy is growing, and these areas are constantly in demand. The same goes for the 11% allocation to industrial equipment/components/metals.
STAG stock also diversifies into the secondary market. This can be a dicey proposition because there is more risk here, such as secondary markets not generating enough economic activity and maybe being more exposed to economic cycles.
But STAG management takes a fairly prudent approach here.
The other important element of any REIT is how it handles its debt. STAG stock benefits from management acumen here, constantly trying to lower the cost of capital.
Over the past two years alone, secured debt has been trimmed by more than 70%, leaving a mere 6% of total debt secured. This provides for enormous flexibility.
Maturities are spread out over the next ten years, with an unsecured revolver due in 2019 of about $250 million that only costs LIBOR + 115bps. 2020 sees $150 million in an unsecured term loan due, which only costs 2.7% annually.
Another $150 million unsecured term loan comes due in 2021, which costs 3.35%. The only secured debt is $205 million due in 2022.
The average of all the $1.2 billion in debt is a maturity of 4.8 years and weighted average rate of only 3.4%. Fantastic.
The next thing I look for is the dividend payout ratio, as a fraction of Adjusted Funds from Operations (AFFO). While I would love anything under 70%, that’s pretty rare.
Instead the $1.42 per share payment this year should be about 78% of AFFO. That is a significant decline from 2017’s 84%. STAG has been in the mid-80s since 2014.
Finally, we try to value REITs based on Price to AFFO as one metric. STAG stock trades at about 15x AFFO, which is one of the cheapest in the sector. In fact, short of tow other peers, all other peers trade at 21x or higher.
With a yield of 5.7% and a strong business model, I think STAG Industrial stock makes a fine addition to your income portfolio.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].