STAG Industrial, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

STAG Industrial is an industrial real estate investment trust (REIT) focused on the acquisition and operation of single-tenant, industrial properties across the United States, which it leases to a wide range of tenants.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

STAG Industrial is a REIT that acquires and operates single-tenant industrial properties, with a primary focus on light manufacturing and warehouse/distribution facilities. They lease these properties to a diverse range of tenants, which reduces risk as the Company isn’t reliant on any single industry.

  • Revenue Distribution:
    • The majority of STAG’s revenue comes from rental income, with a small portion from service, tenant recoveries, and property management revenue. They operate as an “open-air” industrial REIT, leasing out facilities for rent and collecting fees for upkeep.
    • As of September 30, 2022, The Company’s 30 Target Markets are 18.3% of total annualized base rent, and the Top 20 largest industries (e.g., Automotive, Air Transport, etc.) amount to 83.3% of annualized base rent.
  • Industry Trends:
    • The industrial real estate market is currently benefiting from e-commerce growth, increased supply chain reshoring, and rising demand for logistics space. This demand has resulted in generally higher rental rates and occupancy rates.
    • However, rising interest rates and inflation pose some headwinds, increasing capital costs and potentially impacting tenant profitability which may affect the company’s revenue growth.
    • The industrial real estate market is highly fragmented. This implies that a single major downturn in the industry can have a material impact. However, at the same time, market downturns are less likely to influence the entire industrial real estate landscape as there are so many different factors at play.
    • There is an increasing demand for “last mile” warehouses which are located closer to end-consumers to meet the needs of fast delivery for e-commerce customers.
  • Margins:
    • STAG’s operating margins typically hover around 60%, and net margins are significantly lower because of depreciation and other related financial charges.
    • However, the company has a well-established track record of maintaining a high margin level.
    • Margins have dipped recently because of higher interest expenses and general operating expenses.
  • Competitive Landscape:
    • The industrial REIT market is highly fragmented, with numerous large and small players.
    • In the long-term, most companies are fairly similar to each other, but for a single year, there may be differences in revenue growth, profitability and ROIC.
    • Since the company focuses on single-tenant industrial real estate, its competitors include other REITs that own similar properties, and large, private investment firms.
    • The competitive environment also depends on geographic regions and other differences and nuances of local economies. This includes local taxes, regulations, and other region-specific policies.
  • What makes the company different?
  • STAG focuses on single-tenant industrial properties, not other kinds of real estate like office or residential. Also, it has a relatively wide geographic diversification, unlike many other REITs.

STAG tries to be very granular in its investment strategy and to invest in areas where the competitive threat isn’t very high.

Financial Analysis

  • Reorganized Income Statement:
    • For the nine months ended September 30, 2022, STAG Industrial reported a revenue of $550.5 million. This is up from $478.2 million during the same period in 2021.
    • Operating expenses also saw a corresponding increase, rising to $240.7 million in 2022 from $209.3 million in 2021, driven primarily by higher property operating expenses.
    • Operating profit for the nine months ended September 30, 2022, came in at $309.8 million compared to $268.9 million in the same period the prior year.
    • The net income attributable to common stockholders was $105.1 million, a decrease compared to the $157.4 million in 2021.
    • The FFO for the same period is $1.79, an increase compared to the $1.67 the previous year.
    • In the latest quarter (Q3 2022), the company reported a very healthy occupancy of 98%, but a slight drop in blended rent growth by 2.6% to 23.9%. They also mentioned that a slowdown in the leasing pace may be a sign of caution because of possible macro headwinds, like a recession.
  • Balance Sheet
    • The company has been growing its operations quite rapidly through acquisitions, which has led to an increase in debt levels.
    • On September 30, 2022, their total assets stood at $7.8 billion, while their total liabilities were $3.9 billion. However, the company also has $831 million in cash, suggesting they are well-funded.
    • As of September 30, 2022, the company had $1.6 billion in net debt, and a debt to EBITDA ratio of 5.5
    • The company is consistently expanding its cash position, and is well-funded from this end.

While the company has quite a lot of debt, their assets are more than enough to keep the financial structure stable.

  • Cash Flow
    • For the nine months ended September 30, 2022, cash from operations totaled $325 million.
    • The company has shown strong and relatively consistent cash flows over time, which have been largely allocated to capex, acquisitions and paying down debt.
  • Recent Concerns / Controversies and Problems
    • The recent slowdown in occupancy growth and the drop in rent growth are areas of caution in the company’s performance.
    • There have also been a few acquisitions that the company had to drop, due to the potential impact on the companies profitability.
    • High interest rates will mean that the company will need to adjust its capital structure.
    • The management is aware of the risks, and has reiterated that they are focused on long-term sustainability.
    • The management is focused on acquiring high-quality tenants that can withstand economic downturns.

Moat Assessment

  • Sources of Moat:
  • STAG’s main source of moat stems from its location-based advantages, which allow for cheaper transportation costs, a benefit especially for commodity-based tenants. Also, these local advantages help the company form regional mini-monopolies that are often very difficult to replicate, making them valuable. * The company also benefits from switching costs for its tenants; since the company operates as a single-tenant operator, all the tenants have made their own changes and modifications to the properties. The costs of moving and reinstalling are very high, and this makes clients sticky.
  • Moat Rating: 2/5
    • STAG does have a moat, but it’s narrow. While the company has a lot of benefits from its location and switching cost based moats, the company faces a lot of risk from the macroeconomic forces of industry, and can be easily displaced by new market conditions.
    • They also don’t seem to be a leader in any of their target markets, nor do they have proprietary technology that gives them a competitive edge. They are also highly susceptible to local recessions.

Risks to the Moat and Business Resilience

  • Industry-Wide Factors: Rising interest rates can increase borrowing costs. The growth of e-commerce can also slow down, which will reduce demand for warehouses and logistic space.
  • Economic Factors: Economic downturns and local recessions can lead to a decline in occupancy rates or defaults from the company’s clients.
  • Company-Specific Factors:
  • Any problems with the company’s financial structure, especially a sudden increase in interest expenses, could put pressure on liquidity and profitability.
  • A sudden downturn or slowdown in new investment, or an increase in bad debt by the company’s customers.
  • Business Resilience:
    • STAG’s current performance is good and has the potential to grow further. But it also has a few weaknesses, like overreliance on debt to fund growth and susceptibility to negative economic changes.
    • While a large-scale recession may affect the company’s earnings somewhat, the diversification in clients means that it is likely to have less risk than other, less diverse, real estate companies.
    • The management is also trying to focus on long-term tenants, which would help give some stability to their revenue.

Understandability Rating

  • Rating: 2 / 5
    • The company’s overall business is fairly easy to understand: they lease warehouses and other industrial spaces to tenants for a profit. But the nuances behind a REIT are often confusing, especially for newcomers, and the accounting can also get difficult.
    • Also, while they are not a complex business, it also requires a detailed understanding of the micro-economics of its many locations, which can take some time to understand. The complex interactions between real estate, leases, and debt can make it complicated for newcomers.

Balance Sheet Health Rating

  • Rating: 4/5
    • The company has a decent balance sheet. While their debt is high, it is still manageable and their assets provide enough back-up.
    • They also have a good cash position that is being used wisely, and their capital position is very stable.
    • However, the high debt level will make the business vulnerable to interest rate changes, which the management is working to fix.

Conclusion

STAG Industrial is a company that can continue to do well and generate a good profit. However, it is subject to a few risks related to economic and industry wide headwinds, which means that their moat is a bit narrow. The company also does a good job at generating cash and maintaining their financial strength, which makes it reasonably healthy and safe for investors.