Introduction

STAG Industrial (NYSE:STAG) is a high-quality REIT that seems to be a favorite amongst dividend investors and for good reason. And although I don't own them, they remain a favorite and one I have been watching for a long time. I currently own two other monthly-paying REITs in my portfolio in Agree Realty (ADC) & Realty Income (O).

I've been looking to add a monthly payer to my retirement portfolio and STAG Industrial seems to fit my criteria as a result of their well-covered dividend and organic growth potential. In this article I discuss the company's fundamentals and why I currently think they are a buy for investors looking for reliable income.

Brief Overview

STAG is a monthly-paying REIT in the industrial sector. The company IPO'd in 2011 and owns a diversified portfolio that expands across 41 states. They focus on single-tenant industrial properties and currently own 570 buildings. Additionally, a good portion of their properties are located within a 1 hour, or 60-mile radius from Megasite projects.

Earnings

Aside from being a REIT that pays monthly, STAG Industrial also has shown some strong growth initiatives. During their latest Q1 earnings back in early May, STAG showed strong growth year-over-year. FFO and revenue both beat analysts' estimates. FFO came in at $0.59, a growth rate of roughly 5.5% year-over-year.

This ticked up by a penny from the prior quarter. Revenue grew higher year-over-year coming in at $187.54 million, a growth rate of roughly 8% from $173.6 million. This was thanks to the company's same-store cash NOI growth of 7.1% year-over-year.

For comparison purposes, peer and industrial favorite of mine, Rexford Industrial (REXR) same-store NOI growth rate was 8.5% on a cash basis over the same period. For 2024, STAG is expecting same-store NOI growth of 4.75% - 5.25%. Rexford expects 7% - 8% over the same period. STAG's strong growth was also due to their acquisitions made during the quarter.

They commenced 29 leases and closed on a Class A warehouse for $50.1 million. Additionally, they acquired 3 buildings, 2 in South Carolina, and one in Tampa, Florida for $85 million. These totaled nearly 3 million square feet.

Balance Sheet Supports Further Growth

Another reason STAG Industrial may be a good addition to your portfolio is they have a strong, investment-rated balance sheet to support further growth. At the end of the quarter they had a net debt to adjusted EBITDA of just 4.9x. Peer Rexford Industrial's was slightly lower at 4.6x. while First Industrial's (FR) was higher at 5.3x.

They also had plenty of liquidity available with $1.1 billion. This puts them in a strong position to continue its growth initiatives. Their debt maturities are also well-laddered with manageable debt maturing in 2025. Furthermore, STAG refinanced some of their upcoming debt during the quarter. One, a $200 million loan scheduled to mature this upcoming January.

They also issued nearly 800,000 shares for gross proceeds of $31 million that they will used to pay down the revolver and fund their acquisition pipeline.

Retained Capital Also Supports Further Dividend Increases

Another way the company will continue growing at a healthy rate is by retaining a good portion of its cash. This puts them in a favorable position to grow organically, not severely impacted by the high interest rate environment. The company had a very low payout ratio of 69.9% after paid dividends.

Cash available for distribution was $98.1 million during the quarter, a growth rate of nearly 9% year-over-year. For context, STAG's payout ratio is lower than both Agree Realty and Realty Income's, who had payout ratios of 73% and 76% respectively.

Compared to peers like Rexford Industrial, Realty Income, and First Industrial, STAG's 5-year dividend growth rate lags behind. Since 2019, STAG's dividend growth rate is just 3.5%.

In the chart below you can see their peers all have significantly higher growth rates in comparison with Rexford Industrial leading the pack with 126% and First Industrial coming in 2nd with nearly 61%. However, both peers pay quarterly instead of monthly.

	5-year Dividend Growth
O	$0.2255 - $0.2630 = 16.6%
REXR	$0.1850 - $0.4175 = 126%
FR	$0.23 - $0.37 = 60.9%

Strong Total Returns

Additionally, over a 5-year period, STAG bests all peers, with the exception of First Industrial and doubling the returns of Rexford Industrial when it comes to total returns. When it comes to STAG, investors should expect high single-digit returns and steady growth over a period of time. Essentially a steady eddy, sleep well at night stock.

Valuation

At a price of $36 at the time of writing, I think STAG presents a good entry price for long-term investors. Using the mid-point of guidance, STAG has a P/FFO multiple of 15.1x. This is in comparison to REXR's 19.27x and FR's 18.26x. So, considering valuation purposes, STAG is trading at a significantly lower multiple currently.

And with interest rates likely to decline soon, I think passive income investors are likely to receive some solid upside. Wall Street currently has a price target of $39 and a high of $47. STAG has traded as high as 20x P/FFO.

Using Fastgraphs 5-year multiple of 18.52x, STAG offers more than 11% upside from the current price. And while this may not seem like much, investors get paid a well-covered monthly dividend while they wait.

Risks

One risk aside from higher for longer interest rates that could negatively impact STAG Industrial is another downturn in the economy such as a recession. The company is not known for its high growth, but a recession would likely cause a slowdown in their growth prospects.

This could also cause an uptick in vacancies which would impact their financials going forward. This would also negatively affect the REIT's share price and could cause concern amongst investors about the REIT's ability to collect rent from its tenants.

One thing to note is STAG's occupancy rating did decline slightly quarter-over-quarter from 98.2% to 97.7%. And this is something investors should keep an eye on going forward.

Bottom Line

STAG Industrial is a top-notch monthly paying REIT that is the perfect investment for conservative investors looking for passive income. Their fundamentals are solid with an investment-grade balance sheet and a conservative payout ratio under 70% currently.

Additionally, their portfolio is well-diversified across 41 states with additional room for growth. Their liquidity profile supports further growth, and I expect them to deliver solid total returns in the coming years. As a result of their well-covered monthly dividends, fundamentals, and upside potential with interest rates likely to decline soon, I think STAG Industrial is a compelling buy at the moment.