I recently added STAG Industrial (NYSE: STAG) to my portfolio. I invested a little more than $625 into the real estate investment trust (REIT), which focuses on the industrial real estate sector. While it's a small position to start, I like to build a holding by steadily adding to it over time.
Here's why I recently bought shares of the industrial REIT and why other investors might want to consider joining me.
A quick primer on STAG Industrial
STAG Industrial currently owns more than 500 properties with over 100 million square feet of space. One of the hallmarks of STAG Industrial is its diversification. Its portfolio spans 60 markets, with its largest only accounting for 7% of its annual base rent (ABR).
Meanwhile, it leases space to tenants across 45 industries, with its largest tenant contributing less than 4% of its ABR. This means it offers broad exposure across the entire industrial real estate sector, which helps reduce risk.
Everything I want to see in a REIT investment
While industrial real estate might not be pretty, STAG Industrial is my kind of REIT. That's because its diversified portfolio generates very stable rental income. That allows STAG to pay an attractive dividend. It's one of the few REITs paying a monthly dividend.
Further, its payout currently yields 3.6%. That's well above the S&P 500's 1.3% average and the roughly 3% average yield of most REITs.
However, STAG's dividend is only part of its appeal. It also hits on the three other factors I like to see when I invest in a REIT:
- A strong financial profile
- Attractive growth prospects
- Compelling valuation
STAG definitely checks off the first box. It has a conservative balance sheet, backed by an investment-grade credit rating and relatively low leverage ratios. The REIT also has a reasonably conservative dividend payout ratio of around 70% of its core FFO. Those factors put its attractive dividend on solid ground while giving it a lot of financial flexibility.
Next, STAG Industrial has solid growth prospects. Internally, the company expects to grow its same-store cash NOI by 3.35% to 3.75% this year. That's a historically high level for the company, as it's benefitting from robust demand for industrial real estate, enabling it to capture higher rental rates as existing leases expire.
In addition, STAG anticipates acquiring $1 billion to $1.2 billion of properties this year. That's also a high level for the company, which has averaged $700 million of acquisitions over the last five years. It benefits from low interest rates and its financial flexibility, allowing it to acquire properties from owner-operators in sales-leaseback transactions. STAG has a massive opportunity to continue expanding, as it currently controls just 0.5% of the $1 trillion (and growing) U.S. industrial market.
Finally, STAG trades at a compelling valuation. I picked up shares at about 20 times its 2021 FFO. For comparison, most industrial REITs trade at more than 30 times their FFO. That's largely due to their concentration on logistics properties like warehouses, while STAG owns a diversified portfolio of industrial properties, including warehouses and light manufacturing facilities. Still, warehouses make up more than 90% of its portfolio, making it seem relatively cheap compared to its peers.
Why STAG is a great REIT for any investor
STAG Industrial offers a compelling value proposition. It pays a rock-solid income stream backed by a strong financial profile and a diversified industrial real estate portfolio. Meanwhile, it has ample growth potential while trading at an attractive valuation. Because of all that, it's an excellent REIT for any investor to consider buying, especially those seeking to generate passive income from real estate, given its high-yielding monthly dividend.