I am, personally, a fan of small cap and international investing, as I consider these markets to be less efficient. Similarly, when I analyze real estate companies, I like companies that choose to swim in blue oceans, and not with sharks. Stag Industrial Inc (NYSE:STAG), an acquirer and owner of single-tenant industrial properties in the U.S., targets acquisitions in less-competitive markets and faces limited financial and business risks. Moreover, Stag Industrial is an attractive investment candidate with a 5.2% dividend yield.
Be the big fish in the small pond
Stag Industrial Inc (NYSE:STAG) targets acquisitions of smaller industrial properties (net rentable area of less than 350,000 square feet) in secondary markets (markets with net rentable square footage ranging from 25 million-200 million square feet). Using an example in equity investing, one of the reasons for the out-performance of small cap stocks is that institutional funds are unable to buy stocks outside of benchmark indexes, or those below a certain market capitalization. Stag Industrial Inc (NYSE:STAG) avoids competing with deep-pocketed institutions in the same way. Instead, it chooses to be the big fish in the small pond, competing with and buying from less well-capitalized individual or smaller corporate investors. The numbers speak for themselves; Stag Industrial Inc (NYSE:STAG) has more than doubled its assets through acquisitions since its IPO in June 2011.
When you take care of the downside, the upside takes care of itself
As a firm believer of the blue ocean strategy, I am convinced that picking where to compete is far more important than your choice of how to compete. Stag Industrial Inc (NYSE:STAG) already has half the battle won by acquiring smaller industrial companies in secondary markets that are less competitive. The other half of the battle relates to managing the investment downside through proper risk assessment. The key indicators for REITs include tenant, industry and geography concentration, tenant retention, lease term, and leverage.
Firstly, no single tenant accounted for more than 3% of Stag Industrial Inc (NYSE:STAG)’s total revenue, implying that the negative impact of any tenant not renewing its lease is minimal. Also, from 2013 to 2015, only slightly more than a quarter of its leases are up for renewal. The weighted average lease term for Stag Industrial’s properties is five years, which is a pretty long time.
Secondly, Stag Industrial is relatively shielded from black swan events associated with specific industries or geographies. It has its properties located across 33 states in the U.S., with its largest revenue-generating state, North Carolina, contributing slightly more than 10% of its rental revenue. In addition, its tenants come from varied industries, including cyclical automotive companies, stable defensive household durables, and food and beverage companies.
