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.
Lastly, Stag Industrial has a manageable gross debt-to-assets ratio of 42%, supported by a decent interest coverage of five times. More importantly, it faces limited refinancing risk, with no debt maturing from 2013 to 2016.
Peer comparison
Stag Industrial’s peers include DCT Industrial Trust Inc. (NYSE:DCT) and First Industrial Realty Trust, Inc. (NYSE:FR). Stag Industrial stands out from its peers with a forward dividend yield of 5.2%. In contrast, DCT Industrial Trust Inc. (NYSE:DCT) and First Industrial Realty Trust, Inc. (NYSE:FR) sport dividend yields of 3.6% and 1.9%, respectively.
DCT Industrial Trust Inc. (NYSE:DCT) is differentiated from Stag Industrial in that it selectively develops some of its properties. It has $128 million worth of development properties under construction or recently completed, of which 70% have been leased, according to a management presentation at the Citi 2013 Global Property CEO Conference. Although DCT Industrial Trust Inc. (NYSE:DCT) manages its risk by focusing on a maximum of two building projects at any one time, and caps development assets under 15% of total assets, I prefer that REITs, property owners and landlords, not take on development risk.
There were two positive takeaways from First Industrial Realty Trust, Inc. (NYSE:FR) in 2012 and early 2013. Firstly, through a combination of increased cash flow from leasing and decrease in secured debt, First Industrial Realty Trust, Inc. (NYSE:FR) lowered its gearing from about 9.8 times net debt/EBITDA at the end of 2008 to 6.8 times net debt/EBITDA at the end of 2012. Secondly, it also re-initiated its payment of a dividend on its common stock for the first quarter of 2013, after suspending payouts since the fourth quarter of 2008. While other investors might be excited by such a re-initiation and prospects of increased dividends in the future, I prefer stocks with an unbroken record of dividend payments.
Conclusion
Every investment is an exercise in evaluating the upside and downside that a stock brings, relative to its valuations. Stag Industrial has a better chance of securing good returns since it faces weaker competition in its target markets. It is also well-diversified in terms of tenant, industry, and geography, and has a strong balance sheet. A high dividend yield is the reverse of a low price-to-dividend ratio, implying attractive valuations for Stag Industrial.
The article This Company Chooses Its Battleground Wisely originally appeared on Fool.com is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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