And despite having a relatively big dividend, Stag’s valuation (Price to FFO) remains reasonable. Worth noting, some investors believe Stag should have a relatively cheaper valuation than some of its peers because of its unique risk exposures (e.g. secondary/tertiary properties, traditionally non-institutional markets). However, we believe the valuation is still not unreasonable.
And for additional color, these next charts show Stag’s FFO multiple versus the peer universe as described by Stag’s management.
Also worth noting, the following chart shows Stag’s price-to-FFO multiple versus its own historical level.
As the above chart shows, Stag is not cheap relative to its own history. However, we believe the valuation is not unreasonable considering the trajectory of its FFO growth, and its ability to pay the dividend. For example, the next chart shows Stag’s AFFO payout ratio, which remains fairly consistent, and currently has more than 10% cushion versus the 100% payout level.
For perspective, Stag’s peer Prologis (PLD) generated $0.48 of AFFO per share during the quarter ended 6/30, and it paid $0.42 in dividends, for a payout ratio of 87.5% (Prologis Q2 Supplement, p.3).
Risks
In our view, the biggest risk to Stag is an economic downturn. We believe that because the company is well diversified (as described previously) the risks posed by individual tenants is not necessarily overwhelming (because they’re well diversified across geographies, tenants and industries). Stag describes this risk in their annual report by saying:
Adverse economic conditions will harm our returns and profitability.
Our operating results may be affected by market and economic challenges and uncertainties, which may result from a continued or exacerbated general economic slowdown experienced by the nation as a whole or by the local economies where our properties may be located or our tenants may conduct business, or by the real estate industry, including the following: poor economic conditions may result in tenant defaults under leases; releasing may require concessions or reduced rental rates under the new leases due to reduced demand; adverse capital and credit market conditions may restrict our operating activities; and constricted access to credit may result in tenant defaults, non-renewals under leases or inability of potential buyers to acquire properties held for sale.
Another risk has to do with lease expiration dates. Stag describes this risk in their annual report as follows: “A significant portion of our properties have leases that expire in the next three years and we may be unable to renew leases, lease vacant space or re-lease space as leases expire.”
