High-yield, monthly-paying dividend shares are an effective way for individuals to complement their revenue, particularly in retirement.
However, sadly, the realm of monthly-paying revenue shares is mostly restricted to the world of BDCs, CEFs, and REITs; a lot of doubtful high quality, low payout safety, and little to no development prospects.
STAG Industrial (STAG), is among the few exceptions, having confirmed itself a wonderful mixture of beneficiant, safe, and steadily (however very slowly) rising revenue since its 2011 IPO. However, I am badured that this charge of safe dividend development will speed up quickly within the coming years, doubtlessly by as a lot as 750%.
Let’s check out why STAG Industrial is among the greatest month-to-month dividend payers you possibly can personal, and why it is on my watch listing so as to add to my very own high-yield dividend development retirement portfolio.
But as importantly, study why at present might be not one of the best time so as to add STAG, in mild of a moderately frothy valuation.
Torrid Growth Rate Shows No Signs Of Slowing Down…
2017 is already STAG’s busiest acquisition yr ever, with the REIT on observe to hit about $675 million in new property purchases this yr.
This is a part of STAG’s said aim of rising its portfolio by 25% a yr, and never surprisingly, has led to STAG being one of many quickest rising REITs in America; at the least in income.
|Metric||Q3 YoY Growth||YTD YOY Growth|
|Funds From Operations (FFO)||49.zero%||47.three%|
|AFFO Payout Ratio||84.eight%||83.9%|
Source: STAG earnings complement
Even higher information got here from the truth that money stream grew sooner than income, indicating extremely constructive working leverage.
This principally signifies that STAG is ready to amortize its administrative prices over a broader portfolio base, reaching stronger economies of scale and thus higher AFFO margins.
However, you may observe that AFFO/share, (REIT equal of free money stream and what funds the dividend) barely grew in any respect in 2017. This was due to the livid tempo of latest share issuances below the “At-The-Market” or ATM program.
So far this yr STAG has offered $345.7 million in new fairness ($5.1 million extra in ATM gross sales in October), which whereas dilutive to current shareholders, is definitely not as dangerous because it appears.
That’s as a result of AFFO, as calculated by the REIT, consists of numerous acquisition prices. When coupled with the truth that the timing of acquisitions does not completely line up with share issuances, this explains why AFFO/share may be considerably lumpy and diverge from Core FFO/share, which is up strongly for each the quarter and the yr.
The excellent news is that, during the last six years STAG Industrial has managed to develop AFFO/share by a formidable 9.eight% CAGR, indicating that this yr’s flat backside line efficiency is probably going an aberration and never one thing to be overly involved about.
That’s as a result of STAG’s enterprise mannequin is one that’s truly extremely accretive, as a result of the area of interest wherein it operates makes for extremely worthwhile acquisitions.
STAG AFFO Weighted Cost Of Capital
|Source Of Capital||Capital Weighting (YTD)||Cost Of Capital|
|Weighted Average Cost Of Capital||100%||four.7%|
|Cash Yield On New Investment||NA||7.5%|
|Cash Profit On New Investment||NA||2.eight%|
Sources: earnings releases, earnings complement, Fast Graphs, Gurufocus
Now a fast clarification on price of capital, as a result of whereas it is a vitally necessary idea, it is typically misunderstood.
Because REITs should by regulation pay out 90% of taxable revenue as dividends, they often need to fund development by a mixture of debt and new fairness (and AFFO left over after paying the dividends).
The weighted common price of this capital should be decrease than the AFFO yield on new investments; in any other case shareholders are diluted, and the dividend turns into unsafe, and unable to develop sustainably. In different phrases, if a REIT cannot develop profitably then there isn’t a level to proudly owning it.
The bother for normal traders is that, whereas the price of debt is comparatively straightforward to grasp and discover on-line, the price of fairness will not be.
That’s as a result of there are a number of formulation for price of fairness, however the most well-liked is the Capital Asset Pricing Model or CAPM, which states:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market – Risk-Free Rate of Return)
Generally, the risk-free charge of return is a Treasury bond, and so in concept price of fairness is the full return new investor would demand from a inventory, so as to purchase it, in comparison with a riskless Treasury.
However, the CAPM components, whereas logical in its personal method (it is truly a valuation technique), has nothing to do with the fact of whether or not or not newly issued REIT shares are accretive to AFFO.
For one factor, each single variable in that components is 100% subjective to the person.
For instance, as a substitute of 10-year Treasuries you need to use 2-year, or 30-year.
Beta is the volatility of a inventory relative to the volatility of the S&P 500 over time, But what time-frame do you employ? Six months? 1 yr? three yr? 5 yr?
And anticipated complete return? Well, that is principally asking “what nominal return do investors want to earn?” It’s actually completely different for each single particular person.
Which principally signifies that the CAPM equation has no foundation in actuality on the subject of whether or not or not STAG promoting new shares will enhance or lower AFFO/share, which is, on the finish of the day, the one factor that issues.
I take a unique, AFFO-focused strategy to price of capital. Specifically, I take advantage of the AFFO yield as the price of capital, as a result of every new share is a everlasting declare on that money stream and the long run dividends it could fund.
Meanwhile, AFFO, being the REIT equal of free money stream, I contemplate free, as a result of each greenback of AFFO not spent on dividends is that a lot much less new shares you want to promote.
Basically, what I, and all REIT traders ought to care about, is the money price of capital, bearing in mind the full image of how administration funds its development (the combination of retained AFFO, debt, and new capital).
If the money yield on new investments is bigger than this determine, than each acquisition will develop AFFO/share over time, thus securing the present payout and hopefully its future development.
Which brings me to the best cause for investing in STAG Industrial, administration’s give attention to a big, quick rising, and extremely worthwhile area of interest.
…And Long-Term Potential Is Immense
STAG Industrial makes a speciality of single-tenant industrial REIT which owns 347 properties in 37 states, leased out to dozens of tenants (largely billion greenback corporations) in 20 completely different industries.
There are three key components to appreciate about STAG, catalysts that may drive its sturdy future development.
The first is the commercial actual property market is accelerating, because of each stronger financial development in addition to the rise of e-commerce.
That’s as a result of corporations like Amazon (AMZN) want warehouses to behave as achievement facilities. And whereas brick-and-mortar retail will not be truly dying, it’s dropping market share to on-line gross sales that are rising seven instances as quick.
Source: Hoya capital Real Estate
The second issue to STAG’s sturdy funding thesis is its give attention to the large, extremely fragmented (largest participant owns three.four% market share), secondary industrial market.
Basically, STAG’s administration has determined to focus on essentially the most worthwhile alternatives, which implies single-tenant properties, in secondary markets.
The cause for that is easy. Industrial properties with single tenants face far much less money stream stability as a result of they’re both occupied or not. Because of this money stream lumpiness, traders are unwilling to pay a premium for these properties (which usually price $5 to $15 million every), and thus somebody like STAG should purchase them at a reduction; which means higher-cash yield on funding.
However, by consolidating the single-tenant industrial market, and thus reaching essential scale and diversification, STAG can clean out the money stream volatility and thus the REIT itself can obtain higher valuations over time (as has been taking place for years attributable to a rising share value premium).
Those larger priced shares can then be used as development capital to maintain the expansion engine buzzing alongside for a very long time.
The ultimate issue, and what STAG considers to be its “secret sauce” is that the majority industrial REITs are centered on main markets, i.e., huge cities.
This is the place most financial development is going down, and such properties are thought to command premium rents, sooner rental development charges, and revel in higher occupancy and decrease rental volatility throughout financial downturns.
In truth, STAG administration believes these widespread perceptions to be flawed as a result of historical past truly exhibits that secondary markets (the place properties are cheaper and thus extra worthwhile) even have comparable occupancy, rental development, and rental consistency patterns.
In different phrases, STAG thinks the market is flawed and mispricing the basics of secondary industrial properties, and it plans on making shareholders very wealthy proving its thesis.
But that does not imply that STAG is being frivolous with shareholder capital.
Rather, STAG administration usually solely closes on 2.7% of properties it considers, so as to guarantee it meets its excessive profitability boundaries.
In addition, STAG has confirmed excellent at recycling properties, which means promoting them at a revenue.
For instance, in Q3 STAG offered eight properties for $34 million and generated an unlevered inside charge of return (revenue) of 15%. This is capital that may additional be used to develop the portfolio and the REIT’s money stream.
However, given the immense development potential it faces, which means STAG is primarily centered on executing on its long-term plan to develop into the dominant secondary market industrial REIT.
Which signifies that, at the least for now, it isn’t rising dividends as shortly as some could like.
Focus Remains On Retaining Growing Cash Flow For Now…
Other than the wealthy valuation (extra on this in a second), the most important cause to be skeptical of STAG is the disappointing dividend development charge over the previous few years.
After all, with about 10% long-term AFFO/share development one would count on a lot stronger annual dividend will increase. However, there are three excellent causes for this.
Source: Earnings releases and dietary supplements
First, like many new REITs, STAG needed to IPO with a sufficiently excessive yield to be aggressive with different REITs and appeal to investor curiosity earlier than it had a confirmed observe document.
STAG IPOd in 2011 with a yield of about 7.three%, and a dividend that was barely higher than AFFO/share.
This signifies that it needed to develop its method into that dividend to make sure a extremely safe payout which in flip means much less threat and a usually decrease yield, larger value, and decrease price of fairness.
The different factor to remember is that as a result of STAG remains to be comparatively small, and rising so shortly by fairness issuances, which means AFFO/share may be extremely unstable.
For instance, between 2014 and 2015, REITs and STAG specifically, grew to become crimson scorching, and administration properly capitalized on this by issuing quite a lot of new shares at document highs.
However, this produced a short lived mismatch between the time STAG raised the capital and the time wanted to shut on new acquisitions, and for the AFFO generated by these properties to hit the underside line.
In different phrases, due to STAG’s small dimension, torrid development charge, and sensible long-term technique of promoting new shares at a premium, the AFFO/share and the payout ratio may be considerably unstable.
This signifies that, within the early years, STAG’s dividend was a lot much less safe, and it was capable of retain little or no money stream to fund inside development.
However, lately, STAG’s declining AFFO payout ratio, together with a robust share value and opportunistic debt refinancing (at steadily decrease charges), has resulted in an amazingly low money price of capital for such a small REIT.
STAG’s present technique, wherein it each retains an growing quantity of AFFO to fund development in addition to prints new shares at a livid tempo to lock in its document excessive premium value, is sensible in the long run.
Because whereas it could imply slower dividend development now, it additionally signifies that STAG can delever its stability sheet (thus decreasing its price of debt), and when the share value inevitably turns (as a result of markets are fickle) then it’ll have loads of low-cost borrowing energy to proceed rising with far much less fairness issuances. That in flip means AFFO/share ought to develop exceptionally shortly, and permit for longer-term, sooner dividend development.
The backside line is that STAG is taking a long-term view, and managing its capital raises to make sure that it could proceed to develop shortly in all method of market, rate of interest, and financial environments.
This is why I finally count on STAG to begin delivering much more spectacular payout development, which is more likely to end in solidly market-beating complete returns primarily based on dividends alone.
…Dividend Growth Should Accelerate In The Future
|REIT||Yield||TTM AFFO Payout Ratio||10-Year Projected Dividend Growth||10-Year Potential Annual Total Return|
|STAG Industrial||5.zero%||82.5%||four% to six%||9% to 11%|
Sources: earnings releases, Gurufocus, Fast Graphs, Multipl.com
The key to STAG being a great long-term holding is a robust payout profile, which means a beneficiant yield, safe payout, and good long-term dividend development prospects.
Fortunately, whereas the yield has been steadily declining over time (as a result of share value appreciating a lot sooner than dividend development), it is nonetheless yielding 150% greater than the S&P 500.
More importantly, the AFFO payout ratio has now fallen to the trade common of 83%, and mixed with the sturdy stability sheet, signifies that STAG’s dividend is now low threat.
|REIT||Debt/Adjusted EBITDA||Interest Coverage Ratio||Fixed Charge Coverage Ratio||Debt/Capital||Fitch Credit Rating|
|STAG Industrial||5.zero||5.6||four.three||46%||BBB (secure)|
Sources: Morningstar, Earnings Supplement, CMA alert
Note that whereas STAG’s leverage ratio is barely above common, its larger profitability properties imply that the REIT’s curiosity protection ratio is definitely a lot superior to its friends. This is why it has comparable to sturdy funding grade credit standing that signifies a 2.11% likelihood of bond default.
Better but? STAG has been deleveraging aggressively, by concentrating its capital raises into premium priced fairness, permitting it to develop its future borrowing capacity for when share costs tumble.
For instance, the fastened cost protection ratio (EBITDA minus unfunded capital expenditures and distributions divided by complete debt service) and curiosity protection ratio are up from three.9 and 5.2, respectively, in simply the final quarter.
Most importantly of all, STAG is nowhere close to violating its debt covenants. If breached, this could permit collectors to right away name in loans, triggering a liquidity disaster and sure end in a dividend minimize.
In different phrases, STAG has a really sturdy stability, which not simply vastly enhances its dividend safety, however permits it to borrow at remarkably low rates of interest.
For instance, STAG’s weighted common rate of interest is three.44%, and it has the flexibility to borrow for so long as 10 years for simply four.42%.
In truth, regardless of rising rates of interest, STAG continues to refinance its debt to decrease rates of interest. This features a July 28th $150-million 5.5 yr unsecured mortgage, which was used to repay a $88 million, 6.1% secured debt facility. This signifies that not simply is STAG decreasing its borrowing prices over time, but additionally bettering its total debt profile (unsecured debt is significantly better than secured).
Overall, STAG has $360.2 million in remaining liquidity (money and remaining borrowing energy). Given the excessive share value, it is seemingly administration will leverage that with at the least an equal quantity of low-cost fairness (and doubtless much more).
That would imply that STAG’s precise dry powder is at the least $720 million (and maybe as a lot as $1.08 billion), which is sufficient to fund one other document yr of acquisitions.
Taken collectively, badysts count on STAG’s declining payout ratio, coupled with its large development pipeline of $2.2 billion, to imply that in 2019 the REIT will reverse course and begin accelerating its dividend development charge.
- 2019: 2.1% dividend development
- 2020: 5.5% dividend development
- 2021: 5.2% dividend development
- 2022: 5.6% dividend development
- 2023: 5.three% dividend development
While all long-term forecasts must be taken with a grain of salt, on this case I consider that STAG will certainly develop its payout at a good charge sooner or later.
Source: Brad Thomas, Fast Graphs
This is as a result of the payout ratio is more likely to quickly decline to a stage that each creates a sufficiently giant security buffer within the occasion of a recession (extra on the dangers of this later), and in addition permits administration to retain sufficient capital to proceed its quest to beat the secondary industrial actual property market.
Industrial REIT FFO/share Growth Projections
Source: Brad Thomas, Fast Graphs
In different phrases, I count on that after STAG hits a sure payout ratio, administration might be keen to develop the dividend on the similar charge as money stream per share.
And provided that STAG is the fourth quickest rising industrial REIT proper now, that charge ought to make dividend traders very comfortable.
Valuation Is A Bit Frothy
STAG Total Return Price information by YCharts
Over the previous yr, STAG Industrial has not simply almost tripled the full returns of most REITs, however has additionally handily overwhelmed the crimson scorching S&P 500.
This makes intuitive sense, for the reason that market as an entire continues to place a premium on development. However, this additionally signifies that STAG is now buying and selling at among the least interesting valuations in years.
|REIT||P/AFFO||Historical P/AFFO||Yield||Historical Yield||Percentage Of Time Yield Has Been Higher|
|STAG Industrial||16.four||14.1||5.zero%||5.7%||Yield Near All-Time Low|
Sources: Earnings Releases, Gurufocus, Fast Graphs, Yieldchart, STAG investor presentation
For instance, the P/AFFO (REIT equal to P/E ratio), whereas not outlandish in its personal proper (it is a lot decrease than the trade common in spite of everything), remains to be considerably above its historic norm.
Meanwhile, the yield, an important valuation metric for revenue traders, isn’t just a lot decrease than its historic median, however is near an all-time low (although it’s almost double the trade common).
STAG Dividend Yield (TTM) information by YCharts
Note that the all-time excessive yield STAG skilled in early 2016 (about 9%) was attributable to a mixture of a market freakout over Fed climbing rates of interest, and the primary correction in about three years.
Both components may very effectively repeat themselves within the coming quarters, leading to a much more engaging shopping for alternative.
Of course, when that will happen is inconceivable to foretell. So within the meantime, does not STAG’s sturdy long-term development potential nonetheless imply it could be value shopping for at present?
That is determined by how effectively you badume STAG will develop its dividend sooner or later.
|Forward Dividend||Projected 10-Year Dividend Growth||Projected Dividend Growth Years 11-20||Fair Value Estimate||Dividend Growth Baked In||Discount To Fair Value|
|$1.42||zero.7% (worst case state of affairs)||zero.6%||$22.67||four.7%||-25%|
|four% (conservative case)||four%||$26.99||-5%|
|5% (seemingly case)||four%||$28.24||zero%|
|6% (greatest case state of affairs)||5%||$30.01||6%|
Sources: Gurufocus, Fast Graphs
That’s as a result of, if we use a long-term (20 yr) discounted dividend mannequin, with a 9.zero% low cost charge (the submit expense complete return of an S&P 500 ETF, since 1871 and thus the chance price of cash), we discover that STAG shares at present are already pricing within the REIT’s sturdy seemingly development.
That signifies that one of the best course of possibility is to attend for the market to appropriate, and watch development darlings like STAG return to extra affordable valuations earlier than shopping for further shares.
Brad Thomas, Seeking Alpha’s resident REIT guru, recommends ready till $27 earlier than new traders open a place in STAG, which I contemplate a usually good thought.
That’s as a result of $27 is what I contemplate STAG to be value, primarily based on conservative long-term development badumptions, and thus it might be justified below the Buffett precept of “it’s far better to buy to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
Risks To Consider
A whole lot of traders badume that rising rates of interest are a serious menace to the expansion of all REITs, however in actuality that is much less of a priority than chances are you’ll badume.
For instance, whereas true that rising charges can lead to decrease share costs for REITs at instances (and thus larger price of fairness), the correlation between long-term charges (10-Year Treasuries) and REITs will not be that sturdy and may fluctuate over time.
In addition, as a result of their leases are comparatively quick (about 5 years), industrial REITs have much less charge sensitivity than issues like triple internet lease retail REITs whose contracts are often 15 to 20 years in length.
This signifies that triple internet lease REITs have much more inflation threat, since they’ve to attend a really very long time between lease renegotiations.
For instance, at the moment, the beta to yield of STAG Industrial is about zero.62%, which means that every 1% enhance in 10-Year Treasury yields leads to a zero.62% enhance in STAG’s dividend yield.
Or to place one other method, a 1% enhance in long-term rates of interest might be anticipated to doubtlessly end in STAG’s share value declining to $25.27, or 10.6% from the $28.24 it’s at present.
However, whereas this is perhaps an issue for somebody who has to promote shares periodically (comparable to retirees using the four% rule), it seemingly would not truly cease the REIT from persevering with to develop.
This is as a result of regardless of a big publicity to floating charges, the general money price of capital at present is so low that the money revenue on its investments (money yield on acquisitions minus money WACC) would stay bigger and doubtless comparatively secure.
That’s as a result of rising long-term charges are likely to make business actual property costs decline, which means that rising charges may imply larger money yields on new properties, leading to comparable accretion profiles on new investments sooner or later.
But that does deliver me to one among two main considerations I’ve with STAG that I might be fastidiously watching going ahead.
The first is the common money yield on new properties, which is right down to 7.5% thus far this yr, in comparison with 7.9% in 2016.
Now it is pure sturdy economic system and a booming industrial actual property market could cause yield compression, and there are nonetheless loads of bargains for STAG administration to seek out.
After all, in Q1 2017 the common money yield on new properties was a really wholesome eight.2%.
However, do not forget that STAG’s aim is 25% property development annually, which is a really tall ask, particularly in a couple of years when its portfolio goes to be a lot bigger.
This means there’s a threat that administration may really feel strain to shut on much less worthwhile acquisitions simply to maintain the expansion engine buzzing, particularly since proper now that’s all Wall Street appears to care about (inventory value rising regardless of flat dividend).
However, the most important threat I am doubtlessly nervous about is what the subsequent recession may do to the REIT’s money stream.
Source: Jeff Miller
Now do not get me flawed there aren’t any recessionary storm clouds on the horizon as but, because the economic system seems to be accelerating.
In truth, based on quite a lot of main indicators, the likelihood of a recession within the subsequent 4, and 9 months is 2.5% and below 15%, respectively.
However, finally, we are going to get an financial downturn at which level STAG Industrial’s area of interest thesis, that secondary industrial property markets will maintain up effectively when it comes to lease and occupancy, might be examined.
Remember that STAG has solely been public since 2011, effectively into the present financial restoration. While true that administration has been within the industrial REIT enterprise since 2004 (when STAG Capital Partners was fashioned), that also signifies that the REIT’s observe document is moderately quick and restricted to instances of financial development.
Assuming that STAG’s occupancy had been to say no to the identical stage because the trade common in 2009, (about 89%) that will characterize a 6.5% occupancy decline which might doubtlessly translate right into a decline in similar retailer NOI of about 5.6%.
Note that STAG noticed a 70 foundation level occupancy decline within the final quarter, which resulted in an identical decline in internet working revenue.
Because of excessive fastened prices, (sustaining vacant properties and administrative bills) this might end in a considerable decline in AFFO throughout a recession.
This is as a result of the REIT’s retention charge on expiring leases, whereas comparatively secure over time, can be a lot decrease than different REIT sectors like triple internet lease retail which take pleasure in retention charges of about 90%.
And as you possibly can see, in any given quarter the retention charge may be extremely unstable, falling as little as 50%.
The cause that industrial REIT retention is so low in comparison with workplace or retail REITs is due to the commodity nature of the enterprise.
For instance, whereas an organization leasing an workplace is not more likely to transfer its complete operations on the finish of the lease (and badly disrupt its enterprise), industrial clients are usually extra versatile and keen to maneuver to new areas.
And whereas in good financial instances STAG has been capable of shortly discover new tenants, and obtain larger rents on new leases, in an financial downturn that will reverse and the REIT is perhaps pressured to chop rents to fill its properties.
That in flip may imply a big decline (as a lot as 10% to 15%) in AFFO/share throughout a recession. While on the present payout ratio this would not put the dividend in danger, it’d considerably gradual the REIT’s capacity to develop the payout.
Then there’s the potential that STAG administration actually does consider itself as Amazon, which means that it plans to retain higher and higher portions of AFFO to reinvest again into the enterprise, doubtlessly for many years (for so long as the expansion runway lasts).
In different phrases, whereas STAG has the potential for sturdy dividend development, sufficient to ensure it market-beating complete returns from dividends alone, there’s a threat that STAG could not stay as much as it.
After all, ought to administration resolve to maintain the present token dividend will increase going without end (simply sufficient to maintain the expansion streak alive and finally develop into a dividend aristocrat), STAG’s present yield would find yourself representing just about the one revenue traders obtain.
And provided that it isn’t maintaining with inflation, this could more and more make STAG extra of a development story than an revenue funding, and thus not appropriate for my portfolio (which targets yield + dividend development of 10+%).
Bottom Line: STAG Is A Great Choice For Those Seeking Monthly High-Yield With A Strong Growth Kicker But Wait For A Better Price
I proceed to be very impressed with how STAG is “Amazoning it” on the subject of executing on its long-term development technique.
Specifically, I like the best way that administration is placing whereas the fairness iron is crimson scorching to lift more and more decrease price capital and maximize its development potential.
I’m badured that within the subsequent few years STAG will reward long-term shareholders with far stronger dividend development, which can seemingly function a catalyst to make sure market-beating complete returns over the approaching decade.
That being mentioned, whereas the premium share value is nice for current traders and the REIT’s speedy development wants, at at present’s ranges I am unable to suggest traders put new capital to work on this inventory. In different phrases, STAG Industrial is a Hold proper now.
Fortunately, as a result of STAG is priced as a development REIT and never a price REIT, which means the subsequent correction, every time it happens, is more likely to current a way more engaging shopping for alternative; one I hope to partake in aggressively.
Disclosure: I/now we have no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours.
I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.