Business Overview and History

STAG Industrial, Inc. (NYSE:STAG) is a real estate investment trust (REIT) focused on the acquisition, ownership, and operation of industrial properties throughout the United States. The company has built a well-diversified portfolio of 591 buildings across 41 states, totaling approximately 114.5 million rentable square feet as of September 30, 2024.

STAG Industrial was founded in 2010 and went public in 2011, trading on the New York Stock Exchange. The company was formed as a Maryland corporation and elected to be treated and intends to continue to qualify as a REIT. STAG is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns all of its properties and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P. As of September 30, 2024, the company owned 98% of the common units of the limited partnership interests in the Operating Partnership.

Over the years, STAG has grown its portfolio through strategic acquisitions, expanding from its initial focus to now owning 578 industrial buildings in 40 states with approximately 114.5 million rentable square feet as of September 30, 2024. The company's strategy has been to target multi-tenant industrial properties in secondary and tertiary markets, utilizing its proprietary risk assessment model to identify assets that offer relative value.

STAG has faced some challenges during its growth, such as tenant bankruptcies, but has demonstrated the ability to navigate through these issues. For example, in October 2024, one of STAG's tenants, American Tire Distributors, Inc., voluntarily filed for reorganization under Chapter 11 of the United States Bankruptcy Code. However, as of the filing, ATD was current on its rent obligations to STAG.

To fund its growth, STAG has been active in the capital markets, utilizing both equity and debt financing. The company has maintained a diversified capital structure, with unsecured credit facilities, term loans, and unsecured notes. As of September 30, 2024, STAG had total immediate liquidity of approximately $810 million, comprised of $70 million of cash and cash equivalents and $740 million of immediate availability on its unsecured credit facility.

One of STAG's key competitive advantages is its diversified tenant base, which helps mitigate concentration risk. As of September 30, 2024, the company's top 20 tenants accounted for just 16.5% of total annualized base rental revenue, with no single tenant contributing more than 3% of revenue. The portfolio is also well-diversified across industries, with the top 20 tenant industries representing 82.1% of total annualized base rental revenue.

Financials and Operating Metrics

STAG's financial and operating performance has been consistently strong, even amidst macroeconomic headwinds. For the nine months ended September 30, 2024, the company reported total operating revenue of $568.1 million and net income of $141.3 million. The company's core funds from operations (Core FFO) for the same period was $341.5 million, or $1.88 per share.

For the most recent quarter ended September 30, 2024, STAG reported revenue of $199,325,000, net income of $50,954,000, operating cash flow of $104,929,000, and free cash flow of $66,268,000. The increase in revenue, net income, OCF, and FCF were primarily due to continued growth in the company's portfolio through acquisitions and organic growth. Despite the challenging economic environment, STAG's diversified portfolio and operating platform allowed them to produce strong results.

STAG's balance sheet remains healthy, with a net debt to annualized run rate adjusted EBITDA ratio of 5.2x as of September 30, 2024. The company's debt-to-equity ratio stood at 0.886 as of the same date. The current ratio and quick ratio were both 0.483, indicating the company's ability to meet its short-term obligations.

Operating metrics have also been strong, with same-store cash net operating income (NOI) growth of 5.8% for the first nine months of 2024, which was a record for the company. Occupancy in the operating portfolio stood at 97.3% as of September 30, 2024, and the company achieved a retention rate of 76.6% for the year.

Rental Income Segment

STAG's primary source of revenue comes from rental income, which includes fixed lease payments, variable lease payments, straight-line rental income, and above and below market lease amortization. For the three months ended September 30, 2024, same-store rental income increased by approximately $4.75 million, or 2.8%, to $175.56 million compared to the same period in 2023. This increase was primarily due to the execution of new leases and lease renewals with existing tenants, contributing approximately $8 million. However, this increase was partially offset by a reduction in base rent of $2 million due to tenant vacancies and a net increase in the amortization of net above market leases of $0.2 million. Additionally, management's evaluation of certain operating leases resulted in a decrease of approximately $0.3 million in same-store lease income.

Other Income Segment

In addition to rental income, STAG generates other income, which includes items such as tenant billings for insurance, real estate taxes, and certain other expenses. For the three months ended September 30, 2024, same-store other billings increased by $0.4 million, or 1.3%, to $32.3 million compared to the same period in 2023. This increase was primarily attributable to a $1.3 million increase in real estate tax reimbursements, offset by a $0.9 million decrease in other expense reimbursements.

Property Expenses

STAG's property expenses consist primarily of operating expenses and real estate taxes. For the three months ended September 30, 2024, same-store property operating expenses increased by $1.5 million, or 4.6%, to $34.8 million compared to the same period in 2023. This increase was primarily due to increases in real estate tax, other expenses, and insurance expense of $1.8 million, $0.3 million, and $0.2 million, respectively, partially offset by decreases in repairs and maintenance and utility expenses of $0.7 million and $0.1 million, respectively.

Liquidity

STAG Industrial maintains a strong liquidity position, which provides financial flexibility and supports the company's growth initiatives. As of September 30, 2024, STAG had total immediate liquidity of approximately $810 million, comprised of $70,040,000 of cash and cash equivalents and $740,000,000 of immediate availability on its unsecured credit facility. This robust liquidity position enables the company to pursue acquisition opportunities, fund development projects, and manage its operations effectively.

Acquisition and Disposition Activity

STAG has been active on the acquisition front, adding 17 buildings comprising 3.5 million square feet for $407.7 million during the first nine months of 2024. These acquisitions were completed at a weighted average cash capitalization rate of 6.2% and a weighted average straight-line capitalization rate of 6.9%.

On the disposition side, the company sold 8 buildings totaling 1.3 million square feet for net proceeds of $97.7 million during the same period, realizing a gain on the sales of $23.3 million. This activity demonstrates STAG's ability to recycle capital and maintain a disciplined approach to portfolio optimization.

Development and Redevelopment

STAG has also been active in development and redevelopment, with approximately 2.5 million square feet of activity across 11 buildings as of September 30, 2024. This includes a 474,000 square foot build-to-suit project in Greer, South Carolina, which was 100% pre-leased prior to completion.

Additionally, in December 2024, STAG entered a 90/10 joint venture to develop two railroad-served buildings totaling 400,000 square feet in the Charlotte, North Carolina market. This project has an expected stabilized yield of 7%.

Guidance and Outlook

For 2025, STAG has provided the following guidance:

• Same-store cash NOI growth of 3.5% to 4.0%
• Occupancy in the operating portfolio to decrease by 100 basis points
• Acquisition volume of $350 million to $650 million at cash capitalization rates of 6.25% to 6.75%
• Disposition volume of $100 million to $200 million
• Core FFO per share of $2.46 to $2.50
• Retention is projected to range from 70% to 75%
• Cash leasing spreads are expected to be approximately 25%
• STAG plans to complete 14 million square feet of new and renewal leasing in 2025
• G&A is expected to be between $52 million and $54 million

This guidance reflects the company's continued focus on disciplined capital allocation, portfolio optimization, and operational excellence, positioning STAG for another year of solid performance. It's worth noting that STAG achieved a record same-store cash NOI growth of 5.8% in 2024, and its core FFO per share for Q4 2024 was $0.61, representing a 4.8% increase compared to 2023.

Industry Trends

The industrial real estate sector has been experiencing strong demand driven by factors such as the growth of e-commerce, supply chain reshoring initiatives, and increased inventory levels. Industry analysts estimate the CAGR for the US industrial REIT market to be approximately 2.9% from 2024-2028. STAG's focus on the industrial real estate market has been the primary driver of its financial performance, allowing the company to maintain strong occupancy rates and execute new leases and renewals at favorable terms.

Risks and Challenges

While STAG's diversified portfolio and prudent management have helped the company navigate various market conditions, there are still risks to consider. These include rising interest rates, potential economic slowdown, and competition for acquisitions. Additionally, the company's reliance on the industrial real estate sector means it is exposed to fluctuations in demand and supply dynamics within that market. The company has also faced some challenges, such as tenant vacancies and increases in property expenses, which have impacted its net operating income.

Conclusion

STAG Industrial has established itself as a leading diversified industrial REIT, delivering consistent financial and operational performance through its well-executed investment strategy. The company's focus on secondary and tertiary markets, active asset management, and disciplined capital allocation have contributed to its success. With a strong balance sheet, ample liquidity, and a solid 2025 outlook, STAG appears well-positioned to continue creating value for its shareholders in the dynamic industrial real estate market.