STAG Industrial, Inc. reported robust industrial leasing activity in its third quarter 2023 earnings conference call. The company is benefiting from trends such as nearshoring, onshoring, and e-commerce. However, it noted that the lack of new construction starts is expected to accelerate market rent growth as existing supply is absorbed. The company also announced that acquisitions for the third quarter totaled $204.3 million, with dispositions amounting to $28.4 million.
Key takeaways from the call include:
- The softest part of the industrial market is in big box spaces between 500,000 and 1 million square feet, a segment where STAG does not directly compete.
- Deliveries are projected to be approximately 3% of the overall industrial stock this year, resulting in a national vacancy rate of 4.4% by year-end.
- The company expects market rent growth in its portfolio to be in the high single digits this year and mid-single digits in 2024.
- STAG achieved substantial shell completion for its Port 290 development in South Carolina and closed on 31 acres of land in Tampa, Florida for $9.6 million.
- The company increased its core FFO per share guidance to a range of $2.26 to $2.28 per share and decreased its acquisition and disposition volume expectations due to the current uncertain macro environment.
During the call, the company representative, Bill Crooker, discussed the performance of different markets and suite sizes. He noted that while larger box markets are experiencing slower growth, smaller suite sizes are performing well. He also identified struggling markets such as Indianapolis, Columbus, and South Dallas.
The company also provided updates on development projects, including one in Tampa with a profit margin in the high teens and a yield in the high 6 to low 7 range. They expressed interest in pursuing more development opportunities if they arise and stated that they are seeing development opportunities with low initial prices and are using a combination of free cash flow and revolver to fund these projects.
STAG Industrial also discussed its strategy of focusing on Tier 1 CBRE markets and the top 30 markets within those. The funding for these opportunities will come from a combination of free cash flow and revolver. In terms of dispositions, STAG Industrial has been selling both noncore and opportunistic assets, with a cap rate in the high 6s to low 7s.
The company expects to have more opportunities for development, but it may take longer to acquire at the most effective price. In terms of capital sources, STAG Industrial has significant liquidity and low leverage, with the ability to retain $90 million to $100 million of free cash flow this year. The company is not currently evaluating many opportunities and is not looking at equity as a capital source.
STAG Industrial has addressed 37% of its expected leasing for 2024, with rental spreads of about 30%. For next year, they anticipate leasing spreads to be between 25% and 30%. In terms of developments, the company is focused on achieving the best risk-adjusted returns and building to meet market demand.
About 25% of STAG Industrial's portfolio is multi-tenant, and their acquisitions in recent years have been split between multi-tenant and single-tenant properties. The cap rates for acquisitions are currently in the high 6s to low 7s, with a potential mark-to-market opportunity. Finally, the company mentioned that they have significant liquidity, low leverage, and a retention of $90 million to $100 million of free cash flow this year. They are not currently considering equity as a capital source.
InvestingPro Insights
According to real-time data from InvestingPro, STAG Industrial, Inc. has a market capitalization of $5870M and a P/E ratio of 32.13 as of Q3 2023. The revenue for the last twelve months as of Q3 2023 stands at $694.86M, marking a growth of 9.49%.
In line with the company's performance, InvestingPro Tips suggests that STAG has high earnings quality, with free cash flow exceeding net income. This is consistent with the company's statement of retaining $90 million to $100 million of free cash flow this year. Furthermore, it has maintained dividend payments for 13 consecutive years, which aligns with the company's robust industrial leasing activity.
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