There was a new teaser email from the Oxford Income Letter folks this morning that caught my eye… and in these tumultuous days, when I don’t really feel like doing any trading around these short-term gyrations caused by pandemic panic and political pandering, I confess to being extra-interested in relatively stable dividend-paying investments. So let’s dig in and see what this one is, shall we?
Here’s the intro to the email I received today:
“Amazon has been one of the BEST-performing stocks during the pandemic.
“Its price has more than doubled to around $3,200, creating a massive wave of wealth for shareholders.
“Unfortunately, that price puts it out of reach of most regular investors.”
That’s not really true, though it can certainly feel that way sometimes. Many investors are still focused on the old rules that required buying 100-share “round lots” of shares through full-service brokers, but those rules have gradually disappeared over the past 20 years… and recently, fractional shares have become widely available, so most brokers these days will let you place an order for $200 worth of Amazon shares, or $20,000 worth, without worrying about exactly how many shares that is.
I’m an Amazon (AMZN) shareholder and have been gradually adding to that position, and I sometimes buy partial shares, which wasn’t really possible until a couple years ago but is a great tool for small investors, particularly in this era when stock splits have become less common and companies seem to have been taking more pride in having a $500+ share price. I still vividly remember, when my portfolio was far smaller 15 or 20 years ago, that I scraped together the capital to buy my first Berkshire B share for more than $3,000, with a single share being about what my Roth IRA annual contribution was at the time. That was a little tough to do, and I thought it was worthwhile to make that work in order to buy into Warren Buffett’s colossus, but that kind of investing is thankfully far easier now — not only did Berkshire split the shares to make their acquisition of BNSF easier, bringing the B share price down to a more accessible level in the $50-100 range, but even now, with Berkshire back well above $200, if I had only $20 to invest this week I could easily buy a tenth of a share of Berkshire through Fidelity, Robinhood or many of the other easily accessible discount brokers who offer fractional shares (almost every big broker already allows this, but I bet we’ll be able to drop that “almost” pretty soon — competition is a wonderful thing).
So whether or not you care to be an Amazon shareholder, the price per share of an investment shouldn’t mean all that much for most people these days — in almost every case, any interested investor can buy an appropriate amount of exposure to whatever stock they want (unless, of course, you’re using an options strategy — CBOE experimented with mini options that were based on 10 shares instead of 100 shares for some higher priced stocks for a while, but I’m pretty sure those have all been discontinued over the past couple years).
Sorry about that interlude, I’ll stop down off my soapbox… what else does Oxford say about this stock? More from today’s email:
“… today, we’re revealing a stock that OWNS Amazon warehouse real estate… and it trades for around $30.Are you getting our free Daily Update
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“That’s right. Amazon pays rent to THIS company. And anyone can afford to get in.
“Best of all, this little-known stock pays a massive dividend. Every single month.”
Ah, so that gets rid of most of the mystery for us… The ad is now dated “October 2020,” but it looks like it’s essentially the same pitch I wrote about in September.
Which means, with these extra clues, that we can confirm with more certainty what I said a couple months ago: yes, this is Stag Industrial (STAG).
And indeed, that new email I received today links to a largely unchanged “Real Estate Redo” pitch from Marc Lichtenfeld… it’s got a new date, but the pitch for this particular one of the stocks he hints at has not changed. Here’s a little snippet of those clues, should you want to have a refresher:
“…an industrial REIT that rents out logistics real estate for e-commerce. Think warehouses and supply chain buildings.
“Its biggest tenant? Amazon.
“Amazon has warehouses all over the country so it can get you your package as fast as possible… and it’s adding more all the time.
“Imagine collecting income from all the shipping Amazon does….
“But get this – this REIT also collects rent from companies like UPS, FedEx, Target, Wayfair, Samsung and more.
“It’s paying out $214 million each year… and you get paid MONTHLY, just like collecting a real rent check.
“To get the most bang for your buck, I personally recommend reinvesting the dividends you’ll get each month until you need the money.
“You’ll get more shares… and eventually see massive income streams.
“But if you need the money now, by all means, collect that monthly payment!”
What’s missing since the last time I wrote about this one? In the previous iteration, Lichtenfeld hinted that it was “trading for 25% off recent highs,” and that’s not in the current version of the spiel. For good reason. That was no longer true by the time we started to see the original ad over the summer, and certainly hasn’t been true since May or so, though it is true that at $31 or so, the stock is still about 10% below its all-time high share price (which was hit in early August).
Stag Industrial is a single-tenant industrial/warehouse REIT which, like the much-larger (and more frequently teased) industrial REIT ProLogis (PLD), counts Amazon as its largest tenant — though as of earlier this year, Amazon still accounted for only about 2% of STAG’s revenue, so we shouldn’t overstate that connection. Freight and logistics generally represents about 8.4% of STAG’s revenue, but “automotive” is the biggest sector at 11.6%.
Why is it a match? The dividend payout is quite close to what’s teased, this year the total dividend payout should be a little above $214 million, since the dividend tends to rise and the share count will also probably rise, but it’s very close right now (there are 149 million shares outstanding, the most recent quarter totaled 36 cents in dividends per share, that tallies up to $214 million if you annualize it at the current rate).
That “single tenant” business doesn’t mean that they have only one tenant, by the way, it just means that they typically have only one tenant per building — which increases the risk a bit, but is common in these kinds of REITs. Generally, properties like warehouses or logistics facilities have only one tenant or a small number of tenants, unlike an office building or a shopping mall, so having just one vacancy can mean a substantial drop in “occupancy rate,” and a purpose-built warehouse can be difficult to repurpose for a different client if your customer defaults.
STAG is fairly small, and relatively volatile for a REIT, and pays an above-average yield of 4.6% (12 cents per share, per month, equals $1.44/year, which is 4.6% of $31) — and yes, it pays monthly, which generally attracts individual shareholders who like either the monthly income to help with their actual living expenses, or the slightly more rapid compounding you get from a monthly dividend compared to the more typical quarterly dividend.
And what has happened lately? STAG reported last week, so interested investors can check out that press release or read the transcript of their conference call to see what they’re saying about the current business climate… but the short answer is, “things are going well.”
Industrial is the happiest sub-sector in the REIT space this year, thanks to the strength of e-commerce and home improvement and some of the other large customer groups who depend on logistics and warehouse real estate… though things are not perfect, not by any means, and they certainly have a few tenants who are suffering and some rent that is not being paid on time, as well as some leases up for renewal right now that are unlikely to provide the kinds of rent increases they had gotten used to in recent years. They say that rent collection for October has continued to be strong at about 97.5%, so they are clearly not in crisis, but they are not quite at 100%.
The numbers reflect that — things are not great, but they are as good as last year… and compared to most real estate companies, that is a real ray of sunshine. STAG posted Core Funds From Operations of 46 cents per share, exactly what they posted in the same quarter of 2019 (FFO is a cash flow measure that REITs tend to use instead of earnings to reflect their ability to sustain the business and pay dividends — it mostly just ignores depreciation and the impact of purchases or sales of property, and most REITs further shine their books by referring to “Core FFO” or “Adjusted FFO” to make it even cleaner-looking by removing other stuff they don’t want to talk about).
FFO is where the ability to pay the dividend comes from, not really from earnings, since most REITs fund acquisitions or renovations with new equity or with debt, not by “banking” the money that depreciation is intended to set aside for such purposes. Through the first nine months of 2020, STAG has generated $1.40 per share in that “Core FFO”, which is about a 3% increase over last year. They also use a metric called “Cash Available for Distribution,” which is lower but grew faster — that number was $180 million for the first three quarters of the year, with this last quarter at $55 million. That means “Cash Available for Distribution” stands at about $1.20 per share for the year to date (there are 149.23 million shares outstanding), and the dividend is 12 cents/share/month, so we shouldn’t expect big dividend increases anytime soon — they usually declare their dividend increase in early January, and it is usually tiny (the last increase was by 0.7%, so it didn’t even keep up with inflation), but they’re already paying out 90% of their “cash available for distribution.”
They didn’t use that “Cash Available for Distribution” term last year, but if they had it would have been $1.09 per share, so they have at least gotten a little bit less stretched on that front, last year at this time they were on track to have paid out $1.07 in dividends out of $1.09 in cash available, so 98% or so instead of this year’s 90%. That’s a little encouraging, though not necessarily an indicator of big growth to come.
The Conference Call includes some interesting notes about the health of their tenants and their own balance sheet:
“We recently completed our fourth annual tenant survey. Not surprisingly, there are more and less fortunate industries during the pandemic. The more fortunate include third-party logistics providers and the home improvement industry, and of course, anything e-commerce related. Less fortunate include tenants in the trade show industry and certain small automobile tenants. E-commerce remains a dominant theme. Approximately 40% of our respondents across our portfolio utilize a portion of their space to conduct e-commerce activity and approximately 15% of our buildings are solely dedicated e-commerce. Our tenants reported an increase in the percentage of their warehouse footprint focused on e-commerce activity, an increase from 30% in 2018 to almost 40% in 2020. STAG is in enviable position as we approach the end of the year. Our balance sheet is defensively positioned and our liquidity is high. The STAG team is working effectively and efficiently in the current work from home environment, the strong engagement across the organization and a resilient culture.”
And while things are generally pretty solid, we should point out that it’s also not going to really be a “growth” year… more from the call…
“We have increased our expected acquisition volume range now projecting between $650 million and $750 million with an expected cash cap rate range of 6% to 6.25% and we expected straight-line cap rate range of 6.5% to 6.75%. We have increased our 2020 disposition volume range, now projecting between $150 million and $200 million. We have increased our expected retention range, now projected between 70% and 75% for the year, which includes 2 million square feet of non-retention associated with the Solo Cup and GSA facilities.
“We have increased our expected annual cash same store range now projecting 2020 annual same store pools cash NOI growth to be between 75 and 125 basis points for the year. This range includes the reduction in our annual credit loss guidance to a range of 75 to 125 basis points. We continue to expect G&A to be between $39 million and $41 million for the year. We expect to run leverage between 4.5 and 5.25 times for the year. Capital expenditures per average square foot is still expected to be between $0.27 and $0.31 for the year. We have increased the expected range of core FFO per share to be between $1.86 and $1.88 for the year, representing a midpoint increase of $0.03.”
That core FFO would make it feasible to increase the dividend if they like, but they haven’t shown such an indication in the past… dividend growth for STAG is paltry, which is my largest caution flag here. Growth in the investor payout has averaged about 1% a year over the past four years, well below inflation, so unless you see a surprise dividend increase of more substantial scale it’s probably safest to assume that the dividend will be the entirety of your return. So yes, a yield of almost 5% isn’t bad, but it’s not great for a stagnant dividend… I do like STAG’s positioning, but I’d want to be able to model up a vision for future dividend increases before investing, and that’s hard to do right now — if they do increase the dividend more than 1% or so in January, it will probably be because they sell one of their more valuable properties, a large logistics warehouse on the New Jersey Turnpike that they’re talking about offloading, and put that capital into something with a slightly higher cash yield, though the competition is pretty fierce in the industrial space and the cap rates are awfully low, in the 5-6% range (“cap rate” is essentially net property income divided by purchase price, so if you’re buying properties at a 5% cap rate and paying out a 4.6% dividend you don’t have a lot of cash left to pay overhead… unless you borrow a lot of the capital for the acquisition, and your borrowing costs are very low).
On the other hand, of course, we have the reality that investors need income, a near-5% yield ain’t bad, and the Federal Reserve seems likely to try to keep interest rates tamped down to near zero, which should support “alternative” sources of income like REITs. That’s probably largely why so many REITs have outperformed their dividend in recent years — here’s what the growth has looked like for STAG over the past five years, in most cases, over the long term, I find that REIT share prices are driven by the increase in the dividend, but you can see that STAG investors have bid the stock up faster than the company has increased its payout:
That doesn’t mean anything in particular for the near term, but in general REIT performance tends to be driven, over the long term, by the REIT’s ability to increase the dividend on a per-share basis. The fantastic performers are fantastic dividend growth stories, not just strong companies who manage their properties well. You can get some sense of that from the largest company in STAG’s space, Prologis (PLD), here’s that same chart for them:
And Lichtenfeld is also still hinting at a couple other REITs, as we covered last time, and they’re still Innovative Industrial Properties (IIPR) and Digital Realty Trust (DLR), so here are the charts for those two, in case you’re curious — IIPR hasn’t been public for five years yet, but still the dividend growth is an obvious driver:
And Digital Realty’s five year chart shows the trend…
But they also went through a bit of a restructuring that lifted the stock dramatically in 2016, so the three-year chart is perhaps a little more illustrative of the importance of dividend growth:
Monthly income and a reasonably high dividend yield are both attractive things, and both can serve as a bit of a security blanket for those of us who are feeling a little Linus tendency during these turbulent days… but dividend growth is what builds fortunes. Building a fortune is slow, I’m sad to say, but if you can choose strong stocks and let those dividends compound, it can also seem quite relentless for the patient REIT investor.
The big picture risk to be wary of, for essentially all REITs, is a shift to a long period of rising interest rates, should that ever come, because REITs haven’t ever really been tested in a long bear market for bonds. Real Estate Investment Trusts have technically been around for 60 years, the tax structure was created in 1960, but REITS were arguably a niche part of the investing world and untouched by most investors before the 1980s and 90s, and interest rates have been in a gradual decline now for almost 40 years, which has increased the asset value of real property and helped leveraged real estate investments become gradually more profitable (almost every REIT also borrows money, to improve the per-share returns). It’s possible that this big picture backdrop will change, indeed it might even be likely that it will change, though it’s also possible for interest rates to stay in stasis for a decade or more (just ask Japan), and we probably won’t recognize the real turning point until years after it happens.
I have looked into the industrial REITs several times in the past, thanks to relentless teases for ProLogis (which is far and away the industry leader, and one of the largest REITs in the world), so if you want to see that longer-form musing you can catch my update from last week here.
Prologis is a substantially more richly valued company than STAG, based on 2020 guidance STAG is trading at about 17 FFO while PLD is at about 27X FFO using similar numbers… and Prologis is more than 10X larger and has been almost as volatile this year, but it’s also been able to keep lifting the dividend so far, with the latest increase at almost 10%, and that carries a lot of weight for income investors. I think Stag has some potential, and have been cautiously interested in it for a couple years now, but have not convinced myself to buy shares because of the lack of dividend growth.
Your opinion might vary, of course, and I’d be delighted to hear it — just chime in with a comment below, and thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of Innovative Industrial Properties, Amazon and Berkshire Hathaway. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.