We came across a bullish thesis on STAG Industrial, Inc. (STAG) on Substack by Steve Wagner. In this article, we will summarize the bulls’ thesis on STAG. STAG Industrial, Inc. (STAG)'s share was trading at $35.21 as of Feb 19th. STAG’s trailing P/E was 33.86 according to Yahoo Finance.
A crane on a construction site, building a modern office complex for the REIT.
STAG Industrial (STAG) delivered a solid Q4 2024 performance, maintaining high occupancy rates and strong leasing activity despite macroeconomic headwinds. With a diversified industrial real estate portfolio spanning 591 buildings across 41 states, STAG reported an operating portfolio occupancy of 97.3%, demonstrating the resilience of its asset base. Leasing demand remained strong, with new and renewal leases driving a 41.8% straight-line rent increase and a 28.3% cash rent increase, though cash rent growth moderated slightly from 31.0% in 2023. This robust leasing environment helped offset challenges posed by rising interest rates and broader economic uncertainty.
Financially, STAG's rental income for Q4 2024 increased to $198.7 million, up from $182.6 million in the prior year, highlighting consistent revenue growth. Funds from operations (FFO), a key REIT performance metric, grew from $109.1 million to $116.8 million, translating to a Core FFO per share increase to $0.61. Net operating income (NOI) also grew to $159.1 million, while cash NOI reached $155.5 million. However, net income declined slightly to $193.3 million, largely due to higher interest expenses and lower gains from property sales. The company continued to distribute a stable monthly dividend of $0.1233 per share, annualizing at $1.48, supported by strong free cash flow and prudent financial management.
Despite these positives, rising interest rates have increased STAG’s cost of capital, with interest expenses climbing to $31.7 million in Q4 2024, up from $25.3 million the previous year. The company’s total debt stood at $3.04 billion as of December 31, 2024, with a weighted average interest rate of 3.98%. To manage this, STAG has employed a staggered maturity strategy, favoring unsecured loans and credit facilities while actively refinancing to extend maturities. Notably, it issued $450 million in senior unsecured notes in March 2024, carrying rates between 6.05% and 6.30%, while also hedging $1.4 billion of variable-rate debt to mitigate interest rate risks. By focusing on unsecured debt and limiting reliance on secured loans, STAG maintains financial flexibility, a critical advantage given REITs' legal requirement to distribute a significant portion of taxable income as dividends.
Inflation and Federal Reserve policy remain key concerns, as rising costs could impact operating expenses and tenant financial stability. However, STAG's lease structures often include inflation-linked rent escalations, allowing the company to partially offset cost pressures. The fixed-rate debt strategy further shields it from near-term interest rate volatility, providing a level of stability amid uncertain economic conditions.
A key focus for investors is STAG’s lease expiration profile, with 22.7% of total base rent set to expire by 2026, covering 141 leases and 19.1 million square feet. Effective lease renewals will be crucial to maintaining income stability, as STAG's single-tenant property model means that lease expirations often involve entire buildings rather than partial turnovers. However, the continued strength in industrial real estate demand suggests STAG is well-positioned to sustain occupancy levels and rental growth.
STAG's financial results highlight an interesting dynamic between NOI growth and net income pressure. While NOI increased 7.8% year-over-year to $612.6 million, net income declined by 2%, reflecting higher interest costs, increased depreciation, and lower gains from asset sales. Interest expenses surged by $18.6 million (19.7%) due to the new unsecured notes, while depreciation and amortization costs rose by $14.6 million (5.3%) as the portfolio expanded. Gains from property sales also dropped from $54.1 million in 2023 to $32.3 million in 2024, further impacting net income. Additionally, a $5 million impairment charge contributed to the earnings decline. However, these factors are largely accounting and financing-related rather than operational weaknesses, as evidenced by the 7.8% NOI increase, stable occupancy, and strong lease renewals.
STAG's valuation remains compelling, with the stock trading at a slight discount to its estimated net asset value (NAV). Using a 6.2% cap rate, its real estate portfolio is valued at approximately $9.88 billion. After accounting for liabilities and cash equivalents, the estimated NAV per share is $36.72, compared to the current trading price of around $35. This suggests a modest margin of safety. However, if interest rates rise further and cap rates expand to 7%, NAV would drop to $32.73 per share, bringing the stock closer to fair value.
From a price-to-FFO perspective, STAG's Core FFO of $446.5 million translates to an FFO per share of $2.40. At a stock price of $35, this implies a P/FFO ratio of 14.58x—significantly lower than top industrial REITs like Prologis (PLD), which trade at around 20x. If STAG maintains 5% annual FFO growth and the market assigns it a more typical REIT multiple of 15x, its fair value could approach $36 per share. If it were valued closer to PLD’s premium multiple, the stock could reach $45–$48 per share, presenting meaningful upside potential.
Given STAG’s strong cash flow, solid operational execution, and reasonable valuation, the stock remains an attractive hold. Its monthly dividend reinvestment structure further supports long-term compounding potential, making it a stable and reliable REIT investment. While macroeconomic risks persist, STAG’s prudent debt management, inflation-linked leases, and resilient demand for industrial properties provide confidence in its long-term growth trajectory.
STAG Industrial, Inc. (STAG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held STAG at the end of the third quarter which was 26 in the previous quarter. While we acknowledge the risk and potential of STAG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STAG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
