Many investors have shied from real estate companies and real estate investment trusts (REITs) in 2022, as concerns about the economy emerge, observes Doug Gerlach, editor of SmallCap Informer.

In addition, rising interest rates make the yields of even the best REITS less attractive to investors seeking income. But the broad market sell-off has created many imbalances between the prospects for total return that many REITs offer and the prices at which their shares are trading.

Stag Industrial (STAG) is an industrial REIT that has seen its price fall from $48 to $30 in 2022, but the company’s warehouse and logistics business is still delivering results, tethered as it is to the demands of e-commerce and continually-evolving industrial trends (such as “just-in-case” delivery).

The REIT acquires and operates single-tenant, industrial properties throughout the United States. Around 40% of its properties support e-commerce activity, with its single biggest customer being Amazon (AMZN) at 3.1% of total annualized base rent (ABR). Its tenants come from more than 45 industries in more than 60 markets around the U.S.

Management says that in the near-term, accelerating re-shoring and near-shoring trends (bringing suppliers back to or near the US) continue to drive domestic warehouse space demand. E-commerce presently makes up about 14% of total retail sales in the US, but this number is projected to reach 30% by 2030, which means that warehouse and logistics operations such as STAG’s will increasingly be in demand.

Since 2016, though, FFO/S have grown at 6.6% a year. We project revenue and FFO/S growth of 7.0% a year. The balance sheet features low leverage and high liquidity. Total debt to total capital is 45.3%, and long-term debt to equity has been trending down.

On the ESG front, STAG has many initiatives that maintain energy efficiency and sustainability, including the use of reflective roofing on 48.5% of the current portfolio, solar panel installations completed and underway, and fluorescent and LED lighting implemented in 90% of the properties.

In its summer 2022 update, management pointed out that the average FFO multiple of its peers was 28.8, while STAG’s was just 15.0. Now its P/FFO ratio is 14.0, providing perhaps even greater value for its shares. The company makes monthly distributions to shareholders.

We think the REIT can support a high P/FFO ratio of 14.0, which would indicate a high price of $51 in five years. On the downside, a low P/FFO of 14.0 multiplied by TTM FFO/S of $2.13 would provide a low price of $27.

From the current price of $29.85, the upside/downside ratio is 6.9-to-1 and the projected total return with distributions is 15.8%. With the potential for significant capital appreciation ahead, and a current distribution yield approaching 5%, STAG is worth considering for long-term focused investors.

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