STAG's Butcher Sees 'Positive' Leasing Outlook

BOSTON—The general outlook for leasing in the industrial sector continues to be “very positive,” CEO Ben Butcher of Stag Industrial said Tuesday on a first-quarter conference call. Speaking for his Boston-based REIT as well as the sector on a macro basis, Butcher noted that “net absorption is expected to continue to be dramatically higher than the supply.” STAG's own leasing activity was “significant” throughout Q1, he said.

Driving that positive outlook is a continuation of trends the sector experienced in 2013. “Continued general economic improvement, shortening and flattening the supply chains,” as well as an “onslaught of manufacturing” will continue to drive demand for industrial space over the next couple of years, Butcher said. “Even even some moderate slowing of the economic growth will not change the generally positive outlook.”

In recent months, Butcher noted, “the potential for oversupply has begun to creep into some specific market commentary—Dallas, Houston and Southern California in particular. These are markets where we're generally not active and to the extent we are active, it would be in product where we would have a significant cost utility advantage on the new spectrum of product.”

Q1 saw STAG boost both its cash NOI and adjusted funds from operations by more than 25% on a year-over-year basis, to $31.9 million and $19.3 million, respectively. The REIT also boosted its portfolio by one million square feet during Q1; the total of 39 million square feet at quarter's end represented a 25% increase Y-O-Y.

In a note to investors on Wednesday, analyst Daniel Donlan of Ladenburg Thalmann & Co. reiterated his “buy” rating and $27 price target on shares of STAG. “With a niche focus on single-tenant class-B industrial assets that are mostly located in secondary and tertiary markets, STAG continues to see limited competition for assets among institutional players,” he wrote. “This has resulted in the REIT not only achieving highly accretive going-in cash cap rates of 9%-plus on acquisitions, it has also led to asset growth of 31% in 2013 and 63% in 2012.”

Donlan is projecting that STAG will grow its 2014E and 2015E AFFO by 14% and 9%, respectively, “which should comfortably outpace the average REIT, the net lease sector and the industrial sector.” In common with other analysts, however, Donlan says, “we do not believe the REIT's growth is being fairly valued by the market, especially when accounting for its secure and growing 5.4% current yield.”