A Real Estate Play That's Packing Heat

 | May 18, 2012 | 10:30 AM EDT  | Comments
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stag

If you are looking for investment advice, you might as well go to a billionaire. So here is your tip of the day whispered from the past: "90% of all millionaires become so through owning real estate," said Andrew Carnegie. If that's not good enough to whet your appetite, consider this one: "The major fortunes in America have been made in land." That came courtesy of John D. Rockefeller, the oil magnate who, in his time, was worth today's equivalent of around $300 billion.

Now, with that in mind, let's look at some real estate that you can own through shares of a trust run by Stag Industrial (STAG), an emerging growth company that has 114 industrial properties in 29 states, representing 19 million square feet.

The company focuses exclusively on buying properties in a niche that it considers the most attractive: single-tenant warehouses, distribution centers and manufacturing facilities. The company believes these require the least leasing, operating and capital costs per property.

Additionally, the firm zeroes in on Class B industrial properties in secondary markets, where occupancy and rental-rate volatility is historically lower than those of primary markets. There are three primary classes of industrial or retail property -- Class A, Class B, and Class C, in case you are not familiar with the business. The highest-quality buildings in the best locations are Class A buildings, and they typically command the highest rents.

Stag focuses on Class B properties, which are typically also well-maintained but are a little older, and possibly without feature access that's as good as higher-end buildings.

Ben Butcher founded the company in 2003, and has since invested more than $1.6 billion of capital, acquiring dozens of properties in more than 160 separate transactions. He continues to serve as chief executive and chairman. He previously invested in real estate and mortgage-backed securities for several larger firms, including Credit Suisse (CS) First Boston and Nomura Asset Capital.

For a relatively small participant in this industry, at just $225 million in total market capitalization, Stag features impressive diversity. Investments in the portfolio range from $5 million to $25 million, and the company has maintained an occupancy rate consistently above 94%.

With properties spread out primarily over the Eastern and Central U.S., the portfolio includes tenants in industries ranging from packaging and automotive to food , beverage, retail, finance and industrial equipment. No business sector represents more than 11% of the portfolio. Several large corporations are tenants, such as International Paper (IP), Bank of America (BAC) and ConAgra Foods (CAG), but no single tenant represents more than 5% of total rental revenue.

But any investment in a real estate trust ultimately comes back to a strong balance sheet and a competitive dividend yield, and Stag has both.

The company is sitting on $18.5 million in cash and a total of $140 million in purchasing power, based on 50% leverage. Total debt is $337 million, giving it a conservative 51% debt-to-asset ratio, all while paying out a healthy 7.7% annual dividend yield.

The firm was able to grow the portfolio by $126 million in 2011, representing 25% growth, and has already added 10 properties and $65 million more this year.

Stag went public in April 2011, so we've had about a year to fully assess how the market values its shares. After going public at $13 and getting off to a sluggish start, shares are now up nearly 23% so far in 2012.

Stag Industrial (STAG) -- Daily
Source: StockCharts.com

So if you're looking for the growth potential of a small-cap firm, but unwilling to sacrifice a strong dividend payment, then Stag Industrial could be a nice property to pick up on dips. Tell 'em Andrew Carnegie sent you.

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