Contracting Industrial Real Estate Supply And Rising Tenant Demand Will Create Future Opportunities In Manufacturing Markets

Key Takeaways

• Tightening industrial real estate supply and rising tenant demand could boost rental income, occupancy rates, and future revenue growth positively.
  
• Strategic acquisitions and developments, along with pre-leasing success and selective asset dispositions, are set to enhance long-term NOI growth and earnings.
  
• Rising interest rates, tenant bankruptcies, and tariff uncertainties threaten revenue, occupancy, and lease stability, impacting STAG Industrial's growth and income prospects.

Catalysts

We are a REIT focused on the acquisition, ownership, and operation of industrial properties throughout the United States.

• The supply pipeline for industrial real estate is predicted to continue contracting, with deliveries down over 30%, potentially leading to increased demand and higher rental income, impacting future revenue growth positively.
  
• There is an observed increase in tenant demand across various industries, particularly in non-coastal and manufacturing markets, which could result in higher occupancy rates and leasing activity, benefiting future revenues and net margins.
  
• The company has achieved substantial pre-leasing success for 2025, with 70% of the operating portfolio already leased and cash leasing spreads of 23.8%, suggesting strong future rental income and improvement in earnings.
  
• STAG Industrial is involved in development projects, including a joint venture in the Charlotte market with favorable zoning and a high barrier to entry, expected to yield long-term NOI growth, hence positively impacting earnings and margins.
  
• The company is executing on strategic acquisitions with cap rates that suggest potential for significant NOI growth, and the successful disposition of non-core assets will allow for reinvestment in more lucrative opportunities, likely bolstering both revenues and earnings.

STAG Industrial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STAG Industrial's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.6% today to 24.4% in 3 years time.
• Analysts expect earnings to reach $246.7 million (and earnings per share of $0.93) by about April 2028, up from $189.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $271.4 million in earnings, and the most bearish expecting $222 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.0x on those 2028 earnings, up from 32.2x today. This future PE is greater than the current PE for the US Industrial REITs industry at 26.4x.
• Analysts expect the number of shares outstanding to grow by 2.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

STAG Industrial Future Earnings Per Share Growth

Risks

• The recent volatility with interest rates could lead to a slowdown in the transaction market and impact acquisition momentum, which could negatively affect revenue and long-term growth prospects.
  
• With expected same-store occupancy anticipated to decrease by 100 basis points during 2025, this could potentially reduce net operating income and affect earnings.
  
• The bankruptcy situation with American Tire Distributors poses a risk of disruption in rent collections, affecting same-store NOI and FFO per share.
  
• Lease renewals are impacted by fixed-rate renewal options, contributing to lower leasing spreads in the fourth quarter, which may pressure net margins if not managed properly.
  
• The existing uncertainty with tariffs and their potential impact on tenant operations and leasing demand could pose risks to future revenues and financial performance.

Valuation

• The analysts have a consensus price target of $38.0 for STAG Industrial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $246.7 million, and it would be trading on a PE ratio of 39.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of $32.57, the analyst price target of $38.0 is 14.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.