Future Leasing And Acquisitions In Boston May Strengthen Prospects Despite Interest Rate Risks

Key Takeaways

• Anticipated leasing and strategic acquisitions in key markets signal robust revenue growth and enhanced earnings potential.
  
• Prudent financial management and sizable liquidity are poised to strengthen margins and support strategic expansion and development initiatives.
  
• Elevated interest rates and potential vacancies pose risks to revenue stability and net margins due to uncertain rent collection and acquisition costs.

Catalysts

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

• The active leasing market and successful early leasing commitments for 2025, achieving cash leasing spreads of 24.1%, indicate potential for significant future revenue growth as more space is leased at higher rates.
  
• The acquisition of the 5-property portfolio in the supply-constrained Route 128, Route 3 submarkets of Boston, with a favorable WAULT of 4.9 years and strong lease escalations, suggests enhanced future earnings potential through strategic market positioning.
  
• Ongoing development projects in high-demand areas like the North Valley submarket of Reno, with strong tenant demand and anticipated completion dates in 2025, support future revenue and earnings growth through new lease agreements.
  
• Improved acquisition market activity, with a pipeline that has increased to over $4 billion, suggests potential revenue and earnings growth by expanding the portfolio strategically in desirable markets.
  
• The company's control over a sizable liquidity pool of $974 million and prudent financial management through refinancing and retaining cash flow for investments could enhance net margins and support incremental earnings growth by reducing financing costs and supporting further acquisitions and developments.

STAG Industrial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STAG Industrial's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.9% today to 20.0% in 3 years time.
• Analysts expect earnings to reach $194.3 million (and earnings per share of $0.82) by about December 2027, up from $179.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $224.5 million in earnings, and the most bearish expecting $161.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.8x on those 2027 earnings, up from 35.9x today. This future PE is greater than the current PE for the US Industrial REITs industry at 34.5x.
• Analysts expect the number of shares outstanding to grow by 8.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

STAG Industrial Future Earnings Per Share Growth

Risks

• The filing of Chapter 11 bankruptcy by American Tire Distributors, representing 1% of STAG Industrial’s annualized base rent, poses uncertainty about rent collection, impacting revenue stability.
  
• The industrial supply pipeline continues to contract without expectation of an inflection point until late next year, possibly leading to stagnant or reduced revenue growth due to lower market activity.
  
• Elevated interest rates could affect acquisition costs and financing, constraining earnings and capital expenditures.
  
• Supply overhang in certain markets such as Columbus, Indianapolis, and Philadelphia may lead to increased vacancy rates or impacting rental income and net margins.
  
• Increased development activities without corresponding lease commitments could raise financial risks, potentially affecting cash flow and net margins if properties remain vacant.

Valuation

• The analysts have a consensus price target of $41.42 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 $48.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $973.8 million, earnings will come to $194.3 million, and it would be trading on a PE ratio of 61.8x, assuming you use a discount rate of 7.1%.
• Given the current share price of $35.38, the analyst's price target of $41.42 is 14.6% 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.