Analyst Cautions On STAG Industrial's Growth, Downgrades Despite Strong Earnings

RBC Capital Markets analyst Michael Carroll lowered the rating on Stag Industrial Inc STAG to Sector Perform (from Outperform) and a reduced price target of $39 (from $42).

The company reported Q3 FY23 rental income of $177.8 million, beating the consensus of $174.2 million, and Core FFO per share of $0.59 came higher than $0.57 a year ago. 

While the analyst is still encouraged by STAG's current position in the market, given its stronger organic growth prospects (vs. historical trends), he says this positive outlook is likely already reflected in the current stock price.

The analyst expects the elevated trajectory to continue, given STAG delivering 30%+ (RBC estimate) cash lease spreads in 2023 and 25%-30% (management's early read) in 2024. 

The analyst says the spread will narrow in the next few quarters, allowing STAG to be more aggressive in Q2 and, thus, the estimates reflect investment volumes increasing to $325 million (backend weighted) in 2024 and $500 million in 2025.

The analyst maintained 2024 and 2025 FFO estimates at $2.40 and $2.52, respectively, implying core earnings growth rates of 5.4% and 4.8%, respectively. 

On the other hand, the analyst raised the 2023 estimate by $0.02/share to $2.28 to reflect the Q3 FY23 earnings beat vs. their expectations on anticipated strong organic growth of ~5.0-5.5%.

While the analyst projects modest investment activity in the near term, he expects these deals to add ~$0.02 to $0.04/share to the annual run rate in the right environment. 

However, Carroll sees higher debt costs (especially with $300 million of notes maturing in Q1 FY25) as a matter of concern.

Price Action: STAG shares are trading higher by 1.93% at $35.87 on the last check Friday.

Photo Via Company