Jefferies Upgrades STAG Industrial (STAG) to Buy
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Jefferies upgraded STAG Industrial (NYSE: STAG) from Hold to Buy with a price target of $25.00 as 2017 earnings growth gains in focus.
Analyst Jonathan Petersen commented, "STAG is ending the year on a high-note with $166M of acquisitions closed in 3Q16, $101.7M in early-4Q16, and $177M under contract or letter of intent – at going-in cap rates around 8%, the acquisitions are accretive to earnings and set the company up for +9.1% FFO/sh growth in 2017. We view the -15% drop in its stock price, since the end of July, as an attractive entry point. The driver of this underperformance is partially due to the company's high dividend yield, which often results in the stock being put in the bucket of triple-net REITs. However, we see much stronger earnings growth from STAG compared to the typical triple-net REIT, and as Street estimates rise and the company demonstrates earnings growth in the coming quarters, we expect the stock will rebound. The company currently trades at 13.5x forward FFO, but is half a turn below the three-year average of 14.0x, and 3x below the peak multiple of 16.4x (January 2015). Our price target assumes the multiple will return to the three-year average (+4% appreciation) – coupled with earnings growth of +9.1%, and a dividend yield of 6.3%, we anticipate a total return of approximately +20% over the next 12-months. Finally, in the fourth quarter, STAG plans to close on the disposition of a portfolio of warehouses that should be representative of the overall portfolio. Management indicated that the cap rate on this portfolio should be in the low-7% range, which is 150 to 200 bps lower than the average 8% cap rate that the company usually acquires at on a one-off basis. Additionally, the low-7% cap rate would compare favorably to STAG's current implied cap rate of 7.8%. Should STAG trade at a 7.25% cap rate, the stock would increase to about $25/share."
Shares of STAG Industrial closed at $22.28 yesterday.
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