Stag Industrial, 6.875% Series C Cumulative Redeemable Preferred Stock (STAG-C)
If you like STAG’S yield, but you’re not comfortable with the volatility then you may want to consider Stag’s Series-C preferred shares. They trade at a slightly lower price than the common shares ($26.43 versus $27.25) they offer a slightly higher yield (5.30% versus 5.14%), and the share price is significantly less volatile and safer. But before you go diving in headfirst on the preferreds, here are a few things you need to know.
About Stag:
For starters, STAG is a real estate investment trust. The Company is focused on the acquisition, ownership, and operation of single-tenant, industrial properties across the United States. As of December 31, 2016, the Company owned 314 buildings in 37 states with approximately 60.9 million rentable square feet, consisting of 243 warehouse/distribution buildings, 54 light manufacturing buildings, 16 flex/office buildings, and one building in redevelopment.
Stag’s strategy is unique in the sense that it invests in properties perceived to be higher risk, but then reduces the risk through diversification. Specifically, Stag invests in single-tenant, industrial properties, located in non-primary (i.e. secondary and tertiary) locations, posing unique binary cash flow risks. However, Stag believes it can diversify away a significant portion of the risk so as to reduce volatility and keep returns high. You can read more about Stag’s strategy in this article about the company that we wrote last October:
About the Preferred Shares:
Stag Industrial, 6.875% Series C Cumulative Redeemable Preferred Stock (STAG-C):
Stag’s preferred shares are redeemable in just under 4 years (on 3/17/21) at the company’s discretion at $25 per share (see all the details at Quantumonline. This means Stag could give you $25 in exchange for your handsome dividend paying shares. And considering the shares trade at a small premium (they’re currently priced at $1.43 over the $25 redemption price) you could experience a loss of $1.43 on your purchase. That comes out to about a 1.4% loss per year between now and the redemption date (if the shares are actually redeemed by Stag, which they may not be). Granted, your total return would still be positive because the dividend yield of 5.3% is so handsome, but the possible $25 redemption price means your total return could be closer to 3.9% instead of the 5.3% dividend yield. Of course, there is no guarantee STAG will actually redeem the shares. For example, considering the company’s weighted average cost of capital (WACC) is higher (8.9% according to Guru Focus) Stag might just keep paying the 5.3% dividend yield to you indefinitely into the future.
Also, the preferred shares are safer than the common shares because they sit higher in the capital structure. For example, the preferred shares' dividends have priority over the common shares' dividends (i.e. if Stag runs into financial difficulty they would cut or eliminate the common stock dividend before they’d cut the preferred stock dividend). Also, unlike the common stock, the preferred stock dividends are cumulative, so if Stag ever does miss a payment they have to make it up later. And finally, in a liquidation (if Stag were to ever go bankrupt) the preferred shares have priority over the common (i.e. the company is on the hook for the $25 preferred share face value after all the debts have been paid, whereas the common could be worthless).
Additionally, the price of the preferred shares is far less volatile than the common shares (because they generally stay fairly close to the $25 redemption price described earlier). However, here is what could cause the price of the preferreds to fluctuate. For starters, if Stag looks like it might go bankrupt (this is not the case) then the price of the preferreds could decline if there is fear that the company might not have the cash to pay back the $25 per share (again, this is not currently the case at all).
Next, if interest rates go dramatically higher, then the preferred price could go lower because mathematically this will cause the dividend yield to rise (a lower price and the same dividend payment amount makes the yield mathematically higher) thereby making the yield competitive/consistent with market rates. However, based on the current market environment, we don’t expect interest rates to go dramatically higher anytime soon. For example, the highly regarded CME Fed Watch tool suggests the probability of rates increasing dramatically over the next year is essentially zero, as shown in the following chart.
Conclusion:
If you are looking for an attractive preferred stock to own, Stag Series-C Preferred is worth considering. Specifically, Stag is a healthy growing business, but the common stock shares have already increased dramatically and are subject to more volatility and less safety than the preferred shares. The preferred shares also offer a slightly higher yield, and the price of the preferred shares has pulled back modestly over the last month making for a more attractive entry point, in our view.
