Few real estate companies can say they weathered the COVID-19 pandemic unscathed, but with approximately 40% of its assets supporting some level of e-commerce activity, STAG Industrial, Inc. (NYSE: STAG) benefitted as homebound consumers accelerated their online purchases.
Boston-based STAG, shorthand for Single Tenant Acquisition Group, celebrated a decade as a public company in 2021. The REIT has grown into one of the country’s largest owners and operators of industrial real estate, owning more than 103 million square feet in more than 500 properties across 40 states. To lower risk, STAG operates in upwards of 60 markets and 45 industries, where each of its tenants—which include Amazon and FedEx Corp.—account for less than 4% of revenue.
This is a big change from the private equity real estate portfolio that President and CEO Ben Butcher took public in 2011. Back then, it had just 14.2 million square feet across 26 markets. Flex and office space filled about one-fifth of the space, compared with just 0.3% now. In terms of equity market capitalization, the change is striking: It was $290 million then, compared with more than $7.5 billion now.
STAG recently announced that Butcher is expected to step down as CEO and become executive chairman on July 1.
REIT magazine spoke with Butcher about STAG’s view on market analysis, operating in the ‘new normal,’ and where he hopes to travel next, among other issues
What makes STAG unique among industrial REITs?
The biggest differential to investors is that we don’t focus on development. Our degree of uniqueness is probably derived from our devotion to agnosticism.
We avoid, for the most part, the use of ‘decision rules’ in our investment decisions and in developing our corporate strategy. We believe that maximizing future cash flow is our primary responsibility and that virtually everything that will affect future cash flows can be analyzed.
It follows that such analysis is always preferable to utilizing decision rules. Remember that the world is not black-and-white, it is shades of gray. Many of our competitors will utilize an investment rule such as ‘only buy in the top X markets’. In doing so, they are essentially saying ‘the asset located in the X+1 market is not worth consideration at all.’ Does that make sense? We look at assets in all the fungible U.S. markets—around 65 individual markets with a minimum of 28 million square feet of fungible industrial product.
In our view, market ‘X’ isn’t good and market ‘X+1’ isn’t bad, they are just different, and these differences can be accounted for in our analysis. Other decision rules employed by some of our competitors include minimum lease term, minimum tenant credit rating, and building age.
Who do you consider your competitors?
On acquisitions, we compete with all manner of equity capital from sovereign wealth funds to individual investors. Because of our focus on individual asset purchases, where there is less competition, we primarily compete with regional real estate private equity and individual investors. On leasing our owned assets, we compete with the other industrial owners’ new and existing product.
In terms of who we compete with for investor dollars, it is the other public REITs, with First Industrial Realty Trust, Inc. (NYSE: FR) probably being the closest peer. Because of our focus on growing externally through acquisitions, none of the other industrial REITs is really a direct peer due to their focus on growth through development.
What are some of the topics you are discussing with your tenants?
They range from building expansions to sourcing additional space across the 60-plus markets in which we operate, and sustainability-related upgrades, such as efficient lighting conversion. These themes were highlighted in our recently completed fifth annual tenant survey. Tenants are looking to enhance the resilience and strength of their supply chains as well as to support new growth initiatives, although labor availability remains a concern and a limiting factor in these efforts. The majority of respondents indicated e-commerce activity has increased over the last 12 months, consistent with the belief that there has been a structural change in consumer behavior. The survey also revealed a noticeable increase in the importance of sustainable building operations as a measure of overall building fit.
How did STAG navigate the pandemic?
Surprisingly well. After some initial disquiet about operations and capital markets, the industrial market fundamentals took off—driven largely by the rapid uptake in e-commerce and supply chain issues. Going to 100% virtual was a pretty easy step for us. I have been a bit surprised by how readily corporate culture has been maintained.
Has STAG changed in the ‘new normal’?
The realities of the new normal were becoming evident pre-pandemic; the last two years have served to accelerate in-place trends. Work from home was already a vibrant topic and now is a given in order to be a competitive employer. The question now is ‘how many days in the office?’ ‘Work from anywhere’ is now the new frontier. One thing I am convinced will not work going forward is mandating time in the office. To the extent that we, as managers, believe that employees’ time in the office will benefit the company (and the employees), we actually need the employees to see how time in the office benefits them. Our office space may end up being considered just another benefit we offer to our employees.
