STORE Capital: Same Old Story, Beats Expectations, Raises Guidance

| About: STORE Capital (STOR)

Summary

STORE Capital is doing more of what it does best, beat expectations and raise guidance.

I’m going with management’s estimates on AFFO over Street expectations because management seems on top of it.

STORE Capital is one of the more expensive triple net lease REITs, but it is not as expensive as the other top producers.

The REIT took advantage of its size and issued new equity and debt to fund more acquisitions.

The acquisitions are bought at attractive rates and reinforce growth in AFFO and dividends.

STORE Capital (NYSE:STOR) delivered more what shareholders have to get used to. This is a triple net lease REIT with a great portfolio and intelligent management making acquisitions that are immediately accretive. In the process, they beat Wall Street's estimates for AFFO (adjusted funds from operations) per share again. For the second quarter, they delivered AFFO per share of $.40, beating analyst expectations of $.38. The headline from the prior quarter was roughly the same, except then it was beating lower expectations of $.37.

Should Analysts Listen To Management More?

Management raised and narrowed guidance on AFFO per share to a range of $1.61 to $1.63; previously it was $1.60 to $1.63.

Anyone want to make a prediction for AFFO on the second half of the year? I'll go with $.81 to $.83. Management here has done a great job and their estimates have regularly provided a clear indication of what shareholders should be expecting.

This is what I like to see in an earnings release.

How Does STORE Capital Do It?

I bought into STORE Capital in 2015 after analyzing their business model and the ratios. They are one of the more expensive triple net lease REITs when it comes to metrics like price/AFFO or price/FFO, but they are cheaper, okay, making them "less expensive" than the companies I would consider peers such as National Retail Properties (NYSE:NNN) or Realty Income Corporation (NYSE:O).

The business model for STORE Capital is a huge reason for them to succeed as a triple net lease REIT. They are making acquisitions of small properties with very long lease terms and they are almost exclusively acquiring the "profit center" for the business they are working with. The strategy behind picking the profit centers is important.

STORE Capital is designing their portfolio to hold properties that will increase in value and are less likely to be replaced. If they were holding the "cost center" for a company, they would face a much larger risk than their tenant would seek to outsource the job and default on the contract. Consequently, STORE Capital wants to own and finance the property the tenant uses to generate profits.

Acquisitions

Another big factor working for STORE Capital is their size. They have a market capitalization of around $4.5 billion. That is large enough for them to have great access to credit and debt markets, but it is also small enough that their new acquisitions can make a material impact on their portfolio.

As a shareholder, I want those new acquisitions to be a material portion of the portfolio. During the quarter, they invested $356.1 million in acquiring new properties. Those properties had a weighted average capitalization rate of 7.8%. That is immediately accretive to AFFO.

Some shareholders may be concerned that STORE Capital will need to continue issuing new shares to buy more properties, but that shouldn't be a concern. Yes, it will most likely happen. However, shares are currently trading at about $30. I'm projecting AFFO of about $1.62 for the year. That means the estimated AFFO yield is about 5.4%. If they can acquire properties with a mix of debt and equity, I would expect the result to be material growth rates in AFFO per share.

Great Capitalization Rates

The capitalization rates of 7.8% for the quarter are great. I see no problem there. Working with much smaller clients can give STOR access to a market most large landlords are ignoring. Other REITs invest in the retail space, but STORE Capital excels at working with smaller clients.

Conclusion

I've avoided putting out any ratings on STORE Capital since the morning after Brexit. My last rating was the evening the vote came in and the treasury yields were dropping. I predicted the triple net lease REITs to take off. They opened down slightly, but STOR, O, and NNN were up around 8% to 10% within a week or so. The climb in share price kept me from issuing fresh ratings, but I can't complain about it as a shareholder. If STORE Capital takes advantage of the high price by issuing shares and buying more properties, it just means faster growth in AFFO and dividends.

This was a great quarter. Due to price appreciation in the sector and the treasury yields moving back up, I'm not issuing any new ratings (or ending old ones). However, I'm also not taking profits. My investment stays in STORE Capital, and any major dips would cause me to buy more and issue strong positive ratings again.

Disclosure: I am/we are long STOR, NNN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.