STORE Capital Corp: Wait For A Drop

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About: STORE Capital (STOR)
by: Achilles Research
Summary

STORE Capital Corp. is a high-quality commercial property REIT.

STORE Capital Corp. has a diversified property portfolio and robust dividend coverage metrics.

The REIT grows organically and through acquisitions.

Shares are rather expensive at today's price point and therefore, have an unattractive risk-reward ratio for income investors.

An investment in STOR yields 4.3 percent.

STORE Capital Corp. (STOR) is a diversified commercial property REIT with a high-quality real estate portfolio and robust dividend coverage stats. STORE Capital Corp. is growing FFO organically and through acquisitions, which has allowed the REIT to boost its dividend payout at a fast clip in the last three years. However, the REIT's shares are a bit on the expensive side today, in my opinion and as a result, have an unattractive risk-reward. An investment in STORE Capital Corp. yields 4.3 percent.

STORE Capital Corp. - Portfolio Overview

STORE Capital Corp. is a diversified commercial property REIT with a national presence. At the end of Q2-2018, STORE Capital Corp.'s real estate portfolio consisted of 2,084 properties that were leased to 412 different customers in 105 industries.

Here's a portfolio snapshot.

Source: STORE Capital Corp. Investor Presentation

The REIT's properties are spread out all over the United States.

Source: STORE Capital Corp.

STORE Capital Corp. has a high-quality real estate portfolio, for three specific reasons:

1. The real estate investment trust derives a large amount of rental revenues from investment-grade rated lease contracts, which means that STORE Capital Corp.'s cash flow is very robust. This, in turn, also reduces dividend risks for shareholders.

Source: STORE Capital Corp.

2. STORE Capital Corp. regularly reports occupancy rates in the high 90-percent range which points to a high-quality, in-demand real estate portfolio.

Here's STORE Capital Corp.'s occupancy rate over time.

Source: Achilles Research

3. STORE Capital Corp.'s key portfolio metrics stack up well against its peers in the commercial property REIT sector: STORE Capital Corp. has the most diversified tenant base and the longest lease terms, providing a high degree of stability to the REIT's cash flow.

Source: STORE Capital Corp.

Acquisitions And Internal Growth

STORE Capital Corp. regularly purchases new properties as a means to grow its real estate portfolio. Year-to-date, the REIT has made net acquisitions totaling $495 million.

Source: STORE Capital Corp.

While acquisitions are central to the REIT's growth strategy, STORE Capital Corp. also grows cash flow internally through automatic rent increases and reinvestment of cash flow. The REIT targets at least 5 percent internal growth annually.

Source: STORE Capital Corp.

Solid Dividend Coverage And Above-Average Dividend Growth

STORE Capital Corp. does not only have solid portfolio stats but also decent dividend coverage metrics.

STORE Capital Corp. outearned its dividend in the last twelve quarters as it pulled in ~$0.42/share in adjusted funds from operations while it paid out only ~$0.29/share (AFFO and dividend per-share data are both based on quarterly averages). The AFFO-payout ratio averaged just 69 percent.

See for yourself.

Source: Achilles Research

STORE Capital Corp. also produced above-average dividend growth in the last three fiscal years.

Source: STORE Capital Corp.

Guidance And Valuation

STORE Capital Corp.'s strong portfolio and dividend coverage stats have led to premium valuation. The REIT's dividend stream is currently valued at 16.1x Q2-2018 run-rate AFFO which is far from being a bargain.

In terms of price-to-book value, STORE Capital Corp. ranks about midfield in its peer group with a P/B-ratio of 1.73x.

Chart STOR Price to Book Value data by YCharts

Risk Factors Investors Need To Consider

Investors in STORE Capital Corp. face a couple of risks that they need to account for:

  • The U.S. economy is in a late-stage expansion, suggesting that a recession is likely in the next one or two years.
  • U.S. real estate values will likely consolidate as a recession manifests itself.
  • Occupancy rates could decline and pressure on rents build up.
  • Dividend growth rates would likely decrease over the long haul.

Your Takeaway

There is a lot to like about STORE Capital Corp. as long as the U.S. economy is roaring ahead. The REIT has a strong property portfolio that is diversified and derives a large percentage of revenues from investment-grade rated lease contracts. Occupancy rates have proven to be robust. The dividend is covered with cash flow and has grown fast in the last three years. However, STORE Capital Corp. is vulnerable to a U.S. recession which could put pressure on cash flow and limit rent growth. Investors today pay full retail price for STORE Capital Corp.'s dividend stream which translates into an unattractive risk-reward ratio based on valuation. I'd wait for a drop towards $20 before scooping up some shares again.

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Disclosure: I am/we are long O, 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.