Why We Think STORE Capital Is A Great REIT
Summary
- Great track record.
- Great dividend.
- Great management.
- A short-term hold and long-term buy.
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Investment Thesis
Over the last few months, the broad market has been trading in reach valuation territories supported by accommodative monetary and fiscal policies and strong corporate earnings. During this kind of environment, we are looking for quality businesses that are at worst fairly valued. In this article, we will review STORE Capital Corporation (NYSE:STOR) and examine if this can be a good investment for income-oriented investors.
Background and Historic Performance
STOR is a triple net real estate investment trust (REIT) that specializes in the acquisition, investment and management of single-tenant operational real estate. As of the end of Q2 2021, STOR had 2,738 investment properties, 529 customers in 49 states. We consider STOR to be well-diversified and well managed. The top 10 customers account for 18% of base rent and interest with the top tenant accounting for 3.0%. Their customers operate in 118 industries and are broken down to 64.4% service, 16.8% retail and 18.8% manufacturing. Looking at their customer breakdown and exposure it is clear that their customers are selected with risk reduction in mind. This is evident from the continuous growth STOR has exhibited over the years and the fact that STOR consistently reported occupancy rates of 99.5%+. All this and more is summarised below.
Source: Investor Presentation
How does this translate into figures?
Source: Own analysis
As we can see from the graph above revenue and net income have been increasing consistently since 2012 with the exception of 2020 and 2021 due to COVID-19. Similarly funds from operation (FFO) and adjusted funds from operations (AFFO) have increased consistently since 2012. 2020 and 2021 have seen this growth flatten out. Again this is due to the COVID-19 pandemic.
Source: Own analysis
Given the nature of REITs, paying 90% of their profits as dividends, we also need to examine the per-share metrics. REITs and as we can see on the graph below STOR issues new shares to raise capital and expand their portfolio, and this is a common trend across the industry.
Source: Own analysis
Management’s ability to add shareholder value comes from identifying the right deals and structuring them in ways that can continuously add value to shareholders.
Source: Own analysis
As we can see STOR has been able to do that consistently on a per-share basis as well. Again, with the exception of 2020 and 2021 revenue and diluted EPS have grown year after year. Total growth since 2012 was 26% and 65% and CAGR was 2.9% and 6.5% respectively for revenue per share and diluted EPS.
Source: Own analysis
With no exception, FFO and AFFO per share show a similar trend. STOR has consistently increased FFO and AFFO per share every year prior to the global pandemic. They grew by 60% and 57% since 2012 with a CAGR of 6%. This includes 2020 and 2021 which have decreased since 2019. The average growth rate from 2013 to 2019 (the years prior to the pandemic) was 5% and 16% for FFO and AFFO respectively.
STOR also has had some impressive occupancy rates since their inception. STOR never fell below 99.5% of occupancy since 2012 including 2020 and 2021. This is a strong indicator that management has a strong due diligence process that for the last decade has worked well. This is also reflected in STOR's balance sheet strength compared to peers. Lastly, a good track record is reflected in a good balance sheet. We will leave readers below with some ratios provided in the Q2 2021 presentation which highlight how conservative management is when running STOR.
Source: Q2 2021 Presentation
Overall the company's track record could be summarised in one word, consistency. We like consistency and we see a great track record and a great financial position.
Dividend and peer comparison
STOR also has a great dividend track record. Since 2012 dividend per share increased by 66% with a CAGR of 6.5%.
Source: Own analysis
2020 and 2021 growth rates have decreased but this is to be expected given the global pandemic. We do expect STOR to move back to more aggressive growth rates once the pandemic passes. Over the long term, shareholders should benefit from an average dividend raise of 5% year on year.
Source: Own analysis
As we can see above the FFO and AFFO payout ratios have increased during 2020 and 2021. Again, this is an impact of the pandemic. STOR over the last few years (pre-COVID-19) paid around 70% of FFO and 65% of AFFO and we do expect this to be the case post-COVID-19.
In addition, STOR currently pays a quarterly dividend per share of $0.36 and has a forward yield of 4.7%. Assuming buying today and having a 5% growth indefinitely, yield on cost without dividends reinvested will look like the below. In approximately 15.5 years, the shareholders buying today should receive a 10% dividend based on their initial purchase.
2021 | 2025 | 2030 | 2035 | 2040 | 2041 | |
Yield-on-cost (%) | 4.7 | 5.7 | 7.3 | 9.3 | 11.9 | 12.5 |
Source: Own analysis
This also compares favourably with competitors. Q2 2021 presentation highlights clearly that STOR offers a higher CAGR, low payout ratio and a well-diversified tenant base.
Source: Q2 2021 Results
In addition, STOR is trading at more attractive price multiples compared to most of its peers.
STOR | Sector Median | |||||
P/ FFO (FWD) | 17.8 | 18.8 | 17.9 | 18.9 | 15.7 | 18.1 |
P/AFFO (FWD) | 16.9 | 18.2 | 17.7 | 19.3 | 14.6 | 20.8 |
Source: Seeking Alpha
STOR trades at around 2% and 19% discount compared to the sector median and has a lower multiple compared to O, FCPT and ADC. The combination of strong CAGR, low payout ratio, diversified tenant basis and price multiple separates STOR from its peers. STOR has a great dividend track record and one that we believe will continue to grow over many years to come.
As we can see from the price chart above, STOR seems to have outperformed O, FCPT and ADC Year-to-Date and still trades below their multiples. The more back to normality the economy continues to go back to the more confident we are in STOR's ability to continue to generate shareholder value.
Looking at the stock price for the last 3 years, STOR is currently trading below pre-pandemic levels and close to prices seen in Q1 2019. Market uncertainty may be justifying the current price, however, from an income perspective, shareholders are able to lock in the current forward dividend yield of 4.7%.
Management
When it comes to STOR, we strongly believe in management’s ability to deliver shareholder value. There are two key attributes that we strongly rate about STOR’s management. The first one is experience. FFCA and Spirit Finance corporation are two examples where shareholders have generated above-average returns with Christopher Volk, who is now the executive chair of the Board. More specifically shareholders return was 18.5% and 12.2% with FFCA and Spirit Finance Corporation respectively and in both cases above equity REIT performance at the time. Mary Fedewa, the current CEO, is a co-founder of STOR with significant experience in the industry and was part of the Spirit Finance Corporation team. The second attribute is the fact that the executive team acknowledges and communicates with shareholders clearly. Christopher Volker’s letters can be found here. Reading these letters we noticed that management is transparent with its shareholders and is straight to the point. Risks are identified and their ideas are communicated clearly. The fact that Berkshire Hathaway (BRK.A) (BRK.B) is the second-largest shareholder of STOR is an indication that management is trusted by individuals like Warren Buffett. Of course, who would not want to buy STOR at what Warren Buffett bought back in 2017; however, we do not see why BRK.A would not sell if they lost trust in management's ability. STOR has great management.
Risks
We see one major risk with STOR, COVID-19. As we have highlighted above COVID-19 has caused some deceleration or negative growth rates for STOR. STOR does have a strong and diversified tenant portfolio hence management did a good job in running STOR. However, some of these tenants continue to face difficulties and will continue to do so until everyone goes back to more normality. Cash collection for July stood at 98% and are continuing to improve based on the Q2 2021 results. These cash collection levels are pre-COVID-19 levels and management did mention that they see the pandemic’s issue largely gone. However, new virus strains could derail this trajectory. A new variant, the “MU” variant, was discovered and data suggests that it can sidestep vaccines and thus can spread faster. This is a real risk that shareholders should keep in mind.
Summary
The broad market is trading at a rich valuation. This is a time where we double down on high-quality companies that are at least trading at fair value. STOR fits our criteria of a great track record, great management, and great dividend. The stock seems to be fairly valued at the moment however, with every dip, investors should add more to their position. As we have explained above STOR is trading at lower price multiples compared to its peers. Currently and due to its current valuation, the company is a hold. However, for long term income-oriented investors the company is a buy hence, we rate STOR as a buy.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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