STORE CAPITAL (NYSE: STOR) is an all-American real estate investment trust (REIT) that owns a variety of service-oriented retail locations. They own $11.2 billion in real estate assets across 2,965 locations in the United States. Their customers (tenants) include the likes from Burger King, Fleet Farm, Camping World and more. According to my research, this is the highest-yielding dividend-paying stock in Warren Buffett’s (Berkshire Hathaway) portfolio (BRK.A), because it has a yield of 5.8%. The REIT also boasts an exceptional occupancy rate of 99.5%, with a weighted average lease term of 13.3 years, which is above the industry average.
The stock price fell off a cliff during the pandemic crash of 2020 as its customer outlets were closed. However, the stock rebounded quickly and was up around 147% from the lows. Since August 2021, the share price has fallen by 27%.
The stock is now undervalued relative to historical valuation multiples and the majority of its peers, so looks like a great stock for income investors. While simultaneously, the company beat earnings expectations for the first quarter of 2022. Let’s dive into the business model, financials, and valuation of this juicy 5.8% dividend-paying stock.
Solid business model
STORE Capital is a real estate investment trust (REIT) specializing in buying and then leasing real estate to the service-oriented, manufacturing and service-oriented retail sectors. Their acquisition pipeline totals $13.2 billion in real estate value, which is leased to 573 clients across multiple sectors including; Manufacturing (24% of value) to RV/auto dealers (7%) and even restaurants (7%). The beautiful thing about this REIT is that it is extremely well diversified, across industries and clients.
The majority of STORE Capital’s top 10 tenants are less vulnerable to online disruption, for example, Spring Education Group and Cadence education are private preschools. Today, although online education is growing in popularity for college education, a preschooler is unlikely to have the ability or desire to participate in a Zoom call.
Other tenants include US LBM, which is one of the largest distributors of building products in the United States. While Ashley Homestore and At Home which specialize in furniture and so these stores entice people to go to the physical store. Then we have the self-explanatory Camping World and Bass Pro Fishing stores. The only real “risky” tenant I see listed below is AMC Movie Theater, which I will expand on in the “Risks” section.
The REIT’s top 10 customers represent only 18% of their base rent plus interest. This is less than other competitors in the REIT sector, for example Four Corners Property Trust (FCPT) has an eye watering 79.3% of rents from the top 10 tenants, which adds greater risk for investors.
STORE Capital is also well-diversified geographically across the majority of the United States, with a slight focus on the East Coast, South and Mid-West regions.
They have an exceptional occupancy rate of 99.5%, with a weighted average lease term of 13.3 years, above the industry average. Only 4.9% of their leases are expected to expire in the next 5 years, which is significantly lower than competitors.
STORE is the abbreviation of Single Tenant Operational Real Estate. Their tenants sign “triple net leases”, which means that the tenant is responsible for the maintenance of the building and all the bills. This is great because it means the business is unlikely to see any unexpected charges and therefore offers less risk to investors.
This REIT operates with a strategy of growth through acquisitions, which has accelerated in recent years. They achieved a gross acquisition volume of $513 million in the first quarter of 2022 alone, while they divested (sold) $56 million worth of locations that did not fit their strategy. STORE Capital aims to invest in “Profit Center” real estate, which essentially means that facilities are an essential part of the profitability of the business, for example, as you see with a Burger King or a school. Their direct customer relationships account for approximately 80% of STORE’s acquisitions, showing that customers see value in them as owners.
As of 2021, STORE Capital generated $783 million in revenue, with the majority coming directly from rentals, which grew 12% year-over-year. While total spending was $564 million, which grew at a similar rate, 11% year-over-year. For the first quarter of 2022, STORE Capital beat Wall Street expectations, with funds from operations adjusted [FFO] per share of $0.57 compared to the analysts’ average estimate of $0.52, a slight increase from $0.56 in Q4 2021 and a substantial increase from $0.47 in Q1 2021 .
Total first quarter revenue was $222.1 million, which exceeded consensus estimates of $212.1 million and was higher than the $209.2 million achieved in the prior quarter. The company raised its guidance for the remainder of 2022 and forecast adjusted FFO per share of $2.20 to $2.23 from the previous range of $2.18 to $2.22.
According to CEO Mary Fedewa:
“As we enter 2022, we have built on the momentum we built in 2021 and closed $513 million of diverse and granular investments in profit center real estate, which was a first quarter records for us”
They sold 11 properties in the first quarter, giving them a net gain of $6.1 million. The company operates with a very high gross margin of 97% and an operating margin of 52%.
Their balance sheet for Q122 shows $9.2 billion in real estate investments and $39.3 million in cash, which is down from $166 million in 2020. However, a low cash position makes sense, as REITs are legally required to pay out at least 90% of their taxable income to shareholders in the form of dividends each year.
In terms of debt, they have $1.7 billion in unsecured notes and $2.4 billion in non-recourse debt securities. The company operates with a Fixed Charge Coverage Ratio (FCCR) of 4X. This is very positive because the FCCR is a measure of a company’s ability to cover its fixed charges, such as debt payments, interest charges, and equipment rental charges.
They are currently paying a monstrous 5.84% dividend, which is Grade A according to Seeking Alpha. They also earned an A- for dividend consistency and B- for dividends after more than 7 years of growth.
The price to funds from operations (P/FFO) ratio is 12, which is below the industry median of 16.73, while the adjusted price to funds from operations (P/AFFO) is 12.7, which is also below the industry median of 16.73. 15.13.
The Seeking Alpha Valuation Grade is also at A- for STORE Capital at the time of writing.
Brick and mortar uncertainty
The future of physical outlets has been uncertain for many years, and this was accelerated by the 2020 lockdown. E-commerce has a penetration rate of 20.4% according to a Digital Commerce 360 and industry increased by 9.2% at T421. Thus, many Brick and Mortar outlets are disrupted by online businesses. STORE Capital tries to mitigate many of these industrial risks by focusing on manufacturing (24% of rental value) and “service oriented” businesses. Their biggest client is “Spring Education Group” is a chain of private preschools, they are highly unlikely to be completely disrupted by online technology, even with Zoom lessons. However, AMC is one of the top 10 customers that has had many problems in the past due to declining movie attendance. This was a very short-sold stock in the past and the target of a very public short squeeze. The good news is that this chain represents only 1.2% of their rental income.
The annual inflation rate in the United States unexpectedly accelerated to 8.6% in May 2022, after a short dip to 8.3% in April. Inflation increases input costs for businesses such as materials and squeezes the consumer with higher food and electricity costs. STORE Capital’s customers/tenants and their physical outlets have a higher cost structure than online competitors, making them more vulnerable to supply chain issues and inflation.
Low industry growth
STORE Capital has a large chunk of customers who are unlikely to be disrupted by the growth of e-commerce. However, their select clients are also not really benefiting from new industry growth trends such as what you would see with a Data Center REIT (see my other articles).
STORE Capital is a great REIT that offers investors exposure to a diverse range of retail and manufacturing locations. They pay a good dividend of 5.8%, which should be stable and even grow. The stock is the 2nd cheapest in the sector and on an EV/EBITDA multiple basis. The only major risks appear to be headwinds from online shopping and food delivery, which can lead to lower property values in the long run. But other than that, this stock seems like a great choice for long-term income investors.