Is STORE Capital a Buy?

There’s no question that 2020 has been a difficult year for real estate investment trusts (REITs) that own retail assets. At one point, STORE Capital‘s (NYSE: STOR) shares were off by around 60%. Through Thursday’s close, the year-to-date loss is “only” 24%.

clouds in the sky: Is STORE Capital a Buy?

© Provided by The Motley Fool
Is STORE Capital a Buy?

Is STORE Capital on sale, or should investors look elsewhere for a better deal?

A little background

STORE Capital is a net-lease real estate investment trust, which means that its tenants pay for most of the operating costs of the properties they occupy. It’s generally considered a low-risk sector of the REIT space because leases are traditionally quite long. At the end of the second quarter, STORE’s average lease had 14 years left on it. That’s enough time to get through most economically difficult periods, even ones as uncertain as today’s. 

clouds in the sky: Storm clouds in distance with lightning strike

© Getty Images
Storm clouds in distance with lightning strike

STORE also tends to originate its own leases, so it has more control over the terms. Equally important today, however, are the insights provided by working directly with a seller that eventually turns into a long-term tenant. Effectively, the REIT has a deeper understanding of the financial position of the companies it’s dealing with. 

Roughly 65% of the portfolio is leased out to service-based businesses, with another 18% or so in more traditional retail properties. Adding a bit of diversification to the mix, the remainder is in the manufacturing sector. That’s not materially different from some of the company’s larger, more established peers.

That brings up the big issue right now: STORE’s initial public offering was in late 2014. 

Trial by fire

Gallery: 15 Dividend Aristocrats Stocks to Buy Now (The Motley Fool)

That date is important, because it means STORE wasn’t public during the last recession between 2007 and 2009. The recession that started in early 2020 is the first time STORE has dealt with material headwinds as a public company. And this downturn is possibly even more difficult, because it has been driven by a global pandemic that resulted in governments shutting non-essential businesses and people staying home to socially distance. This is not a good environment for service-oriented businesses or traditional retailers. 


Load Error

May was a low point, with STORE collecting less than 70% of its contractual rents. That number is now up to nearly 90%. So, for the most part, the REIT appears to be holding up reasonably well. (The collection rate at one prominent peer, National Retail Properties, dropped by nearly 50% during the worst of the COVID-19 crisis.) Add to that STORE’s conservative adjusted funds from operations (FFO) payout ratio of roughly 70% heading into the downturn, and it makes sense that STORE has been able to maintain its dividend through this very difficult period. In fact, in a show of strength, it just provided a token penny-a-share dividend increase in September. 

chart, line chart, histogram: STOR Dividend Yield

© YCharts
STOR Dividend Yield

STORE’s performance certainly hasn’t placed it at the top of the net-lease category, but it is muddling through fairly well, and on par with key industry peers like Realty Income. If this were a graded test, STORE would probably get a solid “B.” And with the stock still materially lower than where it started the year, investors might find the 5% yield attractive here. 

Is it a buy?

With a heavy focus on the retail sector, STORE is probably not appropriate for investors in search of a well-diversified net-lease REIT. A better option would be W.P. Carey — this highly diversified REIT’s rent collection rates never dipped below 95%. However, if you are looking to buy a retail-focused REIT, STORE’s performance through its first real test as a public company has been fairly strong. Most investors would probably find it an appealing addition. 

Reuben Gregg Brewer owns shares of W. P. Carey. The Motley Fool owns shares of and recommends STORE Capital. The Motley Fool has a disclosure policy.


10 stocks we like better than STORE Capital

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and STORE Capital wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of September 24, 2020


Continue Reading

Source Article