STORE Capital: Checking all the Boxes

05/30/2017 2:56 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

Surveying the list of Net Lease REITs, that demonstrate a "margin of safety" in both price and dividend safety, I find STORE Capital (STOR) to be the most attractive, explains Brad Thomas, editor of The Intelligent REIT Investor.

While the market is suggesting that STORE is unpopular, I find this Net Lease REIT attractive, especially when compared with the fundamental elements of value creation. Simply put, STORE checks all the boxes.

STORE also decided to more completely describe its top ten tenants, including greater sector investment descriptions, as well as more color on historic performance running this and prior public companies. The company’s major tenants include AMC, Cadence, O’Charleys, and Ashley Furniture.

STORE has 1,750 properties with 369 customers (about 17 net new customers quarterly) that represent about 590 contracts (about 30 transactions closed quarterly) with an average transaction size below $9 million.

STORE has intentionally weighted its portfolio heavily to service industries, including restaurants, movie theaters, fitness clubs, early childhood education, veterinary clinics and more; it believes that the performance of the investment portfolio should not be impacted by traffic pattern disruptions caused by sales declines suffered by most other major retail chains.

While many of the bigger Triple Net REITs focus on traditional credit-based fundamentals, STOR's tenants typically don't have credit ratings. Most of these unrated companies either prefer to be unrated or are simply too small to issue debt rated by a nationally recognized rating agency in a cost-efficient manner.

STOR's approach is more of a risk management one, and so, instead of herding hundreds of Net Lease deals through the door every year (like many of its peers), the company takes a more granular approach to ensure there is a critical piece of real estate attached to a profitable business operation. As far as I'm concerned, this is the "secret sauce" for STOR.

STOR has only 2% of "flat leases," and a majority (74%) of the leases are contractually CPI-based. Around 67% of the REIT's leases have "annual" rent escalations and around 28% of the leases have "5-year" rent bumps.

By obtaining quarter sales reports from most (98%) tenants, STOR can measure performance of each individual property. This communication channel provides it with an advantage with which the company can mitigate risk and provide a higher degree of predictability.

At quarter end, STORE's gross investments totaled $5.5 billion, of which approximately $2.9 billion had been pledged as collateral for secured debt.

The remaining $2.6 billion of real estate assets is unencumbered. This growing pool of unencumbered properties provides STORE with increased financial flexibility, which adds to its overall financial strength.

For the first quarter, STORE's AFFO increased 25% to $70 million or $0.43 per basic and diluted share from $55.8 million or $0.40 per basic and diluted share last year. This represents an increase of 7.5% on a per-share basis.

Since the IPO, STORE has increased its dividend per share by 16% while maintaining a low dividend payout ratio. For the first quarter, the company declared a cash dividend of $0.29 per common share, representing approximately 67% of AFFO per share.

On the Q1-17 earnings call, STORE affirmed its 2017 AFFO per share guidance in the range of $1.74 to $1.76. The AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.75%.

STORE is attractive based on all metrics, and I especially like the dividend yield today. I am upgrading shares in STORE from a BUY to a STRONG BUY.

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