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STORE Capital: Buffett Bets on Triple Net Leases

09/08/2017 2:54 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

Net lease real estate investment trusts are a REIT sub-sector with companies that have provided investors with up to decades long records of dividend growth and stability, says Tim Plaehn, editor of The Dividend Hunter.

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The net-lease business model involves owning a portfolio of single tenant properties. The properties are leased on long-term “triple-net” leases.

These leases have the tenants pay all property related expenses such as upkeep and maintenance, property taxes and insurance.

The REIT just collects monthly rent checks without being responsible for property expenses. Net-lease contracts have built in annual rent escalators. This allows a REIT to grow its annual dividend even if market conditions make acquisitions difficult.

STORE Capital (STOR) is a relatively new REIT, which launched with a November 2014 IPO. The company was launched by an executive team with three decades of experience in net-lease property  management.

According to the company’s 2017 second quarter presentation the STORE portfolio contains 1,700 properties, across 48 states, leased to 371 customers.

The average lease term is 14-years, with an average of 1.8% rent escalations annually. The company is adding about 70 new properties each quarter.

Sixty-nine percent of the properties are leased to service businesses, 17% to retail businesses and 14% to manufacturing companies. What sets STORE apart from other net-lease REITs is the company’s focus on analyzing store level income statements.

The result is that the STORE portfolio of properties has businesses with a higher level of profitability and stability than the average properties owned by other net-lease REITs. In early July Warren Buffett’s Berkshire Hathaway purchased a 9.8% stake in STORE. Buffet believes in this REIT.

While several of the net-lease REITs have great histories of steady dividend payment and annual dividend growth, both the yields and dividend growth rates have been too low for me to have made one of these stocks a Dividend Hunter recommendation.

STORE has the attractive combination of both a higher yield and higher dividend growth when compared to the older REITs in the group.

In its first two years, the STORE dividend has increased by 8% each year. FFO per share is growing by 10% per year, so I expect continued high single digit increases. The current yield is 4.65%. The dividend growth will propel share price appreciation over the years.

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