STORE Capital: A Ben Graham Value
03/13/2018 5:00 am EST
STORE Capital (STOR) is a REIT that manages hundreds of restaurants, retailers and other business properties; its occupancy rate is more than 99% and has been right around that level for many years, asserts Azmath Rahiman, editor Cabot Benjamin Graham Value Investor.
STORE stands for Single Tenant Operational Real Estate. The REIT is well diversified, with 1,921 properties leased to 397 customers across 100 industries. No single tenant contributed more than 3.4% of revenues, while the top 10 tenants combined made up only 18.5% of total revenue.
During 2017, 87% of the leases originated by STORE Capital were master lease agreements with an average lease term of 17 years.
My primary thesis in investing in STORE is its inherent hedge against inflation — 75% of its leases and loans have annual escalations adjusted to the Consumer Price Index (CPI), while almost all of its debts are at fixed rates. Thus, if inflation picks up, the firm’s revenues will do the same, while its financing costs will stay the same.
As of year-end 2017, the company had $1.89 billion in land and improvements and $3.95 billion in building assets. Rental revenue in 2017 was $427 million, with a rental yield of about 8% of the net property, a figure that rises every year with the aforementioned inflation adjustment.
The company has around $2.7 billion of debt, the majority of which is facilitated through STORE Capital’s master funding conduit. The average current interest rate on the debt is about 4%.
The spread between the rental yield of about 8% and the borrowing rate of 4% allows STORE Capital to expand by prudent leveraging. Mainly, what is to be noted is that the majority of leases (income) are hedged against inflation, and borrowing is hedged against interest rate hikes.
Thus, the 4% spread with a rental escalation of 1.8% gives STORE enough room to increase its equity. Based on this assumption, I believe STOR’s intrinsic value to be about 30 per share. I rate the stock a buy.