With the coronavirus pandemic shutting down wide swaths of the economy, real estate has been hit especially hard. Small and fast-growing real estate investment trust STORE Capital (STOR +0.00%), which specializes in single-tenant properties focused on retail and services industries, is no exception. Shares of the REIT are down some 55% from their mid-February highs.
It's going to be a long road back, and the recovery will be highly contingent on how sectors of the economy adapt after the pandemic-fueled crisis abates. Nevertheless, STORE provided an update this month that indicates it is doing far better than the average real estate portfolio, and it has taken positive steps to keep its income stream and future expansion on the right track.
Image source: Getty Images.
A positive first response to a disruptive event
Up until March, STORE was piecing together another solid quarter. New property acquisitions in the last year helped fuel higher revenue and funds from operations (FFO) per share -- the equivalent of earnings for REITs. Underperforming properties were also sold off, keeping total occupancy at 99.5% at the end of March.
|
Metric |
Q1 2020 |
Q1 2019 |
Change |
|---|---|---|---|
|
Revenue |
$177.9 million |
$156.6 million |
14% |
|
Total expenses |
$117.8 million |
$109.0 million |
26% |
|
Adjusted funds from operations |
$120.1 million |
$107.8 million |
8% |
|
Adjusted funds from operations per share |
$0.49 |
$0.48 |
2% |
Data source: STORE Capital.
Net investment in new property (less sales totaling $18.9 million) was $245.2 million in the quarter. Total portfolio value was $9.1 billion at the end of March. New property purchases were funded with STORE's own free cash flow as well as $150 million from proceeds from drawing down its revolving credit facility and $149 million it raised in stock issuance (opportunistically sold at an average of over $36 a share, compared with the current price hovering around $20).
Most of those results are pre-crisis, though. Business changed drastically at the end of March and into April. Of the company's more than 2,500 properties, 14% of rents come from the restaurant industry, 6% from early childhood education, 5.4% from health clubs, and 3.9% from movie theaters -- all of which have experienced significant disruption. Additionally, its second-largest customer, Art Van Furniture, is finalizing bankruptcy proceedings, although a new tenant has resumed operations and is paying rent equal to 70% of the previous arrangement.
The good news is that no single customer makes up more than 3% of STORE's revenue, and though brick-and-mortar business was deeply affected by coronavirus, 68% of base rent and interest for April has been collected. For those rents that were deferred, nearly all of them have reached an agreement that consists of interest payments, lease payment escalations, or longer lease terms. Over half are also expected to qualify for federal government aid, and STORE thinks it will recover most of that deferred income by year's end.
A value, if you're patient
Real estate is all about the long game, and buying at an attractive price only boosts that long-term potential. While the future level of activity at businesses dependent on real estate is currently uncertain, STORE is in pretty good shape.
After paying its first-quarter dividend and paying for some other ongoing construction activity, management pointed out it had $550 million in cash and equivalents on the balance sheet. That's more than 2.5 times 2019 cash operating and interest expenses (less non-cash depreciation and amortization expense). Leverage also remains low, with the company's current debt-to-equity ratio one of the lowest among its peers. Total debt -- including $600 million total drawn down in revolving credit -- was $4.18 billion.
Granted, the company pulled its full-year 2020 guidance, and its dividend is under review. Management will be providing monthly updates, with the next one due on May 27. However, it appears STORE was able to mitigate the crisis and has ample cash on hand to ride out the storm. While the reopening of the economy is unlikely to be smooth sailing, quite a bit of future pain is now priced in. Shares of the REIT are trading for roughly 9 times adjusted FFO. While the metric will no doubt deteriorate further in the second quarter due to the pandemic, the REIT looks cheap for investors looking more than a year into the future.
