STORE Capital (STOR) is a net-lease real estate investment trust (REIT) with a roughly 7.2% yield. That's far more than the yield of industry bellwether Realty Income (O 0.52%), which offers just 5%. Is this an opportunity to pick up an unloved stock on sale, or is there a good reason for the discrepancy? Here's a quick look at what's going on, and how you should be thinking about the stock today.
A strong model
Real estate investment trust STORE owns properties that it rents out under long-term leases. At the end of the first quarter the company's average lease length was an impressive 14 years or so. That makes it easier for STORE to get through economic contractions, since its tenants are under contract to stick around for what will most likely be longer than the downturn. The company originated over 80% of its own leases, too, which means it was able to set the terms of these agreements.
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In addition, the net lease structure itself is fairly conservative. Essentially, STORE's tenants are responsible for most of the operating costs of the properties they occupy. Although it's a bit of a simplification, the REIT basically just sits back and collects rent. It keeps the difference between its cost of capital and the rental rates it charges.
Meanwhile, STORE's portfolio of around 2,550 properties is, in some ways, fairly diversified. It has assets in 49 states with nearly 500 lessees in over 100 industries. No single tenant makes up more than 3% of the portfolio. Roughly 75% of its tenants, taken individually, account for less than 1% of the portfolio each.
So far STORE sounds pretty enticing. Now add in the fact that the REIT has increased its dividend every year since its initial public offering (IPO), and the story would seem to get even better. Only that's not exactly true when you step back just a little bit.
The problems with STORE
While STORE has increased its dividend regularly, its annual streak of increases is only six years long. That's because the REIT went public in late 2014. It paid one pro-rated dividend that year, and then increased it each year through September 2019. The dividend hasn't been increased in 2020, but at this point history suggests that isn't something that would have happened anyway. The key takeaway here, however, is that STORE is a very young REIT compared to peers like Realty Income, which has increased its dividend for over 25 consecutive years at this point.
This is an important fact to keep in mind, because the last economic downturn occurred between 2007 and 2009. Realty Income lived through it and kept increasing its dividend. So did W. P. Carey (WPG), which offers a roughly 7% yield, roughly similar to what STORE is offering investors today. STORE, at this point, is a good idea that hasn't been stress tested.
That brings up another point about the company: diversification. While STORE discusses the over-100 industries in which its tenants operate, when you unpack that information just a little, you end up with 65% of the portfolio in the "service" sector, 19% specifically in retail properties, and 16% in manufacturing. That's roughly similar to what Realty Income's portfolio looks like. W. P. Carey is far more diversified, with retail at just 17% of the portfolio, industrial 24%, office 23%, warehouse 22%, and the rest in self storage and "other." So STORE is not only young, it's not quite as diversified as it suggests -- or as much as some of its peers.
April, which is when the effort to contain the spread COVID-19 really hit the economy, wasn't the best month for rent collections, as STORE only managed to collect 68% of its rents. For comparison, Realty Income collected 83% of its rents. W. P. Carey collected an impressive 95%. In what really amounts to the first signs of how STORE will hold up under adversity, it didn't do nearly as well as peers that have been around for longer.
Wait and see
Long-term dividend investors should probably sit on the sidelines here until STORE has proven it can handle adversity. That's not to suggest that it is a poorly run REIT, only that it hasn't been stress tested. And, based on early results, it may need to experience some adversity to learn how to best position its portfolio for the long term. More aggressive types may like the service sector focus in the portfolio, which hints that performance will rebound once stores are allowed to open again following COVID-19-related shut downs. But it's still early days in this crisis, and if the United States falls into a recession, which looks highly likely at this point, a rebound may take longer than investors expect.
