When the COVID-19 pandemic spread across the United States in early 2020, the stock market went into a free fall. One of the worst performing sectors was real estate.
This certainly makes sense. After all, real estate investment trusts, or REITs, generally own physical buildings that rely on the ability and willingness of people to go places. Even after the vaccine-fueled rebound we've seen recently, many real estate stocks remain beaten down. While the S&P 500 has produced a 16% total return in 2020, the real estate sector's return has been negative 14%.
However, there are some excellent bargains in the real estate sector for patient investors. One of the most compelling is STORE Capital (STOR), a net-lease REIT. It's down by about 19% from its pre-pandemic peak, but doesn't really deserve to be trading for such a steep discount.
STORE Capital in a nutshell
STORE Capital is a real estate investment trust that specializes in single-tenant properties, primarily occupied by service, retail, or manufacturing businesses. The company owns nearly 2,600 properties that it leases to more than 500 different tenants. (Note: If you're wondering why I keep capitalizing STORE, it's because it stands for Single Tenant Operational Real Estate.)
Investors need to know two things about STORE's properties. First, STORE Capital is a net lease REIT. That means that tenants are responsible for property taxes, insurance, and maintenance expenses, which helps keep the company's income nice and predictable.
Second, while the word "retail" tends to scare investors, STORE's tenants generally aren't recession-prone or in competition with e-commerce disruptors. Restaurants, auto repair businesses, medical and dental practices, furniture stores, and car dealerships are some of the large tenant types you'll find in STORE's portfolio.
The effects of COVID-19 are likely behind STORE Capital
While its tenants are generally recession-resistant or not easily disrupted by e-commerce, that's not true of global pandemics. About one-third of STORE's rental revenue comes from restaurants, fitness centers, day care businesses, family entertainment centers, and worst of all, movie theaters. When the pandemic hit, STORE's rent collection plunged to as low as 70% of billed rent in May.
However, the worst effects of the pandemic appear to be long gone. Virtually all of the company's properties (excepting some movie theaters) are now open for business, and rent collection reached 90% of billings in October. Plus, much of the uncollected rent is deferred, meaning that STORE will get it eventually.
Excellent growth and income potential
STORE Capital is a relatively young REIT, having completed its IPO in 2014. However, in that time, the company's portfolio growth has been impressive, and management has raised the dividend each year (including in 2020), with a total increase of 44% since the IPO. While the current 4.4% dividend yield is certainly impressive, it's fair to expect that the company will continue to prioritize dividend growth going forward.
What's more, STORE Capital sees its addressable market as $3 trillion of potential acquisition targets. That's not to say that STORE will ever actually get close to this size. The point is that with a current market cap of less than $9 billion, there is no shortage of growth runway for the company. STORE Capital is growing quite aggressively, spending $650 million on acquisitions through the first three quarters of 2020 at very favorable investment yields, so the company clearly intends to capitalize on its massive market opportunity.
Prepare for a bumpy ride
To be perfectly clear, STORE Capital's business should be an excellent way to get long-term growth and income in your portfolio, but it's likely to take investors on a bit of a roller coaster ride in the near term. While there is a vaccine coming, the pandemic (and its full economic effect) remains a very fluid situation. So-called "reopening" stocks like STORE Capital are likely to be quite volatile until life truly returns to its pre-pandemic normalcy.