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1 High-Dividend REIT With Tons of Room to Grow

By Matthew Frankel, CFP® - Feb 25, 2021 at 6:47AM

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You might be surprised how big this REIT's market opportunity is.

STORE Capital (STOR 0.27%) invests in single-tenant properties occupied by tenants in the service, retail, and manufacturing industries. How much of this type of real estate do you think there is in the United States? $100 million? $500 million?

You might be surprised to learn that STORE's addressable market of existing properties is several trillion dollars in size. In this Fool Live video clip, recorded on Feb. 16, Millionacres real estate analyst Matt Frankel, CFP, and editor Deidre Woollard discuss how STORE Capital has been doing recently and the enormous addressable market opportunity the company has. 

Deidre Woollard: Let's talk about STORE Capital for a bit.

Matt Frankel: Sure. They're doing good. Back to you. [laughs]

Woollard: They're not really a recovery story as they're just gathering steam because the one thing that makes STORE Capital different is that they have so much essential retail and service-based retail -- very different than malls, very different than a Simon Property Group.

Frankel: No, they do. To be fair, STORE Capital wasn't always doing well during the pandemic. About 30% of their properties are in industries that were affected heavily by COVID. Restaurants are their biggest property type, for example, they have a lot of fast food and quick service restaurants, things like that. Daycares are another major property type on their tenant list. About 5% of their portfolio is movie theaters. Those are still doing terribly.

Woollard: Yeah.

Frankel: Simon, for a period of time, was not doing very well. They weren't quite as much of a no-brainer in the middle of the pandemic as Simon was, but for a while their stock price was pretty down in the dumps. But you're right; they are mostly made up of essential businesses or at least those that can operate while a pandemic is going on.

For example, 20% of the portfolio is manufacturing businesses, like a metal fabrication shop or something like that. Those you don't need to be allowed to open retail stores for those to be operational. Auto dealerships are another thing that are a big part of their portfolio. Furniture stores are their No. 1 non-service retail business in their portfolio. They have a lot of essential businesses.

STORE Capital tenants sign long-term, what are called, triple-net leases, which essentially means that it locks a tenant in for a long time. The tenant pays a variable cost of the property, and over time, rent goes up at a predictable rate. That's known as an escalator. So pretty much locks them all in. STORE Capital has done a great job of growing, and they are back in full-on growth mode.

Out of the four REITs we're talking about, no one is growing faster than STORE Capital right now. They are full steam ahead with their acquisition strategy. Simon is more of a reinvesting in their current property strategy right now, especially, after acquiring Taubman, they're looking to just double down on quality.

STORE Capital has a big addressable market. They grow through acquisition. They're not a developer. They buy properties that are mid-sized businesses generally, or mid-sized companies, which if you look on their top tenants list, you're not going to see any of that like Walmarts or Costcos or anything like that because they specialize in the mid-market businesses. They estimate that is a $3 trillion dollar market of properties that they could potentially go after.

They will never be a $3 trillion dollar company, but the point is that they have a lot to choose from here. Currently, they have about 2,500 properties, a little bit more than that. They're the only REIT in Berkshire Hathaway's portfolio. We mentioned Warren Buffett owns a lot of Seritage, but Berkshire Hathaway itself owns a lot of STORE Capital, just under 10% of the company. They are doing quite well. They're collecting most of their rent. Most of their properties are reopened to one extent or another. The movie theaters remain pretty much the weak part in their portfolio, which, like I said, is only about 5% of the total. Most of them are open, but can't afford to pay rent because there aren't movies right now. I can't name the last big movie that did well in theaters. I don't know if you can. It was probably something in early 2020.

So the movie theater business is not doing very well. That's the trouble spot. But for the most part, especially, with the COVID cases going down, restaurants are less of a concern than they were about a month ago, the daycares are less of a concern than they were when the cases were spiraling out of control. STORE Capital is a great slow-and-steady growth retail play, if that's what you're looking for.

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Stocks Mentioned

STORE Capital Corporation Stock Quote
STORE Capital Corporation
$26.11 (0.27%) $0.07
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$456,500.00 (0.10%) $468.99
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$304.05 (-0.03%) $0.10
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$108.84 (-1.09%) $-1.20

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