STORE Capital's (STOR) 2020 is now in the books, and the real estate investment trust (REIT) finished an otherwise forgettable year in notable fashion. Despite a second round of coronavirus shutdowns in the fall, the company's portfolio of properties continued to make steady progress toward reopening. Plus, STORE's operations are heavily slanted toward suburbia -- the same areas Americans are quickly migrating to. This REIT remains an underrated and misunderstood way to invest in a gradual reopening of the economy.
2020 in review
STORE Capital posted revenue of $172.9 million in the fourth quarter, compared to $173.5 million in the same period the year before. Adjusted funds from operations (AFFO, a.REIT's equivalent of earnings) were $115.1 million, compared to $120.0 million last year. As was the case all year, AFFO was hurt by the temporary deferral of rent and interest payments, especially when for the tenants most impacted by shelter-in-place and social-distancing orders.
Image source: Getty Images.
Nevertheless, paired with financials from the rest of 2020, STORE more than held its own during an unprecedented time for the real estate industry.
|
Metric |
2020 |
2019 |
Change |
|---|---|---|---|
|
Revenue |
$694 million |
$666 million |
4% |
|
Adjusted funds from operations (AFFO) |
$463 million |
$458 million |
1% |
|
AFFO per share |
$1.83 |
$1.99 |
(8%) |
Data source: STORE Capital.
Objects in mirror are not closer than they appear
STORE is poised to return to growth in the year ahead, led by the gradual reopening of its tenants (rent and interest collected from tenants was 93% in February, compared to just 70% last May), new properties acquired (it owned 2,634 at the end of 2020, compared to 2,504 at the end of 2019), and an expected $1.0 billion to $1.2 billion in net real estate acquisitions in 2021. Commercial real estate isn't dead, but needs are rapidly evolving, and STORE is positioned well for the oncoming changes.
As CEO Christopher Volk explained to me last spring, many investors tend to think about what just happened and project that onto the future. This is a mistake for a growing company like STORE, which is delivering above-average returns on equity and has low debt compared to its peers. Though some commercial real estate will take many years to recover -- if it ever really does -- STORE will be just fine in a post-COVID-19 world. It focuses on single-tenant properties in more suburban areas, and it hasn't been deeply impacted by secular changes taking place in the most densely populated cities. With more people moving to the areas where STORE has a presence, that bodes well for the long-term health of the businesses that lease its properties, and for the value of said properties themselves.
That's not to say all is peachy for STORE. It does have outsized exposure to the restaurant industry, and the handful of movie theaters in its stable still face an uncertain future. Nevertheless, this is a nimble REIT that is making fast progress diversifying itself. It has made notable changes just in the last three months, like reducing the number of restaurant properties in its portfolio by 27 compared to the end-of-Q3 count.
|
Industry |
Number of Properties |
% of Total Base Rent and Interest as of Dec. 31, 2020 |
% of Total Base Rent and Interest as of Oct. 31, 2020 |
|---|---|---|---|
|
Restaurants (full- and limited-service) |
750 |
12.8% |
13.5% |
|
Early childhood education |
244 |
5.9% |
5.9% |
|
Health clubs |
93 |
5.5% |
5.2% |
|
Metal fabrication |
91 |
4.9% |
4.8% |
|
Automotive repair |
176 |
4.7% |
4.7% |
|
Furniture |
69 |
4.4% |
5% |
|
Farm and ranch supply |
42 |
4.1% |
4.5% |
|
Movie theaters |
37 |
3.8% |
3.9% |
|
Pet care |
182 |
3.5% |
3.5% |
|
Family entertainment |
41 |
3.4% |
3.7% |
Data source: STORE Capital.
This explains why the stock has doubled from its lows last March, and there's plenty left in the tank as the company returns to growth mode in 2021. In the meantime, STORE's dividend yields 4.3% and is handily covered by AFFO generated. In fact, the company increased its payout last autumn. Expect more gradual increases to this payout going forward as the REIT expands and its tenants return to health. At just 18 times 2020 AFFO, this remains a solid bet on a gradual reopening of the economy.
