STORE Capital (STOR) did something important during pandemic-stricken 2020 by simply surviving with its dividend intact (it actually increased the disbursement, year over year). But now that 2020 is over, the net lease real estate investment trust (REIT) needs to prove itself anew. Here's why 2020 was so important, and what big question STORE Capital needs to answer in 2021.
The big test
STORE Capital's initial public offering was in November 2014. That's incredibly important to the story in 2020 because the last recession was the one from 2007 to 2009. So, heading into the coronavirus pandemic, this REIT had never lived through an economic downturn as a public company. It came out strong early on, providing a series of reasons why management believed it was well positioned to survive the headwinds, but with no history to look back to, there was no precedent for its assertion.
When rent collection levels in STORE Capital's portfolio fell into the 70% range early in the pandemic, investors weren't wrong to question the REIT's staying power. However, these numbers improved throughout the year. In December, the collection rate was up to 90%. By this February, the company was collecting 93% of its rents. That's not as good as 100%, of course, but it shows that the portfolio is resilient.
To highlight management's belief in the company and its improving performance at the portfolio level, the dividend was increased 2.9% in the third quarter of 2020. And along with that change, it provided an update on its acquisition plans, which, as you might expect, it said would fall well short of its original goals. Which brings us to the big question STORE Capital has to answer.
Let's talk about growth
When STORE Capital came public, it owned 850 properties. At the start of 2020, the portfolio was up to a touch more than 2,500 properties. Portfolio growth has been a big part of the story here. But by the end of 2020, the portfolio had only increased to 2,630 properties. The volume of net acquisitions (which includes the impact of divestitures) was down about 45% year over year. That's not exactly shocking given the circumstances, but it brings up a bigger question: Can STORE Capital get back to the higher growth rates to which investors have become accustomed?
The STORE Capital story has largely been about portfolio growth. But as a company increases in scale, it needs to make more acquisitions to keep growing. 2020 was an outlier in many ways, and the key takeaway is that STORE Capital's business was resilient to adversity. However, now that 2021 is underway, management needs to prove that it can return to growth. It has projected that its net investment in new assets should fall between $1 billion and $1.2 billion this year. At the end of 2019, it set a 2020 goal of roughly $1.2 billion, so that number is at best flat with pre-pandemic levels. That's a little troubling given that the portfolio grew in 2020 despite the pandemic, which means STORE Capital's spending is probably a little less than what some might have expected.
Giving STORE Capital a little leeway here since 2020 was such a difficult year, it's probably OK to set a conservative 2021 acquisition target. Acquisition and disposition activity, meanwhile, tends to be lumpy in nature, so you can't simply divide the full-year projection by four to create a quarterly figure. It might require a couple of quarters to get a real feel for how management is doing on returning to stronger portfolio growth.
Still, when STORE Capital reports its first-quarter results, investors should be looking to see what kind of progress it has made on the acquisition front. If the REIT can't get back into growth mode, the long-term story will have changed. Notably, if first-quarter net acquisitions are low, with a promise of more to come later in the year, it would not be a particularly comforting sign.
There's no particular reason to doubt whether STORE Capital can manage the task of returning to its pre-COVID acquisition pace. After all, it did a pretty good job navigating a difficult 2020 while still finding some new properties to buy. So investors should probably go into 2021 expecting good things. That said, acquisitions still need to be watched closely this year to ensure that STORE Capital's growth engine hasn't stalled.