Although it has only been around for a few years, net-lease real estate investment trust STORE Capital (STOR -0.14%) has already delivered excellent returns for its investors and has attracted the attention of some pretty prominent investors, including Warren Buffett. In this Fool Live video clip, recorded on June 14, Fool.com contributor Matt Frankel, CFP, along with host Jason Moser, responds to a viewer's question about STORE's future growth potential.
Jason Moser: Here's an interesting, this REIT question from Tyler where he asks, "I have $1,000 in STORE Capital, I struggle to understand the growth potential of the REIT with only having $1,000 for the next while would I be better off putting it in a growth company versus the REIT. I'm struggling to hold the REIT as I watch my growth stocks fly." I think the general crux of this question is I own this steady, slow grower and I'm watching all of these other big growers just fly right past it. What's the justification for holding onto a slower grower like this?
Matt Frankel: I mean, I can tell you the growth thesis for STORE Capital. STORE Capital, it's an acquirer. It doesn't build properties from the ground up, it acquires properties. It can borrow money at about 3% interest and buy properties that are giving it 8% initial yields. If it does this enough, that's a big value creator over time. It's not going to double this year. It's just not. If that's what you're looking for, you should probably look elsewhere. What it can do is produce market-beating returns because of that cost of capital advantage over time. Realty Income (O 0.40%), it's like STORE Capital's big brother, I'd call it. Has handily beaten the S&P 500 in almost 30 years as a publicly traded company. By far, I want to say like three times the return to the S&P 500. The way it's done is by borrowing cheap, buying properties that yield well that have high-quality tenants that aren't going to default and create consistent income streams and use that to leverage it to buy more and more. It kind of creates a snowball effect and now Realty Income has 7,000 properties. It has a lot of long-term growth potential. It does not have a ton of quick short-term growth potential, it's kind of a big differentiator there.
Frankel: That's kind of what I would say on STORE Capital. I don't want to give personal advice if your objective is to shoot for the next 10-bagger in the next five years. Then you probably would be better off in a growth stock. It has to do with your own risk tolerance, and your objectives but there is a lot of market-beating potential in some of these REITs. It just going to take a while to get there.