Popular net-lease-focused real estate investment trust (REIT) STORE Capital (STOR +0.00%) recently announced it is being taken private by GIC and funds controlled by Oak Street. Long-term dividend investors who held stock in the company have every right to be upset about the $14 billion deal that the board of directors approved.
Let's take a look at why investors might have been upset and at what they can do with the proceeds from this all-cash offer to rebuild their income stream.
Short-term gains don't replace lost long-term potential
Prior to the announcement of the STORE Capital transaction, the REIT's shares were trading at around $26.80. Institutional investor GIC and its partners are offering an all-cash deal valued at $32.25 per share. That's roughly a $5.45-per-share gain, or about 20% or so. On the surface, that seems hard to complain about.
NYSE: STOR
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But when you step back and think about this deal in a bit more detail, long-term dividend investors have every right to be displeased with the outcome. A stock is, basically, a claim on the long-term cash flows that a company produces. Dividends are a tangible return of cash flow. STORE Capital currently pays investors an annual dividend of $1.54 per share (four payments of the current quarterly dividend of $0.385). The adjusted funds from operations (FFO) payout ratio was a solid 66% in the second quarter, suggesting there's little risk of a dividend cut.
So, the premium in this transaction is only equal to about three and a half years' worth of well-covered dividend payments. Investors are, in effect, giving up what could have been decades of dividend payments at the current (and potentially higher) rates in exchange for a meager 3.5 years' worth of dividends up front. That suggests a raw deal, given that REITs own physical assets that generate reliable long-term income streams.
Given that math, it's completely understandable if investors felt the board let them down on this one. But what to do now?
There are some REIT alternatives to consider
Given that STORE Capital is one of the largest net lease REITs, the safest replacement option would probably be Realty Income (O 0.56%). Realty Income is the 800-pound gorilla of the net lease niche with over 11,000 properties. Its portfolio is also fairly similar to that of STORE, with about 80% of assets in retail properties and the rest in industrial and other property types.
On the plus side, Realty Income's nearly $40 billion market cap suggests it is unlikely to be taken over, and it is a Dividend Aristocrat, with more than 25 years' worth of annual dividend increases behind it. On the negative side, the roughly 4.5% dividend yield is lower than what STORE Capital offered. But, for play-it-safe investors, Realty Income is worth deep consideration.
NYSE: O
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Sticking with the largest REITs, W.P. Carey (WPC 0.23%) is a strong option, as well, given its generous 5% or so dividend yield and broad diversification. This REIT has increased its annual dividend every year since its 1998 initial public offering (IPO), which puts it on the cusp of Aristocrat status.
The big problem here is that retail assets only make up around 16% of the portfolio. The rest is spread across industrial (26%), warehouse (24%), office (20%), self-storage (5%), and a broad "other" category (the remainder). For those seeking out solid dividend payers, W.P. Carey should be a good fit. However, if the goal is a retail-focused REIT, then you might want to look elsewhere.
National Retail Properties (NNN +0.25%), another Dividend Aristocrat, also offers a 5% yield. This REIT is focused on domestic retail assets and nothing else. It has a long history of working closely with current tenants to expand its business, which offers interesting internally driven growth opportunities. But, as noted, it lacks the diversification provided by industrial and other property type exposure that STORE Capital offers. Still, given its impressive dividend history, that might not bother investors seeking to maximize dividend income.
NYSE: NNN
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Stepping down a bit on the size front, the $5.5 billion-market-cap Spirit Realty (SRC +0.00%) and its roughly 6% yield might be appropriate for more aggressive investors. The company lacks the impressive dividend records of the names above, having cut its dividend in 2019 during a portfolio overhaul. That said, the REIT got back on the dividend growth path in 2021. And its portfolio is roughly 70% retail and 30% industrial and other, which is pretty close to STORE's mix.
Assuming Spirit Realty has, indeed, gotten itself on a more solid trajectory, it might be the best combination of portfolio and yield. That, however, is only true if you believe the overhaul noted above has put the REIT on the right path. A little extra homework is warranted on this one.
It's probably time to move on
Looking at the yield on offer from Realty Income, some might wonder about the possibility of a higher offer for STORE Capital (which has a post-deal announcement yield of around 4.8%). The problem is that an offer would have to be much, much higher to make up for the future dividends income investors were likely expecting here. However, there's no use crying over spilled milk, even if you believe the board let investors down on this one.
If you are looking for alternative uses for the cash you'll collect in the REIT space, Realty Income, W.P. Carey, National Retail Properties, and, for the more aggressive and active investors out there, Spirit are all reasonable options.
