Real estate investment trusts (REITs) are income-producing securities that give investors a simple way to own institutional-level property. But what happens when an institutional money manager buys a REIT, like the recent agreement between GIC and its partners and STORE Capital (STOR)? The answer is that Wall Street gets a look at what the "smart money" thinks about REITs. That's good news for investors worried about the premium valuation that's long been afforded to net lease giant Realty Income (O -0.11%).
A quick look at the deal
STORE Capital is a net lease REIT that owns around 3,000 single-tenant properties. Net lease refers to the fact that STORE Capital's tenants are responsible for most of the operating costs of the assets they occupy. Given the size of the portfolio, this is a pretty low-risk approach, even though any single property is high risk because there's just a single tenant. Notably, STORE Capital's portfolio makes it one of the largest net lease names on Wall Street.
That won't last for much longer, however, because STORE Capital has agreed to sell itself to GIC and institutional partner Oak Street. GIC is an institutional money manager that oversees Singapore's investments. Oak Street is an institutional investor focused on net lease assets owned by Blue Owl, a global wealth manager focused on alternative assets. Arguably, these entities are the "smart money" on Wall Street.
The agreement calls for STORE Capital investors to get $32.25 per share in cash for each share they own. That's roughly a 20% premium to the price prior to the news hitting the market, leading to a swift price increase in the shares. Taken another way, institutional investors think that the assets STORE Capital owns are worth notably more than the price Wall Street was paying for them.
The yield factor
This is where Realty Income comes in. Realty Income, with over 11,000 properties, is the 800-pound gorilla of the net lease space. It has long been afforded a premium price over peers like STORE Capital. One area where that has been very notable is the yield, which has been relatively low for Realty Income compared to similarly run REITs. Essentially, investors have historically been willing to pay more for Realty Income's stock, pushing its dividend yield lower.
Some investors have legitimately worried that Realty Income's valuation has been too high. However, following the news that STORE Capital had agreed to be bought out, the yields on these two REITs converged. So the valuation that institutional investors have placed on STORE Capital is roughly in line with the valuation the market has afforded Realty Income.
STOR Dividend Yield data by YCharts.
That doesn't even take into consideration the size benefits that Realty Income has over STORE Capital. Or Realty Income's long history of annual dividend increases, which makes it a Dividend Aristocrat. And there are additional factors that would attract investors to Realty Income, too. All in, however, if you look at the valuation being afforded to STORE Capital as it is being taken private, the premium Wall Street has historically afforded Realty Income no longer looks unusual.
In the real world
When investors look at a stock, there are all sorts of ways to get a handle on valuation. One of the most powerful is to see what similar companies are being "sold" for in the private market. In this case, STORE Capital's valuation on the private market appears, using dividend yield, to be fairly close to what Realty Income is being afforded in the public markets. If you own Realty Income and are worried about its valuation, the STORE Capital deal suggests you may be worrying about nothing.
