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Could STORE Capital Corp. Be a Millionaire-Maker REIT?

[Updated: Aug 27, 2020 ] May 22, 2020 by Matthew DiLallo
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The management team behind STORE Capital (NYSE: STOR) has a long history of creating value for investors. They built and sold two publicly traded real estate investment trusts (REITs) -- FFCA and Spirit Finance -- which produced total annualized returns for their investors of 12.2% and 19.7%, respectively. More recently, they produced hefty total annualized returns of 26.3% for private investors in STORE Holdings. Because of that, investors have great expectations for their latest venture, STORE Capital, which is a REIT focused on net lease properties.

Unfortunately, STORE Capital has gotten off to a bit of a rocky start as a public company. The stock is down about 7% from the IPO price in late 2014, though it has generated a roughly 20% total return after adding in its dividend.

However, recent lackluster performance doesn't mean the company can't enrich investors in the years to come. Here's a look at what it would take for STORE Capital to mint millionaires from here.

The math to $1 million

A small investment can grow into a $1 million nest egg given enough time and rate of return. For example, a $1,000 investment in an S&P 500 index fund would need 75 years to grow into $1 million, assuming the S&P 500 maintained its historical pace of delivering average annualized returns of around 10%. Increase the size of the investment, or the rate of return, and an investor can become a millionaire much quicker. For example, a hypothetical $10,000 investment that earns a 15% total annualized return would turn into a $1 million windfall in about 33 years.

From rich to poor in a matter of months

Given that arithmetic, any stock that can produce market-beating total returns over several decades can turn a relatively small initial investment into a massive windfall. STORE Capital was on track with that pace until this year. From its IPO in late 2014 until mid-February, it had produced a more than 150% total return, which crushed the roughly 80% total return of the S&P 500.

However, the rapidly spreading COVID-19 outbreak forced governments to shutter nonessential businesses this spring, which derailed STORE Capital's stock. It has cratered more than 50% this year. The main weight is that many of the retailers that lease space from STORE Capital are withholding rent to preserve cash, with only 68% of its tenants making lease payments in April.

The company has been working with tenants in the hardest-hit industries by deferring rent to assist them in these tough times. It believes that these tenants, including movie theaters, home furnishing stores, restaurants, and health clubs, are needed and will successfully emerge so that they can resume paying rent.

The opportunity to earn outsized returns

While STORE Capital believes in its tenants, the market doesn't have the same confidence, which is evident in its stock market valuation. The REIT currently trades at about a 70% discount to the net asset value of its real estate. This value implies that the company will permanently lose 35% of its rent roll, won't recover any deferred rent, and won't be able to grow its portfolio in the future.

While that's possible in a worst-case scenario, it doesn't seem to be the likely outcome considering that most states are reopening their economies, allowing nonessential businesses to resume operations. As those businesses start paying rent again, STORE Capital's stock should begin reclaiming some of its lost ground.

Meanwhile, with a strong balance sheet and a conservative dividend payout ratio of 70% of its funds from operations (FFO), STORE Capital has ample financial flexibility to continue growing its portfolio and earnings. It has no shortage of options, given its massive acquisition opportunity set, which it values at $3 trillion. STORE estimates that by reinvesting the 30% of the FFO it retains after paying dividends into value-enhancing acquisitions, it can grow FFO by about 2.5% per year.

On top of that, contractually guaranteed rental rate increases should tack on another 2.75% to its bottom line, implying it can deliver annual FFO growth of at least 5% per share. Add that to the company's 7.7%-yielding dividend, and it could produce a total return of 12% to 13% per year. Combine that with its valuation upside as market fears fade, and the long-term wealth creation potential is even higher.

STORE Capital has millionaire-maker potential

While it won't happen overnight, STORE Capital could generate the market-beating returns needed to turn a small upfront investment into a massive nest egg. That, of course, assumes its management team doesn't eventually sell the company for a premium as they've done with previous REITs. Either way, STORE Capital has the potential to enrich long-term investors, especially considering how undervalued it seems to be following this year's sell-off.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends STORE Capital. The Motley Fool has a disclosure policy.