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Net-lease real estate is built to provide steady and predictable income. Tenants are generally in recession-resistant businesses and aren't easily disrupted by e-commerce. They sign long-term (15 years or more) leases and cover taxes, insurance, and maintenance expenses. All the landlord has to do is get a tenant in place and enjoy years of steadily growing income.
For net-lease real estate investment trust STORE Capital (NYSE: STOR), that was true until a few months ago. While the majority of the tenants are considered to be essential businesses, many are not. Just to name a few of the troubled areas of STORE's portfolio:
|Industry||% of Base Rent|
|Family Entertainment Centers||4%|
For the most part, these businesses were shuttered by the pandemic. Fully 100% of STORE's health clubs, movie theaters, and family entertainment centers were closed as of early May when STORE reported first-quarter earnings. About one-fourth of the education businesses and a select few restaurants and furniture stores remained open.
Recent results have been quite strong
As you might expect given the portfolio composition, STORE Capital didn't collect all of its rent during the shutdowns, but the results look quite strong. As of June 15, STORE Capital has collected 68% and 70% of its April and May rent, respectively, and 76% of its expected June rent. And much of the rest is deferred, meaning the company still expects to get paid, just at a later date.
Furthermore, it appears that the worst is over for STORE's tenant base. At the 2020 REIT Week virtual conference, the company's management said that just two out of its roughly 500 tenants had initiated a request for rent deferral in May.
Is STORE Capital at risk of a dividend cut?
The short answer is "probably not."
For one thing, STORE Capital pays a $0.35 quarterly dividend, which is just 71% of adjusted FFO in the first quarter. This means that the company's profitability could drop by nearly 30% and it would still be enough to pay the dividend. And while profitability could certainly fall by this amount or more in the second quarter, such a decline is likely to be short lived. STORE Capital has already declared its dividend (with no reduction) for the second quarter and has tons of liquidity available to make up any temporary shortfall.
Not only does the June data show rent collection bouncing back nicely as STORE's properties reopen, but it's important to remember that most of the uncollected rent is deferred income, not lost income.
STORE Capital's tenants are of generally high quality. The company demands property-level financial reporting from each tenant and always requests master leases from multi-unit tenants. STORE's leases have gradual rent increases built in, which should help drive significant income growth over time, and have an average remaining term of 14 years.
Finally, STORE Capital (like most other net-lease REITs) prides itself on increasing its dividend over time. Since the company's 2015 IPO, the dividend has been increased every year, by a total of 40%. And it's hard to imagine that management would allow that streak to end if it didn't have to.
In a nutshell, the pandemic certainly isn't over yet. But the worst impact on STORE Capital and its tenants appears to be behind us. STORE's profitability may suffer in the second and third quarters of 2020, but unless the COVID-19 case numbers get dramatically worse and further shutdowns become necessary, there's no reason to believe a dividend cut is coming.
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