Why STORE Capital Is A Wonderful Company At A Fair Price

Summary

STORE Capital is a uniquely positioned net lease REIT with durable competitive advantages.

It’s exhibiting strong operating fundamentals and continues to see healthy investment spreads.

It has a robust acquisition pipeline and pays a well-covered and growing dividend.

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MarsBars/E+ via Getty Images The recent market rally has been great for short-term bulls, but not so great for long-term value investors who seek to layer in capital at attractive prices. That’s why it’s always good to have a few default Buys handy for times when value is hard to come by.

Such I find the case to be with STORE Capital ( STOR ), which is neither cheap nor expensive at the moment. In this article, I highlight why STORE fits the mold of a “wonderful company at a fair price”, especially in this frothy stock market. A Wonderful Company At A Fair Price

STORE Capital is a fast-growing and internally-managed net lease REIT that focuses on owning profit center real estate that are leased to middle-market and larger companies across the U.S. At present, its portfolio consists of 2,788 properties leased to 538 tenants in 119 diverse industries and 49 states.

STORE’s properties are generally profit centers for the tenant, and are therefore operationally essential. This is a prudent strategy, as profit centers are less likely to be closed down than cost centers. In addition, the vast majority of STORE’s locations (98%) are subject to unit-level financial reporting.

This benefits STORE in that it gives management the opportunity to quickly identify any financial issues that may pop up with a tenant location and plan an appropriate course of action. STORE also benefits from long-duration lease terms, with a weighted average lease term of 13.5 years, one of the highest in the net lease space.

STORE continues to perform well in the current environment, with a 99.4% occupancy rate and 13.6% YoY revenue growth in the third quarter (10% YoY revenue growth in the first nine months of 2021). Management has also been active on the acquisition front, originating $412M of acquisition volume in Q3 alone, as STORE’s tenants have turned their attention to growth initiatives in the currently strong economy.

STORE also carries an attractive investment strategy, as it seeks to invest in quality tenant properties at or below replacement cost. STORE’s internal measurement tool (based on unit-level reporting) suggests that the median tenant financial credit rating is a solid Baa2, well within investment grade territory, and 72% of contracts are rated investment grade. (Source: Investor Presentation )

This proprietary model enables STORE to purchase quality properties at attractive cap rates with a weighted-average 1.8% annual rent escalator. This is reflected by the weighted average initial cap rate of 7.7% on recently acquired properties in the latest reported quarter.

This compares favorably to STORE’s cost of equity of 6.35% (based on management’s 2021 AFFO/share guidance of $2.175 at the midpoint, and the current $34.24 share price). STORE’s investment spread widens further when we factor in the low 2.8% cost of debt on the recent $515M long-term fixed notes that STORE issued.

Looking forward, I see a healthy growth runway for STORE, as its target market is comprised of 215K companies. As shown below, STORE’s target market is just a fraction of the total addressable market of single-tenant properties in the U.S. (Source: Investor Presentation)

Plus, management is guiding for strong growth even in an inflationary environment, as noted below during the recent conference call : “Now I’d like to touch on inflation, which is the current headline macroeconomic topic. For a few key reasons, we believe STORE is well positioned to deliver strong AFFO growth even in an inflationary environment. First, as a triple-net lease REIT, STORE does not incur property-related operating expenses. Second, we have average annual contractual rent escalators of nearly 2% built into our leases, which provides a natural hedge against inflation. Third, we have flexible financing options and our existing portfolio is financed with well laddered fixed rate debt and no significant maturities until 2024. Finally, we have a strong pipeline of new opportunities. And given our direct approach to acquisitions, we have the flexibility to structure new lease contracts based on the current operating environment.” – CEO of STORE Capital Meanwhile, STORE maintains a strong BBB rated balance sheet and a safe net debt to EBITDA ratio of 6.16x. It also recently grew its dividend by […]

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