STORE Capital Stock: Best Risk/Reward REIT (STOR)

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Last week I wrote an article on Federal Realty Investment Trust (FRT), saying there are better alternatives to the Dividend King. I don’t spend a lot of time reading comments on my articles, but I try to browse through them and see if there are any recurring themes. I was not surprised to see comments asking for my favorite alternatives on this article. I make it a point to write my articles as clearly and concisely as possible, which is why I have not included other REITs in this article. However, I thought it was worth writing an update on one of my favorite REITs, STORE Capital (NYSE: STOR).

Investment thesis

STORE is one of many net lease REITs that I plan to own for years to come. The company focuses on mid-market properties across the United States and generates attractive cap rates on its portfolio. They also get unit-level financial information, giving them better insight into each site’s business performance. At 12.2x price/FFO, share a flight today. Income investors can collect a 5.9% dividend that is expected to increase further this fall. I think investors are expecting double-digit returns from a combination of income and multiple expansion, and I still think the risk/reward ratio is heavily skewed to the upside.

A brief update on the company

Several factors will determine the long-term success of STORE. I covered them in more detail in my first article on the company, but a brief recap is in order. One of the things I really like about STORE is that they get unit-level financial data for their properties, which shows how the tenant’s businesses are performing in a specific location.

STORE Capital Overview

Presentation of the SHOP (storecapital.com)

They also have long lease terms compared to their peers, at generally higher capitalization rates as well. These factors are generating attractive investment spreads, and investors can participate in a cheaper valuation now that stocks have sold over 20% year-to-date.

Evaluation

One of the main reasons I’m so bullish on STORE is the cheap valuation. It is cheap compared to average multiples and cheap compared to other net lease REITs. The shares are currently trading at a price/FFO of 12.2x, which is well below the average multiple of 16.9x. It’s also a discount to other net lease REITs, which doesn’t make much sense to me given how good STORE is.

STORE Capital Stock Valuation

Price/FFO (fastgraphs.com)

If equities return to a 15x multiple, investors are looking for attractive returns through continued FFO/equity growth and modest multiple expansion. I think stocks will likely trade over 15x at some point over the next two years, which would mean even better returns for investors. I choose to reinvest my dividends, and if you don’t need cash, I would recommend long-term investors do the same.

Dividend growth

One of the reasons I ignored the FRT is the low dividend growth. STORE, on the other hand, offers an intriguing combination of current yield and a history of attractive dividend growth. STORE should see another dividend hike this fall if the trend of the past two years continues. This will be on top of a juicy 5.9% return, and I think we’ll see a rise into the single-digit percentage range.

If you are looking for a REIT with a longer history of dividend increases, the other alternative that comes to mind is none other than Realty Income (O). It’s an investor favorite for good reason and is well known for its frequent monthly dividend increases. The current yield stands at 4.2% and the valuation is a bit richer than STORE currently at 19.4x price/FFO. It’s a hold right now in my opinion, but if the stock drops into the 60 range, I think it would be an attractive buy for long-term investors.

Conclusion

Although STORE is not quite in the same industry as FRT, it is my preferred alternative for investors looking for the trifecta of attractive valuation, high dividend yield and the potential for future growth. dividends. One of the things every investor needs to weigh for themselves is risk and reward. With STORE it checks all the boxes I look for with long term income investing. A very attractive starting valuation at 12.2x price/FFO, healthy underlying activity and a large dividend of 5.9% which should grow in the coming years.

Sallie R. Loera