STORE Capital Stock: Double down on that safe 5.3% yield (NYSE:STOR)
STORE Capital Corporation (NYSE: STOR) is a high-quality REIT in which I recently added to my position. The real estate investment trust is well managed by a leadership team that regularly expands the trust’s portfolio footprint and investment locations.
In my opinion, STORE Capital is a great REIT investment that allows investors to participate in the trust’s long-term funds from growing operations.
A dividend as safe as possible
STORE Capital has grown into a true REIT juggernaut, investing billions of dollars in primarily service-oriented retail and manufacturing properties across the United States. STORE Capital owned properties in 49 states as of June 30, 2022, making it a truly national real estate investment trust.
At the end of 2Q-22, the real estate investment trust had more than 3,000 investment locations and leased its properties to tenants in 124 sectors. All of STORE Capital’s properties have long-term rental structures that provide the trust with consistent rental income and cash flow visibility.
The trust’s focus on high-quality properties and tenants has resulted in an occupancy rate of 99.5%, which is particularly impressive. Because there is always some turnover in a property portfolio, the occupancy rate is extremely high, demonstrating good trust management.
Realty Income Inc. (O), another REIT I hold in high esteem, had 98.9% occupancy in 2Q-22. Realty Income and STORE Capital are two extremely well managed companies with near full portfolio utilization.
Acquisitions drive STORE Capital’s growth
STORE Capital’s constant acquisitions result in a slow but steady growing national real estate platform. So far this year, the trust has acquired 173 properties worth $904.4 million, with transactions completed at a weighted average capitalization rate of 7.1%. During the same period, the trust sold $117.2 million of non-performing real estate assets.
In terms of disposals, STORE Capital made a net profit of $19.7 million on the sale of 24 properties. STORE Capital’s acquisition volume varies between 50 and 100 properties per quarter, with 2Q-20 being an exception due to uncertainty in real estate markets caused by Covid-19.
STORE Capital Vs. Peers
Acquisitions by STORE Capital help the company increase its operating funds and dividend. The Trust’s real estate assets generated $163.8 million in adjusted funds from operations, or $0.58 per share, in 2Q-22, representing 16% year-over-year growth due to a robust return of demand in real estate markets after the pandemic.
STORE Capital earned $0.58 per share in adjusted funds from operations in 2Q-22, more than enough to cover the dividend of $0.385 per share.
STORE Capital has a lower payout ratio (68%) than Realty Income (76%), which is widely considered the gold standard in the REIT industry due to its exceptionally long track record.
The trust could afford to significantly increase its dividend due to strong growth in funds from the operations of acquisition-focused STORE Capital. In fact, STORE Capital has outperformed all but one of its large retail trust peers in terms of dividend growth, with an annual rate of 5.9% since 2015.
Increase in 2022 forecasts and AFFO valuation
STORE Capital has raised its adjusted operating funds forecast from $2.20 to $2.23 to $2.25 to $2.27 and expects $1.3 billion to $1.5 billion in net real estate acquisitions in the year full. Based on this forecast, shares of STORE Capital are trading at an expected AFFO multiple of 12.9x.
Realty Income, STORE Capital’s closest competitor and comparable in portfolio quality, forecasts adjusted funds from operations of $3.84 to $3.97 per share (unchanged).
The stock trades at an AFFO multiple of 18.9x based on Realty Income’s AFFO expectations for this year. Based on the long-term AFFO growth potential, I think Realty Income is slightly overvalued and STOR Capital is undervalued.
Why STORE Capital might see a lower valuation
STORE Capital is not in danger. In 2Q-22, the trust earned its dividend, which was well covered by the trust’s operating funds. A greater risk for STORE Capital would be the emergence of a more severe recession, which could lead to higher vacancy rates and slower funds from operations and dividend growth in the future.
Given that STORE Capital has handled previous recessions well, I don’t think this is a high-risk factor that investors should worry about.
STORE Capital is a very well-managed real estate investment trust, and the company’s strategy of buying properties across the country in small steps has resulted in the creation of one of the largest and most diversified REITs focused on retail trade in the United States.
As the company acquires many properties across the country, the trust’s operating funds increase. The payout ratio is very low and higher than the ratios of competitors in the retail REIT sector.
At the current price, there’s nothing I don’t like about STORE Capital. It has a hedged return of 5.3%, a healthy portfolio and a low valuation.