I’ll be surprised if this REIT doesn’t double in value
STORE Capital (NYSE: STOR) might not sound like the most exciting venture at first glance. The company buys stand-alone real estate and leases its properties to businesses such as restaurants, furniture stores, and car washes – not exactly one of the tech headlines that have made headlines in recent times. time.
However, it is a very important concept for investors to know that a boring business does not necessarily mean boring. Return. Here’s a quick look at how STORE Capital’s business is and why I think it could double over the next few years – and start over and over again.
STORE Capital in brief
STORE Capital is a net leasehold real estate investment trust, or REIT, which owns single tenant properties occupied by retail, service and manufacturing businesses. (Note that the letters in STORE are in upper case because the name stands for Single Tenant Operational Real Estate.)
At the end of 2020, STORE Capital’s portfolio consisted of 2,634 buildings leased to 519 different tenants. About 65% of the rent comes from companies in the service sector, such as restaurants, health clubs and auto repair shops, to name a few examples. Another 18% comes from retail renters, with furniture and farm and ranch supply stores among the major subcategories. Finally, the remainder comes from manufacturing companies such as metal fabrication shops and food processing companies. Bass Pro Shop, Ashley HomeStore and Camping world (NYSE: CWH) are a few examples of major STORE Capital tenants you may know.
STORE rents its properties to tenants on a triple net basic, which means tenants agree to long-term rental terms with annual rent increases (called escalators) built in. Plus, tenants pay the variable costs of ownership – especially taxes, insurance, and maintenance. All STORE Capital has to do is build a high quality tenant and enjoy years of predictable and growing income.
Tons of growth potential
STORE Capital’s primary method of growth is acquisition, and the company is certainly taking an aggressive approach. In 2020, STORE spent $ 1.09 billion on acquisitions and the company plans to spend at least $ 1 billion this year. Keep in mind that STORE’s total market cap is around $ 9 billion.
It’s no wonder the company is so ambitious. STORE funds its growth strategy through a combination of retained earnings (it pays about 70% of its funds from operations), new shares issued (which raised $ 686 million in 2020) and debt.
And the part financed by debt has a particularly favorable economy. The average capitalization rate, or initial yield, of properties acquired by STORE is over 8%, and the company’s most recent 10-year debt issue came with an interest rate of just 2.75. %. As a long-time REIT investor, I cannot stress enough the winning recipe for value creation.
And while it may not seem viable to acquire over $ 1 billion in real estate annually, you might be surprised. STORE Capital management estimates that there is currently around $ 3.9 trillion in the type of real estate it could potentially acquire.
It won’t double overnight, But…
STORE Capital has only been around for six years and has already produced a total return of 135% for its investors. And that might be just the start. Real estate income (NYSE: O), which has been a 27-year publicly traded REIT with a similar investing style, generated a total return of over 4,000% for its investors during that time period, an annualized return of approximately $ 15. %. A few quick calculations show that the stock has doubled investor money every five years throughout its history.
With excellent management, a very favorable cost of capital and a more aggressive growth strategy than its peers used at similar stages of their growth, there is no reason to believe that STORE cannot deliver the same kind of performance. (or even better) in the long run.