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STORE Capital Stock: A Great Opportunity for a 5.2% Dividend Yield (NYSE: STOR)

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With stocks zigzagging since the war in Ukraine broke out and inflation on the rise, I have been actively looking for stocks that appear to be well protected or at least less exposed to inflation to somewhat protect the portfolio while earning an attractive income .

REITs in general tend to perform better in such phases and so I started to overweight triple net lease REITs in my monthly savings plans. Since the pandemic hit, I started investing in industry leaders like Realty Income (O), STAG Industrial (STAG), WP Carey (WPC) and STORE Capital (NYSE: STOR) and thus generated attractive returns.

I love all 4 of them and still buy them at today’s prices, but right now STORE Capital is the most attractive to me.

What’s going on at STORE Capital?

I covered STORE Capital in August 2020 for the last time. At the time, we were in the middle of the pandemic and the company was on the verge of recovering from the huge hit to its stock price caused by the COVID-19 outbreak. I concluded that the business can only be successful when its tenants are successful and now, about 1.5 years later, that is exactly what has happened. The company has dropped its COVID-19 slides from its quarterly investor presentations, a sign that the pandemic pain is behind them and instead focuses on the various business opportunities ahead.

STORE Capital recently announced that its fourth quarter 2021 earnings were quite spectacular with an easy double beat and improved guidance. Revenues climbed 21% year-on-year and the AFFO forecast for 2022 is significantly above consensus of $2.09 at a midpoint of $2.20. Based on today’s price, STORE Capital is only trading at an AFFO multiple of 13.4x after the last sale.

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Data by Y-Charts

The stock is down 14% year-to-date and this weak performance did not coincide with Russia’s invasion of Ukraine. Despite strong business fundamentals, other factors weighed on the share price during the first quarter of 2022. Late last year, STORE Capital fired Christopher Volk, former CEO and co-founder of the company, for no reason and there was no real reason the company dumped him. There could be some sort of nefarious reason, but that’s subject to speculation. What is clear is that he was one of the driving forces in convincing Buffett to take a large stake in the company and investors began to worry if STORE could do without him.

Further fuel was added to the fire when in early 2022 Josh Brown revealed he had sold shares explicitly citing the former CEO’s sudden departure as the main reason:

He was the founder, he was the architect of the company. I think it will be fine, but I have to make room to do other things. I took a profit. I went short of that stock the last week of the year like Antonio Brown leaving the Meadowlands without my shirt.

Source: Looking for new Alphas

Another drop came when BMO downgraded STORE Capital for “underperforming” citing a substandard portfolio as well as the sudden departure of Mr. Volk leaving “question marks over potential strategy changes”.

For me personally, it’s basically a bunch of noise. I can understand the sudden departure raises a few question marks but STORE Capital had many co-founders and two of them remain on board and there is no suggestion that STORE Capital will fundamentally change its strategy given that with Mary Fedewa , co-founder of STORE , an internal candidate was named CEO.

STORE Capital – Diversified Triple Net Lease Sole Tenant REIT

Store Capital is a triple-net lease REIT that essentially acquires and then leases its properties to tenants. In return, tenants pay all service expenses like maintenance and insurance as well as all taxes. The tenants are essentially responsible for the management of the building and can thus benefit from STORE’s experience in the sector and favorable financing conditions. Engraved in its corporate name STORE which is the acronym of Singest Jchild Ooperational Real Estate, STORE only rents to single tenants using the entire property, as opposed to renting to multi-tenant malls, plazas, or office buildings. That’s not to say they’re typical “mom-and-pop” shops, but neither are they the multi-billion dollar businesses that STORE’s peers have.

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STORE Capital – Customer profile (STORE Capital Investor Relations)

Unsurprisingly, STORE Capital has been relatively hard hit by the pandemic, especially early on, with rental receipts dropping below 70% at one point before recovering quickly. This was primarily due to the fact that many STORE customers had to close businesses as a result of the COVID-19 containment measures, but as soon as businesses started to reopen rent collection rates began to increase rapidly. and have remained above 90% in recent years. a few quarters. The rent deferrals that STORE Capital offered its tenants reached $57.1 million at the end of 2020 and have declined massively since. At the end of 2021, short-term rent deferral agreements entered into in response to the COVID-19 pandemic accounted for $8.3 million, which equates to just under 4% of total annual revenue and is not therefore of greater concern when evaluating the business.

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STORE Capital – Rental income by sector (STORE Capital Investor Relations)

STORE’s top 10 tenants represent 18.4% of annualized base rent spread across 386 properties, with the two largest customers – Spring Education Group and US LBM – accounting for 3% each.

STORE Capital

STORE Capital – Top 10 Customers (STORE Capital Investor Relations)

STORE’s portfolio is dominated by the service sector which is responsible for 65% of the base rent while the retail sector (18%) and the manufacturing sector (17%) have significantly lower shares.

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Geographical diversification of STORE Capital (STORE Capital Investor Relations)

STORE Capital is also very diverse in terms of geography with properties in virtually every US state, although the majority of properties are located to the east and southeast, with the state of Texas assuming the highest share of the basic rent.

As the tide has turned regarding COVID-19 (unless there’s a new, much deadlier variant – fingers crossed that doesn’t happen), it’s time for STORE Capital to set sail for expand its business and continue its strong track record. Regardless of how this change happened, the arrival of Mary Fedewa as the new CEO could be a good time in this regard.

His vision for the next 3 to 5 years is essentially:

The market is huge and so is the opportunity. We estimate that 200,000 companies could use our real estate financing solutions. Right now we have 522 customers. Therefore, the set of opportunities is vast.

Sole-tenant properties have a total addressable market of $3.9 billion and STORE Capital is well positioned to meet market needs by providing tailored financial solutions and building direct, long-term relationships with its clients. It’s time to take this company to the next level now that it has proven that its underlying triple net business model is not relatively recession proof, but also capable of withstanding an unprecedented global pandemic that has forced many of its tenants to close up shop.

What’s in it for dividend investors?

STORE Capital has a long and strong dividend track record, having increased its dividend every year since its IPO in August 2014. Its compound annual growth rate of the dividend from 2015 to present has been 6 .4%. Its latest dividend increases read as follows: 6.9% in 2021, 2.9% in 2020 (COVID-19), 6.1% in 2019 and 6.5% in 2018.

With the exception of the extraordinary year 2020 where COVID-19 forced STORE to cut its dividend growth rate, dividend growth has been comfortably beaten by inflation. Instead of being disappointed with this slow increase in 2020, I was actually very pleased that STORE is one of the few REITs I own that has managed to increase its dividend during the pandemic, which speaks to the strength of its underlying business and the financial health of the business.

Since its IPO, STORE’s dividend has increased by more than 50% and this dividend is safely covered by an AFFO payout ratio of 74%.

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STORE Capital – AFFO Payout Ratio (STORE Capital Investor Relations)

Following the recent sell-off and continued share price weakness, the dividend yield currently stands at 5.2%, which is the highest since November 2020 and comfortably above its average dividend yield. over 4 years of 4.52% and above. the industry median of 4.45%.

Key takeaway for investors

I started investing in STORE Capital in the first quarter of 2020 and have set a goal to expand into a core portfolio position as I am bullish on triple net lease REITs and easy to understand business but powerful from STORE has proven itself over decades. . It is durable and almost guarantees constant and reliable internal growth by design. It is somewhat inflation-protected due to built-in contractual rent indexations and can also withstand a pandemic.

STORE Capital is a prime target for dividend investors looking for high-yielding stocks in the real estate sector. With my investments in Realty Income, STAG Industrial and WP Carey, the portfolio has been well exposed to the real estate sector for decades for me.

At its current price of around $29, STORE is a solid buy for me.