Most retail real estate investment trusts (REITs) focus on developing or owning multi-tenant retail property such as strip malls, outdoor retail centers, or large-scale malls. But STORE Capital Corporation (NYSE: STOR) does things differently, specializing in long-term net leases for single-tenant operational real estate across a number of different sectors including retail, industrial and manufacturing, and service. At a time when retail is drowning, let's take a closer look at who STORE Capital is and whether they're a buy today.
Strong performance despite turbulent times
What sets STORE Capital apart from other single-tenant retail REITs is the quality of their portfolio and tenants. STORE Capital owns 2,587 single-tenant properties in 49 states leasing the properties on long-term net leases to 511 different tenants. Their property portfolio is diverse with roughly 63% of properties falling under the service category, which can include health clubs, movie theatres, restaurants, auto repair and mechanics, or education centers. About 19% of their properties fall under retail and 18% are focused on manufacturing such as food processing, metal fabrication, or other goods manufacturing.
Around 74% of their tenants are quality-grade tenants, with an average lease term remaining of 14 years as of September 30, 2020. Despite many retailers facing record high vacancy rates, 99.6% of STORE Capital properties are occupied and the company achieves a 91% rental collection rate in January 2021.
STORE isn't immune to the negative impacts of the coronavirus and is suffering losses in revenues from the asset classes, including movie theatres and child care centers, among others, which have struggled to reopen and recover. But thankfully, their expansion efforts in 2019 have helped offset losses in 2020, resulting in a 5.9% increase in revenues for the nine months ending September 30, 2020, and a 2.9% increase in adjusted funds from operations (AFFO) year over year.
Can they ride out the storm?
Despite being in a tough economic climate, I believe STORE Capital has a super strong portfolio with a top-notch tenant base and a healthy financial position. The company invested $800 million in 2020 while maintaining a 5x debt-to-EBITDA, which is well within the normal range. Their payout ratio is also within the healthy range at 76% currently, meaning the company is well-positioned to ride out the storm, maintain dividends, and continue to grow. 2021 is a big year for debt maturities, with $246 million being due. But its $144 million in cash and $450 million in revolving credit line, which was repaid in full by the end of September 2020, means it should be able to repay the debt without a problem. The company recently increased its dividend, which means investors can expect just over a 4% return on their money at current trading prices.
With stock prices still trading below pre-pandemic highs, I definitely believe STORE Capital is a buy right now for investors with a higher risk tolerance. Even though the retail market is experiencing unparalleled changes, most of which are negative, I believe STORE Capital is still a buy given the overall health of their portfolio as well as the number of essential tenants and services it contains.