Net-lease real estate investment trusts (REITs) are often thought of as solid retirement investments. Their tenants generally sign long-term leases and agree to cover the variable expenses of owning properties, particularly property taxes, maintenance, and insurance. And they agree to annual rent increases known as escalators. All of this is a recipe for predictable income that grows over time. Add in that fact that most net-lease REITs pay above-average dividends and it's easy to see why they could be a good fit for retirement portfolios.
However, STORE Capital (NYSE: STOR) has performed terribly during the COVID-19 pandemic, which is concerning for a company whose business model is supposed to perform well in any economic climate. Here's a look at why STORE Capital has been such a laggard in 2020 and whether it could be a smart addition to your retirement portfolio, especially at the current beaten-down price.
Why has STORE Capital performed so poorly?
Even after strong performance in recent months, STORE Capital is down by more than 31% in 2020. Compare this with a 16% decline in fellow net-lease REIT Realty Income (NYSE: O), which has a similar focus (mostly retail, with about 20% of the portfolio occupied by other types of commercial tenants).
The reason for the lousy performance has to do with STORE Capital's tenant base. Specifically, about one-third of STORE's rental income comes from tenants in industries that have been severely impacted by the COVID-19 pandemic -- restaurants, day care centers, health clubs, movie theaters, and family entertainment centers. Most of these businesses were either closed or operating on a very limited basis throughout much of the early months of the pandemic.
Should investors be worried?
Not surprisingly, many of these tenants didn't pay rent during the shutdowns. STORE Capital's rent collection fell to under 70% of billed rent in May, which was certainly a cause for concern.
However, things are starting to get better fast. The company recently announced that 93% of its tenants are open for business (most of those that are still closed are in the movie theater category). And rent collection has rebounded to 86% in both July and August. What's more, much of the collected rent is deferred -- meaning that STORE should be able to recover a substantial amount of it eventually.
In STORE Capital's recently released second-quarter 2020 results, the company's adjusted funds from operations (FFO, the REIT version of earnings) came in at $0.44 per share. STORE's dividend yield is $0.35 per quarter. So even in the depths of the pandemic, with a substantial percentage of tenants not paying rent, the company not only remained profitable but earned enough to keep paying its dividend with room to spare. That's a sign of a strong margin of safety.
While it's not a good idea to buy a stock just because a billionaire investor does, it's worth noting that Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the conglomerate led by Warren Buffett, just increased its investment in STORE by 31%. STORE Capital remains the only real estate investment trust in Berkshire's portfolio, and the conglomerate now owns nearly 10% of it.
A good fit for a retirement portfolio?
The bottom line is that while STORE Capital has been affected by the pandemic to a greater extent than many of its net-lease peers, it could still be a smart addition to a retirement portfolio. The vast majority of STORE's tenants should emerge from the pandemic just fine, and the company should be able to collect a substantial portion of missed rent.
At the current price, STORE trades for less than 13 times trailing 12 months (TTM) FFO and pays a dividend yield of about 5.6%. While the stock could be rather volatile for the next couple of years as the effects of the pandemic play out, the risk-reward profile makes a lot of sense at the current valuation.