Real estate investment trust (REIT) STORE Capital (NYSE: STOR) has only been a public company since 2014. That's not a particularly long history for investors to go by, but the company's success so far is worth considering. That's especially true given the difficult backdrop of 2020. Here's why this dividend payer will likely hit a big milestone in the next five years.
Hard to tell
When a company has just recently gone public, there are a lot of unknowns to deal with. Management can talk up a good game but then fall short of the story they have been selling to investors.
That was a big issue with STORE Capital, which went public after the deep 2007 to 2009 recession and had, basically, only operated in a strong economic environment. At least until 2020, when the coronavirus pandemic put this REIT's business model through a major stress test.
Don't underestimate the value of this event. You learn more about a company by what it does when the chips are down than by what it does when times are good. STORE Capital, basically, took the coronavirus pandemic in relative stride.
At its worst, rent collections fell into the high-60% range last year but quickly bounced back to the mid-80% area. By October, rent collections were back up to 90%. Notably, management provided frequent updates so that investors were well aware of what was going on in the portfolio.
Then there was the dividend. REITs are specifically designed to pass income on to investors, so this is one of the most important things to watch. STORE Capital didn't cut its dividend, as many other REITs were forced to do. In fact, it increased its dividend in the third quarter of 2020 by a penny a share. That was a relatively modest hike, but the statement was huge. (For reference, the dividend also increased in Q3 2021, this time by nearly 7%.)
The future from here
STORE Capital's business model is pretty simple. It is a net lease REIT that likes to originate its own deals, meaning it buys single-tenant properties from a property owner and then instantly leases the building back to the seller. Usually, there's a long-term lease with regular rent escalations built in, and importantly, the lessee is responsible for most of the property's operating costs.
It's generally considered a low-risk way to invest in the real estate sector, and STORE Capital has done a very impressive job of building its portfolio this way. To put a number on that, the REIT started its public life in 2014 with around 850 properties, but today has around 2,700. Although growth becomes more difficult to achieve as a property portfolio's size increases, STORE Capital is likely to keep getting bigger over the next five years.
That's great, and basically, it's what investors should be hoping for. However, you need to couch that in some history, specifically 2020. Until the pandemic, there was no way to know what would happen when times got tough here. Now, there's a track record of what to expect when adversity strikes, as it inevitably does, and it's a good one.
Basically, even when times get tough, investors should expect STORE Capital to keep executing well and rewarding shareholders along the way, even if it's just by a token amount.
Which brings the story to the really notable thing that's likely to occur in the next five years. STORE Capital will probably string together 10 consecutive years of dividend increases, allowing it to reach Dividend Achiever status.
That's a big milestone and one that some income investors use to screen for dividend stocks. The idea being that if a company can hike its dividend for a decade, it has proven that it is a reliable dividend payer. Given this REIT's ability to get through 2020 without skipping a dividend beat, there's little reason to believe it won't be able to hit this mark, and more, in the future.
The yield history for STORE Capital is fairly short, given its only been public since 1994. However, the current 4.1% dividend yield is at the low end of its range and, interestingly, right in line with industry giant and bellwether, Realty Income. That's actually a pretty big statement about how investors view STORE Capital.
Value-conscious investors probably won't be interested in this REIT today, but if you are willing to pay for quality, 2020 allowed STORE Capital to prove its model's durability. At the very least, this is one REIT that should be on your watch list in case a broader market pullback opens up a buying opportunity.