STORE Capital (NYSE: STOR) might not look like the most exciting business at first glance. The company buys freestanding real estate and leases its properties out to businesses like restaurants, furniture stores, and car washes -- not exactly one of the tech stocks that have been getting tons of headlines lately.
However, it's a very important concept for investors to know that a boring business doesn't necessarily mean boring returns. Here's a quick rundown of STORE Capital's business and why I think it could double within the next few years -- and then do it again, and again.
STORE Capital in a nutshell
STORE Capital is a net-lease real estate investment trust, or REIT, that owns single-tenant properties occupied by retail, service, and manufacturing businesses. (Note that the letters in STORE are capitalized because the name stands for Single Tenant Operational Real Estate.)
At the end of 2020, STORE Capital's portfolio consisted of 2,634 properties leased to 519 different tenants. About 65% of the rent comes from service industry businesses, such as restaurants, health clubs, and auto repair shops, just to name a few examples. Another 18% comes from retail tenants, with furniture and farm and ranch supply stores among the top subcategories. Finally, the rest comes from manufacturing businesses like metal fabrication shops and food processing businesses. Bass Pro Shop, Ashley HomeStore, and Camping World (NYSE: CWH) are some examples of major STORE Capital tenants you might know.
STORE leases its properties to tenants on a triple net basis, which means the tenants agree to long lease terms with annual rent increases (known as escalators) built in. What's more, the tenants pay the variable costs of property ownership -- specifically taxes, insurance, and maintenance. All STORE Capital has to do is get a high-quality tenant in place and enjoy years of predictable, growing income.
Tons of growth potential
STORE Capital's primary method of growth is through 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 STORE's entire market cap is about $9 billion.
It's no wonder the company is being so ambitious. STORE finances its growth strategy through a combination of retained profits (it pays out about 70% of its funds from operations), new equity issued (this raised $686 million in 2020), and debt.
And the portion funded with debt has especially favorable economics. The average capitalization rate, or initial yield, on STORE's acquired properties is over 8%, and the company's most recent 10-year debt issuance came with an interest rate of just 2.75%. As a long-time REIT investor, I can't stress enough what a winning recipe for value creation this is.
And while it might not seem sustainable to acquire more than $1 billion worth of real estate on an annual basis, you might be surprised. STORE Capital's management estimates that there's currently about $3.9 trillion worth of the type of real estate it could potentially acquire.
It won't double overnight, but…
STORE Capital has only been around for about six years and has already produced a 135% total return for its investors. And this could be just the beginning. Realty Income (NYSE: O), which has been a publicly traded REIT for 27 years and has a similar investment style, has delivered a total return of more than 4,000% for its investors during that time, an annualized return of about 15%. Some quick math shows that the stock has doubled investors' 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 in their growth, there's no reason to believe STORE can't deliver the same type of performance (or even better) over the long run.