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Mark Roussin

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Summary

  • Berkshire Hathaway added another 5.79M shares in the company during Q2.
  • Well diversified portfolio with no tenant accounting for more than 2.8% of base rent.
  • Exposure to restaurants, health clubs, and theaters is a risk, but I am of the belief these sectors will adapt and return, albeit in different formats.
  • This idea was discussed in more depth with members of my private investing community, High Yield Landlord. Get started today »

STORE Capital (STOR) is once again making headlines for the same reason it made headlines a few years back, the GOAT, Warren Buffett, has once again increased his share count in this net-lease REIT. STOR has been a REIT that I have been not only excited about for some time having written about them on numerous occasions, but it is also one I am heavily invested in personally.

As I mentioned, STOR is a net-lease REIT which means they buy the property and lease the property to single tenants. The tenants are responsible for all the operating costs of the property, including:

Property Tax
Insurance
Maintenance

STORE Capital is built in a similar fashion to that of Realty Income Corporation (O), but due to Realty Income’s superb track record, STOR tends to slide into the shadows. Let me dive into more details about STORE Capital and why I believe they are a great portfolio to own for the next 20+ years.

The Making of STORE Capital
STORE Capital was formed in 2011 by CEO Christopher Volk and was listed on the NYSE in 2014. The word STORE has a special meaning for the company as the acronym

Single
Tenant
Operational
Real
Estate

This is the second go-around for this leadership team as the first they took public, which was later bought by a private investor at a large profit.

As of Q2 ’20, the company leased 2,554 properties to 503 different tenants. Of the 503 tenants, 71% are of investment grade quality.

Source: Q2 Presentation

STOR is up 30% since going public in 2014, but it was up over 100% in February. The company has fallen a great deal due to the ongoing pandemic that has ravaged the US and the global economies.

Focus On Middle Market

A few of the areas that STOR has been able to differentiate themselves has been on their focus on middle-market America, which has limited sources to raise capital at favorable terms. As noted in the company’s Q2 investor presentation, the median tenant revenue is just $54 million, with 73% of STOR tenants having revenues exceeding $50 million.

Source: Q2 Presentation

Do not be misled by the middle-market strategy, as it does result in some higher risk; however, it is important to know that 71% of the company’s leased contracts are investment grade quality.

Here is a look at the company’s top 10 tenants.

Source: Q2 Presentation

No tenant accounts for more than 2.8% of base rent, which corroborates the fact that the company maintains a very diverse portfolio. Diversity amongst property types and tenants.

The company breaks out their customers into three segments: Service, Retail, and Manufacturing. Here is how the company portfolio is allocated based on segment.

Service: 65%
Retail: 18%
Manufacturing: 17%

However, there are some areas of concern within the portfolio that have come to light during the pandemic. Restaurants, both full service and quick service combined make up over 13% of the entire portfolio. In addition, health clubs and theaters make up 5% and 4%, respectively, of STORE’s portfolio. These are well-documented sectors that have been hard hit by the pandemic and will be forced to change their business models moving forward.

Theaters and health clubs have remained closed for the better part of a few months, while restaurants have had to either close for dine in option and offer takeout only or operate at a reduced capacity.

Many in the field have expressed major concerns with exposure to these sectors, but I am of the belief they will adapt accordingly. The American consumer is all about and will continue to be about entertainment. I can see theaters adapting quickly by taking out every two seats to spread out the distance or building more higher end theaters that provide more space and operate at higher margins.

The Buffett Effect

In 2017, Warren Buffett and company, Berkshire Hathaway (BRK.B) purchased $377 million in shares of STOR, which represented 9.8% of outstanding shares at the time. Shares are up roughly 20% since that purchase.

Just last week, 13-F filings showed that BRK.B added some more STOR shares to their portfolio purchasing an additional 5.79 million shares bringing their value to $581 million.

It is always great seeing the Oracle of Omaha dip into a REIT you love!

Investor Takeaway

As I discussed above, STORE Capital is a triple-net lease REIT that focuses on middle market tenants in secondary and tertiary markets. The company has its risks due to the exposure it has to restaurants, theaters, and health clubs during this pandemic, but these are all areas I see returning, albeit in a different fashion once a vaccine is made available.

The company continues to see an improvement in collections as more and more states reopen. The company collected 85% of July rents, which is up sizably from April in which the company collected only 68% of rents.

The stock currently trades at only 12.9x P/FFO, which is 21% under their five year average of 16.5x. The company has increased the dividend 40% since their IPO in 2014, and currently yields 5.42%, well above their five year average yield of 4.3%, again indicating the stock appears undervalued.

I not only believe the REIT sector to still offer plenty of opportunities having yet to recover much from the March drop, but STOR shares are trading at a sizable discount in my opinion. As a long-term hold, I believe shares of STOR are a STRONG BUY.

Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!

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Disclosure: I am/we are long STOR, O, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author’s Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.

Author: Mark Roussin

Source: Seeking Alpha: STORE Capital: A High-Quality REIT To Own For The Next 20+ Years

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