STORE Capital (NYSE:STOR) is trading cheaply – again. As has become common for this net lease REIT (‘NNN REIT’), market volatility has presented an attractive entry point for dividend investors. The stock is offering a generous 5.6% dividend yield that is backed by consistently growing cash flows. STOR has been increasing the credit quality of its portfolio, but that improvement has not led to improvements in its stock price. I can see the stock re-valuing toward a lower yield – the stock presents a compelling opportunity today.
STOR Stock Price
STOR is not a tech stock, but it shares the same characteristic of still trading at the same levels of several years ago.
I last covered STOR last November, when I rated the stock a buy while still noting that there may be better buying opportunities elsewhere. Given where tech stocks trade today, my assessment still applies, but STOR stock has also become even more compelling than then.
STOR Stock Key Metrics
In this past quarter, STOR grew adjusted funds from operations (‘AFFO’) by 21% to $0.47 per share, largely due to 2021 seeing most of its acquisition activity in the second half of the year. The company raised full year guidance to up to $2.23 in AFFO per share, representing 8.8% growth over 2021 (prior guidance was $2.22 and initial guidance was $2.20). Leverage remained elevated at 5.7x debt to EBITDA, which was due to the fact that the company funded its 2021 acquisition activity in large part with debt. We can see the acquisition and disposition activity below. While cap rates have come down, STOR has done a good job in sustaining a 7.1% cap rate and its 1.8% lease escalators.
One thing to note is that disposition activity has been rather high as of late, totaling 17% of acquisition activity over the past three quarters. I view elevated disposition activity to be a sign of potential credit underwriting issues, as it indicates a need to recycle underperforming properties in favor of new investments. In comparison, best-in-class operator Realty Income (O) historically sees dispositions totaling only a single-digit percentage of acquisitions.
I stress through the keyword “potential,” as STOR still maintains a solid credit profile. Since two quarters ago, the company has begun disclosing the credit health of its tenants with greater granularity – we can now see that approximately 9% of its tenants have fixed charge coverage ratios over under 1x.
Yet we can also see that the company has seen steady improvement in its weighted average FCCR, with its 4-wall FCCR standing at 4.7x – higher than the 4.0x from just a year ago.
Looking forward, investors should hope for disposition activity to decline in relation to acquisition activity, if only because it would reduce the potentially dilutive effect that dispositions have on overall growth.
Is STOR Stock Undervalued?
At least based on historical dividend yields, STOR looks very compelling here. Outside of the pandemic crash in 2020, the stock is trading at its highest yield since 2017.
I do not view REITs to be “never sell” kind of stocks due to the highly visible albeit modest growth rates. Instead, I view REITs to be best bought only when the yields are attractive because the multiple expansion potential helps improve the overall total return potential.
Is STOR Stock A Buy, Sell, Or Hold?
In comparison with other NNN REITs, some investors might consider STOR to be of higher risk due to the elevated acquisition cap rates. In contention, I’d point out that STOR performed very well during the pandemic lockdowns even while most retail REITs were having issues with credit quality. Furthermore, STOR offers additional attractive properties including one of the longest weighted average lease terms in the sector.
A long average lease term is beneficial because NNN REITs typically do not generate strong leasing spreads upon expiration.
Looking forward, STOR expects to generate at least 5% growth in AFFO per year.
Combined with the current 5.6% dividend yield, that suggests double-digit return potential even without multiple expansion. I can see the stock trading up to a 4% dividend yield, which would represent another 29% potential returns from multiple expansion. If one ever wants to invest in STOR, this is as attractive a time as any. Key risks include both credit quality and the rising interest rate environment. While STOR has not yet shown any credit weakness, it is always possible for weakness to emerge in the future. NNN REIT investors are unlikely to forget the credit weakness seen at Spirit Realty (SRC) a couple of years ago, when its largest tenant Shopko was facing immense financial difficulties. That said, Shopko made up nearly 8% of SRC’s total rent at the time, while STOR’s largest tenant made up only 3% of total rent. The rising interest rate environment has the risk of increasing STOR’s cost of capital, which would decrease its ability to grow through external acquisition activity. It is not clear if cap rates on acquisitions would immediately increase by the same amount, as cap rates have been declining over the past several years (arguably due to competition). Over the long term though, the business model should still allow for solid growth as cap rates adjust. I view NNN REITs to have far less exposure to a weak economy than retail REITs as they do not have exposure to underlying sales like shopping centers or mall REITs, and their tenants tend to be less cyclical in nature. I rate STOR a strong buy due to the high yield and potential for multiple expansion, though once again stress that better buying opportunities may be found in the high growth tech sectors.