The COVID-19 pandemic had a deep impact on the real estate market, and businesses with brick-and-mortar operations are still dealing with the repercussions. The industry is recovering, though, and segments of the commercial real estate investment trust (REIT) space are faring far better than many had expected.
One such example is STORE Capital (NYSE:STOR), which is closing back in on all-time highs last notched back in late 2019 and offers a 3.9% dividend yield at Friday’s prices. If dependable income and gradual appreciation of real estate value are what you’re after, STORE is worth a look.
Steady progress toward normal
STORE is a triple-net-lease property owner (meanings its tenants are usually responsible for property tax, insurance, and maintenance). It operates in the single-tenant real estate mid-market, defined as properties with values of less than $50 million. Economic lockdowns last year put a serious burden on STORE’s tenants, and many of them had to reach rent deferral agreements until they were able to reopen and business started to normalize again.
Now a year removed from the start of this whole mess, this real estate portfolio is doing just fine. Rent collections were back up to 95% as of April (after briefly dipping below 70% last year), with those tenants not paying still under deferral agreements. And thanks to a pipeline of property acquisition, total revenue actually increased to $182 million in the first quarter, up 2.5% from the same period the year before. Adjusted funds from operations (or AFFO, the REIT equivalent of earnings) were up 4.3% to $125 million. AFFO per share was $0.47 compared to $0.49 a year ago, since REITs like STORE Capital issue new shares (and dilute funds from operations) to purchase new properties.
Nevertheless, STORE is nearly back to where it was pre-COVID-19 as far as profitability goes, and the dividend is well covered by AFFO since the dividend payout only cost $98.2 million in Q1. This is a REIT payday you can trust, with plenty of room for the payout to rise over time as STORE grows.
Adjusting the portfolio for a post-pandemic world
STORE is a relative newcomer in the REIT space, a publicly traded entity since only 2014. It was expanding quickly in the underserved mid-market commercial real estate realm, and is now back to its acquisitive ways. During the first few months of 2021, it invested $271 million in 66 new properties and sold 44 (for a total net gain of $15.7 million over the original purchase prices). This portfolio activity resulted in 11 new customer relationships, bringing STORE’s total customer count to 522 as of March and total property count to 2,656. And with a total portfolio value of $9.7 billion at the end of Q1, STORE is still a tiny fraction of the commercial real estate industry.
Some post-pandemic changes were necessary, though, and STORE is adjusting. Restaurant tenant exposure was reduced to just 12.2% of total rent and interest income, compared to 14% last March. Manufacturing tenants have increased, up to 18.5% of rent and interest compared to 16.4% last year. Given the infrastructure spending bill being planned in Washington, D.C., right now, this is a good place for STORE to ramp up exposure for the coming decade.
One area of particular worry has been the movie theater business, which still made up 3.7% of the rent total in Q1. AMC is STORE’s largest theater tenant here at 1.4% of the company’s total rent and interest income in Q1. It’s a tiny piece of STORE’s portfolio, but nevertheless has been a sore spot given the lack of box office activity in the last year. That started to change in May, though, with some fresh movie releases coming out. AMC’s recent fortunes due to its meme stock status and skyrocketing share price bode well for STORE too, since theater rent collection might pick up in earnest again soon.
In short, STORE Capital is on solid footing, and is back in growth mode as the effects of the pandemic ease. This is a slow-and-steady dividend play that could also provide some extra oomph in the years ahead if commercial property values increase. Trading for a little under 19 times expected 2021 AFFO per share and yielding 3.9% a year, this is a solid bet for investors looking for dividend income.
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