Is This Blue Chip Retail REIT a Buy?
IIncome investors have been through a rough patch in recent years. With the S&P 500 Set to close this year at a new all-time high, it remains difficult to find stocks offering sustainable returns.
This does not mean that it is impossible to discover quality stocks with high dividends. An example is the Real Estate Investment Trust (REIT) STORE Capital (NYSE: STOR). But just because it’s quality stock doesn’t mean it’s time to buy stock. A few other factors should also be looked at to see if the stock price qualifies. Let’s take a look at its fundamentals and valuation to see if this blue chip REIT is a buy.
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Solid and improving operational fundamentals
Before reviewing its recent operating results, it would be helpful to better understand the business model of the company.
STORE Capital owns and leases nearly 2,800 properties in 49 US states to more than 500 tenants. All leases are subject to triple net leases, which means that the tenants of STORE Capital are responsible for the expenses associated with the leased properties. These expenses include property taxes, building insurance, maintenance and utilities, as well as the amount of base rent paid to STORE Capital.
Two factors make STORE Capital’s business model even more attractive. The first is that the weighted average remaining term of the company’s leases is 13.5 years, which should provide STORE Capital with a steady stream of long-term income. Second, the weighted average annual escalation of the company’s leases is almost 2%. When the leverage of the company is adjusted, this translates into an annual growth in adjusted operating funds (AFFO) of 2.5% per share before considering reinvesting the retained cash flow to acquire more. properties.
STORE Capital reported AFFO’s $ 0.52 per share in the third quarter, an increase of 13% from the previous year. Fewer leasehold properties closed (1.4% vs. 1.9% in the period last year) due to the country learning to live with COVID-19 was one of the catalysts for this growth. In addition to the integrated lease escalations, another catalyst was the 7.8% year-over-year increase in the company’s real estate portfolio due to acquisition activities.
STORE Capital’s admirable third quarter results led the company to raise its outlook for this year to a median AFFO per share of $ 1.99. This is important because it would represent a full recovery to AFFO levels per action before COVID.
And looking ahead to next year, STORE Capital expects its lease escalations and continued real estate acquisitions to lead to $ 2.18 in mid-term AFFO per share. This equates to a growth rate of 9.3% over this year and 2019.
Secure payment better than the market
Since STORE Capital’s 4.5% dividend yield is slightly above the Diversified REIT industry average of 4.1%, it would be wise to assess whether the dividend is safe or is likely to be reduced.
Against the $ 1.47 per share dividend that was paid this year, STORE Capital’s AFFO payout ratio per share will be 73.6% at its midpoint of AFFO per share of $ 1.99. This gives STORE Capital a lot of retained capital to make future acquisitions and increase its AFFO per share. Such a payout ratio also leaves the company a buffer large enough to withstand any temporary decline in profitability.
This explains why STORE Capital was confident enough to distribute a 6.9% increase in its quarterly dividend to shareholders in September. Overall, the stock’s dividend appears to be pretty secure, while the yield is more than three times the S&P 500’s 1.3% dividend yield.
The share price is reasonable for income investors
STORE Capital seems to be ready for an impressive year 2022. But is the valuation attractive enough for income investors to buy the stock?
At its current price of $ 34, STORE Capital is trading at a multiple of AFFO futures per share of less than 16. Since STORE Capital can realistically compound its AFFO per share at a rate of 6% per year in the future. predictably, that seems like a reasonable estimate.
As a result, I would say that STORE Capital is currently a buy for investors looking for immediate income that will almost certainly continue to grow in the years to come.
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Kody Kester is the owner of STORE Capital. The Motley Fool recommends STORE Capital. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.