Historical Opportunity for STORE and Other REITs (O, Simon Properties, STAG, MPW)?

No doubt it has been a very tricky year for commercial real estate. Some locations have experienced multiple shutdowns and in general some environments are just plain difficult to manage during a global pandemic. With good vaccine news it seems like there may be a light at the end of a very long tunnel. It looks like we will not be out of the woods until May of next year. So is this the time to pick up some high quality Real Estate Investment Trust stocks? Enter OPPORTUNITY!? This pandemic will not last forever, in fact this may be the beginning of the brutal end as we experience a terrible surge and begin to vaccinate the population. Therefore this may be a perfect time to consider investing in Real Estate Investment Trusts that have been beaten down. Let’s talk STORE CAPITAL. With over 2,500 investment properties, 511 customers, in 49 states, they are well diversified to ride out this storm and thrive when we enter the new normal.

STORE Capital (Ticker: STOR)

1.44/share dividend

4.3% dividend yield

Daycare centers, urgent care facilities, pet boarding and other service oriented businesses. They all require real estate in some form. 2020 has been brutal on many such businesses, but this too shall pass, potentially creating a unique investment opportunity. But who owns and operates that real estate? Enter STORE! In fact the only REIT that Berkshire Hathaway has invested in. Anyone who owns a home/property or has in the past understands how much is involved. A property requires constant management and attention. There are things to fix, maintain and manicure to keep the property in tip top shape. These investments preserve the value and utility of the asset. There is also another big thing about owning property, the capital required to acquire the asset and then maintain it over time. Businesses have to make decisions about real estate. In other words, businesses are no different and almost all businesses require real estate in some form or fashion. Real estate is either needed as a factory, wherehouse, storefront, administrative office space, etc.

Enter STORE (Single Tenant Operational Real Estate)

STORE not only provides the real estate for a business, they also help the tenant/business evaluate and operate the business for positive cash flow. This becomes a win/win relationship where STORE acts as a kind of landlord and business partner/consultant.

Businesses have a choice to make: Do they own or lease the real estate they require to do business?

Sometimes in business (and life) leasing is the better and most economical option. It requires less capital to rent, less maintenance responsibilities and frees up time and capital to focus on other things. This is because capital that would have been used to finance, acquire and manage real estate, can be freed up to invest back into the core business.

STORE Real Estate Investment Trust (REIT)

Store Capital is a highly regarded REIT investment. Warren Buffett’s Berkshire Hathaway is a large shareholder of STORE ticker “STOR”. And with the S&P 500 projected to have a bummer decade ahead, many investors are looking for alternative yet mainstream investments to diversify their portfolios. Essentially, STORE Capital helps a business determine if leasing or owning is in their best interest. If leasing is optimal, then the company can help that business acquire use of the real estate they need to successfully run their business. STORE owns and operates the real estate, charges rent of course, and returns the majority of profits back to shareholders in the form of dividends. Here is a simple example: Let’s say there is a company that sells furniture. It needs a large showroom to display the furniture and space to store the product. The company could sink millions of dollars into acquiring the prime real estate, financing and ongoing debt obligations. Or it can rent this space from Store Capital for a fraction of the upfront and long term costs of ownership. The millions of dollars that would have been required up front can be used to buy more furniture, more advertising, etc. to successfully run a furniture business.

STORE Capital strives to be the businesses “landlord of choice

Berkshire Hathaway (BRK.A, BRK.B) is a 9.8% owner in Scottsdale-based STORE Capital, investing ~$377 million to own shares. STORE simultaneously issued 18.6 million shares of company stock in a private placement to a wholly owned subsidiary of Berkshire Hathaway at a price of $20.25 per share. It is always a big deal to have the vote of confidence of Mr. Buffett himself.

Single-tenant retail locations are good investment properties. That’s especially true for restaurants, where sales have grown well above the national retail average. Enter Store Capital, again one of the most active real estate investment trusts (REITs) involved in buying free-standing single-tenant locations, especially restaurants. Store buys properties, leases them back to business under long term contracts that average 17 years. Their portfolio tallied $3.5 billion las quarter, with 1,175 plus locations in 46 states.

More than a REIT

Store helps business understand the numbers and business fundamentals in a clear and concise manner so they can make the best strategic options. For example, they help businesses value their business, cashflow, expenses, etc. so they can make a sound real estate decision. They assist in calculating the earnings before interest, taxes, depreciation and amortization, etc.

Net lease REITs have high and consistent income generation, coupled with moderate growth and low risk. What does Triple Net Lease mean, it basically means the tenant pays the taxes, repairs/maintenance and insurance on the property, in addition to rent. STORE Capital is one of the best performing net lease REITs around.

“Net lease” or “triple-net” are commonly-used terms to describe freestanding retail property investments. Who owns the Dollar General convenience stores, CVS pharmacies, or even Chevron gas stations? You can own a small slice of the action if you own shares of REIT STOR. Added bonus, STOR is a Buffett Berkshire stock, so you know it has been pretty well vetted by the master himself.

Alternatives to STORE

Realty Income “O”

I am a long term owner of O stock, Realty Income. This is another strong REIT. Realty Income is a high-quality income vehicle for investors with a moderate risk tolerance. A U.S. recession may be in the cards, exposing income investors to growing downside risks.

SEE RELATED: Realty Income “O” REIT

National Retail Properties “NNN

Another widely touted and strong REIT is National Retail Properties. The stock may be a bit high, but it is deemed another good long term hold. Properties remain highly liquid and many are selling for very low cap rates. Liquidity, dividend growth, and dividend coverage all remain rock solid and the company continues to improve efficiencies. NNN once again showed why its long-term shareholders sleep well at night. While occupancy dipped slightly and signs of growth headwinds have appeared, the company continues to operate effectively, which will fuel dividend growth in the future. National Retail Properties is a buy again. The commercial property REIT has excellent portfolio and dividend coverage stats.

Simon Property Group & Medical Properties Trust

Other strong REITs to consider are Simon Properties Group, Medical Properties Trust and Stag Industrials. Those are on our Christmas list this year. Simon (SPG) owns and operate high end malls. Of course they are steering themselves through the storm at the moment, but this has the potential to be a nice long term investment when the waters have calmed again. Medical Properties Trust (MPW) and Stag Industrials (STAG) are plays that work in any environment. Medical properties are probably immune to whatever is happening in the world and STAG owns the distribution centers where all those Amazon boxes are shipped from. *As always, this is not investment advice for any single individual. This article is for informational purposes only and only represents the opinions of the author.  

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