Amazon Did Not Kill The Mall Yet? – $SPG, $O, $STOR

The Sky is Falling!

Once again, let’s look back a year ago. The world was ending, we had no idea what was going on. Contrast that today by just driving around and observing things in the US. In most cities, people are out shopping, dining, working, going to school etc. Sure, there are some added precautions, but things are really starting to normalize.

The End of the Mall

We heard that malls were dead. Our future was 100% online with Amazon trucks all day long. sSure, Amazon was a big winner of the Pandemic lockdown, but the mall is far from dead, especially high end destination type places.

REIT Recovery Play

The low hanging fruit of cheap REIT’s is probably past, but high quality REIT’s could be a nice hedge against volatility, inflation and add some growth. I also like certain REIT’s because they provide pretty reliable income. Here are a few REIT’s of note:

Simon Property Group

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. From CNBC interview with the CEO of SPG:
The biggest U.S. mall owner Simon Property Group says shoppers are getting back to malls, but that it’s hard to predict what traffic trends are going to look like one year from now. Simon Property CEO David Simon said Monday that sales and shopper visits are improving week over week, but it is still being conservative in its outlook because it’s difficult to know what’s going to stick versus what’s a short-term boost, he said. “Between being cooped up, between being locked down, between the stimulus, between celebrating that the country is still around … there’s clearly some level of euphoria around that,” David Simon said during an earnings conference call Monday
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!?

STORE Capital (Buffet’s REIT)

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.

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.

Realty Income is a 4%+ monthly dividend with 6,600 properties and a 98% occupancy rate. In other words, O is a dividend investors dream.

SEE RELATED: Realty Income “O” REIT

From Market Beat:

Realty Income Co. (NYSE:O) was the recipient of a significant growth in short interest in May. As of May 14th, there was short interest totalling 15,200,000 shares, a growth of 26.9% from the April 29th total of 11,980,000 shares. Based on an average trading volume of 3,110,000 shares, the days-to-cover ratio is currently 4.9 days. Shares of  O opened at $69.35 on Wednesday. Realty Income has a fifty-two week low of $56.33 and a fifty-two week high of $71.84. The stock has a market capitalization of $25.90 billion, a price-to-earnings ratio of 71.49, a price-to-earnings-growth ratio of 4.95 and a beta of 0.73. The company has a debt-to-equity ratio of 0.74, a current ratio of 2.45 and a quick ratio of 2.45. The business’s 50-day simple moving average is $66.66. Realty Income (NYSE:O) last issued its earnings results on Sunday, May 2nd. The real estate investment trust reported $0.26 EPS for the quarter, missing the Zacks’ consensus estimate of $0.30 by ($0.04). The firm had revenue of $442.80 million during the quarter, compared to analysts’ expectations of $413.59 million. Realty Income had a net margin of 20.51% and a return on equity of 3.17%. Realty Income’s quarterly revenue was up 6.9% on a year-over-year basis. During the same quarter in the prior year, the company earned $0.88 EPS. As a group, equities analysts expect that Realty Income will post 3.44 earnings per share for the current year. *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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