STORE Share: Are 6% Dividends Enough to Buy?

The STORE share more than halved in the crash and is still far from previous highs, even after a substantial recovery. The dividend yield is still correspondingly high today at just under 6 percent. STORE is not the only REIT to suffer in the ongoing corona crisis in March and April. The sale took place in all COVID-19 sensitive industries and sectors on the stock market. Shares in US REITs were particularly hard hit, for example in tourism, geriatric care, retail and commercial rental in general.

STORE Corporation (STOR) mainly rents to service providers, which include restaurants, fitness clubs or cinemas, but also to retailers and the manufacturing sector. STORE’s business model is the acquisition of real estate and its long-term rental. For you as a long-term dividend investor, STORE can be an interesting and lucrative investment if there is a general recovery and STORE is still able to rent its properties on a long-term basis at attractive prices without significant payment defaults.

STORE share
logo STORE Capital logo
country United States
Industry retail trade
Isin US8621211007
Market capitalization € 5.1 billion
Dividend yield 5.9%
Stability dividend 0.92 of max. 1.0
Stability gain 0.95 of max. 1.0

The business model: How STORE earns money

Store is an equity real estate investment trust whose acronym “STOR” stands for “Single Tenant Operational Real Estate”. In contrast to, for example, Realty Income (O), the “Monthly Dividend Company”, STOR mainly finances and rents to small and medium-sized companies (SMEs). Realty Income, on the other hand, is rented out to large chains such as Walgreens or Dollar General.

STOR is one of the few Single tenant REITs. I.e. the property usually has only one tenant who, in addition to the mandatory rent, also pays for the operation of the property and all other maintenance costs such as insurance, taxes and maintenance. As a rule, these rental contracts are long-term, which makes the cash flow reliable and predictable, as it increases automatically over time due to the graduated rents often built into these contracts.

Basically, it’s one of the simplest business models you can think of. Companies like STORE finance the purchase of lucrative and attractive properties and rent them out. The delta between financing costs and rental income minus other expenses is booked as a profit. As rents rise over time due to the built-in staggered rents and financing costs remain stable thanks to the predominantly fixed-rate loans, income gradually increases over time.

STORE owns over 2,500 properties in the United States with over 490 different tenants in over 110 different industries and one Occupancy rate of over 99%. STORE is thus broadly diversified in almost all states in the USA with a geographical concentration in the metropolitan areas on the east and west coast, Texas as well as in the Detroit and Chicago area.

Geographically diversified portfolio with a consistently high occupancy rate

Geographically diversified portfolio with a consistently high occupancy rate

STORE’s portfolio is divided into three large segments: Service (65%), Retail (19%) and Manufacturing (16%). Restaurants and preschools have the largest share in the service sector, which are responsible for around 20% of the rental income of the entire portfolio and comprise more than 800 properties. The retail segment is dominated by furniture stores and markets for agriculture, hunting and fishing, which generate around 11% of rental income. The manufacturing segment mainly consists of the metal and plastic processing industry as well as tenants from the food industry.

Annual report 2019

The corona crisis led to numerous temporary closings of entire industries, which resulted in heavy rent losses from the end of March. Before COVID-19, the most important measure for evaluating a REIT was not revenue or profit, but funds from operations (FFO). The profit is not a sensible quantity, since REITs are heavily burdened by high depreciation on real estate assets. Real estate depreciation does not reflect an actual loss in value, nor does it cost the REIT real money. Therefore, the recognized profit is not suitable for measuring how much cash a REIT generates on the bottom line, after all, the dividend is financed by real money. The FFO, on the other hand, is calculated by adding depreciation and amortization to the income and then subtracting all profits from sales. This is also the more meaningful size to evaluate REITs – more on that later.

In times of COVID-19, the FFO continues to play an important role. However, the level of lost rent is even more important at the moment. STORE provides monthly updates and reported rental coverage of 70% in April and 67% in May. In other words, STORE received slightly more than 2/3 of the contractually agreed rent for these two months. Almost ¾ of the loss of rent is attributable to the six core industries of restaurants, preschools, furniture stores, fitness studios, cinemas and entertainment.

The impact of COVID-19 depends on whether the company is pandemic-proof or not

In the long run, rent losses of almost a third are fatal and a good example of the immense economic damage caused by the pandemic. The still relatively high rent cover is presumably due to the fact that the pandemic has a delayed impact on tenants’ business and thus the ability to pay rent. The longer stores remain closed or customers stay away), the more likely it is that tenants who are still solvent will also be in trouble. For example, “social distancing” measures when restaurants are open mean that the same number of tables as before the outbreak is not filled.

Rent is usually the largest or second largest item in spending and a correspondingly large burden in the struggle for survival.

STORE, on the other hand, has no interest in losing its tenants, who were actually solvent but were affected by Corona. One option is a rental discount. Because for STORE, a lower rent is of course better than no rent at all. Especially because it is not at all certain that STORE would find new tenants in the current situation. Due to the precarious situation, STORE publishes the monthly updates, which show the development of the monthly rental income and STORE provides a general assessment of the current situation.

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