One of the nice things about REITs is that they allow investors to buy assets that can be very niche in nature. Examples of variety include asset class, asset type, targeted region, etc. A great example of a niche REIT is Capital Corporation STORE (NYSE: STOR). With a market capitalization at the time of writing of this article of $7.64 billion, STORE Capital is not that big. However, the company has a large physical footprint across the United States and emphasizes a particular type of ownership. Over the past few years, management has done a great job increasing the company’s revenue and increasing its cash flow. Normally a high quality trader like this would have a high multiple. But when you really dig into the numbers, the company’s stock seems to be trading cheap.
STORE Capital – An attractive REIT with upside potential
According to STORE Capital’s management team, the company operates as an internally managed net-lease REIT that focuses on acquiring, if not investing and managing, single-tenant operational real estate. For the most part, the company provides real estate to mid-market businesses and large corporations, with mid-market businesses defined as those with annual gross revenue between $10 million and $1 billion, while large companies exceed this threshold. Many of these companies are trying to optimize their capital to grow. At the same time, whether due to size issues or some other reason, there is a strong desire to have their own dedicated space in which to do business.
To better understand the company, it would be wise to analyze its portfolio. For starters, the company currently has an interest in 2,965 different properties with a combined space of 103.52 million square feet. Approximately 64.1% of the company’s base rent and interest is attributable to service-oriented properties such as restaurants, early childhood education centers, automotive repair and maintenance facilities, clubs healthcare, pet daycares, lumber and building materials wholesalers, etc. 15.7% of revenue comes from retail outlets such as farm and ranch supply companies, furniture companies and others. That still leaves 20.2% of revenue coming from manufacturing operations, with the largest group being metal fabrication.
Geographically speaking, the company is quite diverse. With the exception of Hawaii, the company has assets located in every state in the United States. The most exposed state is Texas. It accounts for 11.2% of the company’s base rent and interest, with 350 of its properties located there. The second largest state is Illinois with 6.1% and 181 properties. It is followed by California at 5.8% with 80 properties. Other important states include Georgia, Florida, Wisconsin, Ohio, Arizona, Tennessee and Michigan. A brief discussion regarding the nature of the company’s leases is also appropriate. Most of the company’s leases are actually long-term. By the end of 2026, leases representing only 4.4% of base rent and business interest will expire. Properties representing 77.9% of its base rent and interest only see their leases expire after the year 2031. This provides significant stability for shareholders going forward.
Over the past few years, the management team at STORE Capital has done a very good job of growing the business. Revenues increased from $452.8 million in 2017 to $782.7 million in 2021. This is largely due to the increase in the number of properties the company owns. In 2017, the company ended the year with 1,921 properties nationwide. By the end of 2021, this number had increased to 2,866. During this same period, it is also worth noting that the company has recorded a consistently high occupancy rate. Using year-end data, the low point was 99.5% occupancy, while the high point was 99.7%. The growth of the company continued during the current financial year. Last quarter revenue was $222.1 million. This is 21.8% more than the $182.3 million reported in the same quarter last year. For 2022 as a whole, management did not provide detailed revenue guidance. But they said they plan to make acquisitions in addition to divestitures of between $1.3 billion and $1.5 billion. This should definitely increase revenue year over year.
In the end, things were also quite positive. Cash flow from operations fell from $309.4 million in 2017 to $583.4 million last year. If we adjust for changes in working capital, this metric would have gone from $307.8 million to $541.1 million. FFO, or funds from operations, increased from $283.9 million to $509 million. The adjusted FFO metric increased at a similar pace, from $306.1 million to $554 million. And finally, we have EBITDA. This metric eventually went from $415 million to $701.6 million.
Similar to revenue, the growth in profitability for the business extended into fiscal 2022. Cash flow from operations fell from $123.9 million to $160, $9 million. The adjusted figure for this went from $123.5 million to $159.9 million. The FFO went from $108.1 million to $154.7 million, while the adjusted figure for it went from $125.2 million to $157.8 million. And finally, EBITDA went from $104 million to $206.1 million. The only direction given by management for net income was that adjusted FFO would be between $2.20 and $2.23 per share. Halfway through, that implies a reading of $621.5 million. If we assume that other measures of profitability will increase at the same rate, then FFO should be around $571 million. Adjusted operating cash flow is expected to be approximately $607 million, while EBITDA is expected to total approximately $787.1 million.
Using this data, we can price the business. At first glance, you might think that a high quality trader like this is trading at a high multiple. But that was not the case. Using 2021 results, the company trades at a price to adjusted operating cash flow multiple of 14.1. The price at the FFO multiple is 15, while the price at the adjusted FFO multiple is 13.8. The highest multiple is that of EV to EBITDA. It comes in at 17.3. If we use our estimates for 2022, stocks look a bit cheaper. These multiples reduce to 12.6, 13.4, 12.3 and 15.4, respectively. To put the company’s price in perspective, I compared it to five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 11.3 to a high of 17.3. Using our 2021 results, we can see that only one of the five companies was cheaper than STORE Capital, while another was on par with it. Using the EV to EBITDA approach, the multiples ranged from 8.7 to 30.7. In this case, two of the five were cheaper than our prospect, while another was tied with him.
|Company||Price / Operating Cash||EV / EBITDA|
|PS business parks (PSB)||17.3||30.7|
|DigitalBridge Group (DBRG)||11.3||30.7|
|Broadstone Net Lease (BNL)||14.1||17.3|
|Essential Properties Real Estate Trust (EPRT)||15.4||19.3|
|American Asset Trust (AAT)||15.8||15.9|
Based on all the data provided, STORE Capital definitely emerges as a quality operator in the world of REITs. The company has an attractive track record of growing revenue and earnings and the shares are trading at levels that look quite affordable. The company is also posting a year-to-date return of 5.64%. This should help investors anticipating tough times ahead. Ultimately, these factors led me to rate the company as a solid buying opportunity at this time.