Streetwise for Sunday, June 24, 2018
There is no question that real estate investment trusts (REITs), have been in and out of favor of late. So, should you consider investing in one. Warren Buffett would say yes.
A year ago, Berkshire Hathawayís National Indemnity, a subsidiary of Buffettís Berkshire Hathaway, invested $377 million in the REIT Store Capital (STOR), representing a 9.8 percent stake. Store issued 18.6 million shares in a private placement to National Indemnity at $20.25 per share.
When I wrote about the company a year ago, my earnings estimate for 2017, was $0.80 per share with a projected 12-month share price of $26 as compared to a price back then of $23.11, equating to a 12.5 percent capital gain. So how did the company do? Earnings came in at $0.90 per share and the shares recently closed at $27.08.
Store is a leading triple net lease REIT that owns 2,000 properties across 49 states. The company leases those properties to over 400 customers, with customers operating restaurants generating more than 20 percent of Store Capital’s base rent and interest.
Approximately 75 percent of its lease contracts are investment-grade quality, which means Store is not as exposed to bankruptcies as are some REITs.
Store has generally stayed away from commodity retailers along with service providers that do not require human interaction, such as bank branches.
Instead, it has intentionally weighted its portfolio heavily to service industries, including restaurants, movie theaters, fitness clubs, early childhood education, veterinary clinics and more.
Can Store Capital continue to grow? The company thinks so and I would agree. There are nearly 200,000 customers in Store Capital’s sweet spot, which are service companies and retailers with annual revenue between $10 million and $1 billion. Leasing space is an attractive option financially for many of these potential customers.
The triple net lease structure allows the costs of the property to be passed back to the tenant as if they were the owners, benefiting Store, which in turn can finance a property on favorable terms through a mix of equity and debt.
By obtaining quarterly sales reports from 98 percent of its tenants, Store can measure performance of each individual property. This communication channel provides it with an advantage with which the company can mitigate risk and provide high degree of predictability.
Looking at Storeís first quarter financials, revenues were $125.8 million, an increase of 16.6 percent year-over-year. The increase was driven by Storeís real estate portfolio, which increased from $5.5 billion, representing 1,750 property locations and 369 customers as of March 31, 2017, to $6.5 billion representing 2,000 property locations and 404 customers as of March 31, 2018.
Net income was $50.0 million, or $0.26 per share, for the first quarter of 2018, as compared to $31.4 million a year ago. Net income for the first quarter of 2018 includes an aggregate net gain on dispositions of real estate of $9.6 million as compared to $3.7 million for the same period in 2017.
AFFO increased 22.8 percent to $85.9 million, or $0.44 per share, for the first quarter of 2018, compared to an AFFO of $70.0 million, or $0.43 per share for the first quarter of 2017. The increase in AFFO between years was primarily driven by additional rental revenues and interest income generated by the growth in the Companyís real estate investment portfolio.
Note that two figures used in evaluating REITs are Funds from Operations (FFO), which defines cash flow. It is calculated by adding depreciation and amortization to earnings, subtracting any gains on sales, and is often quoted on a per-share basis. Adjusted Funds from Operations (AFFO) subtracts from FFO any recurring capital expenditures used to maintain the quality of the assets.
My current earnings estimate for Store for 2018 is $0.93 per share with a projected 12-month share price of $29.78, for 10 percent capital gain. There is also a 4.61 percent indicated annual dividend yield.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.