Streetwise for Friday, June 30, 2017
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.
In case you missed the announcement, Store Capital (STOR), a REIT, recently announced that Buffett through Berkshire Hathaway’s National Indemnity subsidiary, invested $377 million in Store, a 9.8 percent stake. Store issued 18.6 million shares in a private placement to National Indemnity at $20.25 per share.
Store is a leading triple net lease REIT that has 1,750 properties with 369 customers and generates approximately 17 new customers quarterly. The average transaction size is below $9 million. AMC Entertainment, Applebee’s and Ashley Furniture are among its 10 largest 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. In turn, Store can finance the property on favorable terms through a mix of equity and debt.
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.
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 some recent financials, for first quarter of 2017, ended March 31, Store reported revenues of $108.0 million, an increase of 26.7 percent over the same period in 2016. During the quarter, Storeís real estate portfolio went from $4.3 billion, representing 1,397 properties, to $5.5 billion representing 1,750 properties.
Net income was $31.4 million, or $0.19 per share for the first quarter of 2017, an increase of 26.6 percent over 2016. Net income includes such items as gain or loss on dispositions of real estate and the provision for impairment of real estate.
Adjusted Funds from Operations (AFFO) was $70.0 million, or $0.43 per share, an increase of 25.3 percent over 2016. The increase in AFFO was primarily driven by additional rental revenues and interest income generated by the growth in the Company’s real estate investment portfolio. The company declared a regular quarterly dividend of $0.29.
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.
During the first quarter, Store invested $420.7 million in 95 properties at a weighted average initial capitalization rate of 7.7 percent. In March, the company sold $135 million of A+ rated net-lease mortgage notes under its Store Master Funding debt program. It also closed a $100 million two-year unsecured bank term loan which has three one-year extension options.
Finally, the company raised $271.1 million of equity representing approximately 12.0 million shares from an at-the-market equity program and a follow-on stock offering completed on March 31, 2017.
Store has one of the lower payout ratios at 66 percent of AFFO. The company has paid its current $0.29 dividend for 4 quarters and will likely raise it in September. For each of the two previous Septembers, Store has raised its dividend by $0.02 per share. If management does this again in September, the indicated annual yield would be 5.9 percent with a AFFO payout ratio of about 70 percent.
My current earnings estimate for 2017, is $0.80 per share with a projected 12-month share price of $26 as compared to a recent price of $23.11, for 12.5 percent capital gain.
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.