This year, Real Estate Investment Trusts (REITs) have been on quite the ride as the pandemic ravaged the commercial real estate industry. Since many retail businesses were forced to close up shop during the onset of the pandemic, collecting rent payments became a big issue for REITs during the first half of the year. This uncertainty led to large selloffs in the REIT sector that had many investors running for the exit. With that said, things are starting to look up for some retail businesses and REITs as lockdowns ease up and people begin heading out again.
REITs can be very attractive because they are known to offer stable cash flows, diversification, and long-term capital appreciation. STORE Capital Corporation (NYSE:STOR) is a REIT that looks intriguing at this time as it continues recovering from March lows. It’s a strong income-generating investment that stands out in a sector that has seen better days. Below, we are going to take an in-depth look at STORE Capital and why it might be worth a look for your portfolio.
Single Tenant Operational Real Estate (STORE)
Due to so much uncertainty and potential downside for the commercial real estate market, investors should really dive into the types of properties that a REIT owns before buying. That’s because if tenants can’t pay their rent, the company’s earnings will suffer and you might end up dealing with a dividend cut. STORE Capital Corporation is primarily focused on acquiring and managing a diverse portfolio of single-tenant operational real estate properties including things like retail and service industry properties. It is a net-lease REIT, which means that tenants sign long-term leases and pay for their own property taxes, insurance, and maintenance. This lowers the risk for STORE Capital and allows it to collect predictable income throughout the duration of each lease.
About a third of the company’s portfolio was hit hard by the pandemic including restaurants, movie theaters, fitness clubs. However, investors will be encouraged by the fact that 93% of STORE’s tenants are currently open for business and rent collections have rebounded to 86% in both July and August. Movie theaters only account for 5% of STORE’s rent and most of its tenant base will hold up well during a recession. For example, things like auto repair businesses, maintenance facilities, and daycare centers will always have demand. The company’s earnings have taken a big hit during the first half of the year and the stock is down roughly 20% year-to-date, providing an attractive entry for investors with a long-term view.
The Only REIT in Berkshire Hathaway’s Portfolio
Just because Warren Buffett buys something doesn’t mean that you should blindly invest in it too, but it’s always nice to see that the legendary billionaire investor is interested in a stock you are looking at. That’s exactly the case for STORE Capital. It’s currently the only REIT in Berkshire Hathaway’s (NYSE:BRK.B) portfolio which is a good sign if you are interested in REITs but are a little concerned about how they are holding up in the pandemic.
In Q2, Berkshire actually increased its stake in STORE to a total investment of 24,415,168 shares, which equates to a 9.99% stake in the REIT. The fact that Berkshire is loading up on STORE is a good sign for its recovery potential going forward. It’s also worth noting that institutional ownership for STORE Capital is at 93%, which tells us that there are plenty of major buyers that believe in the company.
If you are an investor interested in stocks that pay dividends, there is cause for concern in the market right now as many companies have had to cut their dividend payments. That is not the case with STORE Capital, as it just declared another quarterly dividend payment of $0.36 per share for the third quarter. This was actually a dividend increase for the company that represents an annualized dividend of $1.44 per share, which was a 2.9% increase from the prior rate.
The fact that STORE Capital increased its dividend after two difficult quarters for the company is certainly positive. With a 4.9% dividend yield, 99.5% occupancy in its properties, and positive signs in rent collections rebounding, this is a REIT that investors should be able to rely on for some nice dividends going forward. There could be some volatility related to the pandemic in the short-term for REITs in general, but STORE Capital is one of the best REITs to consider buying at this time.
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