NOTnot only is STORE Capital (NYSE: STOR) in Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) stock portfolio, but it is the alone the real estate investment trust (REIT) in which the conglomerate led by Warren Buffett has chosen to invest its own capital.
STORE Capital significantly underperformed S&P 500 in 2021, with a total return of around 6% for the year against 29% for the S&P 500 a few days of the year. In short, STORE has bounced back distinctly From its COVID-19-fueled decline at the end of 2020, many of the benefits of vaccines and the gradual easing of restrictions in the pandemic era were already being reflected at the start of the year.
However, despite the recent underperformance, I think STORE Capital is still a great stock to add to any portfolio for five main reasons.
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1. Massive market opportunity
STORE Capital owns nearly 2,800 properties and has a market capitalization of approximately $ 9.5 billion. While these numbers may sound like big (and they are), the company has enormous growth potential ahead of it. In fact, management estimates that the addressable market for net leasehold properties in its investment universe is approximately 2 million properties valued at approximately $ 3.9 trillion.
Now STORE will never get all of that, but if it can even achieve 1% of its addressable opportunity, it would be over seven times its current size.
2. Excellent growth economy
STORE Capital is rather aggressive in its growth strategy. Considering its size, investing $ 1 billion to acquire properties in the first nine months of 2021 is a fairly rapid rate of growth.
However, if you consider the economics of STORE Capital, this makes sense. The average initial capitalization rate (operating income as a percentage of cost) on the STORE acquisitions in 2021 was 7.7%. Meanwhile, the average interest rate paid by STORE Capital on debt issued in 2021 is only 2.8%. This is an extremely attractive spread.
3. Excellent evaluation
Based on the midpoint of STORE Capital’s 2021 operating funds forecast (FFO), the stock is trading around 17 times which is essentially the real estate version of “earnings”. Meanwhile, the average S&P 500 stock is trading for a price / earnings multiple of around 30. Not only is STORE Capital growing fast, it’s cheap.
4. A growing income stream
Like most REITs, STORE Capital is designed to be a total return investment. So far we’ve been talking about growth, but the company is paying a generous dividend as well. At the current share price, STORE Capital reports a little over 4.4% per year and has increased its dividend every year since its IPO in November 2014. Thus, in addition to the probable increase in its share price over time, STORE generates a significant and growing revenue stream for its investors.
5. Huge total return potential
I mentioned that STORE Capital went public in 2014 and has generated an impressive 13.7% annualized total return for investors since then, but it doesn’t exactly have a long history to analyze.
However, there are large REITs with similar business models that have been around for decades, and the total returns have been outstanding. Real estate income (NYSE: O) and National Retail Properties (NYSE: NNN) are two with comparable models that have generated total returns of 2,560% and 1,450%, respectively, over the past 25 years. Compare that with the 909% total return of the S&P 500 over the same time period.
Invest for the long term
REITs are designed to be long term investments, and STORE Capital is no exception. While I am convinced that STORE Capital has a good chance of being a great dividend-beating market share to hold for the long term, I have absolutely no idea what it will do in the weeks, months or even. over the next year. or two. But if you are measuring the returns on your investments over longer time frames (say, five years or more), STORE Capital could be a great addition to your portfolio.
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Matthew Frankel, CFP® owns Berkshire Hathaway (B shares), Realty Income and STORE Capital. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends STORE Capital and recommends the following options: long January 2023 calls of $ 200 on Berkshire Hathaway (B shares), short January 2023 $ 200 put on Berkshire Hathaway (B shares) and short January 2023 calls of $ 265 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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