Real estate investment trusts have historically performed better than most investments during spats of rising interest rates and rising inflation, notes Steve Mauzy, editor of Wyatt Research's Personal Wealth Advisor.
REITs outperformed stocks every year during the raging-inflation, rising-interest-rate epoch of 1975 through 1984. More recent data from NAREIT show REITs returned 16.5% during rising-rate periods compared to 10.6% in non-rising-rate periods over the past 30 years
I think you know where I’m going with the narrative. The REIT realm has captured our attention. One REIT has captured it more than most. That would be STORE Capital (STOR).
STORE has caught other investors’ attention, as well. Warren Buffet is most notable among the group. Berkshire Hathaway (BRK.B) owns 8.6% of STORE’s outstanding shares. It is the only REIT in Berkshire’s portfolio.
STORE is one of the sector’s fastest-growing REITs, and one of its largest. As of the end of 2021, STORE owned 2,866 property locations valued at $13.1 billion. Its properties are operated by 556 different tenants/customers covering 120 different industries.
STORE is a triple-net-lease REIT. It acquires properties from business owners and then leases the properties back. The tenant is responsible for operating the business; for maintaining the property; and for paying insurance, property taxes, and other property-related expenses. The tenant, in short, is responsible for nearly all expenses.
STORE is also a retail REIT. It caters to these industries that need a physical presence. For the most part, these businesses and their customers need to be physically present to transact business. Unlike many retail REITs in 2020, STORE was not only able to maintain its dividend, it was able to increase it.
Management has set the midpoint of 2022 AFFO per share guidance at $2.20, representing 7.3% AFFO growth. In short, expect the dividend-growth trend to extend to 2022 and beyond. STORE shares trade at a 24% discount to their 52-week high. Bearish market sentiment has, no doubt, contributed to the discount. The prospect of higher interest rates is also to blame.
A variable specific to STORE has also contributed to investor malaise. In late December, STORE filed a report with the SEC stating that former CEO and current executive chairman of the board, Chris Volk, had been terminated without cause. Many investors were unsettled by the termination. Volk was one of STORE’s founders.
Current CEO Mary Fedewa seems more than capable of running the show. She is the co-architect of the STORE business model, having worked with Volk for two decades. She has the background and expertise to maintain STORE’s upward trajectory. She has demonstrated her abilities. I expect no less for the future.
STORE shares have typically traded between 15- and 18-times forward AFFO. They trade at 13 times as I write. A bump up to historical multiples would cause the shares to appreciate between 18% and 39% over the next year. But even without expanding multiples, investors should expect to realize a 13.1% total return based on the 5.4% dividend yield today (and I expect the dividend to be increased this year) and expected AFFO growth of 7.3%.
My expectations are more ambitious. Given the REIT sector’s favorable record as an inflation hedge and STORE’s exceptional performance within the sector, I expect STORE to attract more investor interest. A 20%-to-30% total return over the next 12 months is a reasonable goal.
