STORE Capital (STOR) is an internally managed triple-net lease REIT, I don't own it (and usually don't like to write about companies I don't own), but Berkshire Hathaway (BRK) recently made a direct investment of $377MM for a 9.8% stake that deserves a closer look. STORE is acronym for Single Tenant Operational Real Estate, basically it means they lend money primarily to middle market retail and service businesses using a sale-leaseback structure where the single tenant box is the collateral. While STORE Capital is a REIT, it's closer to a BDC type lender than it is to an office, multifamily or even a mall REIT. The tenants come to them because they need financing and can't get financing through more traditional bank lending. The tenants then still control the property, pay the taxes, capex, and insurance, plus these are very long term leases, usually 15+ years.
There are plenty of triple-net lease REITs out there, it's a fairly common structure and a commodity business, if STORE does have a "secret sauce" its their focus on unit level profitability. From their 10-K (click to expand):
Where the story gets a little promotional for me, STORE rates the credit quality of each tenant with an internal metric dubbed "The STORE Score". Their tenants are almost entirely non-rated entities, last year they average an 8% cap rate on new investments, and again, these are entities that typically don't qualify for traditional bank financing. Yet, based on SCORE's internal metric, 75% of their tenants would be investment grade if rated, or at least default at rates similar to a Baa2 rating.
But promotion is part of the REIT game, STORE's real product is their own shares, in order for them to continually grow they need to raise more capital by issuing shares. It's not entirely different than an asset management company marketing their funds and selling the product. Berkshire Hathaway bought at $20.25, today the shares trade for $23.25, so accepting BRK's stamp of approval lowered their cost of a capital, probably a smart capital raise on STORE's part. Depending on your assumptions for the fresh BRK capital, STOR trades for about a 6.0-6.5% cap rate today and if they're continually able to invest at 7.5-8.0% cap rates they'd be smart to continue to issue equity.
I'd peg STORE Capital at about fair value today and think it's reasonable to assume a ~10% annual return from here going forward. Management lays out the math a bit in their presentation, but if you're buying in at a 6.5% cap rate today, levering it, reinvesting some of the cash flows, raising rents 1.8% per year, issuing equity to buy at 8%, dock something for defaults/recovery and the returns lay themselves out pretty well.
I co-chair a monthly investment research group where we discuss special situations and just general value investing ideas, yesterday the topic was STORE Capital, if you're in Chicago and free on the 4th Monday of every month come join us.
Disclosure: No Position
Hi, MDC. Have you looked at ESSX? Failed SPAC, assets (rental cranes) liquidated, and board is considering whether to proceed with total dissolution. They've announced they'll do an initial distribution from the asset sale by mid-August, and that it'll be 17-25 cents/share, with a further ~10 cents/share held in escrow for residual claims, etc., to be released (or not) in, I believe, the year after the initial distribution. Currently trades at ~.215 cents with some liquidity.ReplyDelete
-Board ignores shareholder vote and does not liquidate, and squanders remaining cash
-Unsuspected liabilities arise, using remaining cash
-First distribution, promised by Aug 6 (=60 days after June 8 completion of sale of Coast Crane), doesn't happen. Unlikely, but hey, until the money's in hand...
I take the low estimate in the co's filing as legit low (i.e. risk of no distribution is minor), so downside = 17 cents, to be received in next 2 weeks.
Upside = 25 cents in next 2 weeks, with 10 cents to follow.
Obviously this is a tiny OTC issue but still strikes me as attractive risk/reward.
I don't know ESSX, thanks for the idea, I'll take a look.Delete
I like this one, might try to join you, only thing I noticed - the escrowed piece is $500k in 100 days, $1MM in 1 year, and then the remaining $1MM in 2 years. Still attractive.Delete
Whoops, embarrassed to say my eyes glazed over reading the filing and I missed that timing. The only thing which gives me pause in adding to my (medium sized) position is that they are giving themselves 60 days post-sale for initial distribution. I'll give them the benefit of the doubt that they're allowing that time for a cleaner view of liabilities and not for Champagne baths for the board, but will be watching closely over the next week.Delete
1st distribution on this now pushed to 90 days ("before mid September"), which co claims it communicated to shareholders. They might be tying up loose ends but I worry that this will become another Laurence Levy rabbit hole.Delete
I tried for a couple days to get shares, no luck, surprising its moved up on the delay or was there something else hidden in that communication?Delete
Perhaps oddly, they announced last week that they've adopted the liquidation and are commencing with it, with an initial distribution of 20 cents on Aug 31, with up to 8 cents to follow over next 24 months. My basis from earlier in the year in a shade under 20 cents, so an acceptable outcome; the 21.5 cents seemed to me to be near the upper limit of what one should pay, and I was surprised to see it go as high as 24 over the past month--maybe a bizarre FOMO trade. Glad, anyway, they're not doing anything too fancy.Delete
Am currently watching ENZN to see if it dips excessively after the upcoming .15 dividend. That is a very slow motion liquidation which occasionally offers good value when some holders get frustrated waiting for a special dividend. They are, somewhat ridiculously, still an SEC reporting company, which may indicate that they intend to extract some value from the listing and NOLs. If it drops to under ~18.5 cents (which would be its cash balance after it receives its second payment from Nektar in Jan 2018), it will be interesting again.
It's just a bank let's be honest. But instead of a bank source of capital being depositers and the central bank, (or other banks) i.e. debt, these guys sell stock. Equity capital is always more expensive than debt capital as a source of funds. Again, a bank lends it out, STOR here is doing the same, and earning a spread.ReplyDelete
BRK probably bought at book value less a margin of safety...
Yep -- but there's a reason why banks don't make these loans, too risky, but then on the flip side, STOR's funding is more long term and stable than a bank that relies on depositors.Delete
I started looking at STOR but it struck me that it was fairly valued and I was just pretty much betting on management. They have a track record for sue but I lost speed as I flipped the Store University materials on the site. I didn't like him using OPM and YOM in describing the basics of valuing a business. I remember these from Kiyosaki years ago and thought he was full of it. Also, this is very minor, but bow-tie guys (like Volk) always give me a little cause for concern. Nice write-up MDC, thanks for posting.ReplyDelete
Yes, for sure, the Store University stuff is a turnoff. Thanks for reading and commenting.Delete
any thoughts on STAR's earnings?ReplyDelete
I bought a little more today. Earnings seem to be as expected, we knew about STAR and the Lennar settlement, don't fully get the market's reaction? My worry now is what Sugarman is going to do with all the cash coming in the door? Mentioned senior living and single family homes on the call, makes me concerned that this story is going to get more complicated in the future, not less.Delete
I don't get the market reaction either. One potential cause is because Mr market is focusing on earnings primacy (though this is a balance sheet story). STAR did not raise their 2017 earnings guidance despite having great earnings for Q217 (Lennar lawsuit, SAFE transaction).Delete
I hope Sugarman buys back stock or starts a dividend instead of plunking it on senior living.
The company did raise guidance on their Q1 call to account for Lennar and SAFE since those had already occurred at the time of the call, so I don't think its an earnings thing, my best guess is a lack of clarity of the long term strategy.Delete
Curious if you have any thoughts on GRBK's quarter and conference call. Continue to appreciate your blog.ReplyDelete
Very quiet. When are they going to lever up somehow? Ever since the big capital raise they've struggled to grow into their new equity base. I'm willing to be patient, they'll clean out their NOLs in 2-2.5 years, then Einhorn/Loeb will push to sell it?Delete
If GRBK makes an acquisition in Colorado and no one notices it, does it really exist? I am not an expert but have enjoyed following and owning this one for the long-term because of the NOL, who the owners are, the aligned incentives and it seems like a nice fit and a great market to enter. Any thoughts? Again, appreciate your blog which along with the Brooklyn Value Investor are my two favorites. Have learned a great deal from both of you.ReplyDelete
This is an interesting article on the transaction: http://www.builderonline.com/builder-100/strategy/what-you-need-to-know-about-green-bricks-challenger-venture_oReplyDelete
The minority ownership piece is interesting, why deviate from the current model? My guess is Challenger won't be required to secure financing through GRBK at the low teens rate that their other builders are required to do? Clearly doesn't seem like they'd be forced to buy GRBK lots unless GRBK starts making land purchases their separate from Challenger. Why issue equity when you've highlighted your underleveraged balance sheet for several quarters? I can get there on the point of Challenger owners wanting to maintain upside, but it doesn't help GRBK optimize the balance sheet yet. I guess I'll have to wait for more information, but it seems more like a minority stake in a non-controlled builder that could be a controlled builder in 3 years when the NOL is hopefully already exhausted and the company is up for sale? But I like the greater Denver market, same with entry level, both should have some tailwinds for years to come, just a bit surprised by the structure. Thanks for reading and the kind words too, would love to hear your thoughts as well.Delete
Interesting perspective. I like the deal overall but don't understand why they issued equity, especially since I presume they think GRBK is undervalued. Why not use this as an opportunity to start to optimize the balance sheet? Hope those questions get asked or explained at the next industry conference, media interview or conference call. Keep up the great work with this blog. Many thanks.ReplyDelete