Store Capital Vs Realty Income Stock: Which Is Best?

Store Capital Vs Realty Income Stock: REITs (real estate investment trusts) that focus on retail properties have been hardest hit by the events of 2020.

By way of example, Store Capital (STOR) and Realty Income (O) have seen their high points decimated by 50% and 33%, respectively.

But both have bounced back strongly. For income-oriented investors the question is which is best?

REITs 101

Both REITs are considered “net-lease”. They own their respective properties, yes – but their respective tenants must pay for the majority of operating costs for the properties they occupy.

The approach is relatively low risk with little to no maintenance and the REIT makes profit from the difference in rent and financing cost. 

Both REITs essentially do the same thing – on that, the question’s a wash. But there are key differences between Store Capital and Realty Income that are important appreciate.

Store Capital Tenant Duration Exceeds 14 Years

Because STOR is a net-lease REIT, the risk is lower than might be the case with a REIT that has shorter tenant lease durations.

By the end of Q2 2020, this REIT’s average held lease still had 14 years remaining. When you consider the term of most investments, 14 years is long enough to weather even the most economically stormy conditions – even ones like what we see today.

Store Capital also originates many of its own lease agreements, meaning STOR has much more control when it comes to leasing terms.

Just as important, STOR has a greater understanding of its tenants and their financial positions due to the average lease length and the amount of time STOR normally works with a seller prior to their signing long-term leases.

Realty Income Has Struggled To Tread Water

When it comes to business models, Realty Income’s is considered incredibly safe. Rather than leasing out individual spaces and multi-store complexes, Realty Income deals in single-tenant properties – companies that, for the most part, are resistant to recessions and have an immunity to eCommerce storms.

Surprisingly however, Realty Income hasn’t performed as well as the savvy investor would have assumed since coronavirus took hold – at time of press, Realty Income stock was still treading water 15% deeper for 2020.

Why has O stock done so poorly? Is it even a consideration for investors? Maybe the patient ones – the ones who think long term. We’ll look at that in a moment.

Risks Of Investing In Store Capital Stock

The greatest potential risk posed to any REIT investor thinking about Store Capital is we have no benchmark. During the previous recession from 2007 to 2009, STOR was a private company.

The current crisis has made evaluating STOR even more difficult – the pandemic forced governments around the world to close all non-essential business. People are staying home more. This is a recipe unseen in our lifetimes and has several ingredients that simply don’t taste good for traditional retail businesses.

What we can see are the numbers since STOR went public and how it’s fared so far in 2020. When it comes to rent payments, the company was only collecting around 88% of contractual obligations.

It would seem so. This has been a rough period for all REITs – but STOR adjusted its FFO payout to around 70% as we headed into the economic downturn. The stock even increased its dividend payouts by a cent per share in September 2020.

Dangers Of Buying Realty Income

Realty Income’s primary property portfolio consists of dollar stores, grocery chains, drug stores, and convenience shops, which together are almost 40% of the REIT’s rental income. That’s good.

But there are some blind spots that have caused O stock to stay low. The other 60% of Realty Income’s portfolio hasn’t fared so well.

About 6% of the stock’s rental income is derived from theaters – a huge question mark at the moment. The remainder is made up of dining establishments, fitness and gym centers, and childcare providers – all of which have experienced disruption.

In its favor, however, is the fact it’s collected over 86% of its rental payments as of the end of Q2 2020. While this is better than many other REITs can claim, it’s also a big reason why O stock took a hit. Those disrupted properties mentioned above account for 87% of rental payments the REIT has not collected.

Those businesses deemed “essential” have done fine for the REIT – the portfolio’s top industries paid nearly every cent (99.7%) of rental payments for 2020 Q2.

Even if some tenants in the non-essential industries have to close shop permanently, Realty Income’s properties total more than 6,500 – the lost income will be a minor blip.

Realty Income Vs Store Capital Stock: The Bottom Line

If you’re a conservative investor, Store Capital might be your better option. This wasn’t so clear-cut before the pandemic. This isn’t to say that Realty Income isn’t a good REIT – just that the pandemic has forced many businesses of all kinds into a sort of “survival” mode. In reality, this will affect both REITs.

The real question here is this – which REIT will actually obtain rental payments when they’re due? This is a real concern, and to illustrate it better, consider this:

Realty Income has dipped into their revolving credit capabilities for real-time cash flow and scrapped this year’s earning guidance.

While these are good moves on their part, it also illustrates the uncertain landscape of realty investments.

Store Capital, and perhaps rightly so, believes its current portfolio can stand strong in today’s environment – and seems Warren Buffett agrees as he continues to hold it in the Berkshire Hathaway portfolio.

Likely the decade plus long tenant lease commitments added to the tenant quality have won him over. After all, Store Capital prefers tenants like veterinarians that will likely always be in need and cannot be “Amazon’ed” out of business.

Realty Income, on the other hand, has exposure to businesses highly tethered to lockdowns, including fitness studios and movie theaters. For the risk-averse investor, Store Capital may be the safer, if less well established, bet.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.