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STORE Maintains Dividend as Retail Rent Collection Improved in June

On June 15, STORE Capital (STOR) provided a business update and opted to maintain its dividend for the second quarter.

Management was encouraged by an increase in rent collection, giving the team more confidence that cash flow coverage will improve in subsequent months to preserve STORE's financial strength.

STORE said it had received 76% of June rent to date. That's up from 67% in May and 70% in April. The increase was led by health clubs, full-service restaurants, and family entertainment centers. Only one new rent deferral request was received in June, too.

"STORE is maintaining our $0.35 dividend and we'll pay it as scheduled on July 15. The announcement reflects our Board's desire to maintain our dividend, together with our view that the payment of 2020 dividends, inclusive of our challenging second quarter, will neither erode our liquidity nor elevate our leverage. 

"Given the positive impact of sector reopenings, which will be evident to you from our improved June performance, we expect to pay our fiscal year 2020 dividends from operating cash flows."

– CEO Chris Volk

We previously estimated that STORE's rent revenue could fall about 22% before cash flow would no longer cover the dividend.

Management had also said that they would not be willing to borrow to meet current dividend levels, so STORE's rent collection needed to rise in the months ahead.

With lockdowns continuing to ease across most parts of America, that scenario is looking more realistic.

STORE said that 91% of its properties are now open or partially open, up from just 65% in April. Management anticipates that figure to approach 100% by the end of July once movie theaters (4% of rent) reopen.

In addition to reopenings providing tenants with more cash flow, STORE estimated that the government's Paycheck Protection Program was used by about 6.5% of its tenants to help pay June rent, a little over double the number in May.

From a dividend safety perspective, it's hard to know how much to read into a single month of rent collection improvement, much less the risk of a second wave hurting STORE's retail tenants later this year.

However, based on reopening trends, tenants' healthy pre-pandemic rent coverage ratios around 2:1 (i.e. $2 of cash flow for every $1 of rent expense), and "a lot of stress models" run by management, STORE now feels more confident it can afford to pay its dividend from cash flow this year.

In our April note, we noted that these factors could lead to an upgrade:

Should economic conditions quickly improve, or if STORE communicates a stronger commitment to the dividend, an upgrade would be considered.

In light of these positive developments and U.S. retail sales recovering faster than expected in May, we are upgrading STORE's Dividend Safety Score to Borderline Safe.

The retail sector continues to face plenty of unknowns with unemployment remaining high and the potential for another spike in infections as lockdown measures subside.

We will continue monitoring these factors, but for now, it's encouraging to see STORE's confidence in its future cash flow and ability to keep the dividend covered.

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