Additionally, STORE invests in properties that are profit centers for the companies they work with, which means that even in a weak economy, these are the properties tenants will try the hardest to maintain, even if it means paying higher rents.
Rising interest rates and inflation can also reduce the appeal of some REITs due to the terms of their lease agreements and the higher leverage used by this business model.
Like most triple net lease REITs, STORE signs very long-term rental contracts with tenants, with a weighted average remaining term of 13.3 years.
Many of these deals were signed during periods of lower inflation as well, so STORE's average annual rent escalators average only 1.8%.
Long lease terms and less flexibility to adjust the rent rates received from tenants give STORE's existing portfolio some bond-like qualities. And like long duration bonds, this can make STORE's valuation sensitive to interest rates, with investors wanting a more competitive yield as rates rise.
Higher interest rates also make refinancing STORE's debt more expensive. However, STORE remains in solid financial shape with a BBB credit rating, flexible acquisitive growth plans, and a moderate payout ratio that allows for a healthy amount of retained cash flow.
Overall, we do not believe STORE's slumping stock price reflects any long-term concerns with this conservatively run REIT. A recession could cause some tenants to miss their rent payments, but STORE's diversified portfolio and healthy financials should protect overall earnings and the dividend.
Conservative investors looking for investments with solid yields and growing dividends may find STORE an attractive opportunity worth exploring.