STORE Capital Corporation is a US$8.3b mid-cap, real estate investment trust (REIT) based in Scottsdale, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how STOR’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess STOR.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much STOR actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For STOR, its FFO of US$392m makes up 73% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether STOR has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take STOR to pay off its debt using its income from its main business activities, and gives us an insight into STOR’s ability to service its borrowings. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take STOR 8 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times STOR’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 3.02x, it’s safe to say STOR is generating an appropriate amount of cash from its borrowings.
In terms of valuing STOR, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In STOR’s case its P/FFO is 21.28x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
STORE Capital can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for STOR:
- Future Outlook: What are well-informed industry analysts predicting for STOR’s future growth? Take a look at our free research report of analyst consensus for STOR’s outlook.
- Valuation: What is STOR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether STOR is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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