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No. of Recommendations: 6
Ralph posted nov 23 14

STOR is a new equity REIT that IPO'd last week at $18.50. The early trades have been between $19.50 and just under $20. STOR is a triple-net lease REIT, and should be of interest to many - particularly those who like a higher than average dividend yield.

The STOR management team is experienced and smart. Chris Volk is running day-to-day operations, and he has had a good track record in the REIT industry. He ran Franchise Finance some years ago before selling out following good performance. He also headed up Spirit Finance, more recently, before leaving after a disagreement with the controlling shareholder. Volk has a proven track record of good underwriting on NNN-lease properties.

The properties, by and large, don't have the investment grade tenants that other NNN-lease REITs, such as O, do. But, as a result, they provide better entry yields and a little higher annual rent bumps. 90% of the properties (850 in total) are retail, and the rest are industrial. The largest percentage of the tenants (29%) are restaurants; another 13% are educational establishments. The rest are, in addition to industrial properties, health clubs, movie theaters, dollar stores, drugstores and convenience stores.

The nominal cap rate for the properties is in the low-7% range, so these are not REG-type properties. We are relying upon Mr. Volk and his underwriting skills when owning shares in this REIT. The balance sheet is better than average, but STOR has plans to buy a lot of properties going forward and can do so with debt, at least for a while. Thus STOR is likely to have a pretty rapid growth profile for another couple of years. Some may compare STOR to STAG, but I will not - because I don't follow STAG.

I have put a small amount of my capital into STOR, buying between $19.65 and $19.85. I am not enamored with the quality of STOR's properties, but am buying on the strength of Mr. Volk's reputation. The dividend will be $1.00, which should be well covered by current free cash flows from rental income and provides a dividend yield of just over 5%.

Bottom Line: Positives are proven management, high entry property yields and the prospect of rapid FFO/AFFO growth for a few years or longer. Negatives are mediocre property quality, significant NAV premium (like all NNN-lease REITs) and greater sensitivity to rising interest rates.

Ralph
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