Investment Thesis Presentations

[Packer16]

For those who are interested, Steve Kiel (manger of the Arquitos Fund) & I gave presentations at a Manual of Ideas conference that are available here for you viewing pleasure:

 

https://medium.com/@WOAM/willow-oak-asset-management-is-proud-to-announce-that-two-of-our-fund-partners-were-recently-df74f868cdf3

 

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[LC]

Thanks for posting. Ashtead looks interesting.

[RadMan24]

Good stuff.

 

It takes a while to get acquainted with the STOR story - but the CEO letters are top notch.

 

The strategy is promising and, as the author eludes to, the high multiple is actually a benefit to STOR's growth - they consistently sell equity to invest in the business, with unlevered returns hovering 12%. This will limit both shareholder and earnings dilution.

 

The price has run up in January, but I'd second the STOR idea is one a lot of folks should get familiar with. A seasoned manager recently left to begin his own investment fund in triple net lessors as the market remains underappreciated.

 

Thanks for sharing.

[Spekulatius]

Good stuff.

 

It takes a while to get acquainted with the STOR story - but the CEO letters are top notch.

 

The strategy is promising and, as the author eludes to, the high multiple is actually a benefit to STOR's growth - they consistently sell equity to invest in the business, with unlevered returns hovering 12%. This will limit both shareholder and earnings dilution.

 

The price has run up in January, but I'd second the STOR idea is one a lot of folks should get familiar with. A seasoned manager recently left to begin his own investment fund in triple net lessors as the market remains underappreciated.

 

Thanks for sharing.

 

How can they make 12% unlevered returns. Their cap rate, based on invested capital looks to be around 6.66% (~$400M NOI / $6000M invested capital ) and lease escalation are < 2% annual. That’s gets at most an 8.5% total return, neglecting certain costs (renovations etc.)

[frommi]

How can they make 12% unlevered returns. Their cap rate, based on invested capital looks to be around 6.66% (~$400M NOI / $6000M invested capital ) and lease escalation are < 2% annual. That’s gets at most an 8.5% total return, neglecting certain costs (renovations etc.)

 

Yes, i think he probably meant 12% levered returns. While i still hold a small position in STOR, i think it is currently fair valued and forward returns are probably around 10-12%. SRC is a much better buy at current prices in the NNN space. The asset base was set up by the management team of STOR and i expect that O or STOR will buy them sooner or later. SRC`s asset base and leverage is similar to O but is 40% cheaper post spinoff that happened in the summer of 2018.

Thanks for posting the presentation.

[Packer16]

The primary difference between STOR and SRC is the STOR portfolio has about 75% investment grade credits while SRC has about 42% & SRC does not report rent increases.  They have about the same payout ratio & if you assume SRC has 0% rent increase you net get about the same yield (4.3% yield + 1.8% growth = 6.1%) vs. (6.5% yield plus TBD growth).  At this point in the credit cycle I am more comfortable with 75% IG vs. 42% and getting 40bp less in return.  A portion of SRCs asset base was put together by the STOR management over 10 years & has changed under new management which led to the issues with Shopko & the heavy retail exposure.

 

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[DRValue]

Ashtead is on my watch list, just waiting for the cycle to weaken and the price to fall. Fantastic business with amazing metrics. I imagine they merge / are bought out by URI at some point too.

[Spekulatius]

Ashtead is on my watch list, just waiting for the cycle to weaken and the price to fall. Fantastic business with amazing metrics. I imagine they merge / are bought out by URI at some point too.

 

It really needs a “Brexi dump”, hopefully neglecting that the bulk of its business is in the US.

[frommi]

The primary difference between STOR and SRC is the STOR portfolio has about 75% investment grade credits while SRC has about 42% & SRC does not report rent increases.  They have about the same payout ratio & if you assume SRC has 0% rent increase you net get about the same yield (4.3% yield + 1.8% growth = 6.1%) vs. (6.5% yield plus TBD growth).  At this point in the credit cycle I am more comfortable with 75% IG vs. 42% and getting 40bp less in return.  A portion of SRCs asset base was put together by the STOR management over 10 years & has changed under new management which led to the issues with Shopko & the heavy retail exposure.

 

Packer

 

SRC has reported rent increases in the latest earnings call. It was 1.7% which is in line with STOR. (Earnings call slide page 17). The investment grade percentage you reference for STOR is from their own credit rating, i don`t think that is comparable. (Look at the footnotes in their presentation, the "real" investment grade tenants just make up 25%). Realty income has ~50% from "real" investment grade tenants, i don`t think there is a material disconnect between all of them because all 3 have a pretty wide diversification now.

 

The current management of SRC is fresh and spun off the Shopko assets right before bankruptcy with lots of debt and bought back stock at very cheap prices. (10%, which i have never seen on a REIT before). STOR can currently grow faster because its stock price is higher and therefore its cost of capital is lower. But i think that is a bad argument to argue that SRC`s value should be lower.

[Packer16]

The primary difference between STOR and SRC is the STOR portfolio has about 75% investment grade credits while SRC has about 42% & SRC does not report rent increases.  They have about the same payout ratio & if you assume SRC has 0% rent increase you net get about the same yield (4.3% yield + 1.8% growth = 6.1%) vs. (6.5% yield plus TBD growth).  At this point in the credit cycle I am more comfortable with 75% IG vs. 42% and getting 40bp less in return.  A portion of SRCs asset base was put together by the STOR management over 10 years & has changed under new management which led to the issues with Shopko & the heavy retail exposure.

 

Packer

 

SRC has reported rent increases in the latest earnings call. It was 1.7% which is in line with STOR. (Earnings call slide page 17). The investment grade percentage you reference for STOR is from their own credit rating, i don`t think that is comparable. (Look at the footnotes in their presentation, the "real" investment grade tenants just make up 25%). Realty income has ~50% from "real" investment grade tenants, i don`t think there is a material disconnect between all of them because all 3 have a pretty wide diversification now.

 

The current management of SRC is fresh and spun off the Shopko assets right before bankruptcy with lots of debt and bought back stock at very cheap prices. (10%, which i have never seen on a REIT before). STOR can currently grow faster because its stock price is higher and therefore its cost of capital is lower. But i think that is a bad argument to argue that SRC`s value should be lower.

 

Thanks for rent increase information.  This does add about 170bp to SRCs relative yield.  If you look at SRCs disclosure their IG clients (not including "implied IG clients") is 25% also.  The reason why I am comfortable with a higher IG number for STOR is they perform & report store level metrics, they are the only NNN I have seen this done for.  The reason this is important is when you are NNN leasing real estate the location & its cash flow can be as important as the corporate credit rating.  The STOR methodology includes this level of detail, as far as I can tell others do not.  Also if you look at incremental RoI for both STOR & SRC, STOR is about 100bp ahead (11.5% vs. 10.5%).

 

Finally, there is the management differences.  STOR & its team have 20 years+ experience in net lease financing founded 3 REITs & sold at opportune times but the Spirit team is new.  The SRC CEO is an investment banker & the ops head worked for GE Capital (not a plus for me) & a REIT advisory.  I am not saying SRC has a poor management team just not as experienced as STOR.  As a side note, based upon my calcs, STOR management has been able to add about 200bp in RoE above the rent increase & re-investment over the past few years. 

 

If you look at the yield plus rent growth differences the total is about 200bp based upon current prices.  STOR will gain some difference in the 100bp difference in incremental RoE (re-investment potential), longer avg lease terms (14 yrs. vs. 10 yrs. for SRC), high quality investment portfolio (more IG clients) & experienced management team.  Both will do well but I think the difference in price is justified.

 

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[Gamecock-YT]

Thanks Packer, good stuff as always.