Credit Suisse Analyst Cautious On Store Capital

Store Capital Corp's STOR expected earnings growth of 11 percent over the next three years plus its 4.7 percent dividend yield has stirred lots of investor enthusiasm since last month's initial public offering.

But the real estate investment trust rents solely to second-tier tenants whose default rate could soar should the economy turn sour.

Credit Suisse's Ian Weissman launched coverage on Store Monday with a Neutral rating and $22 target, citing its relatively high stock price along with various potential risks to its business model.

Store closed Monday at $ 21.48, up 2 percent. Since its IPO got priced November 18, the shares are up 10 percent.

Store owns 850 properties in 46 states.
Nearly 30 percent of its net lease tenants are restaurants; industrial clients and health clubs, each amount to 10 percent of its business, with day-care centers following at about 8 percent.

Net leases typically free the landlord from maintenance expense, taxes and insurance, all of which are paid by tenants.

Store's business model calls for acquiring "lower quality real estate with potentially little residual value" and locating tenants with less- than-stellar credit, according to Weissman.

But about 7 percent of companies with credit ratings of Baa assigned by Moody's Investor Services default within 10 years, according to Weissman. For those with Ba ratings, the figure is 18 percent.

Moreover, Store's ratio of net debt to its enterprise value is around 45 percent, compared with as little as 25 percent for two competitors in the net lease REIT sector, National Retail Properties Inc. and Realty Income Corp., according to Weissman.

Yet another reason for caution: in periods of rising interest rates, net-lease REIT returns have lagged the S&P 500 as well as the broader REIT market, Weissman said.

But Weissman said relatively low interest rates are likely to extend through the foreseeable future and afford Store with continued access to cheap credit and extensive opportunities for growth.