STORE Capital: A Bittersweet Last Bite (NYSE:STOR)

STORE Capital Corporation (NYSE:STOR) is an internally managed net-lease real estate investment trust, or REIT. It is focused on Single Tenant Operational Real Estate. It operates a large, well-diversified portfolio (across the U.S.), with over 2,500 locations across the United States. I’m interested in this name because it is being acquired by real estate giants GIC and Blue Owl’s Oak Street. They are paying $32.25 in cash. They also let STORE continue paying some dividends, but that’s over now.

The slide below shows its top customers and its diversification across industries.

I’m not a U.S. citizen, so I’m unfamiliar with some of these store brands. Most don’t seem overly worrisome, although AMC Entertainment Holdings, Inc. (AMC) is probably not the best in your top 10. Having said that, even if AMC went through a bankruptcy process (which isn’t entirely unimaginable), the new set of owners would likely still want to operate its movie theatres. Second, even this top 10 tenant is only 1.2% of base rents.

What makes this merger very interesting is that the merger agreement says that the merger won’t close until February 1, 2023 (except if the Parent agrees). It has an outside date of March 31, 2023.

The transaction, which was unanimously approved by the STORE Capital Board of Directors, is expected to close in the first quarter of 2023, subject to approval by STORE Capitals stockholders and the satisfaction of certain other customary closing conditions. The closing of the transaction is not subject to any financing conditions.

CFIUS hasn’t objected to the deal, as might be expected. The shareholders didn’t seem to love the deal (see comments), but it did pass a shareholder vote. I think this deal could close on February 1, but it is possible it could close even sooner than that. The options chain is very illiquid and barely traded, but the prices I see do imply and confirm it is extremely likely to close soon.

Meanwhile, shares are trading at $31.80 (Seeking Alpha pre-market price), and through my broker, I’m seeing prices between $32.06 and $32.16. Depending on the entry, it could be quite an attractive deal.

The annualized return is also very sensitive to the ultimate closing date. Here’s a table showing the percentage return at 3 different price levels and two extreme closing dates.

STOR price	Closing Feb 1 (upside%/annualized%)	Closing Mar 31 (upside%/annualized%)
$31.80	1.42% (101.9%)	1.42% (5.55%)
$32.06	0.59% (32.25%)	0.59% (2.3%)
$32.16	0.28% (15%)	0.28% (1.08%)

Click to enlarge

I expect the closing date will likely fall close to the Feb 1 date. The annualized yields, if it closes that soon, are beautiful. If the deal fails to materialize at this stage, I’d expect a pullback to ~$27. That’s around 16%-20% downside. It is a very unlikely outcome, in my humble opinion, but it is important to be aware of. What’s somewhat reassuring to me is that quite a few STORE Capital Corporation shareholders would perhaps be quite happy.

In the pre-market, I was able to add some shares at ~$32.10 to a small existing position. This reflects a 26% annualized return IF everything goes right, including a Feb 1 closing date and before trading costs.