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Motley Fool Issues Rare “All In” Buy Alert
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The stock market stayed on the defensive on Thursday, as the Dow Jones Industrial Average (^DJI -0.45%), S&P 500 (^GSPC -0.72%), and Nasdaq Composite (^IXIC -0.90%) continued to lose ground in the aftermath of Tuesday’s latest economic report on consumer prices. Nervousness concerning the likely course of monetary policy from the Federal Reserve and the impact of higher interest rates on the economy’s future prospects weighed on investor sentiment.
Index
Daily Percentage Change
Daily Point Change
Dow
(0.56%)
(173)
S&P 500
(1.13%)
(45)
Nasdaq
(1.43%)
(167)
Data source: Yahoo! Finance.
Stock prices across the market have fallen sharply enough that many value-seeking investors are starting to see bargains that they can’t resist. Often, the best sign of attractive investment opportunities comes when institutional investors start to make strategic acquisitions of assets they believe are undervalued. The latest announcement from STORE Capital (STOR -0.69%) early Thursday gave evidence that real estate investment trusts might be one area that bargain-hunting investors should examine more closely for possible ideas.
Shares of STORE Capital closed the day up 20%. The middle-market net-lease REIT got an offer that was too good to refuse from institutional investors seeking to take it private.
STORE Capital’s board of directors accepted an offer from global investment institution GIC and net-lease investment specialist Oak Street to acquire the REIT for $14 billion. Under the terms of the deal, current shareholders of STORE Capital will receive $32.25 per share in cash, giving them a nice bump from the $26.79 closing price for the stock as of Wednesday before the deal was announced.
The acquirers gave the best bull case for STORE Capital’s business. One GIC executive noted that STORE is one of the largest real estate companies dedicated to single-tenant lease properties in the U.S. market, and its emphasis on serving middle-market businesses to meet their real estate needs should continue to produce solid growth well into the future. Oak Street agreed, emphasizing that it already has exposure to the triple-net lease asset class and indicating its confidence that STORE can keep following its successful sale-leaseback business model to generate strong returns for it and its partners at GIC.
Getting an immediate 20% bump to shares seems like a nice win. But it’s important to put the move into perspective. Even with the gains, the deal price is more than 20% below where the REIT’s shares traded back in 2019.
Admittedly, that was before the global pandemic sent the real estate market reeling. The impact of the buyout now, however, is that REIT shareholders won’t get the opportunity to remain long-term investors in STORE and participate in the hoped-for full recovery for the industry.
Meanwhile, the interest in STORE had some opportunistic investors wondering whether the rest of the real estate sector could be ready for further consolidation. Moves among some of the top REITs in the industry were relatively muted, with Realty Income (O 1.39%) falling 3% on the day, single-tenant industrial REIT specialist STAG Industrial (STAG -0.23%) picking up just 1%, and retail REIT Simon Property Group (SPG 0.16%) easing lower half a percent.
Despite attractive dividend yields and reasonable valuations, though, these REITs come with risk. With interest rates on the rise and the threat of economic disruptions ahead, recessionary conditions could bring higher default rates that could jeopardize some of the income these investments generate. However, with STORE Capital’s acquirers willing to take on that risk, you might want to take a second look at the real estate investment trust arena as well to search for other promising companies in the space.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends STORE Capital and Stag Industrial. The Motley Fool recommends Simon Property Group. The Motley Fool has a disclosure policy.
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