The popular REIT Store Capital (STOR) will be acquired by a Private Equity group. As part of the deal, shareholders would receive $32.25/share in cash when the deal closes. This was a 20% premium to the share price from the previous day. (Source: Press Release)
Naturally, a lot of investors were not happy. That's because the REIT is cheap at 14.80 times forward FFO/share and yields 4.80%. A lot of investors bought this REIT with the expectation that it keeps growing FFO/share and dividends per share in the future, and becoming as prominent as Realty Income. Many shareholders feel like they are being robbed of future potential.
Several investors reached out to me, to ask me my opinion on the situation. Naturally, there are a lot of trade-offs involved.
Investors today have several options:
1. Do Nothing
If investors do nothing, they would continue holding on to Store Capital until the deal closes sometime in the first quarter of 2023. Investors would receive the third quarter dividend payment in the amount of $0.385/share, but after that the dividends are suspended. That dividend has not been declared yet.
If investors continue holding, they would receive $32.25/share when the deal closes in Q1, 2023. However, it could take longer for the deal to close, so there is opportunity cost involved with this option. Your money would be tied out in an asset, which would not be paying a dividend in the meantime too.
However, if investors decide to hold, they could also benefit if another suitor comes over and offers a higher price for Store Capital. There is a possibility that someone may offer more. Nothing is guaranteed of course. This is a snippet from the press release:
The definitive merger agreement includes a 30-day “go-shop” period that will expire on October 15, 2022, which permits STORE Capital and its representatives to actively solicit and consider alternative acquisition proposals. There can be no assurance that this process will result in a superior proposal, and the Company does not intend to disclose developments with respect to the go-shop process unless and until it determines such disclosure is appropriate or is otherwise required.
The other thing to consider is taxes. If investors held in a tax-deferred account, then they won't think about timing of taxes. But, if investors held Store Capital in a taxable account, they would owe capital gains taxes if they have a profit on the sale. Deferring that tax payment to 2023 from 2022 may be a better decision from a time value of money perspective. If investors expect to be in a lower tax bracket in 2023 than 2022, it may also make sense to defer from a tax perspective.
From a tax perspective, it may also make sense to sell next year, if it means that newer investors end up paying taxes at the long-term capital gains rate, rather than the short-term capital gains rate.
If investors decide to do nothing and the deal gets cancelled however, the stock price may go down below the offer price. That may be a short-term pain, but if you believe in the long-term prospects of the business, it may be a blessing in disguise.
From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.
2. Sell today
If investors sell today, they would receive an amount that is pretty close to the deal price. There is less than 25 cents/share difference between the offer price and the current price. That money could be allocated somewhere else and pay dividends.
However, investors who sell today would miss out on the third quarter dividend.
Investors who sell today could also miss out if Store Capital attracts another suitor who is willing to pay more for the stock.
Investors who sell today and hold the stock in a taxable account would owe taxes in 2022 rather than in 2023. If investors sold at a loss however, it may make sense to recognize it earlier in order to get the tax benefit earlier too.
If the deal falls through, investors who sold today may be able to acquire shares in Store Capital at a lower price.
From a timing perspective, if the deal goes through as expected and closes at $32.25/share in Q1 2023, investors would do well if stocks in general sell at a lower price then than today. If share prices are higher then than today, then investors would have been better off selling.
Conclusion:
Today, I discussed the various options investors have to deal with the acquisition of Store Capital. They are not financial advice of course. The goal of the post was to show you that every decision involves various trade-offs, and various outcomes on the decision tree.