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Buffett Bets on Store Capital

07/10/2017 2:54 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

Brad Thomas recently upgraded Store Capital (STOR) to a strong buy in his Forbes Real Estate Investor. Here's the real estate investing expert's latest assessment.

Net lease REITs should get a nice boost today thanks to Warren Buffett. More specifically, Berkshire Hathaway (BRK.A) is now a 9.8% owner in Scottsdale-based Store Capital.

Berkshire Hathaway has invested $377 million in Store.  Store Capital simultaneously issued 18.6 million shares of company stock in a private placement to a wholly owned subsidiary of Berkshire Hathaway at a price of $20.25 per share.

Chros Volk, CEO at Store commented, "An investment in our company from one of history's most admired investors represents a vote of confidence in our experienced leadership team and an affirmation of our profit-center real estate investment and management approach."

In addition, STOR's largest holders include Vanguard Group (15% stake), Fidelity Management & Research (14% stake) and Principal Financial (11%).

Store is a leading net lease REIT that has 1,750 properties with 369 customers (about 17 net new customers quarterly) that represent roughly 590 contracts and 30 transactions closed quarterly) with an average transaction size below $9 million.

The company has generally stayed away from commodity retailers, even if the goods that they purvey are non-discretionary. Store has also stayed away from service providers not requiring human interaction (i.e. bank branches).

Store has intentionally weighted its portfolio heavily to service industries, including restaurants, movie theaters, fitness clubs, early childhood education, veterinary clinics and more.

The result is that only 3% of the company's entire investment portfolio is within close proximity (a quarter mile in any direction) to any Sears (SHLD), J.C. Penney (JCP), Macy's (M), Kmart or HHgregg (HGG) store.

Uniquely, 97% of Store's leases require the delivery of property-level financial statements, which is unprecedented and enables such disclosures. 

By obtaining quarter sales reports from most tenants, STOR can measure performance of each individual property. This communication channel provides it with an advantage with which the company can mitigate risk and provide a higher degree of predictability.

The market is not giving Store Capital credit for constructing the economics of its business to have substantial margins for error, or to place this idea in a more positive light, margins of safety.

STOR has been trading at a discount since January, thanks in large part, to the association with retail tenants. STOR's targeted internal AFFO growth per share is between 3% and 5%, driven primarily by the company's differentiated focus on signing leases with middle market companies.

Having margins of safety is the reason that Store has never generated a negative rate of return in any portfolio , private or public, it has ever managed since 1980.

Having margins of safety has consistently outperformed the broader REIT benchmarks over time and with less risk through a myriad of economic and interest rate climates.

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