The Only Real Estate Stock in Warren Buffett’s Portfolio
Time to Check Out This REIT
Real estate investment trusts (REITs) have been a staple for many income investors. And it shouldn’t come as a surprise: collecting rent is literally a centuries-old business and has been proven to generate a stable stream of income for property owners. And thanks to the creation of REITs, regular investors like you and me can easily become a part-owner of a multi-million-dollar real estate portfolio.
But not everyone is a fan of real estate. For instance, legendary investor Warren Buffett is known for making some of the most successful stock picks for more than half a century. Yet for the most part, he’s not really an avid REIT investor.
According to its latest “13F” filling, Buffett’s company Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) held a portfolio of 47 stocks as of March 31, 2019. Only one of those stocks was a REIT. (Source: “Form 13F,” United States Securities and Exchange Commission, last accessed May 21, 2019.)
So that means the REIT I’m about to talk about could be something special.
Warren Buffett’s Real Estate Stock Pick
The real estate stock in question is STORE Capital Corp (NYSE:STOR), a REIT headquartered in Scottsdale, Arizona.
By the end of the first quarter of 2019, Berkshire Hathaway owned 18.6 million shares of STORE Capital, worth approximately $632.8 million at the current stock price.
Now, I should point out that while Buffett isn’t known for his fondness of REITs, he is, in fact, a big dividend investor. For instance, if you take look at Berkshire Hathaway’s top 10 holdings by market value, you’ll see that all 10 of them are dividend-paying companies.
And dividend is indeed what makes STORE Capital stand out. Right now, the company has a quarterly dividend rate of $0.33 per share, which comes out to an annual yield of 3.9%. Considering that the average dividend yield of S&P 500 companies is around 1.9% at the moment, STORE Capital stock is paying more than twice the benchmark average. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed May 21, 2019.)
Other than the sheer size of its payout, STOR stock also stands out when it comes to dividend growth.
You see, STORE Capital completed its initial public offering (IPO) in November 2014, so it doesn’t have a very long dividend history yet. However, since the company’s IPO, its management has raised the cash dividend every single year. (Source: “Dividends,” STORE Capital Corp, last accessed May 21, 2019.)
From its initial quarterly dividend rate of $0.25 per share to today’s $0.33 per share, STORE Capital’s payout has grown by 32% in just over four years.
Earn a Safe and Growing Income Stream
STORE Capital’s dividend is safe, too. In 2018, the REIT generated adjusted funds from operations (FFO) of $377.9 million, or $1.84 per diluted share. Its cash dividends, on the other hand, totaled $1.28 per share for the year. Therefore, the company had a payout ratio of 69.6%. (Source: “STORE Capital Announces Fourth Quarter and Full Year 2018 Operating Results,” STORE Capital Corp, February 21, 2019.)
In the first quarter of 2019, STORE Capital earned $0.48 per share in adjusted FFO while declaring $0.33 per share in cash dividends. That translated to a payout ratio of 68.8%. That is, despite all the dividend hikes, the company was paying out less than 70% of its operating cash flow. In the real estate business, that’s considered a very wide margin of safety. (Source: “STORE Capital Announces First Quarter 2019 Operating Results,” STORE Capital Corp, May 2, 2019.)
STORE Capital is also in the right type of real estate business.
We know that, in this day and age, the retail industry is not in the best of shape due to more and more consumers shopping online. As a result, some retail properties are not earning the best rents. And if a retailer’s business deteriorates to a point where it can no longer cover its rent, the landlord could take a financial hit.
But STORE Capital doesn’t focus on retail. Instead, the company focuses on providing real estate to the service sector of the U.S. economy. In fact, as of March 31, 2018, tenants from the service sector contributed around 65% to Store Capital’s base rent and interest income. (Source: “2019 First Quarter Investor Presentation,” STORE Capital Corp, last accessed May 21, 2019.)
As for specific industries, note that the REIT’s five largest tenant industry groups are “Full Service Restaurants,” “Early Childhood Education,” “Furniture,” “Limited Service Restaurants,” and “Health Clubs,” accounting for 10.8%, 5.7%, 5.6%, 5.5%, and 5.3% of its total base rent and interest income, respectively. No other single industry is responsible for more than five percent of STORE Capital’s business.
Moreover, the company deems that around 75% of its lease contracts are of investment-grade quality. With a high-quality tenant base, a focus on service, and a well-diversified portfolio, this real estate company could keep earning rent even if e-commerce causes more headwinds for the retail industry.
Just take a look at the REIT’s portfolio operating metrics and you’ll see what I mean.
By the end of the first quarter, STORE Capital had investments in 2,334 properties located across 50 states. They are leased to 447 tenants, with a weighted average remaining lease contract term of around 14 years and a weighted average annual lease escalation of 1.8%. The company’s portfolio occupancy rate was at an impressive 99.7%.
Add it up and you’ll see that STORE Capital is well positioned to generate a steadily increasing stream of cash flow.
The Bottom Line on STORE Capital Corp
Now, I should point out that while Warren Buffett is not known as a big REIT fan, his company has already made some serious profits from this real estate stock. According to the company’s press release in June 2017 revealing Berkshire’s stake, “STORE Capital 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.” (Source: “STORE Capital Announces Investment from Berkshire Hathaway,” STORE Capital Corp, June 26, 2018.)
Since STOR stock trades at $34.13 apiece at the moment, Berkshire has already made a return of 68.5% just from share price appreciation. Plus, based on STORE Capital’s annualized dividend rate of $1.32 per share, the position also brings more than $24.0 million in annual dividend income to Berkshire.
While STOR stock has gotten more expensive over the years, its yield remains attractive in today’s market. And since the stock is good enough for the “Oracle of Omaha,” it might be good enough for most income investors, too.