STORE Capital Corp: A REIT Approved by Warren Buffett
Want to Invest in REITs? Read This
I bet you’ve heard of Warren Buffett’s famous saying, “Be fearful when others are greedy. Be greedy when are others are fearful.”
And like most investing mantras, it’s easier said than done.
For instance, when the U.S. stock market had a major sell-off earlier this year due to the COVID-19 outbreak, shares of many solid companies were trading at substantial discounts. Obviously, hindsight is 20/20, but when everything seemed to be falling to the floor, it was not easy to hold any long position in that market, let alone be a buyer of additional shares.
One sector being heavily sold off at the time was real estate investment trusts (REITs). Because REITs are giant landlords that collect rent from tenants—and rent collection was a lot more difficult when the economy tumbled due to the pandemic—few people were willing to buy REIT stocks.
Buffett is not known for being a big REIT investor, but his company Berkshire Hathaway Inc. (NYSE:BRK.B) does have a stake in STORE Capital Corp (NYSE:STOR), a REIT headquartered in Scottsdale, AZ. In June 2017, Berkshire acquired an initial stake of 18.6 million shares of the company through a private placement at a price of $20.25 per share. (Source: “STORE Capital Announces Investment from Berkshire Hathaway,” STORE Capital Corp, June 26, 2017.)
That investment worked out pretty well, with STORE Capital stock trading at over $39.00 apiece by early February. But then the stock market crashed and STOR stock plunged alongside other REITs. By the end of March, the REIT’s share price had dropped by more than 50% from its February high to just $18.12.
So, what would you do in that situation? Cut losses and walk away? Or continue to hold the position?
Well, Warren Buffett followed through on the “be greedy when others are fearful” part. In the second quarter of 2020, when STORE Capital stock started to recover but was still well below its pre-pandemic level, Berkshire Hathaway bought another 5.8 million shares of the REIT. By the end of June, Buffett’s company had increased its position in STORE Capital Corp to 24.4 million shares. (Source: “Form 13F Information Table,” U.S. Securities and Exchange Commission, August 14, 2020.)
And according to the latest 13F filing from Berkshire Hathaway, Buffett’s company continued to hold those 24.4 million shares of STOR stock through the third quarter of 2020. (Source: “Form 13F Information Table,” United States Securities and Exchange Commission, November 16, 2020.)
Take a look at the chart below. It shows that STORE Capital stock currently trades at $32.63 apiece, meaning it had advanced quite a bit since Buffett last added shares.
STORE Capital Corp (NYSE:STOR) Stock Chart
Chart courtesy of StockCharts.com
However, STORE Capital stock remains below its pre-pandemic level. For long-term income investors, this could still be an opportunity.
You see, while many REITs have cut their dividends this year due to poor rent-collection figures, STORE Capital is not one of them. In fact, on September 15, the REIT announced a 2.9% increase to its quarterly cash dividend, to $0.36 per share. (Source: “STORE Capital Increases Quarterly Dividend 2.9%; Provides Acquisition Guidance for Second Half of 2020,” STORE Capital Corp, September 15, 2020.)
At the current share price, the increased quarterly rate translates to a generous annual yield of 4.4%.
The payout is safe, too. In the third quarter of 2020, STORE Capital generated adjusted funds from operations (AFFO) of $0.46 per diluted share. Compared to the $0.36-per-share dividend the company declared for the third quarter, it had a payout ratio of 78.3%, leaving a margin of safety. (Source: “STORE Capital Announces Third Quarter 2020 Operating Results,” STORE Capital Corp, November 5, 2020.)
Furthermore, STORE Capital’s portfolio had an occupancy rate of 99.6% at the end of September, with a weighted average remaining lease contract term of approximately 14 years. Combined with a weighted average annual lease escalation rate of 1.9%, the company is well positioned to generate a steadily increasing stream of rental income going forward.
As for rent collection, the numbers did deteriorate in the early days of the pandemic, but by now they have largely recovered. According the company’s latest update, by November 20, STORE Capital had already received 90% of its contractual base rent and interest for the month of November. (Source: “STORE Capital Announces November Rent Collections of 90%,” STORE Capital Corp, November 23, 2020.)
Bottom line: past performance is no guarantee of future results, and Warren Buffett is not always right. But with STOR stock, the Oracle of Omaha could be onto something special.