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Here’s Why Buffett Bought Store Capital

Warren Buffett made headlines last week when he purchased 9.8% of STORE Capital (STOR) for $377 million on behalf of his conglomerate Berkshire Hathaway (BRK-A) (BRK-B).

Buffett is the most iconic – and most successful – investor of our time. Through decades of profitable business and investment, he has grown Berkshire to a market capitalization of $400+ billion.

Thus, when he buys a stock, I tend to pay attention.

Warren Buffett’s investment portfolio is full of high-quality dividend stocks, which is surprising for many that know Buffett primarily as a value investor.

STORE Capital is the newest addition to Buffett’s portfolio. A closer look reveals that there are many reasons why Buffett might like this stock. Although it is a young real estate investment trust (REIT) that IPO’d in 2014, the trust has expertise in middle-market real estate solutions.

The REIT also has a very high dividend yield. STORE Capital yields 5.1% at today’s prices, making it a member of the short list of stocks with 5%+ dividend yields.

STORE Capital’s exceptionally high dividend yield and stamp of approval from Warren Buffett are two reasons why investors might take an initial interest in this stock.

This article will analyze the investment prospects of STORE Capital in detail.

Business Overview

STORE Capital is a triple-net lease REIT with a market capitalization of $3.9 billion. Triple-net lease REITs pass onto their tenants the three major costs of owning/operating real estate:

  • Insurance expenses
  • Maintenance expenses
  • Property tax expenses

STORE Capital’s name is an acronym which stands for Single Tenant Operational Real Estate. STORE Capital’s IPO was in November of 2014, making it a relatively young company by most standards.

The trust differentiates itself from other triple-net lease REITs by focusing on the middle market of the real estate industry, a group of tenants that would typically rely on expensive bank financing to purchase properties (rather than securitized debt instruments).

Because bank financing is so expensive for these middle market companies, they are highly incentivized to lease properties via REITs like STORE Capital.

(Click on image to enlarge)

Source: STORE Capital First Quarter Earnings Presentation, slide 5

STORE Capital – like many REITs with retail exposure – has experienced downwards pressure on its stock price in recent months because of fears that the traditional retail shopping model is broken.

However, STORE Capital actually has a rather limited exposure to retail properties (although its stock price would suggest otherwise). This may have been one of the reasons why Buffett took an interest in this stock, as he likely interpreted it as a buying opportunity.

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

Even if retail shopping dies completely...