Warren Buffett (Trades, Portfolio) is best known for his well-timed investments in companies such as American Express (AXP, Financial), Coca-Cola (KO, Financial) and Wells Fargo (WFC, Financial), which have all generated outstanding returns for the Oracle of Omaha over the years.
In addition to these major positions, Buffett has held hundreds of smaller positions over the years that are often overlooked. These smaller positions always warrant closer attention to try and figure out what Buffett likes about them and if they offer value.
A recently disclosed new small position is an 18.6 million-share holding in Store Capital (STOR, Financial). Berkshire’s (BRK.A, Financial)(BRK.B, Financial) National Indemnity Co. unit spent $377.1 million on 18.62 million shares at $20.25 each, giving it a 9.8% stake.
Long time coming
What’s interesting about this investment is that it seems Berkshire and its team had been evaluating the business for some time. Reuters reported earlier this year that according to Christopher Volk, Store’s CEO, the Berkshire investment was “three years in the making, beginning with his 2014 email to Buffett, when the REIT was still private, to gauge his interest.
“Over the years, they followed every earnings release, every conference call, every presentation, every investor supplement and became very familiar with the company and our investment strategy,” Volk said.
So what could Buffett and team possibly like about this business? Well, Store is a real estate investment trust that invests in single-tenant properties. The company is relatively disconnected from the retail business with just 18% of revenues coming from the sector; the rest of the group’s income is derived from companies that operate in the service and manufacturing sectors. Store’s portfolio includes more than 1,750 properties and according to Volk, “The quality of the contracts we create is incredible, and the spreads between lease rates and the costs of our borrowings is our highest in memory.”
High-quality REIT?
Store Capital does have plenty of quality hallmarks as well as the Warren Buffett stamp of approval. Funds from operations are growing thanks to new properties and rent escalators. The firm has an occupancy rate of approximately 99% and predicted annual internal growth of greater than 5%. What’s more, to help boost growth last year, Store acquired 360 properties alone, and 75% of its lease contracts were with investment-grade businesses. A unique trait of the business is that it often requires tenants to provide store level profitability figures and requires tenants to pay variable costs, such as property taxes, insurance and some maintenance expenses; these all help increase the bottom line and ensure that the company only leases its properties to the most secure, creditworthy clients.
Put together, the expansion drive, rent escalators and high-quality clients have helped Store grow its dividend per share 172% since its IPO in 2014.
But can this performance continue? Commercial property REITs have come under pressure over the past few years as e-commerce decimates traditional brick and mortar stores. Vacancy rates have been rising and property values are falling. But it seems that so far, Store has been able to avoid this downturn. Acquiring and consolidating weaker players will help the company continue to buck wider industry trends as it uses its already robust store base to provide growth capital. Management seems confident that the company can continue on its growth trajectory having spent an aggregate of more than $1.1 million buying shares since the beginning of the year with only one sale.
So to sum up:
- Store is growing steadily through acquisitions.
- The group has built a strong portfolio of commercial property assets in industries that have steady outlooks.
- The company has high quality clients, which it regularly reviews.
- Rents are increasing above inflation.
- Management is buying in the open market.
- Strong support from Buffett and Berkshire that have conducted detailed due diligence on the company.
Add all of these factors together and without really looking at the figures you already have a solid investment thesis. Store certainly looks to be a stock worthy of further research.
Disclosure: The author owns no share mentioned.
