Warren Buffett’s Real Estate Bet

Warren Buffett’s financial wisdom is legendary. He takes a practical approach to choosing assets for his holding company, Berkshire Hathaway, by focusing on businesses with solid financials, a history of steady growth, and the ability to withstand market volatility. 

Buffett isn’t swayed by fads and trends, and he doesn’t buy into businesses that offer esoteric products and services. One of the most-often repeated Warren Buffett quotes is, “Never invest in a business you cannot understand.” 

A look at Berkshire Hathaway’s portfolio proves that Buffett lives by his investing principles. Berkshire Hathaway’s biggest holdings as of December 31, 2021, include Apple, Bank of America, American Express, Coca-Cola, and Kraft Heinz

Real estate might not appear in Berkshire Hathaway’s top five, but that doesn’t mean Warren Buffett avoids the industry. Quite the opposite, in fact. Buffett knows the benefits of real estate investing, such as tax advantages, steady income, and long-term appreciation. But he also knows the risks: unpredictability, lack of liquidity, and potential negative cash flows. 

Buffett doesn’t choose direct real estate investment – that is, he doesn’t buy rental properties outright – because Berkshire Hathaway isn’t prepared to mitigate these risks and maximize profits. As Buffett’s partner Charlie Munger put it, “We have no special competence in the field, and that means that we spend almost no time thinking about it.”

Instead, Warren Buffett takes a different approach to the real estate market. He lets the experts do what they do best, and he shares in the profits through a Real Estate Investment Trust by the name of STORE Capital. 

What does STORE Capital do, and why is an REIT better than buying investment property outright? 

STORE Capital Is No Ordinary REIT 

STORE Capital is an REIT that makes it possible for shareholders to enjoy the benefits of real estate investing without the challenges – and risks – of managing investment properties directly.

Essentially, shareholders put their money into the company through the purchase of stock, and those funds are then used to buy and manage real property. It’s group ownership at its finest. Real estate experts handle the logistics, investors provide the capital – and reap the profits – for the projects. 

REITs were initially introduced in 1960 to make real estate investing more accessible for average investors. Today, these companies play a major role in the US real estate market.

Collectively, REITs own more than $3.5 trillion in assets nationwide. Approximately $2.5 million of that belongs to public REITs – a figure that represents more than half a billion properties. The combined market cap of all REITs listed in the US comes to an astonishing $1.35 trillion. 

STORE Capital’s history can be traced all the way back to 1981, though the company in its current form was launched in 2011. It held an IPO in 2014 when it owned 850 properties in 46 states. At the time, its market cap was estimated at roughly $2 billion. Today, the company is valued at $8.13 billion, and it owns 2,866 properties (as of December 31, 2021). 

How Does STORE Capital Make Money? 

REITs can own property in a variety of categories, though most tend to specialize for maximum efficiency. Examples of common property types found in REIT portfolios include residential buildings, warehouses, offices, medical facilities, retail centers, hotels, and data centers. 

This REIT’s name comes from its core business: Single Tenant Operational Real Estate. This is a specific class of real estate that includes locations where businesses operate.

STORE Capital is focused on real estate that meets the needs of retailers and various service providers. The industries most frequently found in STORE Capital’s portfolio include automotive repair and maintenance facilities, health clubs, restaurants, metal fabrication, and early childhood education.

STORE Capital makes money through the purchase and management of properties. Basically, it buys real estate, leases space, manages buildings, and collects payment from tenants. The profits from those operations are distributed to shareholders in the form of dividends, which are – at the moment – yielding 5.21 percent

One of the most attractive features of REIT investment is the fact that there can’t be any shenanigans in terms of profit sharing. In order to keep its REIT status, at least 90 percent of taxable income must be handed over to shareholders. Most REITs choose to distribute closer to 100 percent.

Does Warren Buffett Own STORE Capital? 

Warren Buffett and Berkshire Hathaway don’t own STORE Capital outright, though Berkshire Hathaway does have subsidiaries in the real estate space. Examples of Berkshire Hathaway holdings include Clayton Homes, Berkshire Hathaway HomeServices, and Real Living Real Estate.

The commonality between these companies is the fact that they help clients purchase property of their own. They don’t own, manage, and rent out real estate.

In 2017, Berkshire Hathaway opened a position in STORE Capital, and Buffett purchased additional shares in 2020. Today, Berkshire Hathaway owns nearly nine percent of STORE Capital – shares valued at approximately $722 million. 

Through this investment, Berkshire Hathaway benefits from the high returns associated with investment property without taking on the complexities of management. Better still, real estate in general – and REITs in particular – tend to be negatively correlated to the stock market. That helps to protect portfolios in times of economic volatility. 

Is STORE Capital Stock A Buy? 

STORE Capital announced its 2021 year-end financial results on February 23, 2022, and it’s easy to see why Warren Buffett is impressed. Highlights include: 

  • Total revenues: $782.7 million (representing an increase of 12.7 percent from 2020’s $694.3 million) 
  • Net income: $268.3 million ($0.99 per basic and diluted share)
  • Adjusted Funds From Operations (AFFO): $554.0 million ($2.05 per basic and diluted share)
  • Cash dividends per common share: $1.49  

Over the course of the year, STORE Capital invested in 336 properties totaling $1.5 billion, and it issued $515 million in long-term fixed-rate notes. Of those, $337 were AAA-rated.

Those additional properties contributed to STORE Capital’s rising revenues, taking the company’s total real estate investment portfolio from 2020’s 2,634 properties ($9.6 billion in gross investment) to 2,866 properties ($10.7 billion in gross investment) as of December 31, 2021.

At the close of 2021, STORE Capital boasted a 99.5 percent occupancy rate and 556 customers in 49 states. During the earnings call, CEO Mary Fedewa said:

For the full year, we achieved 12 percent growth in AFFO per share, which exceeded our guidance, raised our dividend by 6.9 percent, and acquired $1.5 billion in profit center real estate at an average cap rate of 7.5 percent.

As a result of this success and the momentum it represents, STORE Capital raised its 2022 guidance. Fedewa said she expects 2022 AFFO to come in between $2.18 and $2.22 per share.

So, is STORE Capital stock a buy? Analysts aren’t quite ready to say yes. But it is certainly one to watch, and it may be a good choice for investors who want more real estate in their portfolios. 

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