Buffett’s Store property investment is one off the beaten track
Warren Buffett is betting that some types of brick-and-mortar property will hold up better than others in the age of Amazon.
His Berkshire Hathaway took a 9.8 per cent stake in Store Capital Corporation, sending shares of the real estate investment trust surging on Monday. Unlike other retail landlords that have come under pressure as consumers shop more online, Store focuses on service properties: preschool facilities, health clubs, dine-in movie theatres and pet-care sites.
Less than a fifth of its portfolio is invested in traditional retail – and even those it calls “internet resistant”, including furniture, hobby and craft centres, and hunting, fishing and camping shops.
“Store doesn’t compete on the beaten path,” said Haendel St Juste, an analyst at Mizuho Securities USA. “They are targeting more experiential retail, trying to provide a buffer against risk.”
Investors in retail Reits have taken a beating as Amazon.com and other online sellers make it easier for consumers to buy clothing, toys and other items from their computers or smartphones and not have to step foot into a physical store. Mr Buffett, for his part, has long expressed confidence in property investments to generate income for extended periods of time, and to provide a cushion should the dollar lose value. He has said such bets, whether in buildings or agricultural land, are often safer than gold or bonds.
“Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment,” Mr Buffett wrote in a letter to shareholders in 2012. Farms, real estate and businesses such as Coca-Cola “meet that double-barrelled test”.
As an owner of single-tenant buildings, Store manages its properties differently than many retail landlords. Tenants cover the costs of operating the real estate, including taxes, maintenance and insurance. Store, based in Arizona, acts as a finance company for middle-market tenants without access to affordable capital, Mr St Juste said.
“They get mom-and-pops’ capital on much better terms by monetising their real estate.”
Store Capital issued 18.6 million shares to Mr Buffett’s company in a private placement at US$20.25 apiece, the Reit said in a statement on Monday. That compares with Friday’s closing price of $20.77. The $377 million investment by Berkshire follows a deal last week in which it agreed to prop up Canada’s Home Capital Group by providing a credit line and committing to take an equity stake.
Christopher Volk, Store’s chief executive, said on Monday that Berkshire had been studying the Reit since 2014, occasionally holding conversations with management. Ten days ago, Mr Buffett’s deputy investment manager, Ted Weschler, called the company to suggest a deal because the price had fallen to an attractive level, Mr Volk said.
“Berkshire Hathaway is fundamentally a value-orientated investor,” he said in an interview. “The trading price had dropped because there was a fear that we had a lot of retail exposure, which we actually don’t. We’re predominantly focused on the service sector.”
Store Capital had slipped by 16 per cent this year to Friday. It jumped 11 per cent on Monday, its biggest gain since the company’s 2014 initial public offering. Home Capital had plunged even more before Berkshire agreed to step in. Then the Toronto-based lender jumped 27 per cent the day after the deal.
Mr Buffett has other bets on commercial real estate. Berkshire and Leucadia National are joint owners of Berkadia Commercial Mortgage, a provider of banking and sales services to the property industry.
The billionaire has also personally invested in Reits. After Sears Holdings spun off some of its properties into an entity called Seritage Growth Properties, he took an 8 per cent stake in the trust.