Buf­fett’s Store prop­erty in­vest­ment is one off the beaten track

The National - News - Business - - Analysis - Sarah Mulholland and Noah Buhayar

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.

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