Warren Buffett’s Berkshire Hathaway has made another low dollar deal that is a bit more than it seems.
On Monday night Berkshire became the third biggest shareholder in an obscure US real estate investment trust (REIT) called Store Capital. Berkshire took 18.6 million shares in a private placement at $US20.25 each from Store which gives the Buffett company a 9.8% stake.
Store (https://storecapital.com) has only been listed on the US exchanges since 2014 and is a small player in real estate, but with an unusual strategy – it invests in what it calls single tenant operational real estate, mostly to small businesses and companies in a host of industries – many in retail. It calls itself the leader in “middle market” real estate capital solutions.”
But it stays away from big shopping malls and the like where much of the damage has been done in the past year by the slide in retailer share prices (such as Macy’s and Nordstrom and Kroger) from the rise of online stores, led by Amazon.
Never heard of Store, nor had I and a lot of other investors in the US and around the world because like Berkshire’s moves into Apple and the four major US airlines, it was an unlikely Buffett deal which these days has been more about big dollar deals and acquisitions, such as Duracell batteries, financing the purchase of Heinz and Kraft, and buying Precision Castparts outright for $US32 billion.
The $US377 million investment in Store is tiny by comparison and follows a more traditional Buffett/Berkshire deal last week in which it agreed to prop up the struggling Canadian sub-prime mortgage lender, Home Capital Group by providing a credit line and committing to take an equity stake worth more than $C2 billion eventually.
That was a more conventional style deal done by Buffett that involved a major play (but high risk) at low cost, with preferred securities (paying a rich 9.5%, meaning a lot of income if the deal is successful).
Buffett did similar structured deals in the GFC with the likes of Goldman Sachs, General Electric and Bank of America (which remains in Berkshire’s books with huge profits because of the surge in BA’s share price).
The billions of dollars of investments in Apple and the four big US airlines American, United, Delta and Southwest – were all done via the stockmarket with a steady accumulation of shares over some months.
This deal though was done not by Buffet but by one of his two investment offsiders, Ted Weschler. It is one of the very rare occasions where one of the two deputies has been associated with a public deal (The other deputy investment manager is Todd Combs).
Usually they oversee investments under $US1 billion, according to Buffett followers and monitor big buying deals, such as the huge Apple and airline investments once they have been signed off by Buffett.
Store Capital chief executive Christopher Volk said in media interviews on Monday that Berkshire had been studying the REIT since 2014, occasionally talking to management management. He said that 10 days ago Buffett’s deputy investment manager Ted Weschler called the company to suggest a deal because the price had fallen to an attractive level, Volk said.
Store Capital shares were down around 16% this year, but jumped 11% on Monday after the Buffett deal. It edged up on Tuesday and jumped a further 3% on Wednesday.
Buffett has other deals in commercial real estate. Berkshire and Leucadia National are joint owners of Berkadia Commercial Mortgage LLC, a provider of banking and sales services to the property industry. But it also has big real estate broker operations in many states, home services and property management.
Store Capital boasts investments in over 1,750 properties in 48 US states. AMC Entertainment, the Applebee’s restaurant chain and Ashley Furniture are among its 10 biggest customers, according to an investor presentation.
"Store describes itself as the leader in "Single Tenant Operational Real Estate" and says it is "dedicated to real estate net-lease profit-centre property investments."
Store focuses on service properties: preschool facilities, health clubs, dine-in movie theatres and pet-care sites. Less than 20% of its portfolio is invested in traditional retail – and even those it calls “internet resistant,” including furniture stores, hobby and craft centres, and hunting, fishing and camping shops.
