Overview of Berkshire Investment of $377 Million in Store Capital

In June 2017, Warren Buffett’s Berkshire Hathaway made a $377 million investment in Store Capital Corp, acquiring a nearly 10% stake to become the real estate investment trust’s (REIT) third-largest shareholder. The move reflected Buffett’s confidence in the retail property sector and Store Capital’s business model despite negative trends in the wider retail industry.

About Store Capital

Scottsdale, Arizona-based Store Capital Corp (NYSE: STOR) is a real estate investment trust (REIT) that invests in single-tenant operational real estate. Founded in 2011, Store Capital owns over 2,000 properties across the United States leased to more than 400 customers in the retail, service, and manufacturing industries. As a REIT, Store Capital is required to pay out 90% of its taxable income annually to shareholders as dividends.

Key details of Berkshire’s investment:

Berkshire Hathaway purchased 18.6 million shares for $20.25 per share, a price that reflected a nearly 4% premium to Store Capital’s previous closing share price.
This amounted to a $377 million total investment and gave Berkshire ownership of 9.8% of Store Capital’s outstanding shares, making it the company’s third-largest investor behind Vanguard Group and Fidelity Investments.
Berkshire’s investment accounted for nearly two-thirds of a larger $595 million equity offering by Store Capital aimed at funding new investments in properties.

Rationale for Berkshire’s Investment

Berkshire’s investment in Store Capital aligned with Warren Buffett’s long-term value investing strategy. Key factors that likely attracted Berkshire’s interest:

Stable Business Model

With 30 straight quarters of profitability, Store Capital had a stable, successful business model funding long-term triple net leases to tenants in relatively recession-resistant industries like quick service restaurants, early childhood education, and auto services. This meshed with Berkshire’s preference to invest in companies with predictable earnings.

Growth Potential

Though facing retail industry headwinds, Store Capital offered good long-term growth potential. At the time of Berkshire’s investment, Store Capital owned just 0.05% of the $1.6 trillion fragmented net lease real estate sector and was poised for expansion. Store Capital’s investor presentation highlighted a large target addressable market of over $10.5 trillion in U.S. real estate.

Strong Leadership

Co-founded by Chief Executive Officer Christopher Volk and Executive Chairman Morton Fleischer, Store Capital had an experienced management team with over 100 years of collective real estate investment expertise. This gave additional confidence that the leadership could prudently guide the company’s growth.

Compelling Valuation

In the equity offering, Store Capital sold shares equivalent to a forward funds from operations (FFO) multiple of just over 11x. This reflected a discount to REIT peers and presented an attractive buying opportunity for value-focused Berkshire.

What Berkshire’s Investment Signaled

Berkshire Hathaway’s investment amounting to nearly 10% ownership sent a strong signal of confidence in Store Capital’s prospects:

Belief in Management: Large investment indicated trust in the abilities of Store Capital’s leadership team to continue growing prudently.
Support for Business Model: Showed support for Store Capital’s net lease portfolio business model and validated company’s strategy.
Faith in Long-Term Viability: Berkshire’s typical investment time horizon is forever – investment suggested belief retail properties would remain viable long-term.
Optimism About Specific Property Types: Many of Store Capital’s properties leased to restaurants, early childhood centers, and auto service businesses – showed optimism about these retail segments.

Reaction to Berkshire Investment

Berkshire’s investment sparked a surge in Store Capital’s stock. The company’s share price rose over 12% to $23 on the Monday following news of Berkshire taking a position in the company.

Store Capital executive leadership expressed excitement about Berkshire’s investment, with CEO Christopher Volk stating: “Berkshire’s investment solidly positions us to continue building on our profitability and growth.”

Over the longer-term, Berkshire’s investment has proven lucrative. As of November 2023, Store Capital shares trade over 40% higher than when Berkshire invested in 2017. Powered by acquisitions, Store Capital now owns over 3,500 property locations across the U.S. with continued growth on the horizon.