We recently got our once-quarterly snapshot of Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) massive stock portfolio, and there were certainly some surprising moves. For example, Warren Buffett trimmed the company's bank stock investments by several billion dollars and added a gold mining stock to the portfolio, to the surprise of many investors.
Overall, Berkshire was a net seller of stocks during the second quarter. But in addition to the gold mining stock, there was one notable exception -- real estate investment trust STORE Capital (NYSE: STOR).
Berkshire's STORE Capital stake has grown
STORE Capital has been the only real estate investment trust, or REIT, in Berkshire's portfolio since it was first added in 2017 (although Buffett owns shares of another REIT, Seritage Growth Properties (NYSE: SRG), in his personal stock portfolio).
In the second quarter, Berkshire bought nearly 5.8 million shares of STORE, raising the total investment to 24,415,168 shares, which represents a 9.99% stake in the REIT.
That percentage is significant. It's generally undesirable for Berkshire to own more than 10% of any company, as it comes with additional regulatory requirements. Plus, REITs have a special rule that prohibits any five shareholders from owning more than 50% of the stock, so in most cases, ownership is limited to 10% per investor.
To be clear, we don't know with certainty if the investment was made by Warren Buffett himself (who still controls the bulk of Berkshire's portfolio) or if one of his two stock-picking lieutenants made the purchases.
Why does Warren Buffett like STORE Capital so much?
If you aren't familiar, STORE Capital is a net-lease REIT that specializes in retail and service industry properties. Its properties are occupied by single tenants, and in fact the name stands for Single Tenant Operational Real Estate (in case you were curious why STORE is capitalized). And the business has several characteristics that fit Buffett's investment style well. Just to name a few:
- Net-lease tenants sign long-term leases and are responsible for paying property taxes, insurance, and maintenance -- the variable costs of owning a property. All the REIT needs to do is get a tenant in place and enjoy years of growing, predictable income.
- Most of STORE Capital's tenant base is either recession-resistant, resistant to e-commerce competition, or both. For example, businesses like restaurants and day care centers have little to worry about from online disruption. Auto repair and pet care businesses sell services people need, no matter what the economy is doing.
- STORE Capital requires property-level financials from its tenants, giving it a unique insight into the true risk involved with its operations.
- STORE Capital is a great dividend stock, which Buffett loves. At the current share price, STORE yields 5.5%. It has raised its dividend regularly in its short history as a publicly traded REIT and earns plenty of money to continue paying its current dividend, even with the pandemic's temporary effects on rent collection.
A compelling value at the current price?
Another reason Warren Buffett (or one of the other stock pickers) might have decided to add to the STORE Capital investment is that the stock has become considerably cheaper lately. Even after a bit of a rebound from the lows, it's still about 35% below its pre-pandemic peak.
To be sure, there's a good reason for this. About one-third of STORE Capital's rental income comes from tenants in industries that have been severely impacted by the COVID-19 pandemic, such as restaurants, day care centers, movie theaters, family entertainment centers, and fitness centers. However, rent collection has improved significantly in recent months, and aside from the movie theaters (which are less than 5% of STORE's rent), most of the tenants in the portfolio have reopened.
In short, STORE Capital has several of the qualities Warren Buffett likes to look for in stock investments, and at such a massive discount, it likely seemed like the right time to double down.