Billionaire investor Warren Buffett doesn't own a ton of real estate investment trusts, or REITs. He certainly has his favorite industries, like banking, consumer staples, and financial services, all of which are well-represented in Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) massive stock portfolio.
However, REITs do have quite a few characteristics Buffett likes, such as recurring income, lots of tangible assets, and potential for growth without a ton of volatility. And while Buffett is far from being a REIT-focused investor, he owns a couple of REITs -- one through Berkshire's portfolio and another in his own personal stock portfolio.
A very Buffett REIT
Berkshire Hathaway's stock portfolio has a market value of nearly $250 billion as I write this. This is spread amongst dozens of public companies, but you'll only find one REIT: STORE Capital (NYSE: STOR). As of June 30, 2020, Berkshire Hathaway owns just under 10% of STORE's outstanding shares, a stake currently worth about $676 million.
If you aren't familiar with STORE Capital's business, it owns a portfolio of single-tenant properties throughout the United States, most leased to tenants in either the service or retail industries. And while we don't know Buffett's specific motivation for buying STORE Capital, a few characteristics of the business likely appeal to him:
- Most of STORE Capital's tenants are both recession-resistant and not easily disrupted by e-commerce headwinds. Some of the portfolio was forced to shut down during the COVID-19 pandemic, but this is mainly a collection of resilient industries that operate businesses always in demand.
- STORE Capital is a net lease REIT. Its tenants sign long-term leases (initial terms of 15 years or more in most cases) with annual rent increases, or escalators, built right in. Tenants are responsible for paying property taxes, insurance, and most maintenance costs. Buffett loves predictable, growing income, so this is likely a big draw.
- Finally, STORE Capital requires property-level financials from all its tenants, which gives it a unique perspective when it comes to risk management.
STORE Capital is well off its pre-pandemic level but pays a 5.5% dividend yield that is well-covered by the company's FFO, even during the second-quarter shutdowns. That's why Berkshire bought STORE Capital and even added to its position earlier this year.
This other Buffett REIT has been struggling lately
On the other end of the risk spectrum is Seritage Growth Properties (NYSE: SRG), the REIT created several years ago to buy and redevelop a portfolio of former Sears locations.
Buffett owns 2 million shares of Seritage in his personal stock portfolio, just over 5% of the company, a stake that is worth about $28 million today. But with the stock down by nearly 70% over the past year alone and about 63% lower than its July 2015 IPO price, it's fair to say Buffett paid significantly more than $28 million.
Seritage is a classic deep-value story. The idea behind the business is to take old Sears locations and transform them into modern, mixed-use properties that command high rents and create value for investors. Of more than 30 million square feet of real estate, Seritage has successfully redeveloped about one-third of that, so it's pretty early in executing its vision.
Seritage's main problem is financing. Its sole creditor is Berkshire Hathaway itself, which gave Seritage a $1.6 billion term loan plus a $400 million credit line to fund its redevelopment efforts. The problem is that Seritage cannot access the credit line until it achieves a certain level of non-Sears rental income --and with the perfect storm of an earlier-than-expected Sears bankruptcy and the COVID-19 pandemic, it isn't likely to get there anytime soon. It has been able to sell some assets to buy some breathing room, but it needs a sustainable funding source.
It appears Buffett is holding on to his shares -- at least for now -- so maybe he hasn't lost faith in this now-speculative REIT just yet.
Should you buy these two Buffett REITs?
To be perfectly clear, it's not a great idea to buy any stock just because a billionaire investor has a position in it -- even if it's Warren Buffett. And these are two very different REITs: STORE Capital is designed for rock-solid income in any economic climate, while Seritage is more of a speculative play that needs the right type of economic conditions to execute its vision. Plus, Buffett bought Seritage long before the COVID-19 pandemic, which certainly changes the dynamics of the investment.
In short, while both of these REITs could be smart additions to your portfolio, do your own due diligence before buying either.