NEW YORK, NY – SEPTEMBER 19: Philanthropist Warren Buffett is joined onstage by 24 other … [+]
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While COVID-19 continues to spread its tentacles across most of the commercial real estate sector, the net lease sector has become the new “gold standard” for income-oriented investors.
This week, two net lease REITs are entering the publicly- traded universe in separate IPOs: NetStreit Corporation, trading under the ticker “NTST” raised raised $225 million at $18.00 per share (below the range of $19 to $21) and Broadstone Net Lease filed recently to raise up to $100 million in an IPO (this is likely a placeholder for a deal that could raise up to $500 million).
The Net Lease sector – consisting of free-standing buildings – has become an increasingly dominant investment category, thanks in part to the long-term lease contracts that generate durable sources of rental income.
A decade ago, this REIT sector had a combined market capitalization of less than $5 billion and today it has mushroomed almost 10x, to a market capitalization of over $44 billion (according to Nareit).
Today Berkshire Hathaway’s 13F revealed that STORE Capital (STOR) owns another 5.8 million shares of the company, on top of the 18.6 million shares that were purchased back in June 2017, bringing the total to 24.4 million shares. In a Forbes article (June 2017) I explained,
“Store Capital simultaneously issued 18.6 million shares of company stock in a private placement to a wholly owned subsidiary of Berkshire Hathaway BRK.B at a price of $20.25 per share.”
In what’s commonly referred to as “dollar cost averaging”, Berkshire Hathaway took advantage of the mispricing of STORE shares, to lower the cost basis to essentially “true up” the original allocation ($20.25 back in 2016).
Like most REITs, STORE has been hammered with the COVID-19 lockdown, and the company has been hit especially hard due to its exposure with restaurants (8.5 percent of the portfolio), movie theaters (4 percent of the portfolio), and health clubs (5.3 percent of the portfolio).
STORE has returned roughly -30 percent year-to-date, compared with the rest of the U.S. REIT sector that’s returned -12 percent (based on the Vanguard Real Estate ETF).
However, rent collection has continued to improve as STORE collected 70 percent of rent in April, 67 percent in May, 76 percent in June, and 85 percent in July (average 73 percent in Q2-20).
This announcement also corresponded with the company maintaining its dividend at $0.35/share amidst the COVID-19 concerns.
In a recent COVID-19 update conference call, STORE’s CEO, Chris Volk said that his company’s recent performance leads management (and the board of directors) to believe that the company will have the wherewithal to pay the dividend from operating cash flows rather than being forced to offer equity to shareholders and/or increase the debt load to support the dividend payment.
Berkshire Hathaway’s confidence in the company is evidenced by the 31 percent growth (based on number of new shares) – up 1.15 percent after hours. Berkshire Hathaway’s total STORE investment now stands at approximately 9.6 percent.
STORE has been trading at around $22.00 per share over the last 90 days, so we estimate that Warren Buffet’s prized vehicle has added another $125 million in capital, putting the total investment sum at roughly $500 million.
I’m glad to see Berkshire Hathaway casting a wider net in REIT-dom as this signals trust in the asset class that has become an all-important category for big and small investors, known as Real Estate Investment Trusts.
I own shares in STOR.