Warren Buffett has earned a reputation for being an exceptional investor. One notable stock Buffett's Berkshire Hathaway (BRK.A -0.80%) (BRK.B -1.10%) owns is STORE Capital (STOR), a real estate investment trust (REIT) focused on single tenant operational real estate. It's the only REIT Buffett currently holds.
Here's a closer look at what a $1,000 investment in Warren Buffett's only REIT investment could return over the next decade.
What drew Warren Buffett to STORE Capital?
Berkshire Hathaway initially took a 9.8% stake in STORE Capital in 2017, investing $377 million. Buffett's company has since paired back that stake a bit. It most recently held nearly 7 million shares worth about $195.5 million, representing about 2.5% of the REIT's outstanding shares.
STORE Capital focuses on owning operationally critical properties (i.e., service-oriented retail, service businesses, and manufacturing facilities) net leased to a single tenant. Net leases make the tenant responsible for maintenance, building insurance, and real estate taxes. STORE Capital therefore generates very stable rental income.
One factor distinguishing STORE Capital from other net lease REITs is its focus on until-level profitability. It will only acquire profitable locations, requiring tenants to provide it with unit-level financial statements. This strategy results in superior performance compared to other net lease REITs.
A steady grower
STORE Capital's strategy has paid dividends for investors over the years. Since its initial public offering (IPO) in 2014, STORE has grown its adjusted funds from operations (AFFO) per share -- how REITs measure their cash flow -- at a 5.9% annual rate. That enabled the company to grow its dividend per share at a 6.1% annual rate. Add in its high-yielding dividend, and the REIT has delivered a 9.8% average annual total return since its IPO.
The company expects to continue growing shareholder value in the coming years. A few factors drive that view.
First, STORE Capital's net leases have built-in contractual rate increases. The company estimates that those lease escalation clauses should grow its AFFO per share by more than 2.5% per year.
Meanwhile, even though STORE Capital has grown its dividend faster than AFFO per share, it has the second lowest dividend payout ratio in the net lease sector at 68% of its AFFO. That enables it to retain a significant amount of capital to reinvest in acquiring additional income-producing properties. The company estimates reinvesting its retained cash should support 3% annual AFFO per share growth.
That puts the company's annual AFFO per share growth rate at more than 5.5% without raising additional capital from outside investors. Add in the 5.5% yielding dividend, and here's how much a $1,000 investment in STORE Capital could grow over the next decade if it only relied on its ability to deliver internal growth:
|
Year |
Capital appreciation from AFFO growth (5.5% annually) |
Dividend income (Grows with AFFO) |
Ending value |
|---|---|---|---|
|
Year 1 |
$55.00 |
$55.00 |
$1,110.00 |
|
Year2 |
$58.03 |
$58.03 |
$1,226.05 |
|
Year 3 |
$61.22 |
$61.22 |
$1,348.48 |
|
Year 4 |
$64.58 |
$64.58 |
$1,477.65 |
|
Year 5 |
$68.14 |
$68.14 |
$1,613.92 |
|
Year 6 |
$71.88 |
$71.88 |
$1,757.69 |
|
Year 7 |
$75.84 |
$75.84 |
$1,909.36 |
|
Year 8 |
$80.01 |
$80.01 |
$2,069.37 |
|
Year 9 |
$84.41 |
$84.41 |
$2,238.19 |
|
Year 10 |
$89.05 |
$89.05 |
$2,416.29 |
Data source: STORE Capital and author's calculation NOTE: Assumes AFFO per share and dividend grows by 5.5% per year. Ending value assumes the share price grows with AFFO and adds in dividend income.
STORE could grow its AFFO per share even faster if it issues more stock to acquire additional income-producing real estate. The REIT has a long history of raising outside capital to grow faster. For example, it sold 8.6 million shares during the first six months of this year, raising $249.6 million to help fund $904.4 million of new investments. That has it on track to deliver 10.2% AFFO per share growth this year at the mid-point of its forecast. That follows the 12% AFFO per share growth it delivered last year.
Here's a look at how much a $1,000 investment in STORE Capital could grow over the next 10 years if it were able to expand its AFFO per share and dividend at a 10% annual rate:
|
Year |
Capital appreciation from AFFO growth (10% annually) |
Dividend income (Grows with AFFO) |
Ending value |
|---|---|---|---|
|
Year 1 |
$55.00 |
$100.00 |
$1,155.00 |
|
Year2 |
$60.50 |
$110.00 |
$1,325.50 |
|
Year 3 |
$66.55 |
$121.00 |
$1,513.05 |
|
Year 4 |
$73.21 |
$133.10 |
$1,719.36 |
|
Year 5 |
$80.53 |
$146.41 |
$1,946.29 |
|
Year 6 |
$88.58 |
$161.05 |
$2,195.92 |
|
Year 7 |
$97.44 |
$177.16 |
$2,470.51 |
|
Year 8 |
$107.18 |
$194.87 |
$2,772.56 |
|
Year 9 |
$117.90 |
$214.36 |
$3,104.82 |
|
Year 10 |
$129.69 |
$235.79 |
$3,470.30 |
Data source: STORE Capital and author's calculation NOTE: Assumes AFFO per share and dividend grows by 5.5% per year. Ending value assumes the share price grows with AFFO and adds in dividend income.
On the one hand, it would be difficult for STORE Capital to maintain double-digit AFFO per share growth over a decade, given the cyclical nature of the real estate sector and the impact interest rates have on investment returns. However, it should be able to access outside capital to grow faster than its internal growth rate alone.
A high-value real estate investment
It's easy to see why Warren Buffett still likes this REIT. It can deliver compelling total returns with internally financed growth, with lots of upside as it accesses outside capital at attractive rates. That makes it a great option for investors seeking a lower-risk Warren Buffett stock with compelling total return potential.
