STORE Capital Corp. (NYSE: STOR) is not exactly a household name. Within the investing community, almost the entire float of its public shares is owned by institutional investors. That lack of public visibility may change now that Berkshire Hathaway Inc. (NYSE: BRK-A) has taken a 9.8% shareholder stake in the company. The big question to ask here is why Warren Buffett and his team would take such a keen interest in a commercial real estate investment trust (REIT) when other investors have developed cold feet.
Berkshire Hathaway’s stake came from an investment of $377 million in STORE Capital. In the transaction, STORE Capital issued some 18.6 million shares of company stock in a private placement to one of Berkshire Hathaway’s subsidiaries, National Indemnity Company, at a price of $20.25 per share. These were issued under a Regulation D filing, so they may not be resold back into U.S. markets without a registration or obtaining exemptions.
STORE Capital plans to use the funds to repay debt, to fund property acquisitions and for working capital and other general corporate purposes.
STORE Capital primarily invests in single-tenant properties that lease to chain restaurants, supermarkets, drug stores and other companies tied to retail, movie theaters, early childhood education, service and distribution.
The Scottsdale, Arizona-based outfit was founded in 2011 and STORE is an acronym for single tenant operational real estate. It is listed as one of the largest and fastest-growing net-lease REITs in America, owning a large and diversified portfolio of single net-lease properties in 1,750 locations within 48 states as of March 31, 2017.
The company has only about 70 employees, and its 27.5 million share initial public offering was at $18.50 per share back in 2014. Its equivalent yield after the post-Berkshire pop for new investors was listed as 5.16%.
Amazingly, the 18.6 million shares would not even make Berkshire Hathaway the largest shareholder, based on March 31, 2017, SEC holding data. At that time, Vanguard funds owned 26.13 million shares (a 15.25% stake) and Fidelity funds owned 23.43 million shares (a 13.67% stake). Other key holders as of that date were listed as follows:
- Cohen & Steers, 10,732,987 shares (6.26%)
- BlackRock, 10,152,844 shares (5.92%)
- Principal Financial Group, 9,948,918 shares (5.81%)
- MFS, 8,996,601 shares (5.25%)
- BNY Mellon, 7,579,529 shares (4.42%)
- Wellington Management, 5,867,685 shares (3.42%)
- Daiwa Securities, 5,699,412 shares (3.33%)
- CI Global Investments, 5,001,272 shares (2.92%)
Janney maintained a Buy rating on STORE Capital, with a fair value estimate raised by $1 to $25, on the same morning after the Berkshire Hathaway deal. Janney noted that, despite a 2.5% discount to its prior closing price, this Berkshire Hathaway deal on a net basis provided a superior price to STORE Capital than an overnight equity offering. Due to the increased share count, Janney lowered the is funds from operation per share estimates from $1.67 to $1.66 for 2017 and from $1.78 to $1.75 in 2018.
Other recent analyst calls were made after STORE Capital’s earnings:
On May 5, 2017, Wunderlich maintained its Buy rating but trimmed its target to $25 from $27.50, based on a falling net asset value estimate and multiple compression in the freestanding single-tenant REITs.
On May 4, 2017, Wells Fargo maintained its Market Perform rating with a $23 to $25 valuation range, while noting that its strong portfolio metrics should support steady and predictable cash flows.
On May 4, 2017, UBS maintained its Neutral rating but lowered its target to $24 from $26 over increased concerns about a challenging retail environment.
On May 4, 2017, KeyBanc Capital Markets maintained a Sector Weight rating.
On April 20, 2017, Goldman Sachs maintained a Buy rating but removed STORE Capital from the Conviction Buy list. Its target price was $28 at that time.
On February 10, 2017, Labenburg Thalmann raised its rating to Buy from Neutral with a $28 target price, but on May 10, 2017, it downgraded STORE Capital back to Neutral and removed that target price after noting that the growth narrative was deteriorating as the credit landscape had worsened.
STORE Capital shares were trading up over 10% at $22.87 Monday morning. Its 52-week range is $19.65 to $31.44, and the $3.5 billion REIT has a consensus analyst target price of $26.13.