At Berkshire Hathaway Inc.’s (NYSE:BRK-BC) annual meeting in Omaha this past May the famed Oracle of Omaha said this: "The department store is online now. I have no illusion that 10 years from now will look the same as today, and there will be a few things along the way that surprise us."
Now Buffett’s company has taken a 9.8% stake in real estate investment trust Store Capital Corp. (SYSE: STOR). This apparently signals a bet by Buffett that some types of brick-and-mortar entities will last – even in the age of Amazon.com Inc. (NASDAQ:AMZND).
The Store Story
Store isn’t like most real estate retail landlords. The company focuses on service properties likely to remain brick-and-mortar. These include preschools, health clubs, dine-in movie theaters and pet-care sites to name a few.
According to Store, less than 20% of its portfolio is invested in traditional retail. Even then Store specializes in what it calls “internet resistant” retailers. This includes furniture stores, hobby and craft centers, and hunting, fishing and camping stores.
Investors Join In
Before last Friday, Store Capital had dropped 16% since the beginning of the year. It closed at $23.11 Monday, up 11.27%, reflecting the company’s largest gain since its initial public offering in 2014. Store Capital issue 18.6 million shares to Berkshire in a private placement at $20.25, the REIT said in a statement Monday.
Christopher Volk, Store’s CEO said, “Berkshire Hathaway’s investment solidly positions Store for continued growth. An investment in our company from one of history’s most admired investors represents a vote of confidence.”
Margins Of Safety
Store Capital purposely constructed the economics of its business to allow for large margins for error. As a result, the company has never generated a negative rate of return in any portfolio, public or private.
Analysts like Forbes’ Brad Thomas have upgraded Store Capital to a “strong buy” on the basis of the company’s margins of safety philosophy, which Thomas says the market has not yet recognized and given the stock credit for.
Related: BUFFETT’S ANNUAL LETTER IS HERE!
Other REITs Of Note
News of Berkshire’s investment in Store Capital focuses new attention on REITs with Forbes contributor, Brad Thomas adding his voice to the mix recently by nominating 3 small cap REITs Thomas says are “poised to profit.”
According to Thomas, compared to large cap REITs with heavy Wall Street coverage and investor interest, small cap REITs mostly “fly under the radar. As a result, he says, they can often better growth potential over the long term.
Thomas names commercial real estate mortgage REIT Jernigan Capital (NYSE: JCAP), office property REIT City Office (NYSE:CIOC) and Ashford Hospitality Prime Inc. (NYSE:AHPC) a hotel REIT which spun off from Ashford Hospitality Trust, Inc. (NYSE:AHTF) in 2013, as 3 REITs to watch.