Berkshire Hathaway‘s (NYSE:BRK.A)(NYSE:BRK.B) Chief Executive Officer and Chairman Warren Buffett is arguably the greatest investor in history. Despite his sizeable charitable giving over the years, Buffett is the fifth richest person in the world with his current net worth of $126 billion.
A large part of Buffett’s success as an investor has to do with avoiding investments that are outside of his expertise or area of expertise. This explains why the Oracle of Omaha has avoided buying rental properties throughout his career as an investor.
Buffett hasn’t entirely avoided investing in real estate, however. Let’s take a look at why the legendary investor founded the Real Estate Investment Trust (REIT). SAVE capital (NYSE:STOR) the only REIT in Berkshire Hathaway’s $351 billion investment portfolio.
A successful business model
The first attractive feature that STORE Capital likes is the diversification of its portfolio. Private for-profit school Spring Education Group is STORE Capital’s largest tenant at just 3% of annual base rent (ABR). Overall, the company’s top 10 tenants accounted for just 18.4% of its ABR. That’s because STORE Capital’s real estate portfolio consisted of almost 2,900 properties spread across every US state except Hawaii.
The second quality of STORE Capital that bodes well for shareholders is that the business model has a proven track record of success. The REIT buys single-tenant properties from its customers and leases them back to the same customers. This is a powerful option for STORE Capital tenants to access equity from their properties and use it to grow their business.
In exchange for access to this enticing option, tenants agree to assume all costs associated with their properties for a weighted average lease term of 13.4 years. STORE Capital also collects annual rent increases on its leases, providing a steady and growing source of rental income that typically keeps pace with inflation.
As a result, STORE Capital has experienced 5.5% annual adjusted funds from operations (AFFO) growth since its initial public offering (IPO) in 2014. And with an estimated $3.9 trillion addressable market, STORE Capital’s $10.7 billion real estate portfolio has plenty of room to continue growing.
A track record of impressive dividend growth
Another quality Warren Buffett undoubtedly loves about STORE Capital is its whopping 5% dividend yield, which is nearly four times its dividend S&P5001.4% yield. Dividends received from the REIT give Berkshire Hathaway more capital that can potentially be invested in other stocks. And STORE Capital’s dividend appears poised to grow near the 6.2% annual rate it has achieved since its IPO.
That’s because the stock’s 74% dividend payout ratio allows it to hold on to the capital necessary to grow its real estate portfolio and grow its AFFO per share over time.
The stock is cheaply valued
Best of all, STORE Capital seems to have a modest rating for its quality.
The REIT trades at a price-to-AFFO ratio of 14 per share. That’s hardly an unreasonable rating for a stock with a mid- to high-single-digit annual AFFO per-share growth outlook. And the stock’s trailing 12-month dividend yield of 4.9% is also moderately higher than the median yield of 4.3%. Given that STORE Capital’s fundamentals appear to be intact, the stock appears positioned for future upside potential. This is also why I think STORE Capital is an excellent REIT for the month.
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Kody Kester owns STORE Capital. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends STORE Capital and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B -Shares). ). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.