Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) just made a significant $377 million investment in an Arizona Real Estate Investment Trust (REIT).

The recipient of the investment is Store Capital (NYSE: STOR), an owner of single-tenant buildings. The company owns 1,750 properties valued at more than $5.5 billion.

[ad#Google Adsense 336×280-IA]Berkshire Hathaway had been in occasional discussions with Store Capital management for the past couple of years.

Ten days ago, Berkshire investment manager Todd Weschler called Store Capital to suggest a financing.

The reason? The share price was down, and shares were attractively priced.

Prior to news of Berkshire’s investment, Store Capital stock had posted a YTD decline of 16%.

There were increasing concerns that the company’s business would feel pressure from Amazon’s continued dominance in the retail sector.

While the company’s name might suggest that it’s in the retail real estate business, that isn’t the case. Less than 20% of the company’s properties are for retail.

The vast majority of properties are related to the service sector: preschools, health clubs, movie theaters and pet-care facilities.

Store Capital acts as a financing partner for smaller companies that can’t afford to buy and manage their own properties. Unlike most landlords, Store Capital pays the operating expenses of the properties, including taxes, maintenance and insurance.

Instead of purchasing shares on the public market, Berkshire bought 18.9 million shares of common stock in a private placement. That gives Warren Buffett ownership of nearly 10% of the company.

The price per share in the Warren Buffett purchase was $20.25, a small 2% discount to previous closing price of $20.77.

Once the Warren Buffett purchase was public, Store Capital shares immediately jumped 11%.

Buffett Sends REIT Shares Surging 11%

Store Capital hasn’t been the only REIT to underperform recently.

REITs and the Risk of Rising Interest Rates

Over the last year, REITs have been lagging the overall stock market.

The SPDR Dow Jones REIT ETF (NYSE: RWR) is a popular ETF that includes some of the biggest REITs.

In the last year, the ETF is down 3.2% compared with a 19.9% gain for the S&P 500 Index.

The primary reason is risk of rising interest rates.

REITs are more sensitive to interest rates than other stocks. The reason is that REITs rely heavily on borrowed money to fund their purchases of real estate properties.

So, when interest rates rise, their cost of capital goes up. And therefore, the profits can decline unless they are able to offset rising costs with higher rental revenue.

Warren Buffett Purchase: A Signal on REITs

For REITs with long-term leases on things like office space, this can be a problem. For REITs that have shorter-term leases ̶ such as apartments, storage units, or hotels ̶ this is less of a concern.

The Warren Buffett purchase means he and Berkshire Hathaway seem to think the REIT selloff is overdone. Now could be a great time to buy up other top REITs before they see their shares take off.

— Ian Wyatt


Source: Wyatt Investment Research