There's only one real estate investment trust in Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) closely watched stock portfolio: net-lease retail and service-oriented property REIT Store Capital (NYSE: STOR).
Not only does Store Capital pay an above-average 4.6% dividend yield that is well-covered by the company's profits, but the company's business model puts it in a great position to achieve steadily rising income over time with little reason for investors to worry. If you're wondering how this could be, given the state of the brick-and-mortar retail industry, here's a rundown of what Store Capital invests in, why it is largely immune to the retail-sector headwinds, and why it could be an excellent addition to any dividend investor's portfolio.
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What does Store Capital do?
Store Capital is a real estate investment trust, or REIT, that focuses on net-lease real estate.
A net lease is a type of property lease agreement that requires the tenant to cover property taxes, building insurance, and maintenance. Because of these three expenses that shift to the tenant, this arrangement is also commonly referred to as a triple-net lease.
Triple-net leases also tend to have long initial terms -- think 15 years or more -- with annual rent increases, or escalators, built in. From a property owner's perspective, a net lease is a way to get rid of the unpredictable costs associated with ownership and create a steadily rising, predictable income stream.
Because of the logistics of the tenants paying the expenses, net leases are most common in single-tenant properties. Store Capital's portfolio of roughly 2,200 properties are primarily occupied by either retail or service-based tenants.
How Store Capital is avoiding the retail-industry mess
It's no secret that many retail businesses are struggling right now, but very few of them are among Store Capital's tenants.
In addition to its lease structure, which locks tenants in for long terms, Store Capital has another key advantage when it comes to avoiding the turbulence in the retail industry. In a nutshell, the company invests in properties occupied by tenants whose businesses aren't particularly threatened by e-commerce competitions -- or by recessions, for that matter.
Store Capital's tenants operate in more than 100 different industries, and most have at least one component (in most cases, providing an in-person service) that insulates them from e-commerce headwinds and economic weakness. For example, restaurants are the largest industry in Store Capital's portfolio, and these are service-based businesses that people have to physically go to. The same can be said for early childhood education properties, health clubs, and movie theaters.
On the retail side, Store Capital has lots of tenants operating furniture, hunting and fishing stores, and car dealerships. People tend to like to look at the merchandise sold by these businesses before they buy it. Finally, 16% of Store Capital's portfolio is occupied by manufacturing tenants, and these are obviously resistant to any retail-sector headwinds.
Just to give you an idea, some of Store Capital's top tenants include Bass Pro Shops, AMC Theatres, Ashley Homestore, and Camping World (NYSE: CWH).
In fact, the resilient nature of the tenant base combined with the favorable lease structure is why Store Capital's properties have a remarkable 99.7% occupancy rate.
Additionally, three-fourths of the tenants are of investment-grade credit quality. This means most of Store Capital's properties are occupied by financially sound businesses that have the ability to weather tough times.
One unique requirement for tenants
In addition to the relatively safe nature of its tenants' businesses, Store Capital has a unique quality that differentiates it from other net-lease REITs. The company requires its tenants to provide building-level financial statements of their businesses.
This allows Store Capital to assess any tenant-related risks before they become a problem, and to take appropriate steps to compensate. However, there doesn't seem to be much to worry about. In fact, this reporting requirement tells Store Capital that its tenants' revenue has grown by more than 15% year over year.
Steady income plus growth is a winning formula
As I mentioned, Store Capital has a dividend yield of roughly 4.6%, and based on its FFO (funds from operations -- the REIT version of earnings) through the first three quarters of 2018, this represents a 73% payout ratio, which is on the lower end for a REIT.
Not only that, but the company prides itself on growing its dividend. Since 2014, Store Capital has increased its dividend by 32%, and with the steady-growth nature of the net-lease model and low payout ratio, I fully expect this trend to carry on.
As a final thought, Store Capital estimates that the net-lease profit center market (the company's specific term for its target properties) is approximately $3 trillion in size. Just to put that in perspective, Store Capital's market cap is currently about $6 billion. So, with lots of financial flexibility and a virtually unlimited addressable market for expansion, Store Capital is well-positioned to continue its growth trajectory in the years ahead. This kind of growth, combined with steady and growing income, can make smart dividend investors wealthy over time.
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