Berkshire Hathaway Buys 9.8% Stake in Store Capital -- 2nd Update

By Nicole Friedman and Imani Moise 

Warren Buffett's Berkshire Hathaway Inc. has made its second big real estate bet in two weeks.

On Monday, real-estate investment trust Store Capital Corp. disclosed Berkshire has purchased a 9.8% stake in the firm. The $377 million investment from Berkshire is a wager that some types of storefronts will continue to attract shoppers, even as online shopping has forced the U.S. retail industry to close stores at a record pace. The FTSE NAREIT Equity REIT Index is up 2.2% this year, while the FTSE NAREIT index for retail REITs is down 15% year-to-date.

Arizona-based Store Capital has some insulation from the ongoing problems in traditional shopping retailers. Its largest investments are in single-tenant properties such as chain restaurants, veterinary clinics and fitness centers. The deal comes just a few days after Berkshire invested about 400 million Canadian dollars ($302 million) in struggling Canadian mortgage lender Home Capital Group Inc.

Berkshire bought 18.6 million newly issued shares of Store Capital for $20.25 each, a 2.5% discount to the stock's Friday closing price. Shares rose 10% Monday to $22.83.

Store Capital shares slid this past spring after the company reported disappointing earnings.

Store Capital said Berkshire's investment represents a vote of confidence in its leadership and business model. Store Capital's real estate portfolio totaled $5.5 billion, representing 1,750 property locations in 48 states, as of March 31.

"We're devoted to doing service-sector investments...where you can't buy these services through the internet," said Christopher Volk, Store Capital's chief executive, in an interview. Berkshire "saw an opportunity to invest at an attractive price, and they believe in us."

Berkshire is broadly on the hunt for ways to invest its growing cash pile. The conglomerate, which owns businesses ranging from insurers to cooking supplies and also takes large stakes in public companies, held $96.5 billion in cash as of March 31.

Mr. Buffett didn't immediately respond to a request for comment.

Mr. Volk first contacted Berkshire in 2014 using its public email address to suggest an investment opportunity. Mr. Buffett responded within hours, he said, asking for more information. Mr. Buffett put Mr. Volk in touch with Ted Weschler, one of Berkshire's two portfolio managers, and Mr. Weschler continued to follow Store Capital's financial results.

About 10 days ago, Mr. Weschler called Store Capital to say that Berkshire wanted to make an investment, Mr. Volk said. The transaction closed Friday.

Berkshire didn't request a seat on Store Capital's board, Mr. Volk said.

Store Capital said last year that it plans to invest $900 million in real estate in 2017, but it could spend more than that with Berkshire's investment, said Janney Montgomery Scott LLC in a note.

The firm's biggest customers include a Midwestern furniture retailer, movie-theater chain AMC Entertainment Holdings Inc. and a chain of preschools.

"This deal signals that value investors may be taking a closer look in order to start separating the wheat from the chaff" in the retail real-estate sector, said KeyBanc Capital Markets analysts in a note.

One of Store Capital's top customers, sporting-goods chain Gander Mountain Co., filed for bankruptcy in March. Camping World Holdings Inc., also a Store Capital customer, won a bankruptcy auction for some of Gander Mountain's assets. Representatives for Camping World didn't immediately respond to a request for comment.

Mr. Buffett, Berkshire's chairman and chief executive, lamented at Berkshire's May shareholder meeting that he "was too dumb to realize" the rise of online shopping and failed to invest in Amazon.com Inc. But he also said that Berkshire's wholly owned furniture businesses have seen little effect from online shopping.

Berkshire's investment makes it Store Capital's third-largest shareholder, behind the Vanguard Group and Fidelity Management & Research Co., according to data from FactSet.

Write to Nicole Friedman at [e-mail] and Imani Moise at [e-mail]

(END) Dow Jones Newswires

June 26, 2017 14:56 ET (18:56 GMT)

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