In a surprising move earlier this month, the real estate investment trust (REIT) STORE Capital (STOR -0.44%) announced that it had agreed to be acquired by the large real estate company GIC and Oak Street, a division of Blue Owl Capital. The deal values STORE at $14 billion and will pay shareholders $32.25 per share in cash, which is a more-than-20% premium over what STORE traded at after market close on Sept. 14.
STORE Capital is the only REIT in the large equities portfolio of Berkshire Hathaway, the conglomerate run by the legendary investor Warren Buffett. Berkshire owns slightly less than 7 million shares of STORE, which accounts for just 0.1% of the portfolio.
While one might think that shareholders would be happy to see a 20% premium, STORE’s stock is still below pre-pandemic levels even after the post-announcement pop and is only up about 24.4% over the last five years. What will Buffett and other shareholders do next?
Is it a good deal?
STORE’s single-tenant operator model involves purchasing properties from business owners and then turning around and renting those properties back to those owners under triple net-lease plans. The businesses are then responsible for maintenance and covering expenses such as property taxes and insurance.
This model relieves STORE from serving in the tedious landlord role but is also beneficial for business owners looking for an alternative to buying a property outright and potentially taking on a lot of debt or renting.
It’s hard to say that STORE hasn’t performed well since going public back in 2014. The REIT’s adjusted funds from operations (AFFO) have increased at a nearly 6% compound annual growth rate since its IPO. Furthermore, management this year guided for AFFO per share to grow between 9.8% and 10.7% from 2021. STORE has also consistently raised its dividend every year and currently pays out a very healthy 4.85% yield.
Given that STORE has traded at higher valuations in the past, it probably is fair for shareholders to be disappointed in the deal considering the success the REIT has previously had. On the flip side, management may be doing what it believes is best to get ahead of a much more difficult environment, with inflation remaining stubbornly high right now and many investors expecting some kind of more severe recession in 2023.
There is still some hope for shareholders that a better deal might emerge because the acquisition agreement includes a 30-day “go-shop” period that lasts until Oct. 15.
This means STORE can actively go out and try to find a better deal. While I’m sure STORE’s management team considered all of the options available before accepting this buyout offer, having a price in place can help to establish a new market.
Perhaps even Buffett and Berkshire will get interested. While an immediate 20% gain is nice, REIT investors will lose out on future streams of income from dividends, and as mentioned above, STORE has done a good job of growing the business.
Berkshire has also been quite active on the buying front this year, although it’s hard to imagine that it wouldn’t have had a chance to bid on STORE given its position as a large shareholder. Berkshire did invest in STORE in 2017 during a year in which the latter’s stock price only got as high as $26, so Buffett and Berkshire could call it quits and still come out ahead.
The best thing shareholders can likely do right now is sit tight and hope a better offer finds its way onto the table. If it doesn’t, then there are other REITs that shareholders could buy that can provide similar value, such as Realty Income.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and STORE Capital. The Motley Fool 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.