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Warren Buffett Hates Managing Rentals, but Loves This Other Money-Making Real Estate Investment

Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) chief executive officer and chairman Warren Buffett is arguably the greatest investor in history. Even with his considerable charitable contributions over the years, Buffett's current $126 billion net worth makes him the fifth richest person in the world.

A large part of Buffett's success as an investor has to do with avoiding investments that are outside of his expertise or circle of competence. This explains why the Oracle of Omaha has avoided purchasing rental properties throughout his investing career.

However, Buffett hasn't avoided investing in real estate altogether. Let's take a look at why the legendary investor has made the real estate investment trust (REIT) STORE Capital (NYSE: STOR) the only REIT in Berkshire Hathaway's $351 billion investment portfolio.

A winning business model

The first attractive characteristic to like about STORE Capital is the diversification of its portfolio. The private for-profit school Spring Education Group is STORE Capital's largest tenant at just 3% of its annualized base rent (ABR). Overall, the company's top 10 tenants comprised just 18.4% of its ABR. That's because STORE Capital's real estate portfolio consisted of almost 2,900 properties spread throughout all of the U.S. states besides Hawaii.

The second trait of STORE Capital that bodes well for shareholders is that the business model is a proven winner. The REIT buys single-tenant properties from its clients and leases them back to those same clients. This is a powerful option for STORE Capital's tenants to access equity from their real estate and use it to grow their businesses.

In exchange for access to this enticing option, tenants agree to cover all of the 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, which provides a steady and growing source of rent revenue that typically keeps up with inflation.

As a result, STORE Capital has recorded 5.5% annual adjusted funds from operations (AFFO) per share growth since its initial public offering (IPO) in 2014. And with an addressable market worth an estimated $3.9 trillion, STORE Capital's $10.7 billion real estate portfolio has plenty of room to keep growing.

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Image source: Getty Images.

A track record of impressive dividend growth

Another quality that Warren Buffett undoubtedly loves about STORE Capital is its whopping 5% dividend yield, which is nearly four times the S&P 500's 1.4% yield. The dividends received from the REIT give Berkshire Hathaway more capital to potentially deploy into other stocks. And STORE Capital's dividend looks poised to keep growing near the 6.2% annual rate delivered since its IPO.

This is because the stock's dividend payout ratio of 74% enables it to retain the capital necessary to expand its real estate portfolio and drive its AFFO per share higher over time.

The stock is cheaply priced

Best of all, STORE Capital appears to be priced at a modest valuation for its quality.

The REIT is trading at a forward price-to-AFFO-per-share ratio of 14. This is hardly an unreasonable valuation for a stock with mid to upper-single-digit annual AFFO-per-share growth prospects. And the stock's trailing-12-month dividend yield of 4.9% is also moderately higher than its median yield of 4.3%. Given that STORE Capital's fundamentals appear intact, the stock seems positioned for future upside. That is also why I believe STORE Capital is an excellent REIT to buy for this month.

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Kody Kester owns STORE Capital. The Motley Fool owns 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.

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